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Hancock V Rinehart : The Judgment of 28 May 2015

On 28 May 2015 His Honour Justice Brereton of the NSW Supreme Court delivered a 78 page judgement in the dispute involving Gina Rinehart and her children. The newspapers have only reported the more sensational parts of the 78 page judgment.

What follows is a summary of that judgement by Chris Wall of Walker Gibbs and King Pty Limited.

Lang Hancock married Hope Margaret Nichols. They had one child, Georgina Hope Rinehart, known as Gina Rinehart (“Gina”)

Lang became wealthy principally through his mining ventures in Western Australia.

Gina Rinehart married Greg Milton, also known as Greg Heyward. They had two children, now known as John Hancock and Bianca Hancock. Gina and Mr Heyward divorced.

Gina married Frank Rinehart. They had two children, now known as Ginia Rinehart and Hope Welker.

In 1988 Lang created a trust called the Hope Margaret Hancock Trust. One of the purposes was the education, advancement and benefit of Gina’s children. Lang was the trustee of that trust.

Lang died in 1992. Gina Rinehart became the trustee. There were disputes with the second wife of Lang Hancock, Rose Porteous, which are not relevant to the issues in the case.

By 2015 the trust had assets of about five billion dollars. Income of the trust comprised dividends from Hancock Prospecting Pty Limited, between about 1.5 and 3.5 million dollars per year. The trust held twenty four percent of the voting rights in Hancock Prospecting. Gina herself held the remaining seventy six percent of those rights.

In 2003 disputes started to arise between John and his mother Gina. John changed his name from John Rinehart to John Hancock. In 2004 John alleged that Gina as trustee was not providing trust records and accounts to him, and that there were inadequate distributions from the trust.

Various attempts were made to settle the disputes, and deeds were entered into by the parties in 2005, 2006, 2007 and 2009.

In 2006, through a holding company, Hancock Prospecting entered a joint venture with companies known as “Hamersley”, subsidiaries of Rio Tinto Limited, to develop the Hope Downs Iron Ore Project. Part of the agreement provided that the Hamersley Companies could purchase the Hancock interests if those interests ceased to be controlled by members of the Hancock family.

All trusts must have a date on which they cease to exist. For the Hope Margaret Hancock Trust, that date was 6 September 2011.

Three days before the trust was to come to an end on 3 September 2011, Gina wrote a letter to her children, the beneficiaries of the trust. She wrote that the trust’s tax advisors, PricewaterhouseCoopers had advised that much capital gains tax would be payable when the trust ceased to exist, that each of the beneficiaries would likely be bankrupt, and that the shares held by the trust could not be sold to a non-Hancock family member or mortgaged.

She wrote that these consequences could be averted by extending the life of the trust, but she would only do that if those beneficiaries, her children, agreed not to query or challenge any act or by of her in relation to the trust, and agreed that any partners or spouses would be excluded from claiming on the assets of the trust.

Brereton J noted that ultimately it was established that there was no such advice in respect of capital gains tax, and whilst that it was not entirely clear, the advice that had been obtained suggested that capital gains tax would not in fact be payable when the trust ceased to exist. His Honour also found that sending the letter was intentionally delayed, so that her children, the beneficiaries, would only have one business day to obtain advice on their response. He found Gina instructed that the letter not be sent until one of the children had left New York to travel, which further limited the ability of that child to obtain advice, and increased the pressure to succumb to the demands of the letter. The chief financial officer of Hancock Prospecting, Mr Newby, told one of the children, Bianca, that she would have a tax liability of $142 million dollars if the trust finished on 6 September 2011. The day after the letter, on 4 September, Gina Rinehart extended the trust until 1 July 2068, an additional 57 years. She did not tell the children of this at that time.

On 5 September 2011 all four children, John, Bianca, Ginia and Hope, commenced proceedings in the Supreme Court. They sought various orders, including an order removing Gina as trustee and appointing all four children as the trustees. An urgent order was initially made extending the trust, before the Supreme Court was informed that this had already been done by Gina as trustee on 4 September 2011.

In claiming that Gina Rinehart be removed and replaced as trustee, the main ground relied on was that because she had extended the life of the trust in September 2011, she had demonstrated that she was unfit to be a trustee. The plaintiffs, all four children at that time, said the suggestion that they would incur capital gains tax liabilities with catastrophic financial consequences was a misrepresentation. They were placed under pressure in order to obtain benefits for Gina herself, as the price of performing her duties as trustee.

There were numerous applications in the course of the case, and appeals from the decisions in those procedural applications. Virtually every step in the proceedings was vigorously contested. Gina Rinehart repeatedly sought to have the proceedings stopped or dismissed.

There was to be a final hearing on 8 October 2013. Only seven days before, on 1 October 2013, Gina Rinehart had served no evidence accounting for explaining for or justifying what had occurred in September 2011. She announced that she would stop being trustee, and the issue at that point became who would become the new trustee. Gina Rinehart emphasised that the replacement trustee should be one of her descendants. One effect of Gina Rinehart’s late acknowledgement that she would not be trustee, was that the children were not in a position at the time of the October 2013 hearing to suggest a replacement trustee, at least in any detail. The proceedings were adjourned to 24 June 2014 to consider the issue of a replacement trustee.

Although starting as a plaintiff, (that is someone who seeks orders from the court), ultimately Ginia became a defendant. Hope agreed to whatever orders the court thought appropriate. She ran out of funds to run the case. John and Bianca remained those who sought orders.

There was an issue about whether amendments made in 2006 to the constitution of Hancock Prospecting had been made for an improper purpose or in breach of Gina Rinehart’s obligations. The judge found that it was not established that those amendments had been made inappropriately.

The main issue that remained was who should be the replacement trustee, given that Gina had indicated she would not now be trustee.

One of the difficulties facing the judge who heard the case was that the parties’ proposals as to who should be the replacement trustee (and why) changed over time. Ultimately Gina Rinehart submitted that the trustee should be one of her descendants. Ginia (by then a defendant with her mother Gina) suggested one of three professional trustee companies. Gina Rinehart’s barrister objected to the submissions and the omission of evidence that related to Gina Rinehart’s conduct, saying that because she had resigned, her conduct was irrelevant His Honour found the conduct was relevant. Initially John and Bianca were proposed as replacement trustees, but ultimately John and Bianca submitted that Bianca (with an advisory trustee) was the best proposal. Ginia objected to the appointment of Bianca. Ultimately Hope supported the appointment of a trustee company, as suggested by Ginia. Gina Rinehart offered her support to Ginia’s proposal.

By the time of the ultimate hearing, and in the judgment of 28 May 2015, the main remaining issue was whether the trustee of the trusts should be one of three trustee companies as proposed by Ginia, (with some support and assistance from her mother Gina and from Hope), or Bianca and an assistant trustee, (as proposed by John and Bianca).

His Honour found that the Rio Tinto controlled Hamersley Companies might try to take advantage of the appointment of an independent trustee company. Whilst that appointment may not trigger the right of the Hamersley Companies to buy out the Hancock interests in Hope Downs, there was at least the risk of litigation over that issue. His Honour found that exposing the Hope Downs project to that risk was against the interest of the beneficiaries. That outcome would not be disastrous, but it was significant.

In relation to the individual trustee companies suggested by Ginia, His Honour looked at their independence, their ability or competence, and the cost involved. Judge Brereton observed that there was a question as to whether a trustee company would be able to resist the very considerable degree of pressure and influence that Gina Rinehart was capable of exerting. He found that she was likely to try to exert that pressure. He found that Gina Rinehart had manipulated the trust’s advisors PricewaterhouseCoopers, in advising about the effect on the termination of the trust on capital gains tax. He found she misrepresented the capital gains tax situation in the letter of 3 September 2011. He found she withheld sending that letter until the last minute, to minimise the opportunities for her children, (the beneficiaries), to obtain advice about it or take any legal action before the deadline. When the letter was sent on 3 September, she had already intended to use her power to extend the vesting date, which she did on 4 September 2011.

The judge found that Gina Rinehart used her influential connections to try to stop her children from continuing with the court case. He referred to it as occurring “by measures some of which closely approach intimidation”.

On 8 September 2011 a senior officer of Hancock Prospecting sent Bianca an email indicating that she must withdraw her application because she was a director of Hancock Prospecting.

Three days later on 11 September 2011, Senator Barnaby Joyce sent an email in which he tried to dissuade Hope from continuing the litigation.

On 19 September Alby Schultz, a Liberal member of parliament, sent a similar email to Hope.

On 16 November 2011 Gina sent emails to John and Hope suggesting that if they swore an affidavit saying the statement of claim was true, then it “would be held against you all your life”.

In February 2012 Gina Rinehart threatened to withdraw ransom insurance intended to protect Bianca and her young son.

In her capacity as trustee, Gina Rinehart refused to make distributions from the trust to her children. One reason she gave was that the litigation was “malicious and ill advised”. In December 2013 John and Bianca achieved a court order compelling distribution of some of the trust.

Gina Rinehart procured Hope’s withdrawal as an active plaintiff in the proceedings by making her loans totaling $45 million, in return for which Gina Rinehart took over Hope’s voting rights with Hancock Prospecting.

Seven days before what was to be the hearing, Gina Rinehart agreed that she would not be trustee. Even after that time, on 29 November 2013, she sent letters to Bianca saying that if Bianca persisted with the litigation and Hancock Prospecting lost the Hope Downs Project as a result, Bianca would be personally sued for enormous damages. In March and April 2014 Hancock Prospecting and the Hope Downs Project accused Bianca of unlawful and dishonest contact and contumelious disregard for her confidentiality obligations as the director of Hancock Prospecting, and sought to convince Bianca to withdraw her nomination as trustee. The judge found these allegations were raised in a matter calculated to intimidate Bianca. No evidence to substantiate them was ever produced. Those allegations were abandoned on the eve of the hearing. Bianca was not cross examined on that topic.

His Honour also looked at Gina Rinehart’s conduct in trying to influence the selection of her replacement when she ultimately agreed to resign as trustee. She made personal contact with the former premier of Victoria, Jeff Kennett to arrange nomination of a trustee. Just before Bianca was to give evidence, she had Grant Hackett, a former associate of Bianca, send to Bianca an email indicating that if Bianca gave evidence that she entered the Hope Downs deed under duress, she would be found to be a liar, and she should settle the proceedings.

Gina Rinehart’s barrister accepted that Gina’s views as to the identity of the replacement trustee were irrelevant. However the Judge found that Gina sought to have her views taken into account indirectly, through the views of Hancock Prospecting and the Hope Downs company. Although those companies were separately represented by solicitors and barristers, they were funded directly or indirectly by Gina Rinehart. This continued at the second hearing where the only live issue was selection of a replacement trustee.

His Honour wrote in paragraph 230 of the judgment “I have never seen such pressure exerted, so persistently, on a litigate, as has been apparent in this case”. In terms of whether Gina Rinehart would try to influence the trustee companies proposed by Ginia, His Honour wrote in the judgment “……… it might be asked, if Mrs Rinehart was prepared to act as she did towards her children, how much further might she be prepared to go in the case of unrelated corporate entities.”

He then went on to refer to how she was able to influence PricewaterhouseCoopers and sanitise a version of its advice for provision to her children. His Honour found that she had demonstrated “that she is prepared to go to extraordinary lengths to retain control, directly or indirectly, of the trust, and that she is capable of exerting enormous pressure, and great influence, to do so, and to secure the appointment of a trustee acceptable to her. In my view, there is a reasonable inference that she would likely attempt to overbear any trustee, including a professional trustee, who acted against her interests.”

In relation to the first trustee proposed by Ginia, Australian Executive Trustees Limited, His Honour observed that Gina Rinehart’s ability to make a large investment in its parent company, IOOF to acquire influence, was something that he did not regard as a far-fetched prospect. His Honour indicated the fees proposed by that trustee company seemed quite excessive.

The second trustee prospect proposed by the defendant Ginia was Equity Trustees Limited. Jeff Kennett, a former premier of Victoria, was a member of the board of that company. He had a connection with Gina Rinehart “the precise scope of which was never disclosed….”. It was ultimately revealed that Mr Kennett had a role in introducing the trustee company to the possibility of acting for the trusts, and it was thought his involvement might help the case for that trustee because he was “favorably known to” Gina Rinehart. Mr Kennett would be one of the directors of that company superintending those operating the trust. One witness indicated that it was conceivable, although an unwarranted view, that because of a relationship between Mr Kennett and Gina Rinehart, it was possible people might be more cautious or more reluctant to take action. Parts of an email about this company acting as trustee were removed when the document was produced to the court. His Honour found that it was disconcerting that the person proposed to lead the trustee team for that trustee company (not Mr Kennett) seriously entertained the view that he might produce an altered version to the court.

His Honour found that some acts did not give one confidence that the company would robustly repel any attempt by Gina Rinehart to exert influence.

National Australia Trustees Limited was the third trustee Ginia suggested. It had not given an unconditional consent to acting as trustee by the time of hearing. His Honour found that company’s fees were acceptable, but it had not unconditionally agreed to act. He found it was vulnerable to influence by Gina Rinehart, through her relationship with National Australia Bank, the holding company of that trustee company.

Bianca and John proposed the appointment of Bianca with an advisory trustee with whom she would regularly consult. Her consent to appointment as trustee was unconditional.

Bianca was a beneficiary of the trust, and usually the court is reluctant to appoint a beneficiary. His Honour accepted that there was potential for conflict between Bianca’s interests and those of the other beneficiaries from time to time, in particular because of the funding arrangements for the very litigation which Bianca and John were involved. He found such risks could be reduced by Bianca requiring consent or judicial advice of a court in certain circumstances.

Bianca’s husband was an employee of Rio Tinto. That was a matter of some concern to His Honour. However Rio could not exploit that information, as it was only a minority shareholder in Hancock Prospecting. Ultimately he ceased to be an employee of Rio.

It was submitted that Bianca was not impartial, and that she might have issues with her mother Gina, her sister Ginia and her sister Hope. John had described Ginia in degrading and insulting terms, and the suggestion was that Bianca had failed to disassociate herself from his remarks. His Honour observed that Bianca had not so described Ginia. His Honour found that she did share John’s view that the business should not be left in Ginia’s hands, but neither being involved in the litigation, nor holding that view meant that she could not act as trustee.

His Honour did not agree that Bianca proposing John as trustee meant that she was an unsatisfactory candidate. The litigation was robustly contested. His Honour was satisfied that Bianca understood the concept of trusteeship, and her duty of the upmost good faith as a trustee, and to look after the interests of all the beneficiaries.

It was submitted that because Bianca did not tell Ginia about her marriage, she was not suitable to be a trustee. His Honour observed that she did not tell any other family members about the marriage, and that she was under no moral obligation to do so. It did not affect her trustworthiness.

Then an objection was made to Bianca’s lengthy absences from Australia. His Honour dismissed that submission. His Honour accepted that Bianca was committed to the role of trustee.

Various other objections to Bianca were taken. Ultimately in paragraph 303 of the judgment His Honour accepted that the course taken by Bianca in the litigation was one where she was acting in the interests of all the children, the beneficiaries of the trusts. The functions of the trustee did not involve extensive discretions, being to receive the income (and ultimately the assets of the trust) and distribute them equally between the four beneficiaries. Two referees swore to her character, repute, business practices, suitability and integrity. Their evidence was not challenged.

When it came to choosing between a trustee company on the one hand and Bianca on the other, His Honour observed that two of Gina’s children, the beneficiaries, favored the appointment of Bianca, and two favored Ginia’s proposal for appointment of one of three trustee companies. His Honour found Ginia’s reasons for supporting the proposal for the appointment of independent trustees and opposing to Bianca’s appointment took priority (to Bianca) even over the possibility of the Hamersley Companies being in a position to buy out the Hancock interests from the Hope Downs Project. Neither Ginia nor Hope gave evidence to explain or justify the reasons why Bianca should not be trustee and a trustee company should be trustee.

Gina Reinhart did not give oral evidence and was not cross examined about that issue.

His Honour found that the main reasons not to accept the trustee companies were firstly that Hamersley’s rights to buy out the Hancock interests from the Hope Downs Project could be triggered. Secondly one of the trustee companies was prohibitively expensive and the others would charge costs which would reduce the amount available for distribution. Thirdly, none could provide adequate assurance of independence, and an ability to resist the influence of Gina Rinehart. Following with two of the companies, their consents to act were not unconditional.

On the other hand Bianca would act voluntarily and without remuneration. She demonstrated the ability to act robustly to assert the rights of the trust against the former trustee Gina Rinehart and against Hancock Prospecting. Her appointment would incur no risk of triggering a buyout by the Hamersley Companies. Conditions as to the requirement to get a judge’s advice or consent before making a significant decision could minimise the risks arising from any conflict of interest.

His Honour found that Bianca’s appointment was the least worst option, that it was “less unsatisfactory than the alternatives”.

His Honour made orders appointing Bianca as trustee of the trust on undertakings from Bianca to provide regular statements and accounts, to retain suitably qualified advisors, to seek the advice of the court before selling, commencing court proceedings or transferring Hancock Prospecting shares, and to consult with the beneficiaries in certain circumstances.

Gina Rinehart was ordered to deliver to Bianca by 25 June, (a period of 28 days), all trust documents, and to provide an account of the assets and transactions of the trust from 1 September 2006 to 28 May 2015.

Proceedings regarding that account will continue.

The case was adjourned so the judge could decide which parties would pay the legal costs of other parties.

Those costs are likely to be significant. The hearings took place over nine days in October 2013 and June 2014, prior to delivery of judgment on 28 May 2015.

Watch this space for further developments with costs, appeals and the continuing proceedings regarding the conduct of the trust through its accounts since 1 September 2006.

The full text of the judgment is available for anyone to read. It runs to 78 pages. It can be found quoted as “Hancock v Rinehart [2015] NSWSC 646 (28 May 2015) on the austlii website: http:/lwww.austlii.edu.au/au/cases/NSWSC/2015/646.html