Kelly v Perpetual Trustee Co (Ltd) [1963] HCA 23; (1963) 109 CLR 258 (26 July 1963)

HIGH COURT OF AUSTRALIA

KELLY v. PERPETUAL TRUSTEE CO. (LTD.) [1963] HCA 23; (1963) 109 CLR 258

Settlements

High Court of Australia
Dixon C.J.(1), Taylor(1) and Menzies(1) JJ.

CATCHWORDS

Settlements - Respective rights of life tenant and remaindermen - Stocks of surplus tin accumulated by smelting business carried on by trustees - Sale for purpose of winding up business - Profits on sale of surplus tin - Capital or income.

HEARING

Sydney, 1963, April 23, 24; July 26. 26:7:1963
APPEAL from the Supreme Court of New South Wales.

DECISION

July 26.
THE COURT delivered the following written judgment:-
Here, notwithstanding the omission from the first codicil to his will of executor and trustee - the Perpetual Trustee Company (Limited) which we shall call "the Trustee Company" - concerning the holding during the lives of his children of the shares in his residuary estate which by his will he simply directed to be held in trust for them in equal shares, it does appear to have been intended that each child should have a life estate only in what is nevertheless described as "his or her share of corpus", and that upon the death of each child his or her share of corpus should be held for remaindermen viz. children or other issue as appointed or, in default of appointment, for children in equal shares with substitutional gifts to issue in case of death and with gifts over in default of issue. It is not necessary to describe the remaindermen with any greater precision because all we are concerned with here is whether the distributable share of a particular fund - which answers the general description of part of the share of the estate to which the testator's son William Henry became entitled for life - should be paid to his daughter, the appellant Mary Wentworth Kelly, as the person entitled according to the testator's ultimate dispositions of the corpus of that share; or, as income of the estate of the testator, to the estate of his son, William Henry Kelly deceased, he having died in 1960 and the Supreme Court, by an order - which although unchallenged seems difficult to justify - having appointed respondent Daphne May Johnson, the sole residuary beneficiary under his will, to represent the estate for the purposes of the suit in which the decree appealed from was made. (at p265)

2. Before going any further, however, it is worth observing that this question between life tenant and remainderman arises because by the first codicil to his will the testator reduced the estates previously given to his children to life estates and not from any particular direction that the Trustee Company should pay the children no more than the income or profits of the shares given to them - a direction which would perhaps entail an enquiry whether the testator attached any special meaning to the words "income" or "profits". As life tenant the son William Henry was by law entitled to receive all profits accruing during his life tenancy and it seems that the particular direction to the Trustee Company in the first codicil "that all profits or interest accruing to my estate from the carrying on of any business or businesses or venture or ventures or from the employment of my capital or any part of my estate therein on the footing of a loan or otherwise shall be treated and applied as income of my residuary estate "emphasizes that everything accruing to the estate as a business profit - whether it be money or something else - belongs to the life tenant and forms no part of the corpus of the estate and that the true character of the receipt determines how the Trustee Company should deal with it. (at p265)

3. The fund with which the dispute is concerned came into existence in circumstances that are suggested, rather than established, by the evidence and, to assemble what is relevant, it is necessary both to examine the testator's testamentary dispositions and to piece together scraps of information about how a business had been conducted before and after the testator's death in 1901. (at p265)

4. During his life the testator had, among his other business activities, bought tin ore and sold the tin smelted therefrom by the Sydney Smelting Company, a firm established in 1880 and in which the testator was himself a partner. It seems that the testator's tin ore was smelted by the firm upon the terms of an arrangement whereby the testator was entitled to receive back from the firm the metallic tin content estimated by assay when the ore was supplied but any tin recovered over and above the assayed amount was to belong to the firm. This latter was known as surplus tin. It is probable that ore was smelted at cost but that the testator paid to the firm one half of the profit upon the sale of his tin, that is, the assayed yield. What accounts of these businesses were kept is not known; indeed, little beyond what we have already stated is known but in an affidavit sworn by the assistant manager of the Trustee Company it is stated:- "It appears to have been the practice of the Sydney Smelting Coy. from its inception not to bring any stocks of surplus tin into account, for the purpose of determining profit, until the stock was sold, and this practice was continued after the death of the testator. The smelted tin, to which the Company became entitled as owner, pursuant to the aforementioned agreement with the testator, was in many years wholly or partially retained by the Company but before being sold was not brought into its accounts for the purpose of determining profit. A note in the present records of the Trustee, made some years ago, apparently from early records of the Sydney Smelting Coy., shows that at the date of death of the testator, the 'Stock and book debts' of the Company were of a value of One thousand six hundred and forty pounds seven shillings and one penny (1,640 pounds 7s. 1d.)". It is a legitimate comment that, notwithstanding the fact that twenty-one years had elapsed between the establishment of the Sydney Smelting Company in 1880 and the death of the testator in 1901, it would seem that there was little surplus tin accumulated during that time if, as appears to be the fact, the figure of 1,640 pounds 7s. 1d. include d what there was. We refer to the partnership agreement of 1880 establishing the firm with thirteen partners as a combination of four separate competing existing businesses and to an amending deed made in 1895, when there were six partners, to make two observations. Firstly, that whatever was in fact done about keeping accounts showing stocks of tin on hand, the original deed did provide for the keeping of true accounts of the stocks and effects of the firm and of its receipts and expenditure, its credits and liabilities, and for the making up and presenting of a quarterly balance sheet containing "a summary of the property and liabilities of the Company and also an account of the net profits". The second observation is that the amending deed exempted the testator from that part of the partnership deed which provided that the interest of a partner dying should be taken over by the company at a valuation and positively provided not only that his interest should not cease at his death but that thereafter the business should be managed by the person whom he should appoint. Coming now to the will and codicils, what is important for present purposes is that by the first codicil the testator gave the Trustee Company power to carry on any business in which he was interested at the time of his death by words referring particularly to the Sydney Smelting Company and, following the terms of the deed of 1895, appointed his son Thomas Herbert Kelly to manage the affairs of that business "in all respects as they have been heretofore managed by myself". The codicil also contains an authority of a general character to the Trustee Company to "leave the entire management of any such business or venture either to my said son Thomas Herbert Kelly or to any other person or persons (whether such person or persons be interested in any such business or venture or not) so as to be free from the necessity of attending thereto further than requiring my said son or such person or persons to render once or oftener in every year an account thereof and without being obliged to examine into the accuracy of such accounts". Furthermore, the Trustee Company was authorized to put further capital up to 10,000 pounds into any business which it should carry on in terms that enabled it to make the advance "to my said son Thomas Herbert Kelly either for the purposes of the Sydney Smelting Company or for any other business or businesses or venture or ventures". From these provisions it is apparent that the testator did put his son Thomas Herbert Kelly in a special position in the management of the businesses of the estate generally but a direction to that son to "pay and account to (my Trustees) the said Company for my share of the balance of the profits and to other persons (if any) for their respective shares of the balance of the profits respectively" was limited to the Sydney Smelting Company. (at p267)

5. After the death of the testator the business of the Sydney Smelting Company was carried on by Thomas Herbert Kelly on behalf of the partners and it seems that Thomas Herbert Kelly also bought the ore that was to be smelted and sold the tin recovered (other than the surplus tin retained) on behalf of the Trustee Company under the name "T.H. Kelly". When in 1917 the partnership came to an end and "Sydney Smelting Company" became no more than a business name under which the estate carried on part of its business, Thomas Herbert Kelly managed the whole business or the two businesses on behalf of the Trustee Company. Surprisingly little is known about Thomas Herbert Kelly's management of the business or of the system of accounting that was adopted. His son Thomas Henry Kelly was between 1927 and 1950 employed in the business which the father managed until 1948 and he swore an affidavit in the proceedings which is not very informative but it indicates that after 1927 practically the whole, if not the whole, of the ore that was smelted belonged to the estate and that, although some records of the accumulated stocks of surplus tin were kept, they were disregarded in making up accounts which dealt only with tin sold. (at p268)

6. In 1950 the Trustee Company by two interdependent agreements sold to Sydney Smelting Co. Pty. Ltd. (1) "certain land situated at Woolwich and the goodwill attached to the business of T.H. Kelly and/or the Sydney Smelting Company" and certain plant for 111,401 pounds 2s. 8d. and (2) "the right title and interest of the Vendor" in three descriptions of assets "of the business carried on under the names of T.H. Kelly and/or the Sydney Smelting Company" for a sum to be calculated. These assets were (1) scheduled plant, (2) "the refined ingot tin, tin ore, tin slags, tin oxide, tin drosses and rough tin metals on the premises" and (3) stores and office furniture. It is not in dispute that the price attributed to assets of the second description was 184,446 pounds 16s. 4d. and the question involved in these proceedings is whether so much of that sum as is attributed to the one-third share of the testator's estate to which his son W.H. Kelly was entitled as is distributable among beneficiaries should now be paid to the tenant for life or the remainderman. It is quite clear that the bulk of the tin that was sold for 184,446 pounds 16s. 4d. was what has been described as "surplus tin" accumulated over the period between 1917 and 1950 but it is possible (1) that some part of the tin sold in 1950 was on hand in 1917 (2) that some tin produced just prior to the sale and which was not strictly "surplus tin" was included. Consideration of these two complicating factors can be postponed until we have considered both the character of "surplus tin" in the hands of the Trustee Company and the character of the proceeds of the sale of that tin in 1950. (at p268)

7. We are satisfied that the surplus tin recovered each year was a profit of the business to which the life tenants were entitled. It is, we think, quite clear that when all the outgoings had been met, surplus tin was one of the assets that the Trustee Company had in hand as a profit from carrying on the business of buying and smelting ore. The balance of a wool clip after meeting all the expenses of running a station property would be in exactly the same position. It is unnecessary to multiply instances for we cannot conceive of any other way of regarding part of the net result of the Trustee Company's expenditure in buying and smelting ore to recover tin for the estate. Nor is it important here how accounts were kept, for any system of accounting which showed as debit items the cost of ore and the cost of its treatment and neglected as a credit item any tin produced that was not sold would be grossly misleading and could not affect the rights of beneficiaries and there is nothing in the will requiring that the profits of the business to which life tenants became entitled should be calculated according to accounts made up in such a fashion. While the testator was alive the Sydney Smelting Company was a partnership carried on under a deed which, as has been seen, required the preparation of true balance sheets and accounts showing inter alia the stock of the company and a summary of the property of the company. These had to be expressed in money. In the absence of any evidence to the contrary, it should be assumed that what ought to have been done was done and the direction in the first codicil that Thomas Herbert Kelly should carry on the affairs of the Sydney Smelting Company "as they have been heretofore managed by myself" could afford no justification for a practice of making up misleading accounts, if such a practice was followed after the death of the testator. Nor does it matter whether the estate's business activities with regard to buying tin ore, smelting it and holding or selling the tin are to be looked at as one business or as two - as Mr. Kerrigan for the appellant insisted - for the plain fact is that after 1917 all tin recovered belonged to the estate and was produced by business activities carried on for the benefit of the estate so that, as soon as all liabilities connected with its production were satisfied, the tin which remained was a profit to which the life tenants were entitled. We say this because we are not confronted in this case by problems which may arise in the course of the prudent management of a continuing business. No question arises here whether the prudent management of the business required the retention in the business from time to time of any part of that portion of its gross income which was represented by the surplus tin; the plain fact is that surplus tin was for some reason or other set aside and accumulated and the evidence, such as it is, strongly suggests that it was, in a very real sense, segregated from and, not in any practical way, used in the business. Indeed it appears clearly enough that no purpose of the smelting business was or could have been served by its accumulation. Cases dealing with how the natural increase of live stock should be regarded when trustees carry on a station for the benefit of an estate to which life tenants and remaindermen are entitled have nothing to do with this case for there is no analogy between lasting and barren stocks of surplus tin and flocks and herds of animals which live and die, which have to be maintained and which provide the natural increase for this to be done. We say nothing, therefore, about the cases which troubled Jacobs J., i.e. In re Porter; Porter v. Porter (1930) 31 SR (NSW) 115 and McBride v. Hudson [1962] HCA 5; (1962) 107 CLR 604 , beyond observing that what the later case did was to disapprove an understanding of the earlier case which required that accounts of a station property run by trustees for the benefit of tenants for life and remaindermen should disregard stock on hand at the beginning and the end of an accounting period and in relation to stock bring into account only purchases and sales during the period to ascertain the profits to which the life tenants were entitled. We cannot think, however, that the earlier case would provide any authority for the proposition that in the circumstances here the surplus tin produced year by year could not before its sale be regarded as a profit of the business or businesses which the trustees carried on. Of the pastoral cases, the one most instructive for present purposes is Hassell v. Perpetual Executors Trustees & Agency Co. (W.A.) Ltd. and Ball [1952] HCA 66; (1952) 86 CLR 513 where, in deciding that the proceeds of wool shorn from sheep in wool at the date of the testator's death and sold when the realization of the whole business, including sheep off shears, had been arranged was income, the Court said:- "The reason why the proceeds of wool shorn and lambs dropped are brought into the accounts of a business as revenue items is to be found in the character in which wool and the lambs come into existence as independent subjects of property. They come into existence, by severance in the case of wool and by birth in the case of lambs, as produce of the sheep from which they are derived, and, like crops of grain and fruit, they belong to that class of produce which is periodically detached and periodically recurs: cf. Campbell v. Wardlaw (1883) 8 App Cas 641, at p 645 . They are, by their very nature, a profit. If they are sold in the course of a business the proceeds must be brought into account in ascertaining the profits of the business; and if they are sold otherwise than in a business the proceeds must likewise be treated as received on income account. It is true that upon a sale of sheep in lamb or in wool the whole proceeds of the sale go to corpus if the sheep belonged to corpus; but that is because the property sold consists only of capital assets, though capital assets with a probability of early produce. Once the produce comes into being, it cannot by its nature belong to capital" (1952) 86 CLR at pp 522, 523 . Although in that case the executors - apart from shearing the sheep - can hardly be said to have carried on the business of the deceased, it is possible by parity of reasoning to reach the conclusion here that, once tin came into existence as a result of the smelting by the estate of ore brought for that purpose in the course of business, that tin belonged on revenue account and, if some tin remained unsold and was put on one side in the manner already described, that tin formed part of the profits of the business to which life tenants were and remained entitled. (at p271)

8. For the reasons given, the surplus tin produced year by year was part of the business profits to which life tenants were entitled but it is still necessary to consider the further argument that when the accumulated stocks were sold when the business as a whole was being disposed of, the proceeds of the tin became part of the corpus of the estate. It might seem a strange result that the proceeds of the realization of an item held on income account could in any event come to be regarded as capital but the argument that these proceeds should be so regarded seizes upon the general principle stated by the Full Court of the Supreme Court of Victoria in In re Thornley; Boyd v. Thornley (1925) VLR 569 "that a gain . . . made, not in the ordinary course of carrying on a business, but in a closing process of realization, is prima facie attributable to corpus rather than to income" (1925) VLR, at p 579 and asserts that the proceeds of the surplus tin were received by the Trustee Company by reason of a realization in the process of closing down the estate's businesses of buying tin ore, smelting it, and selling refined tin, and that there is no reason why all the proceeds of that realization should not be attributed to corpus. The general principle stated above is, we think, well recognized. Thus, for instance, in Gover's valuable little book Capital and Income, 3rd ed., (1933) p. 11 the following statement (omitting references) is to be found:- "In the case, however, of farming stock or other consumable stock-in-trade (which is consumed with the object of being reproduced), the life-tenant is only entitled to the profits made by its use, and is bound to keep up the stock: substituted articles becoming subject to the settlement: and if it is all sold off on the business being discontinued, he takes only a life interest in the proceeds: any increase in value being capital; unless a contrary intention is shown, as, by a provision that the life-tenant is not to be liable for any diminution or depreciation in the stock; or by a condition that the life-tenant keep the stock at equal value". The principle is not, however, to be pressed too far for, as the citation which we have already made from Hassell's Case (1952) 86 CLR, at pp 522, 523 shows, an item of profit does not lose its character merely because it is sold otherwise than in the course of a business. Furthermore, in a particular case it may be an important circumstance whether the closing sale is a sale of the business or merely of specified assets of a business, as was the case here. Here it may be conceded that the Trustee Company in 1950 sold the stocks of surplus tin - of which it seems it did not become aware until 1947 - in the course of the realization of the assets of the business which it had been carrying on for the estate with a view to closing down the business. Apart from anything else, however, there is the strongest reason for not treating the proceeds of the sale of surplus tin as capital and this can be most simply expressed by saying that the surplus tin belonged in equity to the life tenants. This is not to say, of course, that the Trustee Company or its manager could not, while the business was a going concern, have resorted to the stocks of surplus tin for the purpose of carrying on business. Had this happened the proceeds would have been carried to revenue account and would have been reflected in what the life tenants received. When, however, at the end of the road it is found that there is tin on hand which was put by year after year out of current production after all revenue expenses have been met for no purpose connected with the conduct of the business and the accumulated stocks are not required to meet liabilities at the close of business, then as between life tenant and remainderman that tin belongs in equity to the life tenant as profits, so that its sale as part of the realization of the assets of the business cannot give the proceeds the character of capital. (at p272)

9. Having decided the main question, it is necessary to return to what we previously referred to as two complications which can be dealt with shortly. If any of the tin sold in 1950 was tin held when the partnership came to an end in 1917, we are disposed to think that that tin, having been taken over by the estate from the partnership, should be regarded as part of the capital of the estate. It will therefore be necessary to exclude the proceeds of any such tin from any declaration that, when the Trustee Company received the sum of 184,446 pounds 16s. 4d., it did so upon income account. The possibility that the stocks of tin sold for that sum included some tin that was not surplus tin because it was not tin recovered in excess of assay is of no importance in the particular circumstance of this case. Any such tin being current production remaining after all liabilities of the business had been met - as the facts show - is properly to be regarded as part of the surplus tin which, as we have said, belonged in equity to the life tenants. (at p273)

10. At this point it is necessary to set out the questions asked in the originating summons and the decree that was made thereon. The questions related to one-third of the 184,446 pounds 16s. 4d. received by the Trustee Company as aforesaid and were whether it:-

"(a) should have been treated as to the whole of the said
one-third part, as income of the trusts estate to which
William Henry Kelly was entitled.
(b) should have been treated as to some and if so what portion
of the said one-third part, as income of the trust estate
to which William Henry Kelly was entitled.
(c) should have been treated as to the whole of the said
one-third part, as capital of that part of the trust
estate in which William Henry Kelly had a life
interest.
(d) should have been treated as to some and if so what portion
of the said one-third part as capital of that part of the
trust estate in which William Henry Kelly had a life
interest". (at p273)

11. The Court, in lieu of answering these questions, declared "that if upon a conventional and appropriate process of accounting in a business of tin smelting of the kind carried on by the estate of the abovenamed testator Thomas Hussey Kelly deceased between the years 1917 and 1950 the surplus tin coming to hand in each accounting period should not have been brought into the accounts of the business for the purpose of determining the profit of the business for the accounting period then the one-third part of the amount of one hundred and eighty four thousand four hundred and forty six pounds sixteen shillings and four pence (184,446 pounds 16s. 4d.) received by the plaintiff as trustee of the said estate for the sale of stocks of tin forming part of the assets of the Sydney Smelting Company should have been treated as to the whole of the said one-third part as capital of that part of the trust estate in which William Henry Kelly had a life interest; but if upon a conventional and appropriate process of accounting in a business of tin smelting of the kind carried on by the said estate between the years 1917 and 1950 the surplus tin coming to hand in each accounting period should have been brought into the accounts of the business for the purpose of determining the profit of the business for the accounting period, then the said one third part of the said amount should have been apportioned on the basis that it comprises a sum of corpus as at the fourteenth day of February one thousand nine hundred and fifty together with simple interest thereon at the rate of five per centum per annum from the year 1917 to the said fourteenth day of February one thousand nine hundred and fifty and the amount so apportioned to simple interest should be treated as income and the balance as capital of that part of the trust estate in which William Henry Kelly had a life interest And This Court Doth Order that it be referred to the Master to inquire whether upon a conventional and appropriate process of accounting in a business of tin smelting of the kind carried on by the said estate between the years 1917 and 1950 the surplus tin coming to hand in each accounting period should have been brought into the accounts of the business for the purpose of determining the profits of the business for the accounting period". Against this declaration both parties have appealed. (at p274)

12. The declaration should be set aside and in lieu thereof it should, for the reasons stated, be declared that the estate of William Henry Kelly deceased is entitled to one-third of such part of the sum of 184,446 pounds 16s. 4d. (less so much thereof, if any, as represents proceeds of tin held by the estate of the abovenamed testator Thomas Hussey Kelly deceased when the partnership, Sydney Smelting Company, came to an end) as is properly available for distribution among the beneficiaries of the estate of the abovenamed Thomas Hussey Kelly deceased. The decree also provides for the payment of the costs of the proceedings out of the estate but in the circumstances it is more appropriate to order that the costs be paid out of so much of the fund constituted by the payment of the aforesaid 184,446 pounds 16s. 4d. as the estate of William Henry Kelly would otherwise be entitled to receive, because the only persons whose rights, it seems, require definition are those who are entitled for life and those entitled in remainder to William Henry Kelly's share of the estate of the said testator. The costs of the appeal and cross-appeal should be paid out of the same fund notwithstanding that the substantial result is that the appeal fails and the cross-appeal succeeds. (at p274)

13. It is desirable to add that we were made aware that other proceedings have been instituted by the appellant against the Trustee Company arising out of its dealings with the fund comprising one-hird of the said sum of 184,446 pounds 16s. 4d. The order disposing of this appeal may well have some consequential effect upon these proceedings, but we have been at pains in stating our reasons for allowing this appeal to confine ourselves to what is necessary for that purpose to avoid disposing of issues in the pending litigation by a side wind. (at p275)

ORDER

Set aside the declaration contained in the order of the Supreme Court dated Thursday, 2nd August 1962, under appeal. In lieu thereof declare that the estate of William Henry Kelly deceased is entitled to one-third of such part of the sum of 184,446 pounds 16s. 4d (less so much thereof, if any, as represents proceeds of tin held by the estate of the abovenamed testator, Thomas Hussey Kelly deceased, when the partnership, Sydney Smelting Company, came to an end) as is properly available for distribution among the beneficiaries of the estate of the abovenamed Thomas Hussey Kelly deceased.

Set aside the order for costs contained in the said order and in lieu thereof order that the costs of the proceedings in the Supreme Court be paid out of so much of the fund constituted by the payment of the aforesaid 184,446 pounds 16s. 4d. as the estate of William Henry Kelly would otherwise be entitled to receive. Let the costs of this appeal and the cross appeals be paid out of the said fund.

Subject to the foregoing, confirm so much of the order under appeal as ordered that Daphne May Johnson be and as thereby appointed her to represent for the purposes of the suit the estate of the late William Henry Kelly and as referred to the Deputy Registrar or the Chief Clerk in Equity to tax the costs of the plaintiff of and incidental to the proceedings in the Supreme Court and to tax as between solicitor and client the costs of the defendants and to certify the same respectively and that such costs and expenses when so taxed and certified be retained or paid out of the estate of the testator as aforesaid in manner following, that is to say: the costs and expenses of the plaintiff be retained by it or paid to its solicitors and the costs and expenses of the defendants paid to them respectively or to their respective solicitors.