Australian Incentive Plan Pty Ltd (in its capacity as Trustee of the Australian Incentive
Trust) v Attorney-General for Victoria [2012] VSCA 236 (Supreme Court of Victoria, Court
of Appeal, Nettle JA, Tate JA and Davies AJA, 28 September 2012)
The plaintiff was the corporate trustee of the Australian Incentive Trust (the Trust). The trust
was constituted by the Australian Incentive Trust Deed made in 2004 between Babcock &
Brown International Pty Ltd (the Settlor), Babcock & Brown Australian Incentive Plan Pty Ltd
(the Trustee) and Babcock & Brown Ltd (Listco). It had previously been decided to terminate
this trust on the liquidation of Babcock & Brown International Pty Ltd, an asset management
company which collapsed in 2009. It was also decided that the residual beneficiaries of the
trust were to be four designated charities nominated by the Attorney-General of Victoria.
In the proceeding below, the Trustee sought an order varying the Deed, pursuant to section
63A of the Trustee Act 1958 (Vic) to provide that the Trust would terminate on the
commencement of the winding up of Listco. The Trustee also sought a direction from the
court that the assets of the trust be distributed among 57 participants in an employee
incentive scheme whose interest had not vested by the date of commencement of the
winding up of Listco. The Trustee proposed that the fund be prorated amongst these
participants. This was rejected by His Honour in favour of the charity beneficiaries.
The two issues which arose for determination in this appeal were:
1. whether the judge was wrong in rejecting the Trustee’s suggestion that the fund be
distributed to the 57 Participants whose entitlements had not vested at the
commencement of the winding up of Listco; and
2. whether it was wrong to direct the Trustee to distribute the Trust Fund to designated
charities.
The Trustee contended that the judge below was wrong to ignore the claims of the 57
employees and confer the residual benefit of the fund on charities. The Attorney-General
replied that the trust had failed since there were no longer employees to be benefited (the
company having been wound up), and so charities were the proper recipient of the fund.
Nettle JA and Davies AJA agreed with the contentions of the Attorney-General, and found no
error in the judgement below. Nettle JA said (at [40]–[42]):
...it would be difficult to accept that, because the 57 Participants in question were
deprived of their Awards by reason of the liquidation of Listco, the values of their
Awards, calculated in accordance with Plan Share values as at the dates on which
the Awards were issued, should form the basis of a distribution of the Fund in the
manner which the Trustee proposes. It is plain that the stated object of the Plan was
to equate the Participants with shareholders, and it would hardly equate their position
with the shareholders, whose shares are now worth nought, to give them significant
sums of money while the shareholders go without... it is surely beyond argument that
the Settlor did not intend to benefit a Participant whose Award failed to vest before
liquidation, any more than the Settlor intended to benefit an Employee who was not a
Participant at all. In those circumstances, it being agreed on all hands that an
Employee who is not a Participant has no claim on the Fund, or any expectation of
receiving a distribution from the Fund in the circumstances which obtain, I concur
with the judge that a distribution of the Fund to the 57 Participants would not accord
to the Settlor’s intentions as expressed in the Deed. It would be tantamount to acting
directly contrary to those intentions.
On the same issue, although he found that there was still a class of beneficiary which could
be designated as ‘employees’, Davies AJA held that (at [132]):
Whilst I accept the Trustee’s submission that the fifty-seven Participants remained
potential objects of the power of appointment within the class of ‘Employees’
notwithstanding the liquidation of BBL, I reject the submission that this makes it
‘appropriate’ for the exercise of power in favour of them. The Trust was created for
the purposes of facilitating and effecting the Incentive Plan activities of the Babcock
& Brown group of companies. Awards were made, and employees became
‘Participants’ under the Trust Deed, on the basis that their entitlements would lapse
on the liquidation of BBL. In the circumstances, the trial judge was correct to
conclude that the nomination of charities solely was within the contemplation or
intention of the settlor. The fact that the awards were provided as an inducement to
employees to stay with the Babcock and Brown group of companies and that some,
or indeed all, of the fifty-seven Participants may have continued in the employment of
companies within the Babcock & Brown group of companies because of an
expectation that their entitlements would vest, and be of value to them, does not
compel any different conclusion. The question here is not the motives of the fiftyseven Participants who continued in employment but the intention of the settlor as
determined by the proper construction of the Trust Deed considered in the context of
which the Incentive Plan forms an integral part.
However, Tate JA dissented to allow the appeal. His reasoning was that the purposes for
which a trust is established are not to be ignored in determining how to exercise the power of
distribution of the remainder (residual amount), even if the purposes could no longer be
fulfilled. As the purpose of the trust in this case was the facilitation of the offering and
granting of awards to employees in an equity incentive plan, those purposes continued to
provide ‘an intelligible and meaningful’ and ‘proper basis for distribution’ to those employees
who remained employed by the company ‘as at the date of liquidation of Listco and who had
been the recipient of an offer or confirmation of an award which was as yet unvested or
unexercised’ (at [114]).
As the appeal decision was 2 to 1 in dismissing the appeal, the Attorney-General of Victoria
was successful. Costs were ordered to be paid from the proceeds of the trust fund.
The case may be viewed at: http://www.austlii.edu.au/au/cases/vic/VSCA/2012/236.html
The costs decision may be viewed at:
http://www.austlii.edu.au/au/cases/vic/VSCA/2012/251.html
Implications of this case
There is a general rule that a trustee should seek the advice of the court on matters such as
those in this case. This is regarded as sound public policy. However, costs are usually borne
at the trustee’s own risk on appeal. Nevertheless, in this appeal, after the decision was
given, the judges made the point that costs would be paid out of the available proceeds of
the fund, which was about $1.6 million. This effectively meant that the costs order would
deprive the charities who were to be the beneficiaries of the fund of some of their money.
The judges were of the opinion that the issues were sufficiently open to question (as
evidenced by the difference of opinion on appeal) to justify costs being paid from the fund.
Nettle JA said on this point:
Were it not for the latter consideration, I doubt that it would be appropriate to impose
the costs of this appeal in effect on the charities in whose favour the judge
determined that the fund should be distributed. Given the long standing rule that a
trustee who appeals against the court’s advice appeals at the trustee’s own risk, I
should assume that the appellant made some sort of arrangement in advance of the
litigation for the 57 beneficiaries to indemnify the appellant against costs in the event
that the appeal proved unsuccessful. Other things being equal, I should not think it
unjust that those persons wear the cost of the appeal.
Therefore, although the 57 potential employee beneficiaries were not to bear the costs of the
failed appeal, effectively, because of the effect of the costs order, it was the charities who
bore the costs.