Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56

New South Wales Supreme Court

CITATION : Permanent Trustee Co Ltd v Bernera Holdings Pty Ltd [2004] NSWSC 56 HEARING DATE(S) : 10/12/03 JUDGMENT DATE : 18 February 2004 JURISDICTION: Equity Division JUDGMENT OF : Young CJ in Eq DECISION : No adjustment made in the liabilities between the parties.

CATCHWORDS : CORPORATIONS LAW [89] Directors- Donee of power of attorney of a director may not exercise office of director. EQUITY [82]- Defences- Acquiescence- Ratification. SUCCESSION [273]- Administration- Conflict between deceased's personal estate and his family trust- Missing entries in records- How conflict resolved- Whether overpaid beneficiary can be sued. LEGISLATION CITED : Corporations Act 2001, s 201M Cashman v 7 North Golden Gate Mining Co (1897) 7 QLJ 152 Clark v Clark (1882) 8 VLR (Eq) 303 David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353 Davies v National Trustees etc [1912] VLR 397 Edmunds v Pickering (No 3) (1999) 75 SASR 407 Equiticorp Finance Ltd v Bank of New Zealand (1993) 32 NSWLR 50 Glasson v Fuller [1922] SASR 148 Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 CASES CITED : Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624 Lapraik v Burrows (The Australia) (1859) 13 Moo PCC 132; 15 ER 50 Leeds (Duke) v Amherst (Earl) (1846) 2 Ph 117; 41 ER 886 Morris v Kanssen [1946] AC 459 Orr v Ford (1989) 167 CLR 316 Re Diplock's Estate [1948] Ch 251 Reid v Deane [1906] VLR 138 Sterndale v Hankinson (1827) 1 Sim 393; 57 ER 625 Wall v Cockerell (1863) 10 HLC 229 PARTIES : Permanent Trustee Company Limited (P) Bernera Holdings Pty Limited (D) FILE NUMBER(S) : SC 2370/02 COUNSEL : P H Blackburn-Hart (P) D Davies SC (D) SOLICITORS : Windeyer Dibbs (P) Makinson & d'Apice (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

YOUNG CJ in EQ

Wednesday 18 February 2004

2370/02 - PERMANENT TRUSTEE COMPANY LIMITED v BERNERA HOLDINGS PTY LIMITED JUDGMENT 1 HIS HONOUR: This is an unusual case involving considering the dealings of a person now deceased with a family trust of which he was the controlling director on the board of the company that was the trustee of the trust.

2 The plaintiff seeks by summons filed on 22 April 2002 a determination that the defendant (the trustee of the McDermott Family Trust) is indebted to the plaintiff (the trustee of the McDermott deceased estate) or, alternatively a determination as to whether the plaintiff is indebted to the defendant. 3 The jurisdiction attracted is that under Part 68 of the Supreme Court Rules, the summary procedure replacing the old administration suit. No cross claim has been filed. 4 The basal facts are that the defendant, Bernera Holdings Pty Ltd ("Bernera") was incorporated on 27 August 1974 and became the trustee of The McDermott Family Trust ("the Trust") on 12 September 1974. 5 The Trust is a discretionary trust with a relatively wide class of possible beneficiaries. 6 Dr John Lawler McDermott was a director of Bernera from 14 November 1974 until 21 February 1995. He was Chairman of Directors throughout this period which conferred on him a casting vote as well as a deliberative vote. 7 Dr John Lawler McDermott died on 3 July 1995 aged about 92. He had been suffering from Alzheimer's Disease and had moved into a nursing home in 1992.

8 During the 1974-5 financial year, the Trust purchased shares in public companies from John Lawler McDermott and also purchased from him No 756 New South Head Road, Rose Bay. These transactions left the Trust indebted to John Lawler McDermott in the amount of $193,115.25. 9 Dr McDermott, his wife, Clare (who died on 15 August 1988) and their only child, an adopted daughter, Gabrielle Joy McDermott ("Gabrielle"), lived in the New South Head Road property as their home. 10 Gabrielle is a disabled person now aged 61 who is under the care of the Protective Commissioner. 11 There is a record of the assignment of that debt to two companies of which John Lawler McDermott was the sole shareholder, but these companies were wound up in 1990 and the debt reappeared in the Trust's books. 12 During the 1985-6 financial year, the property at 756 New South Head Road, Rose Bay was sold for $629,000. The net sale proceeds were paid to the Trust apart from $266,276.74 which it is alleged was paid by way of loan to John Lawler McDerrmott to enable him to purchase 46 Wilberforce Avenue, Rose Bay. With stamp duty and the like, the Trust is alleged to have lent Mr McDermott $303,401.50. 13 The Trust's books show that by 30 June 1989, Mr McDermott's liability to the Trust was $430,850, but there was an offsetting credit so that the net indebtedness was $348,293. 14 The financial accounts of the Trust for 1990 show that there was a capital distribution to Mr McDermott of $452,527. There is no supporting documentation authorising this distribution. 15 There is also an income distribution made to Dr McDermott of $251,982 for which there is no supporting resolution in existence. 16 The evidence of Mr Hayward, accountant, is that, as at the date of death of John Lawler McDermott, 3 July 1995, the Trust's books showed an indebtedness to him of $157,931. There were also monies due to Gabrielle. 17 Mr Hayward calculates that the assets of the Trust as at the date of Mr McDermott's death had a value of $466,325 and the net surplus had all debts been paid was $241,667. 18 Mr Edwards, accountant, who gave evidence for the defendant says that the $157,931 figure assumes the validity of three transactions for which there is no supporting documentation. If some or all of these transactions were invalid there would be no debt owing by the Trust to Mr McDermott's estate ("the Estate") and indeed there would be monies due from the Estate to the Trust. 19 The documents of the Trust are in a disturbing state. In particular, the question as to whether the New South Head Road property was an asset of the Trust or of Dr McDermott personally is raised because entries in the Trust's books tend to be reversed without explanation. A $200,000 bank bill with Westpac appears as a Trust asset and then seems to disappear from the Trust records with the evidence tending to show it was paid out to Dr McDermott personally. The assignments of debt to the two companies to which I have already referred was simply reversed somewhere in 1990 without explanation. 20 Mr Hayward's explanation of some of these matters is that mistakes were made in the bookkeeping and that it should not be presumed that simply because no supporting documentation can be found that the transactions were bad. 21 Mr Edwards is not so generous. He considers that the material shows that there was no authority for the impugned distributions. 22 It is clear from the evidence that, whilst he had his faculties, Dr McDermott treated the Trust as if it were his own funds. Moreover, Mrs Griffiths took the view that as Dr McDermott was the Chairman of Directors with a casting vote, for all practical purposes, what Dr McDermott said, happened. 23 The reason why the indebtedness of the Trust to the Estate or vice versa is significant is that there are different beneficiaries. The beneficiaries under the Trust are relatives of Mrs McDermott and the beneficiaries under the Estate are relatives of John Lawler McDermott. Further, in respect of the Estate, there is a pending application under the Family Provision Act 1982 by Gabrielle. 24 The matter came on for hearing before me on 10 December 2003. On that occasion Mr PH Blackburn-Hart appeared for Permanent Trustee Company Limited, the trustee of the Estate and Mr D Davies SC for Bernera as trustee of the Trust. Some further matters for exploration occurred during the oral argument which resulted in further written submissions being made on the matter of acquiescence during the vacation. 25 The difference between the parties is to be resolved by examining the validity of the capital and income distributions from the Trust and then considering whether the length of time that has elapsed since they were made means that they should not be disturbed even if irregular. 26 It is first necessary to consider the directorate of Bernera. I will do this by assuming that the meetings of which minutes are in Bernera's Minute Book were duly held and that the directors had the power to appoint additional directors and further, that the rotation articles did not affect the position. 27 After the subscriber/directors resigned, the directors from 14 November 1974 were John Lawler McDermott, John Robert Thomas and Miss Mary Johnston Ellis Fleming. Mr Thomas was Dr McDermott's accountant. Later the same day Mrs Clare McDermott and Mrs Marjorie Patricia Gray were appointed directors. 28 For a brief period in December 1974, two Canberra solicitors were appointed directors, presumably to carry out some out of State transaction; they resigned within a matter of days. Otherwise, the directorate remained static for some time. 29 Miss Fleming resigned on 29 December 1978. Mrs Gray died on 4 October 1986. Gabrielle and Joan McDermott were appointed directors by the board on 16 October 1986. John Thomas ceased to be a director on 14 December 1991. Gabrielle ceased on 17 January 1992. 30 On 9 October 1987, Mrs Marie Griffiths (Clare McDermott's sister) was appointed a director of Bernera. However, she says she never received any notice of directors' meetings or members' meetings between March 1988 and December 1993 nor attended any meetings in this period. The Minute Book, however, notes her as present at the directors' meetings of 5 April 1988, 13 December 1991, 24 April 1992 and 16 and 30 December 1992. 31 Thus, in 1992, there were three directors, Dr McDermott, Mrs Griffiths and Mrs Joan McDermott. 32 On 28 September 1994, Mrs Griffiths obtained from Hodgson J an order that Dr McDermott not exercise any voting rights in Bernera on the ground of his mental incapacity. 33 After Dr McDermott's death, Mrs Joan McDermott and Mrs Marie Griffiths carried out the directors' functions in Bernera. However in 1997 Lisa Macrae was appointed an additional director. Lisa Macrae is the daughter of a deceased sister of Mrs Clare McDermott. The affairs of Bernera in this period appear to have been carried on with a representative of the Trust and the Estate being equally represented at board meetings. 34 After Dr McDermott went into a nursing home, the procedure adopted was that Mrs Joy Evans, one of Dr McDermott's sisters, who had his enduring power of attorney, attended the meetings as Dr McDermott's proxy and even signed the minutes as Chairman. 35 Neither counsel sought to justify this procedure before me as being within the authority of a donee of a power of attorney. However, Mr Blackburn-Hart said that Mrs Evans' actions were not without significance. 36 Mr Blackburn-Hart acknowledges the strength of the argument that the declaration of income for 1992 must be considered to have been invalid. However, he says that by the effect of s 201M of the Corporations Act 2001, or because Mrs Evans and others had authority from Bernera to act in the way they did, or because of the doctrines of ratification and/or acquiescence, the accounts should stand. 37 I will first consider the corporations law points. 38 Mr Davies put that the Minute Book of Bernera showed that there was no authority for the distributions of $452,527 and $251,982. Mrs Joy Evans was never an alternate director of Bernera, without her there was no quorum at relevant meetings and Mrs Griffith's evidence that she was not given notice of meetings should be accepted. 39 In my view this analysis is correct. There was some argument put to me that the effect of s 201M of the Corporations Act 2001 which states that the acts of a director are valid notwithstanding any defect in appointment might save Mrs Evans' actions. I do not consider that this section applies where a person claiming no title to a directorship involves herself in the directors' meeting of a company under the guise of being the donee of a power of attorney granted by another director; see Morris v Kanssen [1946] AC 459, 471. 40 Mr Blackburn-Hart puts that there can be situations where a person can have de facto authority to act in all the affairs of a company; see Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 and Equiticorp Finance Ltd v Bank of New Zealand (1993) 32 NSWLR 50, 132-4. 41 He submits that the present is such a case. Mrs Griffiths was content never to receive notice of directors' meetings and to permit Dr McDermott to make the decisions on behalf of the board of Bernera. 42 Mr Davies says that the complete ignorance of persons like Mrs Griffiths as to what was happening removes any basis for this submission. 43 With respect, I do not see why this necessarily is so. There may be cases where people may so trust another that they are willing to cede in advance plenary authority to act on behalf of a company and not wish to be informed as to what is happening. It may be more difficult to make the inference of the grant of authority in such circumstances, but it may be possible to do so. 44 However, what evidence there is in the present case, on balance, tells against the grant of such plenary authority to Dr McDermott. On the one side there is the evidence that Mrs Griffiths and others believed that Dr McDermott was able to do as he wished. However, they never took the position that he was absolved from at least letting them know what was going on. Furthermore, the parties persistently, year after year conducted their affairs on the basis that decisions on matters of distribution would be made at a meeting and recorded in the Minute Book.

45 Mr Blackburn-Hart then submitted that the accounts for 1994 and 1995 were duly certified as correct by the directors Mrs Joan McDermott and Mrs Griffiths. Those accounts incorporate figures reflecting the suspect distributions of 1992. He says that the directors must be taken as approving, ratifying and acquiescing in the distribution as though it were a fresh exercise of the discretion in that year. 46 Even if he be wrong in the previous set of submissions, Mr Blackburn-Hart puts that any indebtedness from the Estate is irrecoverable as that estate has been distributed without mala fides or dishonesty. He also invokes the Limitation Act 1969 and the matters of laches acquiescence and delay. It is odd for a plaintiff to do this, but the plaintiff says that it is in effect being sued for debt by the defendant. 47 Further, the defendant says that there can be no question of ratification as there was never a situation where the directors passed subsequent accounts with the requisite full knowledge of the facts. 48 Mr Davies submits that far from the Trust owing the Estate $157,000, the Estate owes the Trust $839,553. 49 It is always very difficult for parties and the court to work out what are the true rights and obligations of parties when some previous controller of a trust has produced conflicting paperwork. The problem often occurs after the controller has become bankrupt and in such cases, there are guidelines as to how the problem is to be approached; see Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624. However, there is no easy solution available in the instant case. 50 As to ratification, Mr Blackburn-Hart pressed his submissions in his supplementary written submissions. He said again that the directors had on many occasions certified accounts as correct which could only be correct if the impugned transactions were adopted. 51 Under the Corporations Act, directors have a positive duty to satisfy themselves that the accounts are correct. That there might be impugned transactions surfaced about 1996 and accounts have been certified on many occasions since then. 52 Ratification of an unauthorised act can take place by a number of methods. 53 As Halsbury's Laws of England (4th ed, replacement) Vol 1 para 83 puts it: "Although a ratification must be clear … it need not necessarily be proved by positive acts of adoption. In certain cases it is sufficient evidence of ratification that the intended principal, having all the material facts brought to his knowledge and knowing that he is being regarded as having accepted the position of principal, takes no steps to disown that character within a reasonable time … ." 54 Halsbury cites a number of authorities for that proposition, the most recent of which is Lapraik v Burrows (The Australia) (1859) 13 Moo PCC 132, 158; 15 ER 50, 60. 55 As Halsbury points out, it is essential even for ratification by acquiescence that the person seeking to rely on ratification prove that the alleged principal had full knowledge of the facts: Wall v Cockerell (1863) 10 HLC 229, 243; 11 ER 1013, 1019. 56 Because there are some common factors, it is desirable to consider the basic principles of the equitable doctrine of acquiescence at this point. 57 "Acquiescence' is a word which is used in a number of senses. The sense in which it is employed in the present context is of a person standing by for a period of time whilst he or she sees another dealing with property in a manner inconsistent with the first person's right; see Leeds (Duke) v Amherst (Earl) (1846) 2 Ph 117, 123; 41 ER 886, 888. 58 In Cashman v 7 North Golden Gate Mining Co (1897) 7 QLJ 152 at 153, Griffith CJ said: " … the term acquiescence is not a term of art. It was used in Courts of Equity as a term to characterise a defence which may be set up by a person against whom another makes a claim for equitable relief. It is a well-known doctrine of equity that when a person claiming equitable relief has lain by for a long time, and so conducted himself that it would be inequitable to permit him to complain of the defendant's actions, the court will refuse to grant relief … . The term also bears another meaning. It may be fairly applied to a man who, seeing an act about to be done to his prejudice, stands by and does not object to it. He may be very properly said to be acquiescing in that act being done."

59 In Orr v Ford (1989) 167 CLR 316, 337-8, Deane J said (omitting reference to authority): "There has, over the years, been considerable criticism of the loose use of the word 'acquiescence' as a broad conjunctive or disjunctive companion to 'laches' … . Such criticism has obvious force in that, so used, the word has a chameleon-like quality which adds little besides confusion to an already vague area of equity doctrine. Strictly used, acquiescence indicates the contemporaneous and informed ('knowing') acceptance or standing by which is treated by equity as 'assent' (ie consent) to what would otherwise be an infringement of rights … . The word is commonly also used to refer: (i) to a representation by silence of a type which may found an estoppel by conduct; or (ii) to acceptance of a past wrongful act in circumstances which give rise to an active waiver of rights or a release of liability; or (iii) to an election to abandon or not enforce rights."

Deane J then adopted a phrase from the 1892 edition of Banning, Statute Law of Limitation of Actions p 269 saying: "A plaintiff may, however, lose his right to relief by an 'inferior species of acquiescence' which does not amount to assent, waiver or election or give rise to an estoppel. In these cases, acquiescence may be used in at least one of three ways. First, it is sometimes used as an indefinite overlapping component of a catchall phrase also incorporating 'laches' or 'gross laches' and/or 'delay' … . Secondly, acquiescence is used as a true alternative to 'laches' to divide the field between inaction in the face of 'the assertion of adverse rights' ('acquiescence') and inaction 'in prosecuting rights' ('laches') … . Thirdly, and more commonly, acquiescence is used, in a context where laches is used to indicate either mere delay or delay with knowledge of the acts of another person, which encourages that other person reasonably to believe that his acts are accepted (if past) or not opposed (if contemporaneous)."

60 In Glasson v Fuller [1922] SASR 148, 161-3, Poole J noted that "acquiescence" is used in two senses. He described acquiescence in its "true sense" thus: "If one stands by while he sees the violation of his right in progress, and takes no steps to interfere, he is said to acquiesce in the violation, and he may be thereby debarred from his remedy in respect of it." This doctrine had nothing to do, said Poole J, with lapse of time or laches. His Honour noted that: "Acquiescence in the strict sense implies either that the party acquiescing has abandoned the right, or that he is estopped by his conduct from asserting it."

His Honour then considered a second kind of acquiescence: "In another sense, acquiescence is used to denote that some equitable right of A has been violated … and that after the influence has ceased or the violation has been brought to his knowledge he assents to the continuance and the state of affairs resulting from the violation … The lapse of time without proceedings being taken by A is evidence of such assent, and upon acquiescence of this latter kind the doctrine of laches is based."

See also Edmunds v Pickering (No 3) (1999) 75 SASR 407.

61 It is essential for a good defence of acquiescence that the alleged acquiescer had full knowledge of his or her rights both as to fact and law. Ratification will not be presumed from proceeding on an assumed basis if there is nothing in the circumstances as should arouse suspicion: Clark v Clark (1882) 8 VLR (Eq) 303, 328. 62 Accordingly, whether ratification at law or equitable acquiescence is to be relied on, full knowledge must be shown to have been possessed by the directors. 63 In my view, even though there is the statutory obligation to certify correct accounts, I do not consider that this mere fact is sufficient to surmount this barrier. There was nothing in the accounts and the circumstances that all parties considered the Trust was the private domain of Dr McDermott, effectively controlled by him that would have aroused suspicion. 64 In any event, it is a strange concept that by ratification or acquiescence, the directors of the trustee company could improve their position by validating transactions in their favour. Indeed, ratification could be said to have occurred on the other side by the deceased accepting the distributions. 65 Thus, I do not uphold the "defences" of ratification or acquiescence. 66 Further, limitations appear to me to be irrelevant to the situation where the Trust may have a claim against the Estate. The defendant has not actually made a claim and the plaintiff is seeking, in a quasi administration suit, where the rights and liabilities lie. 67 As I understand the position, based on my reading of Brunyate, Limitation of Actions in Equity (Stevens, London, 1932) and Lightwood on Limitation of Action (Butterworths, London, 1909) the only special rules with respect to limitations that apply in an administration suit are that the executor is not compelled to plead the statute and that, so far as creditors proving in the suit are concerned, time stops at the commencement of the proceedings; see Sterndale v Hankinson (1827) 1 Sim 393; 57 ER 625. 68 The period of limitations extends from the time the cause of action commenced against the deceased and then continues for the period of administration by the executor. 69 In the instant case, the Trust's claim against Dr McDermott commenced not later than 3 July 1995 and the six year limitation period had expired prior to the commencement of these proceedings on 22 July 2002.

70 Thus, I do not consider that any monies are owed by the Estate to the Trust nor by the Trust to the Estate. 71 It is not necessary, therefore, to enter into the very interesting submissions put by Mr Blackburn-Hart that as a result of David Securities v Commonwealth Bank of Australia (1992) 175 CLR 353, cases dealing with recovery of payments made by a trustee to a beneficiary, such as Re Diplock's Estate [1948] Ch 251 may need to be re-examined. It may be that the present rule is that the trustee will not recover against an innocent beneficiary, ie one who received the overpayment without notice of his or her lack of entitlement; see Reid v Deane [1906] VLR 138 and cf Davies v National Trustees etc [1912] VLR 397. 72 Accordingly, I answer questions 1 and 5 in the Summons "No". I believe that the appropriate order is that each party bear its own costs of the proceedings, but am willing to hear submissions on this matter at a date convenient to counsel and to the Court.

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