Mcbride v Hudson
(1962) 107 CLR 604(Judgment by: Taylor J)
Mcbride
vHudson
Judges:
Dixon CJ
Mctiernan J
Taylor JWindeyer J
Case References:
Bond v Barrow Haematite Steel Co - (1902) 1 Ch 353
Bothamley v Sherson - (1875) LR 20 Eq 304
Boyd v Thornley - (1925) VLR 569
Clifford Mallam v McFie - (1912) 1 Ch 29
Dodd v Williams - (1921) 1 Ch 178
Evans v Powell - (1909) 1 Ch 784
Gage Crozier v Gutheridge - (1934) Ch 536
Hawkins Public Trustee v Shaw - (1922) 2 Ch 569
Hops v Daniell - (1911) 55 Sol Jo 633
Inglis v Gillins - (1909) 1 Ch 345
Jones v Palmer (No 2) - (1895) 2 Ch 657
Lady Langdale v Briggs - (1856) 8 De G, M
&
G 391; 44 ER 44; 126 LJ Ch 27
Leeming Turner v Leeming - (1912) 1 Ch 828
Little v O'Brien - (1946) 62 TLR 594; (1946) 175 LTR 406
M'Afee - (1909) 1 IR 124
Mallam v McFie - (1912) 1 Ch 29
McIntyre v McIntyre - (1914) 15 SR (NSW) 45; 31 WN 132
O'Connor Westminster Bank Ltd v O'Connor - (1948) 1 Ch 628
Paine v Countess of Warwick - (1914) 2 KB 486
Porter v Porter - (1930) 31 SR (NSW) 115; 48 WN 17
Ritchie v Trustees Executors and Agency Co Ltd - (1951) 84 CLR 553
Robinson v Addison - (1840) 2 Beav 515; 48 ER 1281
Rose Midland Bank Executor and Trustee Co Ltd v Rose - (1949) 1 Ch 78
Rose Rose v Inland Revenue Commissioners - (1952) 1 Ch 499
Thornley v Boyd - (1925) 36 CLR 526
Turner v Leeming - (1912) 1 Ch 828
Warwick v Willcocks - (1921) 2 Ch 327
Webb v Australian Deposit and Mortgage Bank Ltd - (1910) 11 CLR 223
Willcocks Warwick v Willcocks - (1921) 2 Ch 327
Judgment date: 9 February 1962
Judgment by:
Taylor J
This appeal from the Supreme Court of South Australia (Brazel J) is concerned with questions which, in the circumstances related in the reasons of the learned judge of first instance, have arisen in connexion with the administration of the estate of Norman Harold McBride (hereinafter referred to as the testator).
The testator died on 27th May 1946 and his widow, who during her lifetime was, in common with her son, the appellant, entitled to a one-half share of the profits derived from the carrying on of the testator's pastoral business, died on 23rd February 1957. Two of the three questions which are now before us are concerned with defining the extent of the interest in the estate which then devolved pursuant to a direction in the will that upon the death of the testator's wife the whole of his estate should be realized and converted into money and divided into two equal shares or parts, one such share or part to be paid to his said son absolutely and the remaining equal share or part to be held in trust and the income thereof paid to his daughter during her life and after her death such remaining half-share to be divided between her children surviving her in equal shares absolutely.
The source of the dispute which has arisen is to be found in the state of affairs which existed at the date of the death of the testator. As already appears he died shortly after the end of the war, he had apparently been ill for some time, it had been difficult to obtain adequate labour on his grazing property, his son, the appellant, had been engaged on war service, seasonal conditions had been difficult a few years earlier and at the time of the testator's death the property was not being worked to the best advantage. In particular, it was carrying only 1,850 sheep. Whether at this precise point of time it was capable of carrying any greater number without attention to the extensive drains by means of which water was obtained for stock does not clearly appear. But by the 30th June 1947 the number of sheep on the property had increased to 2,840 and a year later the number rose to 4,112. This seems to have been close to the normal carrying capacity of the property and it approximated the number of sheep on the property -- 4,346 -- at the date of the widow's death. The increase from 1,850 sheep on the 27th May 1946 to 4,112 on the 30th June 1948 was almost entirely the result of natural increase. Altogether, the natural increase over this period was 3,371 and of these only some 784 sheep were sold.
The appellant's contention is, in effect, that at the time of the testator's death the corpus of the estate comprised 1,850 sheep and no more; that corpus did not bear the cost of increasing the number of sheep on the property; that, on the contrary, the life tenants went without income to which they were entitled in order that the flock might be built up and that, on the death of the widow, the trustees, in the circumstances of the case, should have apportioned the sheep then on the property, as to 1,850, to corpus, and as to the balance, to income. It is not contended that the trustees acted wrongly in building up the flock by retaining most of the natural increase during the first two years after the testator's death, but it is asserted that the sheep so retained constituted an unrealized profit, that, for this reason, it was proper to say that the flock was built up at the expense of the life tenants and, accordingly, that, upon the widow's death, it was proper to make an apportionment in the manner already mentioned. That is to say, that the widow's estate should now be regarded as having a one-half interest in the proceeds of the sheep over and above the original number of 1,850. Upon what basis the 1,850 sheep belonging to capital were to be identified is a matter of some difficulty but this seems to be a minor problem in the way of the appellant.
In these circumstances, the following questions were raised for consideration and determination:
1(c) Whether the corpus of the estate of the testator was, on 23rd February 1957 properly comprised (inter alia) of (i) 4,346 sheep; (ii) 1,850 sheep; (iii) any other and if so what other number of sheep?
1(f) Whether in the calculation for the purposes of cl 10 of the will of the testator of the net profits derived from the carrying on of the testator's pastoral business during the lifetime of his widow, the profit on livestock account in each year (i) was the excess (if any) of, on the one hand, the proceeds of sales of livestock during the year plus the value of livestock which were used for rations during the year plus the value of livestock on hand at the end of the year over, on the other hand, the value of livestock on hand at the beginning of the year plus purchases of livestock during the year; or (ii) was the excess (if any) of the net proceeds of livestock sold during the year over the net cost of livestock bought during the year; or (iii) should have been ascertained in some other and what manner?
These questions were answered by Brazel J as follows:
"1(c) That the corpus of the estate of the deceased was on 23rd February 1957 properly comprised (inter alia) of 4,346 sheep" and
"1(f) That in the calculation for the purposes of cl 10 of the will of the testator of the net profits derived from the carrying on of the testator's pastoral business during the lifetime of his widow the profit on livestock account in each year was the excess of the net proceeds of livestock sold during each year over and above the net cost of livestock bought during such year".
There is some advantage, I think, in attempting, first of all, to deal with the problems raised by the second question and, in doing so, to make some reference to the yearly statements of account to which we were referred. Included in these statements were livestock trading accounts and profit and loss accounts in respect of the several annual accounting periods between the death of the testator and the death of his widow. These, however, were prepared after the death of the widow and, in spite of the fact that it was said that "the life tenants, as from the year ending 30th June 1948, allowed the greater part of the income credited to their respective accounts to remain in the estate account with Elder Smith & Co Ltd", it is by no means clear how the accounts were made up from time to time during the widow's lifetime. But the case was argued on the basis that the accounts before us were the trustees' accounts for the accounting periods in question and, implicitly at least, we were invited to treat them as such.
A perusal of the livestock trading accounts reveals that each account commences with an item relating to stock on hand (sheep, cattle and horses) at the beginning of the year. The value assigned to this item is, of course, the amount appearing in the preceding account for stock on hand at the end of the period to which it relates. Then follows an item relating to stock purchases which shows, inter alia, the number of sheep purchased during the year and the amount paid for them and, finally, there appears the number of natural increase during the year. On the other side of the account appear items particularizing, inter alia, the number of sheep sold and the amount realized, the number and nominal value of sheep used as rations, the number of sheep lost by death and, finally, the number and value of sheep on hand at the end of the year. For the purposes of the account the sheep on hand at the end of the year were taken in at an average value per head which was arrived at by taking into account, on the one hand, the aggregate of (1) the number of sheep on hand at the beginning of the year; (2) the number purchased during the year; and (3) the number of natural increase and, on the other, the aggregate of the book value of item (1), the cost price of item (2) and the value of the natural increase at a selected figure of ten shillings per head. It will be seen, therefore, that the credit side of the livestock trading account, in each year, contained an element of unrealized gross profit. But according to the answer of the learned judge of first instance to question 1(f) both stock on hand at the beginning of the year and at the end of the year should have been left out of account in ascertaining the distributable profits of the business during each accounting period. In coming to this conclusion he followed implicitly the decision in re Porter; Porter v Porter (1930) 31 SR (NSW) 115; 48 WN, at p 20 where the competing contentions of the parties raised the very point with which we are concerned. In the result it was held in that case that, for the purpose of ascertaining the annual profits of the testator's pastoral business, to which a life tenant was entitled, no account should have been taken of the value of the livestock on hand either at the beginning or the end of the relevant accounting periods. The question was, as their Honours said: "Is a life tenant entitled to have credited to him an ascertained book profit, or is he only entitled to a realized profit?" (1930) 31 SR (NSW), at p 123; 48 WN, at p 20 This question they found readily answered by an observation in McIntyre v McIntyre (1914) 15 SR (NSW) 45; 31 WN 132 where it was said: "Where a testator leaves a business to his trustees to carry on for the benefit of beneficiaries and directs, . . . that the income is in effect to be paid to a life tenant, all the life tenant in any year is entitled to is the amount which, in the ordinary prudent management of that business during the course of that year, was available for distribution as cash" (1914) 15 SR (NSW), at p 48; 31 WN, at p 134.
How far this passage was decisive of the precise problem in re Porter; Porter v Porter (1930) 31 SR (NSW) 115; 48 WN 17 is open to doubt since the basis upon which distributable income was to be ascertained in the earlier case had already been settled by a direction given some little time before the hearing of the reported case and there is no precise information in the report concerning the manner in which, pursuant to those directions, the accounts had been made up. Nevertheless, it is clear that assent was given to the proposition that, within proper limits, it is for trustees who are carrying on a business for the benefit of beneficiaries, to determine what are and what are not distributable profits. However, with the greatest deference to the very learned judges who decided re Porter; Porter v Porter (1930) 31 SR (NSW) 115; 48 WN 17 I find myself unable to subscribe to the proposition that a livestock trading account constructed only by a comparison of the amounts expended in the purchase of livestock during a particular accounting period with the amount realized by the sale of livestock during the same period, can, with any reality, reflect the profit or loss in the activity with which the account is concerned. Is it possible to say that a loss has been incurred if all we know is that in a particular year 1000 sheep have been purchased at £1 per head and 500 sheep, being either some of those purchased or others, have been sold at £1 10s per head? Or can it be said that a profit has resulted if all we know is that £1000 have been expended in the purchase of sheep and £1500 realized by the sale of natural increase? And, in such a case, is the answer to remain unaffected if we are allowed to know that during the course of the year 500 sheep valued at £1 per head have died? There is, of course, as was said by Farwell J in Bond v Barrow Haematite Steel Co (1902) 1 Ch 353, "no single definition of the word profits which will fit all cases" (1902) 1 Ch, at p 366. See also re Spanish Prospecting Co Ltd (1911) 1 Ch 92, at p 106; and Webb v Australian Deposit and Mortgage Bank Ltd. (1910) 11 CLR 223, at p 241. According to Higgins J in the lastmentioned case "the meaning of 'profits' is not rigid and absolute; it is flexible and relative" (1910) 11 CLR 223, at p 241 and it is because of this that it is impossible for a Court to lay down any hard and fast rule capable of solving in all cases the problem of what is and what is not comprehended by the word "profits". Consideration must be given to the nature of the relevant business activity and to the manner in which it is customarily carried on and, if in the course of carrying on a business pursuant to a direction to do so trustees adopt an appropriate and conventional method of accounting in order to determine the amount of profit to which a life tenant becomes entitled during any accounting period, no exception can be taken. No doubt it was for this reason that this Court was prepared to accept as proper and usual the form of accounting disclosed by the facts in Thornley v Boyd (1925) 36 CLR 526 and see sub nom Boyd v Thornley (1925) VLR 569. These observations must, of course, be understood subject to the qualification that if in any particular case it appears from the terms of the trust instrument that business profits are to be ascertained upon a cash basis only, or upon any other basis, those terms must prevail. But in the present case no such indication appears, and the testator, as a person conversant with the manner in which pastoral businesses are generally carried on, must be taken to have intended the profits of the business after his death to be ascertained by a process of accounting conventional and appropriate in that type of business. As was said in Ritchie v Trustees Executors and Agency Co Ltd (1951) 84 CLR 553: "When a fractional part of the share of Charles William Campbell was settled upon trusts for life tenant and remaindermen, the income to be taken by the former under the settlement was necessarily made to depend upon the income properly receivable by the trustees of the settlement from the trustees of the will. The basal intention to be presumed in the case of the settlement is that the life tenant should take the net balance of the fractional part of the income as ascertained in conformity with trusts of the will and paid over as such to the trustees of the settlement. That means, in the case of the trusts of the will, the net income which the trustees, acting in a proper and recognized course of management and employing a system of accounting usual in or appropriate to the business of station properties, determine to be the divisible income of the accounting period" (1951) 84 CLR, at p 583. Brazel J does not appear to have been referred to this statement of principle but, in any event, he was disposed to think that, in speaking of "dividing" the net profits with a direction to "deduct" the manager-son's salary in order to ascertain "the net profits available for division", the will contemplated a division of cash which was immediately available. Moreover, he observed that "if the life tenants were held to be entitled to treat unrealized book profits as cash, the scales could not be said to be fairly held between them and the remaindermen". But the relevant provisions of the will are in quite a usual form and they do not require division in cash between the life tenants at any specified time or times; what is contemplated is a division of the "net profits derived from the carrying on of my pastoral business during the lifetime of my wife". There is, in my view, nothing in the will to indicate that the testator either contemplated or intended that the profits of the business should be ascertained otherwise than by some accounting method conventionally used in the pastoral industry. And, of course, if the testator intended that the net profits should be ascertained by some such appropriate and conventional method of accounting there can be no complaint that the method employed did not do justice as between the life tenants and the remaindermen. For these reasons question 1(f) should be answered by saying that no exception can be taken to the form of accounting employed by the trustees for the purpose of ascertaining the net profits of each year.
Essentially question 1(c) is concerned with the rights of the parties in the circumstances as they were found to exist upon and immediately after the death of the testator's widow. Literally the question which is asked enquires whether, upon the death of the widow, the estate of the testator was entitled to the whole of the sheep, some 4,346, then depastured on the property, or whether, on the contrary, it was entitled only to 1,850 of them. The contention that the interest of the estate was limited to 1,850 only of the sheep rested upon the circumstances already related, it being said that the sheep in excess of this number represented accrued profits of the business and, in effect, that they belonged to the life tenants. But it is not possible to entertain the suggestion that the plaintiff and his mother at any time acquired any interest in the natural increase which was retained in order to build up the flock. Their interest was in the profits of the business, from time to time, and these, of course, could be ascertained only by taking into account the relevant business operations. However, it may do less than justice to the plaintiff's argument to deal with the question in this way for, in spite of the form of the question, what was primarily asserted was, in effect, that upon the ultimate realization of the business assets, including the sheep in question, after the widow's death, the proceeds of the sale of sheep in excess of 1,850 should be credited to the widow's estate and the plaintiff in equal shares. The ground upon which this contention was based was that, as was said in McIntyre v McIntyre (1914) 15 SR (NSW) 45; 31 WN 132 and in re Porter; Porter v Porter (1930) 31 SR (NSW) 115; 48 WN 17, trustees carrying on a pastoral business are not justified in building up the number of livestock on the property at the expense of life tenants. But the statements to this effect were concerned with defining the duties of trustees and not with defining or identifying the distributable profits of any such business. No doubt it was not for the trustees to build up the flock at the expense of the life tenants for the benefit of the remaindermen but it does not follow that whenever the number of sheep carried on a grazing property managed by trustees is increased by the retention of all or some part of the natural increase it can be asserted that the flock is being built up at the expense of the life tenants. Primarily the profits from a business such as that with which we are concerned is earned by the sale of wool and in the discharge of their duties to both life tenants and remaindermen it is of importance that the property shall be stocked to its full carrying capacity from time to time. In contrast with the return from the sale of wool the profits on the sale of surplus sheep are a matter of minor importance. Essentially it is a matter for the trustees to determine how the business shall be carried on to the best advantage. In particular, it is for them to determine whether livestock shall be sold in the ordinary course of business and, in the present case, it is worthy of note that the trustees were authorized "in the carrying on of the said business to exercise all powers reasonably necessary or incidental thereto as fully and effectually as" the testator could, himself, exercise them "if alive and attending to the matter in question and in person". Further, it is obvious that the method of accounting which we have already discussed resulted in the "average" value of all natural increase surviving at the end of each year being taken into account for the purpose of ascertaining the profits to which the life tenants were entitled. Accordingly, the claim to some part of the proceeds of the ultimate realization of the sheep on the property at the widow's death cannot, on any view, extend further than a claim to the difference between the book value and the sale price of the number of sheep in excess of 1,850. How the excess is to be identified it is impossible to say but, however this may be, it is quite clear that no part of such proceeds represent in any way profits derived from the carrying on of the business. It is, I think, unnecessary to say more than this for the contention which is now raised was the subject of consideration in Thornley v Boyd (1925) 36 CLR 526 and the explicit observations and decision in that case make it clear that it must be rejected. That being so the answer given by the learned primary judge to question 1(c) must stand.
The remaining question in the case is concerned with cl 3 of the will. By that clause the testator gave to his widow "free of probate succession or estate duties: (a) all my jewellery and ornaments of my person (b) all moneys payable at my death under any and all insurance policies (c) 196 shares in Elder Smith & Co Ltd". Thereafter the testator bequeathed a number of pecuniary legacies before making provision for the carrying on of his business and the ultimate disposal of the residue. The testator's will was made on 29th July 1944 and it appears that at that time he was the holder of 196 shares of £10 each in the capital of Elder Smith & Co Ltd These shares were paid to £6. But before the death of the testator -- although how long before does not appear -- the ordinary shares of that company were converted into 1 pound shares paid to 12s. As a result the testator, at the time of his death, was the holder, not of 196 £10 shares, but of 1,960 £1 shares, in that company. Brazel J took the view that the gift of the shares was a general legacy and held that 196 £1 shares only passed under the bequest. He was unable to find any indication in the will of any other intention and felt that his conclusion was fortified by the provisions of s 27 of the Wills Act, 1936(SA).
The question which arises in these circumstances is one that has been the subject of debate on many occasions and, perhaps, the strongest case in favour of the view which his Honour took is re Willcocks; Warwick v Willcocks (1921) 2 Ch 327. In that case it appeared that the testator had made three separate bequests of three different classes of stock each nominated by a precise number of pounds shillings and pence. The parcels of stocks so described and bequeathed answered, precisely, the description of stocks possessed by the testator at the time when her will was executed. But before her death she had sold the stock and invested the proceeds in the purchase of real estate. It was held that the legacies were general and, accordingly, that there had been no ademption, P O Lawrence J being of the opinion that, "it would be drawing too fine a distinction to hold that a legacy of stock was general where the sum happened to be a round sum, but was specific where the sum happened to be one which ran into pounds, shillings and pence" (1921) 2 Ch, at p 330. The point has been the subject of discussion in cases such as: re Gillins; Inglis v Gillins (1909) 1 Ch 345; re Clifford; Mallam v McFie (1912) 1 Ch 29; re Hawkins; Public Trustee v Shaw (1922) 2 Ch 569; re O'Connor; Westminster Bank Ltd v O'Connor (1948) 1 Ch 628; Re Rose; Midland Bank Executor and Trustee Co Ltd v Rose (1949) 1 Ch 78; and re Rose; Rose v Inland Revenue Commissioners (1952) 1 Ch 499. The problem is, of course, one to be resolved by a close consideration of the circumstances of each particular case and of the precise provisions of the will. But upon consideration of the authorities I am of opinion that where, as here, a will contains a bequest of a specified number of shares and it appears that at the time when the will was made the testator was the holder of that precise number of shares and no more, very little further is required to support the contention that the gift is a specific bequest of the shares of which the testator was then the holder. In the present case there is, I think, some further slight indication that what the will speaks of are the shares of which the testator was the holder at the time when his will was executed. I find this in the fact that the bequest of the shares is found closely associated in the same clause with specific bequests of the testator's jewellery and ornaments and insurance moneys, and it is not unreasonable to regard the clause as one designed to deal in its entirety with specific property of the testator. I think it ought therefore to be held that the testator made a specific bequest of the shares which he held at the date of his will and, further, that there was no ademption by reason of their subsequent subdivision into £1 shares (re Clifford (1912) 1 Ch 29 and re Greenberry; Hops v Daniell (1911) 55 Sol Jo 633). That being so question 1(a), as propounded in the originating summons, ought to be answered by saying that the widow of the deceased was entitled to receive pursuant to the terms of the will of the testator 1,960 £1 ordinary shares paid to 12s in Elder Smith & Co Ltd