Court confirms capacity to make a BDBN: van Camp v Bellahealth Pty Ltd [2024] NSWSC 7

The recent NSW Supreme Court decision of van Camp v Bellahealth Pty Ltd [2024] NSWSC 7 (22 January 2024) (van Camp v Bellahealth) provides important lessons for advisers when considering a person’s capacity to make a BDBN. It also reinforces the value of keeping good records and file notes.

Facts

• Dr Nespolon was the sole member of an SMSF, and sole director of the corporate trustee, Bellahealth Pty Ltd (Trustee).
• Dr Nespolon signed a BDBN in hospital on the day he died from cancer at the age of 57. The BDBN directed the Trustee to pay Dr Nespolon’s member benefits to his de facto partner, Ms van Camp.
• The Trustee and the other defendants had claimed that Dr Nespolon lacked capacity to make the BDBN and alleged unconscionable conduct on the part of Ms van Camp in procuring the BDBN. They sought an order that the BDBN be set aside or a declaration that it is void or unenforceable.

Relevant to this matter was that the BDBN reflected a change in Dr Nespolon’s prior instructions to some advisers and may have somewhat conflicted with the intentions outlined in his will.

The court relied on various documentary evidence and a number of witnesses. Dr Nespolon had various advisers and many were required to give evidence as to the advice they had given him and details relating to his capacity. A large number of emails, phone calls, text messages and meetings that Dr Nespolon had with his advisers formed part of the evidence in this case. This is an appropriate reminder that professionals must keep good records of all client interactions, as these could one day be before a court.

As well as his advisers, Dr Nespolon’s doctors who witnessed the BDBN gave evidence as to his capacity at the time. There was also expert evidence led by a doctor regarding the effects that various drugs would have had on Dr Nespolon’s capacity.

Outcome

The court found that the defendants did not establish that that Dr Nespolon lacked the mental capacity to make the BDBN. The court outlined the law relating to capacity as follows:

188. In considering the issue of capacity, it is necessary to focus on the BDBN, as the particular instrument signed by Dr Nespolon and the effect it would have. As was stated by the High Court in Gibbons v Wright at 438:

“…the mental capacity required by the law in respect of any instrument is relative to the particular transaction which is being effected by means of the instrument, and may be described as the capacity to understand the nature of that transaction when it is explained.”

…

191. The essential general nature and broad operation of the BDBN is apparent from its terms, namely that Dr Nespolon, the sole member of the Fund, was specifying how his member benefits were to be paid on his death in a manner binding on the Fund Trustee, rather than leaving the decision as to how they were to be paid to the discretion of the Trustee. …
192. In assessing capacity, consideration should be given to whether Dr Nespolon was capable of understanding that the act of making the BDBN would have the particular effects described above, in particular, whether he had the capability of understanding that all of his member benefits would be paid directly to Ms van Camp and would not be used by the executors in accordance with the terms of his Will, if such an explanation had been provided to him. In my view, a general understanding of these matters would not require a particularly complicated explanation in the circumstances of this case. …

When asked by his doctor at the time of making the BDBN “do you know what you are signing?”, Dr Nespolon said that the document related to his will and words to the effect that it would prevent Ms van Camp from being “taxed out of her brains”. This statement was a relevant fact that supported a finding that that Dr Nespolon understood the general nature and effect of the BDBN as [199]:

it indicates that Dr Nespolon appreciated that Ms van Camp would receive the member benefits, understood that his member benefits could be reduced by the incidence of taxation and knew there was an advantage from a tax perspective in using the BDBN to pay the benefits directly to Ms van Camp. …

Regarding the defendants’ claims of unconscionable conduct, the court held that it was not satisfied that the BDBN was the result of Ms van Camp taking advantage of any known special disadvantage of Dr Nespolon in circumstances that were unconscionable. Thus, the elements of unconscionable conduct were not made out.

The court declared that the BDBN was valid and binding and directed the Trustee to pay out the death benefits to Ms van Camp.

Conclusion

This case explains the concepts of capacity and applies them to the situation of a BDBN. Advisers should remember that the question of capacity is determined not by reference to what a person actually understood, but whether they had the capacity to understand the relevant document or matter if it was explained to them.

Whether a person had capacity at a particular time can be determined by a plethora of evidence. Advisers who have been involved with a client at the relevant time are likely to be called to give evidence on these matters. Without a well-kept and thorough file which contains copies of file notes of all relevant communications with a client, an adviser is unlikely to be well received in court.

Some other recent articles on AAT or court decisions are:

• Latest AAT decision on regulation of approved SMSF auditors: Townshend and ASIC
• Lost deed case – Lawyer gives expert evidence on likely terms of missing trust deed
• Re Rentis Pty Ltd [2023] QSC 252 — Court considers attorney power to ‘renew’ a BDBN
• New SMSF case demonstrates how not to have non-arm’s length income

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers hold SMSF CPD training throughout the year. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Shaun Backhaus ([email protected]), Senior Associate, and Bryce Figot ([email protected]), Special Counsel, DBA Lawyers

DBA LAWYERS

23 January 2024