Estate of Sullivan  NSWSC 524
In the case of the Estate of Sullivan, Carroll & O'Dea assisted a beneficiary of the estate in clarifying a Heads of Agreement that was settled by the parties prior to Carroll & O'Dea being engaged.
The deceased died leaving an estate mostly comprising assets of a "live" and ongoing nature.
The beneficiaries to the estate were proposed to receive dividend distributions from a number of companies that formed part of the Estate. The executor was also a director of these companies.
A beneficiary commenced proceedings under the Succession Act 2006 (NSW) to alter their testamentary entitlement. Following a mediation ordered by the court (the family provision phase of the proceedings) the parties recorded their agreement in a Heads of Agreement.
Heads of Agreement
A dispute between the parties arose as to the meaning of certain terms in the Heads of Agreement.
The Heads of Agreement were handwritten at the conclusion of the mediation and compiled 2 pages of agreed terms that set out the income that the beneficiary was to receive into a trust account set up for his benefit. When preparing consent orders for the court the proposed order setting out the Heads of Agreement was substantially different in its wording. The main point of difference was that:
- The beneficiary understood on the Heads of Agreement that the settlement allowed for him to receive on trust 26% of the income of a company that formed part of the estate;
- The executor understood that the settlement allowed for 26% of dividends declared by the company to be paid on trust for the benefit of the beneficiary.
The issue relevant to these two alternative views is that by receiving 26% of the income in the company in point 1, the beneficiary was given certainty that he would receive income on an ongoing basis. However, if he was to receive 26% of dividends declared by the company as in point 2, then he could potentially receive no income if the directors in the company decided not to declare any dividends from the income the company received.
This question could not be resolved and the matter went to hearing.
At hearing, submissions were made by the beneficiary to adopt clear and concise drafting, which was accepted, and further to adopt wording that would ensure he was to receive 26% of the income of the company that formed part of the estate, which was not accepted.
In circumstances where the beneficiary would not receive 26% of the income in the estate a further argument was advanced by the beneficiary to limit the discretionary power of the executor, in his capacity as director, to ensure that dividends to the value of 26% of the company's income would be declared. The executor disputed this on the basis that to place any restriction on his discretion as a director would be contrary to the Corporations Act 2001 and contrary to his obligations as a director of the company that formed part of the estate.
Whilst this potentially gives rise to a conflict of interest in that the executor has fiduciary obligations to the beneficiary, that could be contrary to the obligations the executor would have as a director of the company, the court accepted that there could be no limitation placed on a director of a company in this way. From a practical perspective, this could result in the executor not declaring dividends of the company and therefore not paying any income to the trust of the beneficiary but his honour was careful to warn the parties that they must make this arrangement work in a fair and equitable way or otherwise risk further litigation.
This case is a reminder that in an estate where there are relevant and obvious complexities, including potential conflicts of interests in executor's duties, any agreement reduced to a Heads of Agreement be done with the necessary attention to detail and without ambiguity.
Too often it is the domain of legal drafting that plain language is set aside in favour of overly complicated and legalistic prose which in this case led to significant dispute and required clarification of the court. If simple language was preferred and employed in the original drafting of documents, litigation could have ultimately been avoided.
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