LPY Investments Pty Ltd v JY Property Pty Ltd & Anor [2024] VSC 94; LPY Investments Pty Ltd v JY Property Pty Ltd & Anor (No 2) [2024] VSC 112, Cosgrave J.
In an article in the LIJ in July 2008 I concluded that the answer to the above question was that it depended on the terms of the trust deed. This case confirms this conclusion and, moreover, that it is unlikely that a trust deed will be drawn so as to confer a caveatable interest. In this case Cosgrave J. also grapples with the authority to be accorded to Costa & Duppe Properties Pty Ltd v Duppe [1986] VR 90 (“Duppe”), in which Brooking J. declined to remove caveats lodged by unit holders in a Unit Trust. As my older readers will recall two acknowledged powerhouses of legal knowledge and rigorous analysis in the Victorian Supreme Court in the 1980s and 1990s were (among many strong intellects) Brooking J. and Ormiston J. Accordingly their Judgments tend to stand untouched, and indeed a leading barrister said to me at the time, I think in relation to Duppe, that he was glad that he had gone out to lunch and so avoided getting a brief to advise on whether to appeal against Brooking J’s decision. In the current case Cosgrave J. distinguished Duppe and Schmidt v 28 Myola Street [2006] VSC 343, (2006) 14 VR 447 (“Schmidt”) which concerned a similar trust deed.
In LPY Investments Pty Ltd v JY Property Pty Ltd & Anor (No 2) [2024] VSC 112 his Honour dismissed an application by the caveator for indemnity costs, ordering that the caveator pay standard costs.
The facts were –
- The plaintiff (LPYI) was the trustee of a unit trust (“the Hybrid Trust”). As trustee it was the registered proprietor of various properties, some on the market for sale. It was in dispute whether the units in the trust were held solely by the director of LPYI or whether they were held by companies including the first defendant.
- The trust deed defined:
- “Capital” as “the Trust Fund …” but excluding any undistributed Income.
- “Hybrid Unit Trust” as “a unit trust in which, subject to the rights entitlements and restrictions attaching to a class of Unit and the provisions of this Deed, the Trustee has discretion as to any payment of Income or Capital between Unitholders (as to all or one or more exclusive of the other or others) having an entitlement to share in the Income but in the absence of the Trustee having exercised such a discretion then in proportion to the number of Units which carry such a right and entitlement which each Unitholder holds”.
- “Income” as “the income of the Trust Fund … including profits and gains of a capital nature …”.
- “Property” as “real personal movable or immovable property of any description and wherever …”;
- “Trust Fund” as “the amounts paid by the Unitholders to the Trustee for the issue of Units, or property transferred to the Trustee by Unitholders for which Units have been issued or are to be issued, together with all the accumulations of Income being accretions to the Trust Fund and the investments and property from time to time representing the said money investments property accumulations and accretions”.
- “Unitholders” as “the holders of Units from time to time until the Vesting Day … “.
- “Vesting Day” as “the last day of the Perpetuity Period.” (cl. 1)
- The trust provided:
“2.1 the Trustee will, …, stand possessed of the Trust Fund and of the Income upon the trusts and with the powers and subject to the provisions expressed in this Deed;
2.2 the Trust Fund and the Income shall be held in trust for the Unitholders …; and
2.3 the Trustee shall have power … to issue additional Units and redeem Units.:
…
9.1 The Trustee shall in each Accounting Period determine the Income of the Trust Fund after allowing for all expenses including losses of a capital nature.
9.2 The Trustee shall, on … the determination of the Income, determine to:
(a) pay apply or set aside the whole or any part of the Income for all or one or more exclusive of the others or other of the Unitholders … in such proportions and in such manner as the Trustee, in the Trustee’s absolute discretion and without being bound to assign any reason, shall think fit or accumulate the same or any part of it;
(b) in the absence of the Trustee making a discretionary determination as set out immediately above, or in the event that the Trustee fails to make any form of determination, then pay apply or set aside the whole or any part of the Income for all of the Unitholders … and pay apply or set aside to those Unitholders in proportion to the number of Units which carry such a right and entitlement which each Unitholder holds;
(c) …
(d) accumulate all or part of it
PROVIDED THAT:
(e) if the Trustee shall not by the last date of the Accounting Period have paid or set aside the Income then the Trustee shall hold the amount of Income not so paid or set aside as an accumulation from that Accounting Period which the Trustee may pay or set aside in future Accounting Periods for the benefit of Unitholders at such time whose Units carry the right and entitlement to share in the Income [but a resolution by the Trustee, within six (6) months following the last day of an Accounting Period to Unitholders holding Units during the previous Accounting Period shall not, of itself, be invalid]
10.1 As of the Vesting Day the Trust Fund and the Trust shall vest absolutely. The Trustee … shall pay and assign the whole of the Trust Fund to the Unitholders whose Units carry the right and entitlement to share in the Trust Fund upon its termination.
10.2 The distribution of the Trust Fund upon its termination shall be determined in proportion to the number of Unit which each Unitholder holds … “.
- The trust conferred upon the trustee a wide range of powers and discretions of management of the trust and investment (cl. 11) and provided that, subject to any express provision to the contrary, every such discretion was absolute and uncontrolled and every power was exercisable at the trustee’s absolute discretion (cl. 12.7).
- The first defendant caveated over the properties. On 12 December 2023, in answer to a request for a statement of grounds from the plaintiff’s solicitors, the solicitors for the caveator inter alia alleged the existence of a trust and stated that it would remove a particular caveat to permit settlement of a sale if the entire net proceeds were paid to the Macquarie Bank to reduce the plaintiff’s indebtedness to the bank. On 14 December the plaintiff’s solicitors replied inter alia in substance that the bank would receive at least 90% of the net proceeds of sales. Later that day the caveator’s solicitors responded in substance repeating their previous requirement or that the full net proceeds be paid into court. It appeared that the director of the caveator had given the bank a guarantee and indemnity related to advances by the bank to the plaintiff. After further correspondence that caveat was withdrawn but this was followed by a dispute about a caveat over another property the sale of which was due for settlement.
- The registered proprietor applied under the Transfer of Land Act s. 90(3) for removal of that caveat.
In his Judgment Cosgrave J. dealt at length with Schmidt whose trust deed included:
“6 … the Original Unit Holders and Trustee hereby agree … that the Trustee shall stand possessed of the Trust Fund and of income of that fund … for the benefit of the general beneficiaries and of the Unit Holders in proportion to the number of units respectively held by them of each class of unit and the respective rights of each class of unit. The Trustee acknowledges that subject to the discretionary entitlements of the general beneficiaries the Unit Holders are and shall be beneficially entitled to all assets of whatever nature of the Trust Fund in accordance with the respective rights of each class of unit in proportion to the number of units respectively held by them of each unit.
7(a) The beneficial interest in the assets of the Trust Fund … shall be vested in the Unit Holders for the time being.
…
8 Each unit shall entitle the registered holder thereof together with the registered holders of all other Units to the beneficial interest in the Trust Fund as an entirety but subject thereto shall not entitle a Unit Holder to any particular security or investment comprised in the Trust Fund or any part thereof and no Unit Holder nor any combination of Unit Holders shall be entitled to the transfer of any assets or property comprised in the Trust Fund and save as hereinafter provided, no Unit Holder shall be entitled to interfere with or question the exercise or non-exercise by the Trustee of any discretion in relation to the Trustee’s ownership of such assets or property or in relation to the conduct of any business carried on by the Trustee or otherwise.”
Cosgrave J. ordered removal of the caveat, holding –
- Absent an applicable statutory definition, terms like “unit trust” and “discretionary trust” had no constant, fixed or normative meaning. It was necessary to construe the trust deed to determine what rights and entitlements it granted. [35]
- The term “discretionary trust” described certain features of some express trusts. A discretionary trust differed from a fixed trust because the entitlement of the beneficiaries to the income or the corpus or both was not immediately ascertainable. The trust was purely discretionary, and so non-exhaustive, if the income and capital could be withheld altogether. In contrast, in an exhaustive discretionary trust the discretion related only to the time or methods of paying the beneficiaries, eg where the deed required the trustee to distribute all income at specified intervals. [35]
- If the trust deed granted the trustee a discretion to apply the whole or part of a fund for a person, that person could not demand the fund from the trustee. But if the trustee had no discretion about the amount to be applied to the person, but only its method of application, that person could demand the whole entitlement from the trustee. [36]
- If a trustee had no duty to distribute any particular, or indeed any, amount to an individual beneficiary, the beneficiary’s rights were limited to requiring the trustee to consider whether to make a distribution and properly to administer the trust properly. But the beneficiary could not compel the trustee to act in any particular way, and had no more than an expectancy because the trustee alone could determine whether, and if so in what way and to what extent, the beneficiary would benefit. [37]
- Clause 2.2 gave no interest in the assets comprising the trust fund. [45]
- Because the trustee had a broad discretion about whether to pay, apply or accumulate the fund’s income, no unitholder had a guaranteed entitlement to income and only had an entitlement to a proportionate share of the trust fund upon the termination of the trust. Schmidt and Duppe were distinguishable. The trust deed in this case did not have terms equivalent to cls. 7(a) and 8 in Schmidt (cl. 7(a) and the first section of cl. 8 in Schmidt being in substance the same as two clauses in Duppe). Nor did it have any term like the latter part of cl. 6 in Schmidt. The deed in this case did not provide that: unitholders were beneficially entitled to all assets of the trust fund in proportion to their unit holding; the beneficial interest in the assets as existing from time to time was vested in the unitholders from time to time; each unit holder together with all the other unitholders was entitled to the beneficial interest in the trust fund as an entirety, but no unitholder was entitled to any particular security or investment. [46], [49], [50]
- The assumption that, wherever the legal estate in land was vested in a trustee, there must be some other person entitled in equity for an estate of freehold in possession was incorrect: the trustee could be entitled to the entire estate in possession. Further, absent express terms about the repository of the beneficial interest in the trust assets, it could be difficult to identify and quantify those assets at any given point. The trustee’s right of reimbursement or exoneration took precedence over the rights of beneficiaries, and because the extent of the indemnity fluctuated over time the precise identification of the substance and value of the trust fund also fluctuated, the beneficiary’s entitlement being limited to the available assets after all relevant liabilities had been discharged or provided for. [51], [52], [54]
- The caveators did not have a sufficient interest in the properties to support a caveat, having regard to: the construction of the trust deed in determining the nature of a unitholder’s interest; the limited interest of a unitholder in the trust assets; the breadth of the trustee’s discretionary powers over Income (as defined); the inability of a unitholder to compel the trustee to act in any particular manner regarding income generated by the trust; there being no term in the deed to the effect that the beneficial interest in the trust assets shall be vested in the unitholders or to the effect that each unit entitled its holder, together with the other unit holders, to the beneficial interest in the trust fund as an entirety but no unit holder had any entitlement to any particular security or investment or any part thereof. [60], [61], [68]
- Even if the caveator had had a caveatable interest the caveat would as a matter of discretion have been removed on the balance of convenience. First, because the trustee had very broad powers of investment and management and the caveat would likely interfere with the trustee’s powers of sale particularly because it required an absolute prohibition on dealings with the properties. Second, because it seemed from the solicitors’ correspondence that the director of the caveator was concerned to reduce his potential liability to the bank by forcing the plaintiff to pay the bank the whole of net proceeds of sale, thereby raising the possibility that the caveat had been lodged for a collateral purpose. [62]-[67], [69]
Philip H. Barton
Owen Dixon Chambers West
Wednesday, July 24, 2024