Tami and Ami were residuary beneficiaries of a testamentary trust which owned 50% of the voting shares in a proprietary company. The trust was established to "sell call in collect and convert into money" but "with full power and discretion to postpone such sale 'calling in' collection and conversion either indefinitely or during such period as [the trustee] think fit".
A dispute arose after Ami requested that the trustee make an in specie distribution of the shares. Tami opposed the transfer on the basis that the shares were more valuable if sold together as a 50% voting block than if they were split, such that she would suffer prejudice if the shares were divided between herself and Ami.
The trustee sought judicial advice pursuant to section 63 of the Trustee Act 1925 (NSW).
The primary judge found that there were no "special circumstances" such that the rule in Saunders v Vautier - which confers a right on an adult beneficiary to call for his aliquot share of divisible personal property in a trust - should not apply. The trustee was directed to transfer the shares to Ami as requested.
On appeal, the decision of the primary judge was unanimously upheld. The Court of Appeal found that:
- there was insufficient evidence of a loss of value on breaking up of the shares; and
- in the absence of that evidence, the Court was unwilling and unable to depart from what it regarded as the existing line of English authority which says that the splitting up of a controlling interest per se (without evidence of diminution of value) does not amount to relevant prejudice to override Saunders v Vautier.
It will be of interest to see how other appellate courts apply this decision, and in particular, whether they consider it necessary for an objecting beneficiary to prove that there will be a loss or destruction in value, which may not be that easy, as opposed to demonstrating there lies a risk of prejudice to the interest of the objecting beneficiary.
LESSON FOR TRUSTEES/ BENEFICIARIES
In the absence of evidence of actual prejudice in terms of a quantifiable reduction in the value of the shares, mere loss of control in a proprietary company or a risk of prejudice will not be sufficient to prevent a Saunders v Vautier type direction.
Trustees in those circumstances will be justified in making distribution of an aliquot share in divisible property to a beneficiary, even if such distribution is objected to by other beneficiaries, and gives one beneficiary an advantage over the other.
This is, however, not the case in relation to real property, where loss of value is presumed.
Beneficiaries prejudiced as a result of the distribution of shares may have to turn to oppression type remedies under the Corporations Act 2001 (Cth) to protect their interests.