Fischer v Nemeske Pty Ltd [2016] HCA 11: Trust Capital and Trustees

Today (6 April 2016) in the case of Fischer v Nemeske Pty Ltd [2016] HCA 11, the High Court, by majority, dismissed an appeal from the Court of Appeal of the Supreme Court of New South Wales.  The High Court held that a trustee had validly exercised a power to "advance" and "apply" trust capital or income by creating a debt reflecting the value of shares held by the trustee at the time the advance was made.

Background to the Case

In 1994, the directors of Nemeske Pty Ltd, a trustee company, resolved to make a final distribution of the trust monies to the beneficiaries, Mr and Mrs Nemes. That resolution was purportedly made pursuant to cl 4(b) of the trust deed, which provided that the trustee may ‘advance or raise any part or parts of the whole of the capital or income of the Trust Funds and to pay or to apply the same as the Trustee shall think fit for the maintenance, education, advancement in life or benefit of any of the Specified Beneficiaries …’. No money was ever paid, but instead a non-current liability of close to $4 million was created, eventually executed as a charge in favour of the Nemes, which stated that Nemeske Pty Ltd was indebted to them in the amount of almost $4 million, and would pay the money on demand. By the time both Mr and Mrs Nemes had died, the money was still unpaid. The appellants, who following the deaths of the Nemes and their daughter became the beneficiaries under the trust, sought a declaration that Nemeske was not indebted to Mr Nemes estate.

The appellants commenced proceedings against the Trustee, the executors of Mr Nemes' estate and other beneficiaries of the Trust, seeking declarations including that the distribution made from the Trust was of no effect or void.  The executors cross-claimed, seeking payment of the amount allegedly owing to Mr Nemes' estate.

The primary judge in the Supreme Court of New South Wales held that the resolution was a valid exercise of the Trustee's power to advance and apply trust capital or income under the terms of the trust deed.

That conclusion was upheld by the Court of Appeal, which also held that although there was no power to charge the shares, the covenant in the Deed of Charge confirmed that the debt owing to Mr and Mrs Nemes was payable on demand.

In the High Court

The majority of the High Court dismissed the appeal, holding that the resolution was an effective exercise of the Trustee's power to advance and apply trust capital or income, notwithstanding that there was no change in the beneficial ownership of the shares.  The majority held that the resolution created a creditor/debtor relationship, enforceable at law, between Mr and Mrs Nemes and the Trustee.  Further, the covenant in the Deed of Charge supported the advance and application made by the Trustee's resolution.

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Fischer v Nemeske Pty Ltd [2016] HCA 11

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