Estate Sullivan

For convenience, the active parties before the Court, Michael and Gregory Sullivan, are respectively described in these reasons for judgment as “the plaintiff” and “the defendant”. During the course of preparation of the judgment, and for the purpose of minimising the risk of a multiplicity of further proceedings, other parties with an interest in the proceedings were joined as defendants. Through the defendant’s solicitor, they each filed a submitting appearance.

Gregory Sullivan is now a defendant in his personal capacity, as well as in his capacity as executor of the estate of the late Catherine Annette Sullivan (“the deceased”). He contests the proceedings only in his representative capacity.

Other parties now joined as defendants are CA Sullivan Pty Limited (“CAS Pty Limited”), DW Sullivan Pty Limited (“DWS Pty Limited”), Gabrielle Poularas (sister of Michael and Gregory Sullivan) and the adult children of Michael Sullivan (Philip, Amy and Andrew Sullivan).

The formal participation in the proceedings of “submitting parties” is noted, as a matter of record, but in these reasons for judgment the character of the dispute the subject of determination is presented in the guise in which it was presented to the Court. The proceedings were conducted, in substance, as a dispute between the active participants: Michael Sullivan, as “plaintiff” and Gregory Sullivan, as “defendant”. That is how they are described here, and in the documentation of the parties to which the judgment must refer.

The plaintiff (Michael Sullivan) and the defendant (Gregory Sullivan) are sons of the deceased, who died on 16 August 2014. With their sister (Gabrielle), they are the principal beneficiaries named in the deceased’s Will dated 11 December 2010.

Before the Court is a motion calling for determination of a dispute within the family about how to implement an agreement for settlement of proceedings on a claim by the plaintiff for family provision relief (under Chapter 3 of the Succession Act 2006 NSW) against the estate of the deceased.

In an earlier phase of the proceedings, the Will was the subject of contest, culminating in a partial settlement of the proceedings on 16 February 2015, when orders were made leading to a grant of probate of the Will, in solemn form, made to the defendant on 6 July 2015.

With amendment of court process, the proceedings continued as the vehicle through which the plaintiff made his application for family provision relief.

Following a mediation ordered by the Court in this, the family provision phase of the proceedings, the plaintiff and the defendant agreed, on notice to their sister, to settle them.

They recorded their agreement, at the end of the mediation on 3 June 2015, in a document, styled “ Heads of Agreement” and dated that day, which the plaintiff personally, his then solicitor and the solicitor for the defendant all executed.

Clause 1 of the Heads of Agreement was in the following terms:

On both sides of the record, the parties adhere to their agreement of 3 June 2015 that the principal proceedings have been settled. However, there is one issue upon which they differ as to the form of a formal notation to be made by the Court designed to give effect to the settlement agreement.

That issue has been tendered to the Court for its determination upon the express basis that, however it may be determined, the parties jointly invite the Court to make orders and notations designed to give effect to the Heads of Agreement.

In formal terms, by a notice of motion filed on 24 July 2015, the defendant seeks orders, under section 73 of the Civil Procedure Act 2005 NSW, in the nature of an order for specific performance, for enforcement of the Heads of Agreement.

In the event, because of the parties’ joinder of issue on the motion, and their confinement of their dispute to a single issue, the Court can dispense with a formal order for specific performance, proceeding instead to make orders and notations by reference to draft short minutes, or revised draft minutes provided at the Court’s invitation, which include (for the Court to choose between them) the parties’ competing versions of a single paragraph.

A resolution of the point at issue turns upon construction of one particular provision (clause 4) of the Heads of Agreement designed, principally, to adjust the rights of the plaintiff under clause 8 of the defendant’s Will.

In compliance with directions given by the Family Provision List Judge (Hallen J), the parties prepared separate counterparts of what was intended, ultimately, to be a “Joint Memorandum” identifying the issues required to be determined on a hearing of the defendant’s notice of motion.

The defendant’s counterpart bears the date 9 October 2015. The plaintiff’s counterpart is in evidence under cover of an email dated 12 October 2015. The two counterparts differ only in their identification, in paragraph 18, of the issue that presently divides the parties.

The draft short minutes as originally presented by the parties to the Court, and as subsequently revised, incorporate (in paragraph 5) competing versions of the formal notation proffered as a means of giving effect to clause 4 of the Heads of Agreement.

Before setting out extracts of the Will, the Heads of Agreement and the draft short minutes necessary to frame the Court’s determination of the motion, notice needs to be taken of the general nature of that part of the deceased’s estate affected by the motion.

The deceased died leaving an estate (with an estimated gross value of just under $9.5 million) comprising an interest in three parcels of land, shares in two family companies and a comparatively small amount of personalty. Of the family companies, CAS Pty Limited was the repository for most of the deceased’s wealth. For probate purposes, the deceased’s shares in that company were valued at $6.3 million. Her shares in the other company, DWS Pty Limited, were valued at $225,000.

The principal assets of the family companies comprise shares in publicly listed companies, which shares provide dividend income to the family companies which, in turn, provide dividend income to their own shareholders, including (during her lifetime) the deceased.

The following extract (with editorial adaptation) is taken from the defendant’s draft of the Joint Memorandum:

The plaintiff’s draft of the Joint Memorandum is the same as the defendant’s draft, save that paragraph 18 (with editorial adaptation) is in the following terms:

Both versions of the Joint Memorandum are deficient in that they omit reference to clause 4(b) and clause 14 of the Heads of Agreement.

Clause 4(b) is in the following terms:

Nobody suggests that the expression “annual true-up payment” is a term of art, or that it means anything other than an adjustment of payments “made to the plaintiff equitably with all other shareholders”.

The reference to “all other shareholders” does not fit the facts, in formal terms, because CAS Pty Limited was 100% owned by the deceased, and is to continue in the ownership of her estate. In substance, in the context of the Heads of Agreement and the deceased’s Will, the expression may be taken as a reference to the defendant and the parties’ sister Gabrielle, the beneficiaries other than the plaintiff presently entitled to dividends paid by CAS Pty Limited to the defendant as the company’s shareholder, subject to the trust obligations for which clause 8 of the deceased’s Will provides.

Paragraph 14 of the Heads of Agreement is in the following terms:

It is as well, also, to set out in full the terms of clause 8 of the Will, to demonstrate both the symmetry, and asymmetry, of the provision made by the deceased for her three children. Each of the deceased’s children is to receive a one-third share in her residuary estate. However, the plaintiff’s share is divided between himself, with a life interest, and his children, as remaindermen.

Because clause 8 provides for the plaintiff’s notional one-third share of the residuary estate to be divided, over time, between the plaintiff (as life tenant) and his children (as remaindermen), it is convenient to refer to that share, comprising the interests of the plaintiff and his children collectively, as “the clause 8.3 trust”. Where that expression is used it can, perhaps, best be understood, in the current contest between siblings, as “the plaintiff’s one-third share”. However, whatever language labels are used in aid of an understanding of the scheme of the family’s arrangements, such labels are no substitute for the primary documentation itself. Nor do they dispense with the need to remain mindful that “the clause 8.3 trust” or “the plaintiff’s one-third share”, however it may be conceptualised: (a) is part of a larger trust arrangement embodied in clause 8 of the Will as a whole; and (b) at a micro-level, involves a distinction between the separate interests of the plaintiff and his children.

Clause 8 is in the following terms:

On the case for which the defendant contends in these proceedings, the trust for which clause 8.3 of the deceased’s Will provides, in the context of property adjustments for which the Heads of Agreement provide, contemplates that a stream of income will flow through CAS Pty Limited and DWS Pty Limited, ultimately, to the beneficiaries identified in clause 8.

Counsel for the defendant provided a schematic diagram, in aid of the defendant’s submissions, as a demonstration of how the trust created by clause 8.3 of the Will is expected by the defendant to operate following implementation of the settlement. Observations made under this heading of the judgment are based on that diagram, informed by the parties’ submissions and the evidence generally.

As contemplated by the Heads of Agreement, the assets of the trust for which clause 8.3 of the Will provides are to include:

Allowing for an adjustment contemplated by the Heads of Agreement, the defendant’s beneficial entitlement to shares in CAS Pty Limited will rise from 33 1/3% of the issued capital (an increase of 7 1/3%, reflecting an equivalent reduction in the share of the clause 8.3 trust, from 33% to 26%) and Gabrielle’s share will remain at the 33 1/3% contemplated by clause 8 of the Will.

The Heads of Agreement provides for the plaintiff to sell his 1,001 shares in DWS Pty Limited to CAS Pty Limited. In accordance with clause 8 of the Will, not varied by the Heads of Agreement, the deceased’s 6,003 shares in DWS Pty Limited are to be split three ways, between the defendant, Gabrielle and the clause 8.3 trust. Taking into account the 1,004 shares presently held by the defendant in his own right, the 1,001 shares presently held by Gabrielle in her own right, the plaintiff’s sale of his 1,001 shares to CAS Pty Limited, and the three-way split of the deceased’s 6,003 shares, the Heads of Agreement contemplates that the defendant will hold 33.36% of the issued capital of DWS; Gabrielle will hold 33.32%; CAS Pty Limited will hold 11.11%; and the clause 8.3 trust will hold 22.21%.

The subject matter of clause 4 of the Heads of Agreement relates only to CAS Pty Limited. It does not relate to either shares in DWS Pty Limited or dividends declared by DWS Pty Limited in favour of its shareholders. Nor does it relate to assets of the deceased’s estate, other than shares in CAS Pty Limited or DWS Pty Limited, that are held by the defendant as trustee of the deceased’s residuary estate for the defendant, Gabrielle and the clause 8.3 trust in equal shares. The only estate assets affected by an adjustment of the three one-third shares for which clause 8 of the Will provides are the deceased’s shares in CAS Pty Limited. The share register of DWS Pty Limited will change, upon implementation of the Heads of Agreement, because of the plaintiff’s sale of his shares in the company to CAS Pty Limited. However, that change will not affect the three-way split for which clause 8 of the Will provides as a means of division of the deceased’s residuary estate.

The deceased’s estate, through the defendant as trustee, will continue to own the whole of the share capital of CAS Pty Limited, the directors of which will continue to be the defendant and Gabrielle.

The defendant contemplates that the affairs of CAS Pty Limited will be managed on the basis that:

The shareholders of DWS Pty Limited will be the estate of the deceased, the defendant in his personal capacity, Gabrielle and CAS Pty Limited. The directors of the company will continue to be the defendant and Gabrielle.

The defendant contemplates that the affairs of the company, DWS Pty Limited, will be managed on the basis that:

In summary, on the case for which the defendant contends, the trust for which clause 8.3 of the Will provides, in favour of the plaintiff, will receive 26% of the dividends declared by CAS Pty Limited and 22.21% of the dividends declared by DWS Pty Limited.

The plaintiff’s concern about stewardship of CAS Pty Limited and DWS Pty Limited by the defendant (and Gabrielle), expressed in terms responsive to the defendant’s outline of how the companies are expected to be managed, focuses on the possibility that his siblings will, as directors of the companies, adversely affect his flow of income distributions from the clause 8.3 trust by discretionary decisions about establishment of reserve funds or reinvestment, which decisions will be reinforced by their (or at least the defendant’s) status as a shareholder of the companies and the plaintiff’s lack of any shares in either company.

Clause 4 of the Heads of Agreement contemplates that CAS Pty Limited (and DWS Pty Limited), under the control of the defendant and Gabrielle, will declare dividends on a quarterly basis, with annual adjustments as required.

Clause 14 of the Heads of Agreement contemplates that the plaintiff will be kept informed of the course of the companies’ business at least to the extent of regular receipt of accounting statements.

On the case for which the defendant contends, although CAS Pty Limited and DWS Pty Limited are not obliged to pass on to the clause 8.3 trust the whole of the income that the companies themselves receive, and they can reasonably be expected to have expenses (incurred in the ordinary course of business) to charge against that income before they declare dividends in favour of their shareholder(s), neither company is to be managed without regard to the interests of the plaintiff (and his children) under the clause 8.3 trust.

The defendant acknowledges that he and Gabrielle owe fiduciary obligations as directors of CAS Pty Limited and DWS Pty Limited, and that he has an additional layer of fiduciary obligations as trustee of the deceased’s residuary estate.

It can also be noted, confidently, that Gabrielle has notice of that additional layer of fiduciary obligations. She is herself a beneficiary under clause 8 of the deceased’s Will. She has filed a submitting appearance. She attended court as an observer on the hearing of the motion.

The parties have not included in their submissions any reference to implied obligations of good faith arising from their entry into the Heads of Agreement as an incident of an ongoing relationship. Nevertheless, to the extent that such obligations may exist, they tend in the same direction as acknowledged fiduciary obligations. Decisions about management of CAS Pty Limited and DWS Pty Limited cannot be made by the defendant (or, semble, by Gabrielle) without due regard being paid to the interests of the plaintiff, and his children, under the clause 8.3 Trust.

The draft short minutes of orders presented to the Court by the parties, jointly, include provision for the defendant to be joined in the proceedings in his personal capacity as “second defendant” and for CAS Pty Limited to be joined in the proceedings as “third defendant”. This has been attended to in both respects.

As agreed between the parties, the short minutes comprise, in total, 17 paragraphs detailing the parties’ settlement agreement and providing for the Court (pursuant to section 95 of the Succession Act 2006) to approve a release by the plaintiff of his rights to seek a family provision order out of the estate and notional estate of the deceased. The short minutes include, as paragraph 16, a provision equivalent to paragraph 14 of the Heads of Agreement.

At the hearing of the defendant’s motion, via the draft short minutes, the parties presented to the Court competing versions of paragraph 5, each intended to give effect to clause 4 of the Heads of Agreement.

The defendant’s version of paragraph 5 (for convenience, here described as “Version D1”) is in the following terms:

The plaintiff’s alternative version of paragraph 5 (for convenience, here described as Version “P1”) is in the following terms:

On retiring to chambers after the hearing of the defendant’s motion, I was persuaded, by the plaintiff’s criticism of clause 5(b) of version D1 as opaque, to invite the parties to present a revised version, or versions, of version D1. That invitation required the defendant to rethink his drafting, and the plaintiff to provide a draft reflecting the defendant’s case, not his own. The object of the invitation was to “unpack” the rolled-up drafting of the defendant, and to facilitate a closer comparison of the parties’ respective cases.

The defendant responded to the Court’s invitation with a revised draft (“version D2”) in the following terms:

The plaintiff responded to the Court’s invitation with a revised draft (“Version DP3”) which, with editorial adaptation, was in the following terms:

The parties’ dispute about the proper construction and implementation of clause 4 of the Heads of Agreement is informed by a lack of trust between siblings, particularly the plaintiff and the defendant, with Gabrielle sitting on the sidelines as an observer.

When the settlement agreement is implemented, the plaintiff will be neither a director nor a shareholder of either CAS Pty Limited or DWS Pty Limited. His association with both companies will be confined to that of a beneficiary under the trust created by clause 8.3 of the deceased’s will.

In his version of paragraph 5 of the draft short minutes (Version P1), the plaintiff seeks, in effect, a guarantee that the testamentary trust of which he is a beneficiary (with an interest in the nature of a life estate) is to be paid, on a quarterly basis, an amount equal to 26% of the nett profits of CAS Pty Limited and 22.21% of the nett profits of DWS Pty Limited. In effect, he seeks to impose upon the defendant, in particular, the obligations of a guarantor, obliged to ensure that the testamentary trust in which he has an interest receives from the family companies dividends tied to the income stream received by the family companies from their investments (largely dividends from publicly listed companies).

The plaintiff’s apprehension is that, entrusted with discretionary decisions about management of the family companies and, in particular, the family companies’ declaration of dividends, his siblings (particularly the defendant) will make decisions against his personal interests, thereby diluting or eliminating the commercial interest he has (via the testamentary trust established for him ) in obtaining access to the income stream available to the family companies.

The plaintiff elaborates his case by reference to the following general contentions, taken from his written submissions:

It is not strictly accurate to say that CAS Pty Limited is bound by the Heads of Agreement. It did not execute the document. However, the solicitor for the defendant announced to the Court, on the hearing of the defendant’s motion, that he had instructions to appear for the company and to consent to its joinder for the purpose of giving effect to the Heads of Agreement. In a broader regime of joinders, that has since been done.

The plaintiff complains that the defendant’s version of paragraph 5 of the draft short minutes (Version D1) is deficient because the words in parentheses defining “trust distributions” interpose a filter or block between the income of CAS Pty Limited and DWS Pty Limited and payments made to the testamentary trust of which he is a beneficiary, and because the effect of that interposition is to make the income of the trust subject to discretionary decisions of the directors of the family companies:

The plaintiff complains that the effect of what he describes as the interposition of the directors’ discretionary decision-making is directly opposed to the intention of the deceased, in clause 8.3 of her will, that he receive the “full benefit” of the income of the shareholding in CAS Pty Limited held by the testamentary trust of which he is a beneficiary.

The defendant elaborates his case by reference to the following general contentions, taken from his written submissions:

The defendant’s submissions elaborate these contentions by reference to provisions of the Corporations Act 2001 Cth and the respective constitutions of CAS Pty Limited and DWS Pty Limited, and references to the general law, in exposition of procedures for the declaration of dividends by companies and the fiduciary obligations of directors.

It is not necessary to record these elaborated submissions in detail. The defendant’s exposition of the Corporations Act 2001 and the general law is not the subject of dispute. The plaintiff’s case concedes the existence of these legal principles but, at its simplest, contends that: (a) it was open to CAS Pty Limited to agree, as he says it has agreed, to pay him an amount equivalent to a fixed percentage of its income stream; and (b) it is open to the company to do so, without anybody breaching statutory or equitable obligations, because the defendant took upon himself a contractual obligation, to the plaintiff, to make sure that the company pays him that amount.

In my judgement, the case for which the defendant contends conforms most clearly with the language, and intent, of clause 4 of the Heads of Agreement, read in the context of clause 8 of the Will of the deceased and having regard to the nature and structure of the operations of CAS Pty Limited and DWS Pty Limited.

I do not accept (as the plaintiff’s case, in its bare essentials, requires acceptance) that the defendant, or CAS Pty Limited, guaranteed that the plaintiff would receive an amount equal to 26% of the income received by CAS Pty Limited without deduction. Nothing in the Heads of Agreement justifies a finding that CAS Pty Limited (or, for that matter, DWS Pty Limited) was intended to become a mere cipher, that the discretionary powers of directors were to be abrogated, or that their obligations to manage company business in the interests of the company as a whole could be disregarded in the interests of the plaintiff alone.

I am strengthened in my acceptance of the defendant’s case by the defendant’s acceptance that he and his sister are constrained, in management of CAS Pty Limited and DWS Pty Limited, by layers of fiduciary obligations which, in my assessment, preclude them from disregarding, or sacrificing, the plaintiff’s interests.

I do not accept (as the plaintiff would have it) that the expression “full benefit” in clause 8.3 of the Will bears upon the plaintiff’s claim to a fixed percentage of the nett profit of CAS Pty Limited. It is an expression which is used, rather, to define his interest in the clause 8.3 trust vis-a-vis the interests of his children. The assets of the clause 8.3 trust are held by the defendant on trust: (a) to pay to the plaintiff during his lifetime the income derived by the trustee (the defendant) from those assets; and (b) after the death of the plaintiff, to hold those assets for (or, if required, to transfer the assets to) the children of the plaintiff, in whom the assets will vest at the time of the plaintiff’s death.

In my opinion, the reference in clause 4(a) of the Heads of Agreement to payment of “dividends” on a “quarterly basis” may reflect a common intention that CAS Pty Limited will be managed in a way that ordinarily passes on to beneficiaries under clause 8 of the Will nett profits of the company; but, insofar as clause 4 speaks of dividends being paid “out of the nett profits” of the company, it does not support the plaintiff’s contention that he is to receive a fixed percentage (26%) of the company’s dividend income or an equivalent amount.

On the whole, in my assessment the plaintiff’s construction of clause 4 of the Heads of Agreement is driven by his distrust of his siblings as much as, or more than, it is by an objective appraisal of the language of the Heads of Agreement. His submissions strain the language of clause 4, admittedly ambiguous, to achieve an outcome, or at least greater assurances about future management of family structures, beyond what was, objectively, in contemplation at the mediation.

To the extent that this may be so, the defendant’s articulation of his case in terms that embraced a presentation of his expectation about how CAS Pty Limited, DWS Pty Limited and the clause 8 Trust(s) will be managed may provide comfort enough to minimise risks of future litigation.

In the meantime, my determination is that the defendant’s case on the proper construction and implementation of paragraph 4 of the Heads of Agreement is correct, but the drafting of the plaintiff in version DP3 of paragraph 5 of the parties’ draft short minutes provides a firmer foundation to give effect to that case.

In any event, the terms in which paragraph 5 of the Court’s orders (based on the parties’ draft short minutes of orders) are expressed are informed by that part of this judgment, found in paragraphs 29-46, under the heading “The Defendant’s Representation of the Scheme of the Testamentary Trust(s) for which clause 8 of the Deceased’s Will Provides”.

Accordingly, subject to one qualification (relating to costs), I make orders and notations in accordance with the short minutes prepared by the parties jointly, including therein the DP3 version of paragraph 5 and deleting therefrom the plaintiff’s alternative version (P1) of paragraph 5.

To the extent that the short minutes require an exercise of the Court’s discretions under the Succession Act (including, particularly, section 95) I am satisfied that they should be made.

The parties’ short minutes include an order that provides for the plaintiff’s costs to be paid out of the estate of the deceased in an agreed sum of $50,000, and an order that the defendants’ costs be paid out of the estate on the indemnity basis.

In publishing this judgment I will allow to the parties an opportunity to be heard as to whether those costs orders can, or should, be varied to deal with the costs of the motion. However, prima facie, I incline to the view that the costs of the motion should be subsumed in the costs orders for which the short minutes provide.

Upon publication of these reasons for judgment, Lindsay J provided to the parties, for their review, draft short minutes of orders incorporating his Honour’s determination that the DP3 version of paragraph 5 should be adopted.

Following upon that event the defendant requested, the plaintiff accepted, and his Honour acted upon the basis that, in the orders made by the Court, the word “income” should be substituted for the word “payments” in paragraph 5(b)(iii) of Version DP3.