Take care: trust distribution resolutions taken seriously by High Court

In Fischer v Nemeske [2016] HCA 11, the High Court has ruled on a rather vague resolution by which a Trustee resolved to make distributions, never paid, to beneficiaries. The outcome of the case shows the importance of taking care with these resolutions. They may create debts that can be enforced later by the beneficiaries.

The facts

The Nemes Family Trust had one asset: a parcel of shares in a Norfolk Island company called Aladdin Ltd. The shares were revalued at around $3.9m, and that amount was recorded in the Trust’s accounts as an asset revaluation reserve.

Nemeske Pty Ltd, the trustee of the trust, resolved that ‘a final distribution be and is hereby made out of the asset revaluation reserve … and that it be paid or credited to’ two of the beneficiaries, Mr and Mrs Nemes.

No payment was actually made to Mr or Mrs Nemes. They arranged for the Trustee to grant security over the shares in Aladdin to secure the Trustee’s obligation to make the payment. The Trust’s accounts continued in subsequent years to record ownership of the shares, and a loan account of $3.9m due to Mr and Mrs Nemes.

The litigation

The High Court had to decide whether the resolution was effective to create a debt due and payable to Mr and Mrs Nemes. The deed of security over the shares in Aladdin was largely irrelevant: the NSW Court of Appeal had already held that the Trustee had no power to grant this security. So the case largely turned on whether the resolution – and, perhaps, the Trust’s accounts – created a debt.

The decision

By a 3:2 majority, the High Court held that the resolution was effective.

French CJ and Bell and Gaegler JJ all considered the resolution was effective to ‘advance and apply’ trust funds to Mr and Mrs Nunes, even though no property was immediately transferred to them. They held that this was enough to create a debt due to Mr and Mrs Nunes, which the Trustee was obliged to pay.

Kiefel and Gordon JJ disagreed. In separate judgments, both considered that there had not been enough to constitute a dealing with trust funds that, under the trust deed, would create a debt. Both considered, on the basis of prior authority, that more would have had to be done to set aside a part of the trust fund for the beneficiaries. Gordon J considered that the resolution did not even purport to deal with the assets of the trust fund itself, but only the asset revaluation reserve, which she saw as merely a book entry reflecting a change in value of an asset.

The implications – for the Nemeske Family Trust

The outcome seems to give effect to the parties’ intentions. The Trustee had clearly intended Mr and Mrs Nunes to have the ultimate benefit of the Aladdin shares. The parties had gone to the trouble of drawing up a security deed to acknowledge the debt and give Mr and Mrs Nunes specific security over the shares to secure it. If the dissenting views of Kiefel and Gordon JJ had prevailed, and there had been no debt, the trust assets would have been available to other beneficiaries, which is unlikely to have been what was intended.

But the case was not decided on the basis of the time and trouble spent on the security deed (which was held to have been outside power) – only the resolution and, perhaps, the trust’s accounts. The outcome would have been the same if there had been nothing but the resolution and accounts.

The implications – for other trusts

It is not unusual for trusts to pass annual resolutions resolving to distribute assets which are not matched by transfers of funds to the relevant beneficiaries’ bank accounts. There can be many reasons for this, and the resolutions may well reflect the parties’ intentions.

But not always. It is important to remember, as this case shows, that distribution resolutions may create real debts. And beneficiaries – who may not always remain on good terms with each other – may ultimately require them to be paid.

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