Present Entitlement and Fischer V Nemeske – Part 1

This is part 1 of my three-part series commenting on present entitlement and Fischer V Nemeske. To understand the effect of a resolution to make a beneficiary presently entitled to a sum, with a clear separation from the gloss placed by Division 6, it is important to examine Fischer V Nemeske in depth.

Importance of the Case

The case is important for a number of reasons:

1. First, it draws together a number of cases that consider how income is applied to the benefit of beneficiaries,
2. Second, it is High Court authority on the matter, and so is binding (although precisely what it is authority for and what is the majority is worth examining);
3. Third, it brings together the issues in trust law and accounting that have been ever present and ever problematic with earlier iterations of trust distributions.

Background

In this case, the trustee of the discretionary trust the Nemes Family Trust was the owner of some valuable shares in Aladdin Pty Ltd, the value of the shares was recorded in an “Asset Revaluation Reserve” by journal entry and this amount was resolved to be distributed to Mr and Mrs Nemes. Upon the death of Mr and Mrs Nemes the control of Nemeske passed to the Fischers, and their residuary estate to other beneficiaries, the Fischers sought to deny the effectiveness of the resolution that denuded a large value from the Nemes Family Trust.

Resolution Issues

There seemed to be general agreement between the parties and the various Judges that the resolutions were problematic. Indeed, there was an agreement to read into the resolution several words:

“The parties agreed at trial that the resolution of 23 September 1994 should be construed as written in the Minutes with the last sentence to read[15]:

“An amount equal to the entire reserve … to be distributed to [Mr and Mrs Nemes] as joint tenants.”

All that can be distributed is “an amount equal to” the reserve because the reserve itself is a mere accounting concept; it is not property that can be distributed;

Fischer v Nemeske – French CJ and Bell J

An attractive starting point is to consider the plurality of French CJ and Bell J. Together with Gageler J they upheld the effectiveness of the corpus distribution; It was argued that the distribution created a vested and indefeasible interest, and that it followed that there was a debt enforceable at law;

While often called a beneficiary of a trust, an object is a mere ‘potential’ beneficiary of the trust. The beneficiaries claimed that the distribution vested an interest in the trust property in them. This amount could then be called upon, and once so called would become a debt:

[16]. It was submitted for the executors that the combination of the Trustee’s resolution of 23 September 1994 and the entry in the accounts of the Trust for the period ending 30 September 1994 created an unconditional vested equitable interest and a debt enforceable at law owing by the Trustee to Mr and Mrs Nemes…

Edwards V Lowndes

In Edwards v Lowndes, at [24] Lord Campbell CJ said:

“If … the trustee, by appropriating a sum as payable to the cestui que trust, or otherwise, admits that he holds it to be paid to the cestui que trust, and for his use, the character of the relation between the parties is changed; and the trustee does not hold it as a trustee properly so called, but as a receiver for the plaintiff’s use”.

Commissioner of Inland Revenue v Ward

Mr. Orr, I think, quite rightly submitted that this case, dealing as it does with a different section, was only of limited relevancy but he relied on it as authority for his submission that in the case of a capital advancement at all events, the fund so advanced must be taken right out of the trust estate…

Chianti Pty Ltd v Leume Pty Ltd

In Chianti Pty Ltd v Leume Pty Ltd, Buss JA, with whom Martin CJ and Pullin JA agreed, referred to Vestey and Ward and concluded that distribution resolutions coupled with account entries constituted an admission by a trustee of an obligation to pay the money distributed on demand;

Conclusion

Whilst the majority judgement concluded that the corpus did not need to be set aside for the distribution to be effective, this is open to debate which will be discussed in Part 2 and Part 3.