Dagenmont Pty Ltd v Lugton & Anor [2007] QSC 272

SUPREME COURT OF QUEENSLAND CITATION: Dagenmont Pty Ltd v Lugton & Anor [2007] QSC 272 PARTIES: DAGENMONT PTY LTD (ACN 010 276 981) (applicant) v JAMES JOHN LUGTON (first respondent) and GLENDA LUGTON (second respondent) FILE NO: BS 7859 of 2007 DIVISION: Trial PROCEEDING: Application ORIGINATING COURT: Supreme Court of Queensland DELIVERED ON: 27 September 2007 DELIVERED AT: Brisbane HEARING DATE: 19 September 2007 JUDGE: Chesterman J ORDER: Application dismissed CATCHWORDS: EQUITY – TRUSTS AND TRUSTEES – TRUSTEES AND CESTUI QUE TRUST - DISCRETIONARY TRUSTS – FETTER ON DISCRETION – CONSTRUCTION - where the applicant is the trustee of a discretionary trust – where the applicant was given absolute discretion to distribute income to such beneficiaries as it chooses in amounts it chooses or to accumulate all or part of the income - where the beneficiaries of the trust are the officers and shareholders of the applicant and include the first and second respondents – where differences and tensions arose between the beneficiaries – where a deed was executed to attempt to resolve those issues – where the deed provided for the first respondent to resign his directorship of the applicant and transfer his share in the applicant to another beneficiary and in return the applicant agreed inter alia to pay $150,000 per annum to the first respondent – where the applicant seeks to avoid these payments – whether the deed constituted an unlawful fetter upon the applicant’s discretion as trustee to distribute or accumulate income – whether the deed is a separate promise to pay the agreed amount EQUITY – TRUSTS AND TRUSTEES - -- 1 of 10 -- 2 DISCRETIONARY TRUSTS – CONSTRUCTION – where the trust deed granted the power to the trustee to vary the terms of the trust or make a separate trust for the benefit of a particular beneficiary out of part of the trust’s income – whether the later deed was properly construed as an exercise of that power in the absence of a reference to that power in the deed – whether in fact the deed created a separate trust Property Law Act 1974 (Qld), s 205 (1), s 205 (4) Fitzwood Pty Ltd v Unique Goal Pty Ltd (In Liquidation) [2001] FCA 1628, applied COUNSEL: Mr R T Whiteford for the applicant Mr B Laurie for the respondent SOLICITORS: McCullough Robertson Lawyers for the applicant Simmons Crowley & Galvin for the respondent [1] The applicant is the trustee of a discretionary trust established by deed of 13 August 1981 (‘deed’). It seeks a declaration that a later deed dated 31 October 2000 operates as a fetter upon the discretions conferred by the initial trust instrument and is unenforceable. [2] The trust was called the ‘Lugton Family Trust’. At incorporation the applicant’s only directors and shareholders were the first respondent and his brother in law, Mr Pal. Mr Pal’s wife is the first respondent’s sister. [3] The trust deed defined ‘beneficiaries’ as being in two classes: class A and class B. The class A beneficiaries were Mr Pal, his wife, and Mr Lugton, the first respondent. Class B beneficiaries were the descendants, spouses and widows of the class A beneficiaries, and spouses and widows of class B beneficiaries themselves. [4] The second respondent is Mr Lugton’s wife. She is a class B beneficiary. [5] The deed defined ‘accounting period’ to be, in effect, each financial year ending 30 June. [6] Clause 3 of the deed provided: ‘… the trustee shall during each accounting period receive and stand possessed of the income of the trust fund upon the trusts and with the powers … following … (i) … for the maintenance, education, advancement or benefit of all or … one or more … of the beneficiaries … in such shares … as the trustee shall in its absolute discretion from time to time think fit … (ii) Notwithstanding the foregoing … the trustee may … in its absolute discretion instead of applying the said income … accumulate the same or any part thereof … and hold such accumulations as an accretion to the trust fund … -- 2 of 10 -- 3 … (v) Any determination by the trustee made in pursuance of the powers vested in him by the preceding subclauses … shall be made … before the end of the accounting period during which the income … arises …’. [7] The trustee carries on what appears to be a profitable business of supplying books to libraries. The business is managed by Mr Pal and his family. Mr Lugton claims that he provided the initial capital which started the business. [8] Differences and difficulties have arisen between Mr Pal and his wife and the respondents. It is both impossible and unnecessary to inquire into them though Mr Lugton addressed them in an affidavit to which objection was taken by the applicant’s counsel. The objection was to relevance and the obnoxious content of part of the affidavit. The objections are soundly based and I have regard to the affidavit for the purpose only of noting that there is a degree of dislike and distrust between the parties. [9] The deed of 31 October 2000 (‘October deed’) which the applicant wishes to be rid of was executed as a means of resolving the difficulties. The parties to the deed were the applicant, each of the respondents, Mr Pal and his son, Steven Pal. [10] The October deed recited inter alia: ‘H. James Lugton wishes to resign his directorship of the trustee in favour of Steven Pal and wishes to transfer his share in the trustee to Steven Pal and his siblings.’ The deed then provided: ‘1. The trustee, Peter Pal and Steven Pal, acknowledge and agree that it was the intention of the settlor that James Lugton be financially provided for during his lifetime with distributions of income and/or capital from the trust. 2. To fulfil this wish or intention of the settlor, the trustee shall pay … James an amount of $150,000 per annum (“the payment”). The payment shall be increased in each year in accordance with the movement of the Consumer Price Index … 3. The payment shall be made monthly in advance … . James may direct … the payment … provided that the total amount to be distributed in any year cannot exceed the payment. 4. If … the trustee thinks it necessary or desirable that the business presently carried on by the trustee … be carried on by some other entity and subject to James having consented … the trustee will ensure that it obtains a similar covenant from this other entity to distribute the payment in each year. -- 3 of 10 -- 4 6. In consideration of the promises made by the trustee, James does or will contemporaneously with this deed:- 6.1 Resolves with Peter Pal as a director of the trustee that Steven Pal be appointed a director … 6.2 Immediately following such appointment resigns as a director … 6.3 Confirms his renouncement of or renounces his position as appointor under the trust. 6.4 Executes a transfer of his share in the trustee … 6.6 Disclaims in favour of the trustee any right to monies that are or should be held in his favour under a separate trust. 6.7 Acknowledges the amount to be distributed to him each year in accordance with his agreement is an adequate and proper distribution keeping in mind the intentions of the settlor and disclaims any right to any further distribution. 6.8 Disclaims any right to ………… distribution of capital … 7. In consideration of the promises made by the trustee [Mrs Lugton] … disclaims and renounces any right to any distribution of capital or income over and above that stated … in this deed. 8. Subject to … clause 4, the trustee agrees that it will not take any action or cause the trust to be determined and the capital and accumulated income distributed during James’ lifetime.’ [11] Pursuant to the October deed the first respondent resigned as a director of the applicant. Mr Steven Pal replaced him. Presumably, though it is not sworn to, Mr Lugton also transferred his share to Mr Steven Pal and his siblings. Until December last year the applicant made payments to the first respondent in the agreed amounts. [12] The applicant no longer wishes to make the payments required by the October deed and seeks a declaration that the deed is ineffective and does not bind the trustee to make the payments. [13] The applicant’s point is that the October deed operates according to its tenor as a fetter upon the absolute discretion conferred by cl 3 of the trust deed to distribute income to such of the beneficiaries as it chooses, in amounts it chooses, or to accumulate all or part of the income. The discretion is to be exercised every year prior to 30 June. [14] According to the Law of Trusts by Underhill and Hayton 16th edition (p 690): -- 4 of 10 -- 5 ‘… it is trite law that trustees cannot fetter the future exercise of powers vested in trustees ex officio … . Any fetter is of no effect. Trustees need to be properly informed of all relevant matters at the time they come to exercise their relevant power.’ [15] Meagher and Gummow in Jacobs Law of Trusts in Australia 6th edition para 1616 say: ‘Trustees must exercise powers according to circumstances as they exist at the time. They must not anticipate the arrival of the proper period by … undertaking beforehand as to the mode in which the power will be exercised in futuro.’ [16] Professor Finn (as his Honour then was) in his work Fiduciary Obligations wrote (at para 51): ‘Equity’s rule is that a fiduciary cannot effectively bind himself as to the manner in which he will exercise a discretion in the future. He cannot by some antecedent resolution, or by contract with … a third party – or a beneficiary – impose a “fetter” on his discretions.’ [17] Finkelstein J summarised the position succinctly in Fitzwood Pty Ltd v Unique Goal Pty Ltd (in liquidation) [2001] FCA 1628 (para 121). His Honour said: ‘Speaking generally, a trustee is not entitled to fetter the exercise of discretionary power (for example a power of sale) in advance: Thacker v Key (1869) LR 8 Eq 408; In Re Vestey’s Settlement (1951) ChD 209. If the trustee makes a resolution to that effect, it will be unenforceable, and if the trustee enters into an agreement to that effect, the agreement will not be enforced (Moore v Clench (1875) 1 ChD 447), though the trustee may be liable in damages for breach of contract …’ [18] There can be no doubt that the terms of the October deed constrain the trustee’s discretion as to the application of the income in each accounting period. It has bound itself to pay the first respondent $150,000 annually, indexed for inflation, for the rest of his life. To the extent that the trustee complies with that obligation its discretion to apply as much or as little of the income of the trust fund as it chooses in each financial year and, if it chooses to distribute income, to select which beneficiary or beneficiaries should be paid and the amount of the payment to the chosen beneficiaries, its discretion is restricted, or fettered. Instead, during Mr Lugton’s life, the trustee must choose, in each year, to pay the agreed amount. [19] The respondents resist the application on several grounds. The first is to argue that the October deed is not a fetter upon the trustee’s discretion but a separate promise to pay the agreed amount to Mr Lugton annually, for his lifetime, from its own resources and not by way of a distribution from the trust. [20] This is not a tenable construction of the October deed. Clause 6.7 contains an acknowledgment by Mr Lugton that ‘the amount to be distributed to him in each year in accordance with this agreement’ is an adequate and proper amount. This is a distinct admission that the payment of $150,000 annually is by way of a distribution of trust income. -- 5 of 10 -- 6 To the same effect are the terms of clauses 3 and 4. The former allows the first respondent to direct the applicant to pay the whole or part of the payment at his direction rather than to him personally, ‘provided that the total amount to be distributed in any year’ may not exceed the agreed sum. The latter clause allows the trustee to transfer the business to another company but obliges the trustee, in the event of a transfer, to obtain from the transferee ‘a similar covenant … to distribute the payment in each year.’ These phrases make it abundantly clear that the payment of $150,000 annually is by way of distribution from the trust income and is not a payment from the applicant’s own resources. [21] The applicant is correct that the October deed operates to restrict the trustee’s exercise of discretion conferred by clause 3. If matters rested there the applicant would be entitled to the declaration it sought. [22] The consequences for the respondents would be serious. The October deed would be ineffectual to control the trustee’s choice as to the recipients of trust income and the amounts to be received. Mr Lugton is neither a shareholder nor director of the trustee and can have no influence over the manner in which it makes those choices; the manner in which the trustee exercises its discretion. The applicant is controlled by Mr Pal and his family who, wherever the fault may lie, enjoy a distant relationship with the respondents. The fact that Mr Pal has caused the applicant to bring this proceeding is an indication that it is not disposed in the respondent’s favour. [23] Matters, however, do not rest there. There are other clauses in the trust deed which are relevant. Clause 9 confers on the applicant a general power of variation. It provides: ‘Notwithstanding the trusts … herein contained … concerning the trust fund the trustee shall … have power in its absolute discretion to declare such trusts … concerning … the income … for the benefit of … one .. or other of any of the persons benefiting … under the trust … for such interests … or upon and subject to such trusts … and generally … for the benefit of such persons as the trustee shall … by any deed … appoint and if … the trustee shall exercise the power hereby conferred in relation to part only of the trust fund the trust’s powers … herein contained shall remain in effect in relation to the remaining part of the trust fund.’ [24] Clause 10 regulates the powers of the trustee in relation to separate trust funds which it declares for any beneficiary during infancy or other incapacity. It has no present relevance and does not, in any way, affect the scope or operation of clause 9. [25] I do not see why the October deed is not a valid exercise of the power conferred by clause 9 to vary the trust deed and, with respect to part of the income of the trust, to make a separate trust for the benefit of a member of either class of beneficiary. The power is to be exercised by the trustee in such manner for the benefit of the chosen beneficiary as the trustee shall by deed appoint. On its face the October deed is an -- 6 of 10 -- 7 appointment by the trustee of part of the trust income. This is, in my opinion, the effect of the October deed. [26] The applicant objects to this construction. It is pointed out that the October deed makes no specific reference to clause 9, or to the variation power contained in the trust deed, and that the deed does not, in terms, declare a separate trust of the monies to be paid to the first respondent. It is then pointed out that by clause 6.6 the first respondent disclaimed ‘any right to monies that are … held in his favour under a separate trust’. The submission is made that if the October deed were an exercise of the power of variation contained by clause 9 of the trust deed clause 6.6 would have referred to ‘any other separate trust’. [27] These points have some force but I do not think they determine the question. The October deed was meant to have effect. It was the means the parties chose to resolve their dispute and provide for a division of trust income in a manner the parties thought fair and proper. A mechanism by which that result could be achieved lawfully existed in clause 9. I do not see why the trustee’s solemn act in executing the October deed should not be regarded as an exercise of that power. By the October deed the trustee was obliged to hold a specified part of the trust in each year to be paid to the first respondent. I do not see why this is not the declaration of a trust concerning the trust income, as clause 9 permits. [28] Then it is said that the language of the October deed is suggestive of contract rather than the obligations of a trust. Reference is made to clause 4 and the trustee’s obligation to ensure ‘that it contains a similar covenant’ from an entity to which the business might be transferred; and to clause 6 in which the first respondent promised to do certain things ‘in consideration of the promises made by the trustee’. [29] These points do not compel a construction of the October deed that is other than an exercise of the power of variation. Under clause 4 the trustee’s business might be transferred absolutely to another company. Clause 4 is not concerned only with a change of trustee. It contemplates the annihilation of the trust, at least the possibility, and the transfer of the income-generating business to an entity who would take it free of any equitable obligation. In those circumstances it is only appropriate to describe as a covenant a promise obtained from the transferee that it would make payments in equivalent amounts to the first respondent as those which the October deed secured to him. [30] The formulation of clause 6 is to be understood in the context in which the October deed came to be executed. Its purpose was to effect a separation between Mr Pal and his family from the respondents. The obligations which they were to discharge conjointly or in collaboration were to be terminated and the circumstances that brought them together to exercise the trustee’s discretions were to be expunged. The declaration of a separate trust of part of the trust income was to be part of that process. That part provided for Mr Lugton’s financial needs and acquitted the trustee’s duty to exercise its discretion with respect to his claims as a beneficiary. The other parts of the separation involved Mr Lugton’s departure from the applicant company and the release of any past claims so that, for the future, the payment of the income pursuant to the separate trust was the first respondent’s sole recompense and expectation. -- 7 of 10 -- 8 [31] Accordingly clause 6 provided for these other parts of the disassociation. It is not at all surprising that it should be cast in the ‘language of contractual obligation’. The first respondent did give up his shareholding, directorship and claims on the trustee in return for a declaration of the separate trust securing him the annual payments described in clause 2 of the October deed. [32] The last objection made is that the October deed imposes on the applicant an absolute obligation to pay the agreed amount whether or not the trust income is sufficient to satisfy the obligation. This is said to be consistent with a contractual obligation but not with a declaration of trust. [33] I do not accept this submission. No doubt the trust income in the past has been more than adequate for the required payment and the parties contemplated that that state of affairs would continue. If it does not I have no doubt that the proper construction of clause 2 is that the declaration of trust extends only to the income of the trust fund to the extent that it is available, i.e. sufficient to make the agreed payment. [34] I conclude that the October deed is not a contractual fetter on the trustee’s discretion conferred by clause 3 of the trust. It is a permitted variation of the trust deed. [35] There is another basis on which the October deed may be upheld. Clause 12 of the trust deed provides that: ‘The trustee may at any time release any power conferred … by this deed in regard to the whole or any part … of the trust fund or the income thereof notwithstanding that such power may entail any fiduciary obligation with regard to its exercise.’ [36] The October deed is capable of being read as the release by the trustee of the power conferred on it by clause 3 to exercise an unfettered discretion to distribute or accumulate all or part of the trust income and, in the case of a distribution, to select those beneficiaries as recipients of the distribution. Upon the release being effected by the October deed the discretion was no longer unfettered. It was reduced in scope coextensively with the obligation created by the October deed to pay the specified amount from the trust income. [37] A provision in a trust deed authorising trustees to release powers which they would otherwise have a duty to exercise are valid. See Muir v Inland Revenue Commissioners [1966] 1 WLR 1269 at 1283. [38] The applicant objects to this view of the October deed because it makes no reference to clause 12. The observation is correct but does not compel the conclusion that the October deed is not a proper exercise of the power of release given by clause 12 of the trust deed. The October deed did not have to specify the fountainhead of its efficacy to be valid. If it is in fact an exercise of the power conferred by clause 12 it is nonetheless efficacious for not proclaiming itself. [39] Then it is said that the October deed does not expressly release the applicant’s powers of choice given by clause 3 of the trust deed. It is true that the deed does not say something like: -- 8 of 10 -- 9 ‘The trustee hereby releases so much of its discretionary powers conferred by clause 3 of the trust deed on 13 August 1981 as are necessary for it hereafter to stand possessed of the amount of $150,000 (indexed) in each accounting period from the trust income to be paid to James John Lugton’ or, at the conclusion of clause 2 of the October deed: ‘The trustee hereby releases such of the powers conferred by clause 3 of the trust deed of 13 August 1981 as would enable it to hold part of the income of the trust fund for the purpose of making the payment.’ [40] It is not, in my opinion, necessary for the October deed to have contained such an express release for it to be a valid exercise of the power conferred by clause 12. [41] The applicant’s last objection to the operation of clause 12 is that the power, once released, can not be exercised subsequently. The authority is said to be s 205(1) of the Property Law Act 1974 which provides that after a release of a power the releaser is not capable of exercising the power. The submission continues: ‘Accordingly the applicant no longer would have power to apportion the remaining income of the trust fund between the beneficiaries of the trust. … It would be essential that a new trust be set up “reconferring” discretionary power on the applicant to deal with that income. This has not been done.’ The consequence is said to be that such a profound consequence with such inconvenient results should be avoided. The October deed should be read as not effecting such release. [42] The submission misunderstands the section and the effect of the deed. Section 205 does not apply to ‘a power coupled with a duty’. (Section 205(4)). The discretionary power conferred by clause 3 is such a power. Section 205 does not apply to it. See Principles of the Law of Trusts by Ford and Lee para 5180, p 1074. However, a power of release conferred expressly by the trust deed itself is a sufficient authority for the trustee’s release, as Muir decided. [43] Further, the release effected by the October deed is not of the whole of the powers conferred by clause 3. The consequence of the release is not that there is no trustee with power to dispose of the income of the trust fund after the payment to the first respondent. There has been a partial release of the power. Only so much of it is released as will allow the trustee to decide not to make the payment. Once the payment is made, or provided for, the trustee’s discretion with respect to the balance of the trust income is untouched. [44] Although they are trust deeds the instruments in question are in nature documents recording a commercial transaction. They were meant to give effect to the agreement of the parties with a view to bringing about a division of property and the regulation of their business relationships. When construing any such document the court should strive for a construction which will give them efficacy rather than deprive them of utility. The court should uphold bargains where it can, rather than destroy them. The need is particularly important when the consequences for the respondents are potentially drastic. Accordingly when the October deed is open to the construction I have postulated, that is by its terms an exercise of the powers -- 9 of 10 -- 10 conferred both by clause 9 and clause 12 of the deed it should be read that way so that the parties’ agreement, and the settlement of their disputes, are upheld. [45] For these reasons I conclude that the October deed is not an invalid fetter upon the applicant’s discretionary powers as trustee. The application should be dismissed. -- 10 of 10 --