On 6 April 2016, the High Court, by majority, dismissed an appeal from the Court of Appeal of the Supreme Court of New South Wales. The High Court held that a trustee had validly exercised a power to “advance” and “apply” trust capital or income by creating a debt reflecting the value of shares held by the trustee at the time the advance was made.
The appellants are beneficiaries of the Nemes Family Trust (“the Trust”), of which the first respondent, Nemeske Pty Ltd, is trustee (“the Trustee”). The Trust’s principal assets are shares in a second company, Aladdin Ltd (“Aladdin”). In July 1994, the value of those shares, $3,904,300, was recorded in an “asset revaluation reserve”. In September 1994, the Trustee passed a resolution which distributed the whole of the asset revaluation reserve to two other beneficiaries of the Trust, Mr Emery Nemes and Mrs Madeleine Nemes. In August 1995, the Trustee executed a deed purportedly charging the shares in Aladdin in Mr and Mrs Nemes’ favour (“the Deed of Charge”). In the Deed of Charge, the Trustee recited that it was indebted to Mr and Mrs Nemes in the sum of $3,904,300, and covenanted that it would pay the amount of that debt upon their demand. Mr and Mrs Nemes both died before any demand was made. Mr Nemes bequeathed all the shares in the Trustee and in Aladdin to the appellants. The residuary estate was left to other persons.
The appellants commenced proceedings against the Trustee, the executors of Mr Nemes’ estate (“the executors”) and other beneficiaries of the Trust, seeking declarations including that the distribution made from the Trust was of no effect or void. The executors cross-claimed, seeking payment of the amount allegedly owing to Mr Nemes’ estate.
The primary judge in the Supreme Court of New South Wales [2014] NSWSC 203, held that the resolution was a valid exercise of the Trustee’s power to advance and apply trust capital or income under the terms of the trust deed. That conclusion was upheld by the Court of Appeal [2015] NSWCA 6, which also held that although there was no power to charge the shares, the covenant in the Deed of Charge confirmed that the debt owing to Mr and Mrs Nemes was payable on demand. By grant of special leave, the appellants appealed to the High Court.
The majority of the High Court dismissed the appeal, holding that the resolution was an effective exercise of the Trustee’s power to advance and apply trust capital or income, notwithstanding that there was no change in the beneficial ownership of the shares. The majority held that the resolution created a creditor/debtor relationship, enforceable at law, between Mr and Mrs Nemes and the Trustee. Further, the covenant in the Deed of Charge supported the advance and application made by the Trustee’s resolution.
FISCHER & ORS v NEMESKE PTY LTD & ORS [2016] HCA 11 [Case Summary: [2016] HCASum 8] [LTN 64, 6/4/16]
Court of Appeal – Catchwords
EQUITY – trusts and trustees – powers of trustees – maintenance and advancement – power of trustee to “advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance education advancement in life or benefit of any of the Specified Beneficiaries” – where trustee revalued sole asset constituting the trust property and resolved to “distribute” the whole of the resultant revaluation reserve to two beneficiaries jointly – whether the particular power was thereby exercised – whether those beneficiaries could bring an action in debt against the trustee – whether the trustee had by a subsequent deed validly covenanted to make payment to the particular beneficiaries.
LIMITATION OF ACTIONS – covenant to pay on demand – time runs from time of covenant notwithstanding absence of demand – whether the cause of action was acknowledged within the originally applicable limitation period so as to cause a renewed limitation period to apply.
EQUITY – trusts and trustees – terms of trust – express power to vary in any way – particular power to alter vesting date – purported exercise of the general power so as to alter the vesting date retrospectively – whether the general power was available in the face of the express power – whether a particular limit upon the general power operated to preclude the variation purportedly made.
Supreme Court – Catchwords
EQUITY – trusts – purported distribution of asset revaluation reserve – proper construction of resolution of trustee – whether distribution effected – whether trust indebted to deceased estate of beneficiary.
EQUITY – discretionary trust – vesting date – whether a resolution had effect of varying vesting date retrospectively.
EQUITY – discretionary trust – construction – whether distribution for benefit of beneficiaries – whether the trustee required to give notice to all beneficiaries.
LIMITATION OF ACTIONS – whether cross-claim statute barred – whether debt payable on demand – whether cause of action arose at time of advance – whether cause of action confirmed – whether more than one bar to cause of action.