Partridge v Equity Trustees Executors & Agency Co Ltd [1947] HCA 42; (1947) 75 CLR 149 (29 October 1947)

Partridge and Others Plaintiffs, Appellants; and Equity Trustees Executors and Agency Company Limited Defendant, Respondent.

T. W. Smith, for the plaintiffs, on the questions of limitation of time and equitable defences.

This is an appeal from a judgment of Lowe J. sitting as the Supreme Court of Victoria dismissing with costs an action brought by the appellants, who are the residuary beneficiaries of the will of George Partridge deceased, as plaintiffs against the respondent, which is the sole executor and trustee of the will as defendant.

The plaintiffs allege that a sum of £2,150, part of a larger debt owing to the estate by a company called William Hartley Pty. Ltd. (hereinafter called the company), was lost by the wilful default of the defendant as executor, or alternatively, by the breach of trust and wilful default of the defendant as the trustee of the will, and claim that the defendant should be ordered to make good the consequential damage.

The relevant facts are shortly as follows. By an indenture made on 8th August 1919 between Edith and George Howell as vendors of the first part, F. H. Thompson and the testator as purchasers of the second part, and the company of the third part, the vendors agreed to sell 15,000 fully paid shares in the company to the purchasers for £10,000 to be paid by the company out of its funds on or before 1st July 1924 with an option which was exercised to extend the time for payment until 1st July 1929. The indenture provided for the immediate transfer of one hundred shares to the testator to qualify him to be a director of the company. The indenture also provided that the purchasers should advance £2,000 to the company which should not be withdrawn whilst any part of the purchase money remained unpaid. The whole of this sum was advanced by the testator. The indenture also provided that the purchasers should advance to the company any further sums which the company might require for the efficient and successful carrying on of its business. The testator advanced sums totalling £1,500 at seven per cent interest for this purpose. The indenture also provided that the vendors should receive out of the dividends of the company or the funds or assets thereof quarterly a sum of money equivalent to six per cent per annum on the outstanding purchase money and that the balance of the dividends should be the property of the purchasers.

By his will made on 8th April 1926 the testator, who died on 20th July 1926, gave devised and bequeathed all his real and personal estate to the defendant as his sole executor and trustee upon trust to sell call in and convert the same into money and to pay thereout his just debts funeral and testamentary expenses and the probate and estate duties and certain pecuniary legacies, and subject thereto to pay the income to all his children in equal shares during their respective lives, and immediately after the death of each child to stand possessed of his or her share as well original as accruing of and in the capital and income of his trust estate for the child or children of the deceased child who attained the age of twenty-one years, if more than one in equal shares, and if there should not be any such child of such deceased child such share should be added to the shares of his other children equally. The testator empowered his trustees to suspend for such period as they should judge expedient the sale conversion and getting in of his estate or any part thereof, and during this period to manage and order all the affairs thereof. He empowered his trustees to hold any shares or investments held by him at the date of his death or to which he or they might be or become entitled or possessed of so long as they in their discretion thought advisable. The final clause in the will is in the following terms: "I desire that my trustees shall not press for payment of any debt which may be owing to me by William Hartley and Company Proprietary Limited but will grant the said company such reasonable time as it may require at such rate of interest as my said trustees may deem fit."

At the date of the will the company was making profits and substantial dividends had been declared. The testator had not drawn the balance of the dividends amounting to £6,177 to which he was entitled after paying interest thereout to the vendors, but had lent this balance to the company at interest to be used in the business. He must therefore have thought when he made his will that the company would be indebted to him or his estate for moneys advanced to the company and for undrawn dividends, but that he or his estate would become indebted to the company for the sum of £5,000 for money paid by the company on his behalf to purchase the shares.

But in 1929 the vendors repudiated the sale and the defendant was advised by counsel that the indenture could not be enforced. This advice was accepted by the defendant, the shares and unpaid dividends reverted to the vendors, and a compromise was reached of the defendant's claims against the company. By this compromise, the propriety of which has not been challenged, the company agreed to pay the defendant the total sum of £4,100, as to £2,600 by four half-yearly payments each of £650 without interest on 1st July 1930, 1st January and 1st July 1931, and 1st January 1932. The balance of £1,500 was to become payable six months after the last instalment of £650 became payable, that is to say, on 1st July 1932, and this sum was to bear interest at seven per cent per annum. The first three instalments of £650 were paid, but the fourth instalment of £650 and the £1,500 totalling £2,150 were never paid. These sums remained outstanding until the end of 1935, interest being paid on the £650 at six per cent per annum and on the £1,500 at seven per cent per annum. On 29th January 1936 the defendant agreed to allow the whole amount of £2,150 to remain outstanding for a further five years at five per cent per annum. In October 1938 the company went into voluntary liquidation. Shortly afterwards the National Bank of Australasia which held a debenture over the assets appointed a receiver. The assets were realized but the proceeds were insufficient to pay the secured creditor and the whole sum of £2,150 and some interest in arrears was lost.

The learned judge below found that if the defendant had insisted on payment, the company could have paid the £2,150 in 1932 and for some years thereafter. But his Honour found for the defendant and dismissed the action on the ground that the conduct of the defendant was justified by the final clause in the will. His Honour thought that the testator had indicated in the first limb of this clause a desire that his trustees, whilst seeking to obtain payment of the debt, should stop short of measures amounting to pressure, that is to say that they should not demand payment or sue for the debt if it was not paid, and that the meaning of this limb should not be cut down by the language of the second limb. His Honour said that the testator seemed to have been content to rely on the debtor's sense of obligation to pay any debt owing to his estate, and to have assumed its capacity to do so.

We cannot agree with this construction. It imputes an intention to the testator to be benevolent to the company, even where the benevolence would be detrimental to the estate. We are of opinion that the clause was inserted in the will not for the benefit of the company but for the benefit of the estate. The testator contemplated that his estate would be interested in the company as a creditor and a shareholder, and he would not wish the hasty enforcement of the debt to prejudice the stability of the company to the detriment of his estate. He authorized the defendant to hold any shares to which it might become entitled, and instead of being obliged to demand and enforce immediate payment, to grant the company such reasonable time as it might require to pay the debt at such rate of interest as the defendant might think fit. "Debts due upon personal security are what executors without great reason ought not to permit to remain longer than is absolutely necessary" (Powell v. Evans[1]; In re Gasquoine[2]; Williams on Executors, 12th ed. (1930), p. 1187). We are of opinion that the clause in question should not be severed into two limbs but read as a whole, and that the second limb defines what is meant by the desire expressed in the first limb that the defendant should not press for payment of the debt. The will contains an imperative trust to sell call in and convert the whole estate into money. This paramount duty is qualified by a general power to suspend the conversion into money of any part of the estate, and a special power to postpone the getting in of the company's debt. But the debt was not forgiven, the paramount duty to collect it in full remained.

We agree with his Honour that the £4,100 was a debt within the meaning of the final clause, that the power was not exhausted by a single exercise, and that it was open to the defendant to give the company such further time as the defendant considered the company might reasonably require to pay the £2,150. But we are of opinion that the power was a fiduciary power to be exercised with due care and diligence and solely in the interests of the beneficiaries. It was the duty of the defendant to examine the financial position of the company and only to grant further time if it was satisfied that the company reasonably required such time to pay the debt and that it could be granted without detriment to the estate. The overriding duty was to get in the debt.

An examination of the evidence relating to the years 1932-1935 inclusive does not disclose that the defendant exercised due care or diligence in this period. No agreement was made with the company to pay the £2,150 at any particular future date or even to reduce it by instalments. No attempt was made to obtain any guarantee or other security from the principal shareholders. Matters were allowed to slide. In February 1933 the defendant demanded payment of the £650 and overdue interest thereon but not of the £1,500. But when the interest was paid, the demand for the payment of principal was dropped. In August 1933, when interest was overdue on the £650 and the £1,500, the defendant demanded payment of both sums. But the company paid the interest and the demands for payment of principal were again dropped.

During the whole of the period from 1932 to 1935 the financial position of the company was deteriorating. But it was still able to meet its current liabilities, it reduced its indebtedness to the bank by £2,000, and apparently repaid £1,700 off a loan made by the managing director. Towards the end of 1935 the affairs of the company were approaching a crisis. The bank considered that the management was unsatisfactory and was insisting on a change before it would continue to finance the business. An accountant appointed by the bank reported that there was a deficiency of assets to pay the unsecured creditors unless the shareholders who were loan creditors agreed to convert their debts into six per cent preference shares. The management was changed, the bank then continued to finance the business, and the shareholders converted their loans into preference shares.

We are prepared to infer from the evidence that as part of these transactions the defendant on 29th January 1936 agreed to allow the £2,150 to remain outstanding for five years. We are also prepared to hold that, having regard to the then financial position of the company, the only hope of getting in the debt was that the company would recover under the new management. But the defendant would not have been placed in this position if it had not allowed the matter to drift in the preceding period. We are of opinion that the failure of the defendant to take active measures during this period to get in the debt was culpable and would make it liable to make good any loss flowing therefrom in an account taken upon the footing of wilful default. His Honour has found affirmatively, and we agree with him, that if the defendant had insisted on payment in 1932 or soon afterwards the company would have been able to pay the debt. But it would be enough to say that the onus rested on the defendant to show that, even if there had been no default in its duty, the debt could not have been recovered and the loss avoided (Re Brogden[3]).

It is therefore necessary to examine the other defences relied on by the defendant. The defendant has pleaded s. 15 of the Trustee Act 1928 Vict.. This section provides, so far as material, that a personal representative may, if he thinks fit, allow any time for payment of any debt without being responsible for any loss occasioned by his doing so if done in good faith. We are of opinion that the words "allow time for payment of any debt" are wide enough to include an allowance of time whether made the subject of a binding agreement or not. But the section "involves the exercise of an active discretion, not the mere passive attitude of leaving matters alone, and no relief is afforded where (as here) loss has arisen from carelessness or supineness": Re Greenwood; Greenwood v. Firth[4]; Godefroi on Trusts, 5th ed. (1927), p. 258.

The defendant has also pleaded s. 61 of the Trustee Act. This section provides that "if it appears to the court that a trustee ... is or may be personally liable for any breach of trust ... but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same." We are of opinion that a professional trustee like the defendant is not beyond the protection of the section: see National Trustees Executors & Agency Co. of Australasia Ltd. v. Dwyer[5]. But such a trustee should be particularly careful to act strictly within the line of its duty and would have to establish a strong case before the court would apply the section in its favour.

It is not disputed that the defendant acted honestly, but it is disputed that the defendant acted reasonably. It is also contended that even if the defendant acted honestly and reasonably, the case is not one in which the defendant ought fairly to be excused for the breach of trust or for omitting to obtain the directions of the court. The defendant relied on In re Grindey[6] and In re Mackay[7]. These cases show, in the words of Parker J., as he then was, in the later case[8] "that in considering whether a trustee has acted reasonably within the meaning of the section the terms of the instrument creating the trust ought to be taken into consideration. If an ordinary business man might reasonably entertain a particular view of the construction of the instrument, and the action of the trustee would have been justified if that view had been the true one, the trustee cannot be said to have acted unreasonably merely because this view of the construction of the instrument is wrong."

Each case must be decided on its own facts. The present will, unlike that in Grindey's Case[9], contains an imperative trust to sell call in and convert the estate into money. We do not think that any business man reading the will as a whole could have fairly come to any other conclusion in 1932 than that his dominant duty was to get in the debt, and that he should only grant the company further time if he was satisfied after a proper investigation of its affairs that the company reasonably required further time to pay the debt and that he should then only do so on terms which would afford reasonable protection to the estate. A large amount was at stake, so that it would have been reasonable for the defendant to have obtained the directions of the court. But it did not do so and it does not appear even to have sought advice from counsel or its solicitors. It placed its own construction on the clause and acted accordingly. In all the circumstances we are unable to agree with his Honour that the defendant acted reasonably. The question whether it ought fairly to be excused does not therefore arise.

The defendant has also pleaded that the right if any of the plaintiffs to maintain the action is barred by lapse of time and that it would rely upon the provisions of s. 82 (1) (c) (viii) of the Supreme Court Act 1928, or alternatively of s. 67 of the Trustee Act 1928 or alternatively of s. 304 of the Property Law Act 1928. We are of opinion that the wilful default or breach of trust occurred when the defendant failed to insist on the payment of the debt in 1932 or soon afterwards. The writ was issued on 18th May 1945. The testator had two sons and two daughters, each of whom acquired a life interest in one-fourth of the residuary estate at the date of death. The two daughters and one of the sons are plaintiffs. The other son was also a plaintiff but died after action brought and a representative has been appointed of his estate. The remaining plaintiffs are the children of the sons and daughters of the testator. Some are adults and some are infants. They are interested in remainder under the trusts of residue. At the date of the writ none of the interests in remainder had vested in possession and it is not contended that the interests of the grandchildren are barred. The question is whether the interests of the life tenants are barred. In addition to the vested interest already mentioned, each of the children of the testator has a life interest in remainder in the other three parts of residue contingent on the life tenant of that part not having a child who attained twenty-one years. None of these contingent interests have vested in possession.

We are of opinion that the proper inference to be drawn from the facts is that in 1932 the estate was no longer vested in the defendant as executor but was vested in it as the trustee of the will. Apart from the outstanding debt of the company, the residue had long since been ascertained and the trusts of the will had become operative. Part of the company's debt was still outstanding, but this would not be sufficient to negative the inference that the defendant had assented to the estate which had vested in it as executor being divested and becoming vested in it as trustee: see Commissioners of Inland Revenue v. Smith[10]. The rights of the beneficiaries against the defendant in 1932 were therefore rights derived from the express trusts of the will, and the action is not an action brought against the defendant as executor to recover a legacy within the meaning of s. 304 of the Property Law Act, or for a devastavit in which case it would be an action on the case within the meaning of s. 82 (i) (c) (viii) of the Supreme Court Act.

It is an action for breach of an express trust to which no existing statute of limitations applies within the meaning of s. 67 of the Trustee Act: In re Oliver[11]. Under this section the defendant is entitled to the benefit of lapse of time as a bar to the action in the like manner and to the same extent as if the claim had been against it in an action of debt for money had and received, but so that the statute shall not begin to run against any beneficiary unless and until the interest of such beneficiary is an interest in possession. Section 67 (2) provides that no beneficiary as against whom there would be a good defence by virtue of the section shall derive any greater or other benefit from a judgment obtained by another beneficiary than he could have obtained if he had brought such action and this section had been pleaded. The son and daughters of the testator had life interests in possession at the date of the breach of trust. If these had been their only interests it is clear that actions by them would have been barred at the date of the writ. It was contended, however, that they were not barred because of their contingent life interests in remainder. But the section clearly provides that time will run against an interest in possession and will bar an action brought in respect thereof. The life tenants are therefore barred in respect of their vested interests, and upon the defendant being ordered to pay £2,150 to the estate, a declaration should be made that the defendant will be entitled to receive the income of these interests (In re Fountaine[12]).

The defendant has also pleaded consent and concurrence in the breach of trust and laches and acquiescence on the part of the life tenants. Since we have held that these beneficiaries are barred under s. 67 of the Trustee Act, it is unnecessary to discuss these defences.

There remains the question of costs. The plaintiffs who are remaindermen succeed in the action and on the appeal and should have the general costs of the action and of the appeal. The question is whether the life tenants should be left to pay the costs of the action and of the appeal so far as there are costs exclusively attributable to their claim. The life tenants fail in respect of the life interests which vested in possession at the death of the testator but succeed in respect of their contingent life interests in remainder. On the whole we do not think that we should make any special order as to the costs in question.

Appeal allowed and judgment of the court below set aside. In lieu thereof order that the defendant pay the sum of £2,150 to the estate of the testator within twenty-eight days to be invested and held on the trusts of the will. Declare that the defendant is entitled to retain for its own benefit so much of the income from the investment of the £2,150 as would otherwise be payable to the children of the testator in respect of the life interests which vested in them at the date of his death. Order that the defendant pay interest at four per cent on £537 10s. to the one-fourth share of residue settled on the son of the testator James Russell Partridge deceased and his children from the date of his death to that of payment of the £2,150 to the estate. Order that the defendant pay the costs of the plaintiffs of the action and of this appeal. Liberty to apply to the Supreme Court in respect of any further or other relief.

[1] [1801] EngR 183; (1801) 5 Ves. Jr. 839, at p. 844 [1801] EngR 183; [31 E.R. 886, at p. 888].

[2] (1894) 1 Ch. 470, at p. 476.

[3] (1888) 38 Ch. D. 546.

[4] (1911) 105 L.T. 509.

[5] [1940] HCA 5; 63 C.L.R. 1, at pp. 30-31.

[6] (1898) 2 Ch. 593.

[7] (1911) 1 Ch. 300.

[8] (1911) 1 Ch. at p. 307.

[9] (1898) 2 Ch. 593.

[10] (1930) 1 K.B. 713.

[11] (1927) 2 Ch. 323.

[12] (1909) 2 Ch. 382.

High Court of Australia

Partridge v Equity Trustees Executors & Agency Co Ltd [1947] HCA 42; (1947) 75 CLR 149 (29 October 1947)

HIGH COURT OF AUSTRALIA