The indemnity from the assets of the BDT
45 Clause 15.1 of the BDT's Constitution provides that TVM, as the responsible entity, is indemnified out of the "Trust Fund" for all expenses, losses and liabilities but goes on to provide that the indemnity is not available "where the indemnity is not permitted under the Operating Standards, the Law and only where such expense, loss or liability has been incurred in the proper performance of the duties of the Responsible Entity".
46 The liquidator has sought the order referred to given that the nature of the claims he considers that investors have against TVM are such that it may subsequently be contended that the "proper purposes" carve-out in the indemnity applies, or that s 601GA(2) of the Act applies such that recourse cannot be had to the BDT's assets to pay claims pursuant to the terms of the Constitution alone.
47 Section 601GA(2) provides as follows:
(2) If the responsible entity is to have any rights to be paid fees out of scheme property, or to be indemnified out of scheme property for liabilities or expenses incurred in relation to the performance of its duties, those rights:
(a) must be specified in the scheme's constitution; and
(b) must be available only in relation to the proper performance of those duties;
and any other agreement or arrangement has no effect to the extent that it purports to confer such a right.
48 If the liquidator is unable to have recourse to the assets of the BDT to meet the claims of investor creditors and the Rice & Reynolds Investors, the effect will be that unsecured creditors of TVM (whose claims do not arise from its trustee capacity, or which do not arise from the apprehended misleading or deceptive conduct), will be paid 100 cents in the dollar, and unitholders who are investor creditors would be expected to receive about 13 cents in the dollar.
49 While, as set out above, the non-investor creditors of TVM are limited, the Affected Investors and any Non-Affected Investors who submit a proof of debt that is accepted, stand to recover substantially more if recourse can be had to the assets of the BDT to pay their claims. That disparity arises because, if recourse cannot be had to the BDT's assets, the surplus after payment of TVM's non-trust creditors will be distributed pari passu between unitholders. This means that unitholders who have suffered no loss will receive the same amount as investors who invested after the Relevant Date (or who can submit a proof of debt that is accepted) and who did suffer loss. The liquidator considers, and I accept, that this would be unfair as non-investor creditors would recover more than investor creditors, and earlier investors would benefit over later investors (given earlier investors received distributions from funds contributed by later investors).
50 Of course, if recourse may be had to the BDT's assets to pay the claims of investor creditors (as well as non-investor creditors), their claims will all rank equally, and the distributions paid to non-investor creditors will be reduced. However, as all creditors and investors were given notice of this application (including access to Court documents), and none ultimately sought to appear and oppose it, I do not regard the lesser recoveries of a limited number of non-investor creditors to be a consideration that stands in the way of granting the relief sought by the plaintiffs.
51 The grant of a direction in the terms sought will not determine the substantive legal position, but will operate to protect the liquidator in acting in accordance with the direction. The liquidator has encountered an issue in respect of which the legal position is complex and uncertain. It is precisely in such circumstances of complexity and uncertainty that a liquidator may seek judicial directions before proceeding. That issue is whether the indemnity is unavailable to TVM as trustee given the bases on which its liability to investor creditors arose.
52 In Nolan v Collie (2003) 7 VR 287; [2003] VSCA 39 (Nolan) Ormiston JA (with whom Batt and Vincent JJA agreed) emphasised (at [53]) that "[t]he negative test is the relevant test, that is to allow indemnification for what has not been shown to have been improperly incurred". In Nolan, Ormiston JA also observed that "[o]ne must not forget, moreover, that in Re Beddoe [[1893] 1 Ch 547], seen as one of the leading authorities, Lindley LJ explained that in cases of doubt the trust estate should bear the trustee's costs": Nolan at [46], referring to Re Beddoe at 558. In other words, unless the indemnity is shown not to be available, it should be regarded as being available. This was recently confirmed by the Full Court in QB4 Capital Pty Ltd v Guardian Securities Ltd (2023) 411 ALR 496; [2023] FCAFC 72 (QB4) when their Honours endorsed the primary judge's adoption of what the Full Court described (at [60]) as the "well-established principle that trustees should not be deprived of their right of reimbursement unless they have clearly been shown to have acted improperly, with the onus resting on those who seek to deny the right" (citing Nolan at [50]).
53 In light of those matters, and given the compelling reasons advanced by the liquidator for having recourse to the trust assets to meet the claims of investor creditors, in my view I should only decline to grant a direction in the terms sought if it is tolerably clear that the indemnity is unavailable to TVM. In my view, I should not decline to grant the direction sought only because, as the authorities stand, an argument could be mounted that the indemnity is unavailable, or because the position is attended by some uncertainty. In this case, as noted above, notice of the liquidator's application was given to all creditors and unitholders of TVM, including the investors who would stand to gain if recourse to trust assets is not permitted. None has come forward to contend that the indemnity is not available. Further, and as referred to below, the contradictor also supported the direction sought.
54 In this case (unlike the position in most of the relevant authorities), there has been no trial in which TVM's conduct has been closely examined and findings made about qualitative aspects of that conduct. Here, consideration about whether the indemnity is unavailable must necessarily be conducted by reference to the liquidator's personal assessment of TVM's conduct. While the liquidator has conducted an extensive investigation, his views remain just that: views formed through an investigation, and not curial findings made following a contested trial.
55 In his supplementary submissions, the liquidator described the conundrum he faced as follows: "The difficulty for the Liquidator is that, although TVM's conduct can be described as honest, it was not reasonable (for then, impairments would have been disclosed)." As noted above, the causes of action identified by the liquidators against TVM are actions for misleading or deceptive conduct arising from representations made in TVM's financial reports and disclosure documents and the failure of those documents to recognise impairments to the commercial loan book. In the course of his investigations, the liquidator obtained expert advice which identified failures by TVM's auditors and accountants. The liquidator also expressed the view that the directors of TVM did not act reasonably to the extent that they failed to take action in relation to a provision for bad or doubtful debts after concerns were raised by TVM's auditors in mid-March 2006 and by its accountants in December 2006 and in mid-April 2007.
56 It has long been accepted that a trustee's right of indemnity in equity is not unlimited. Most commonly, the limitation has been expressed on the basis that expenses incurred will only be indemnified when they have been "properly" incurred. The historical basis for this qualification has been traced by some scholars back as far as Amand v Bradbourne (1682) 2 Chan Cas 138; 22 ER 884: see M Scott Donald, "The 'proper' approach to a trustee's right to indemnity out of trust assets" (2014) 8 J Eq 283 at 285. The imposition of this limit is equity's attempt to balance the interests of trustees (and the cognate interest of beneficiaries in persons being willing to accept appointment as trustee) with the risks posed to beneficiaries by trust assets being depleted by trustees with over-broad indemnities.
57 As may be seen, the concept of the "proper" performance by the trustee of its duties has been picked up by the terms of the indemnity provided for by cl 15.1 of the BDT's Constitution, and by s 601GA(2) of the Act.
58 But what does it mean to describe the exercise of powers by a trustee as "proper" or, conversely, "improper"? That language has been criticised on the basis that it expresses a conclusion, rather than articulating a yardstick by which conduct can be measured: eg Gatsios Holdings Pty Ltd v Mick Kritharas Holdings Pty Ltd (2002) ATPR 41-481; [2002] NSWCA 29 (Gatsios) at [8] (Spigelman CJ). Be that as it may, there are numerous cases making it clear that certain breaches by a trustee of its duties will be regarded as sufficiently serious as to deprive a trustee of recourse to the indemnity, while other situations will call for closer consideration of the particular actions of the trustee and the particular duty whose performance exposed the trustee to the cost, expense or liability in question.
59 In Nolan, Ormiston JA explained the different approaches having regard to the nature of the duty in question as follows (at [51]-[53]) (emphasis added, internal citations omitted):
[51] The answer to what now seems to be a degree of confusion as to the nature of costs, expenses and liabilities for which a trustee can seek indemnification may well lie in the simple proposition of Lindley LJ in Re Beddoe to the effect that the words "properly incurred" are equivalent to the words "not improperly incurred", a proposition so abundantly obvious that it tends to obscure some of the complications which have been overlooked from time to time. In my opinion the use of the negative is intended to show that what is "proper" and "improper" must be answered by reference to the circumstances and in particular by reference to the duty with which a trustee was obliged to comply or the power which a trustee is intending to exercise. The content of trustees' duties vary considerably, as do the obligations taken on when a power is exercised. A significant number of trustees' duties requires strict compliance so that failure to comply with that duty will necessarily lead to the conclusion that a particular cost, expense or liability has not been properly incurred. On the other hand, the more day to day functions of a trustee in the management of a trust require only that the trustee "exercise the same care as an ordinary, prudent person of business would exercise in the conduct of that business were it his or her own": per Gummow J in Breen v Williams …
[52] On the other hand, expenses and liabilities may be incurred where a trustee is engaged in activities which extend beyond mere management. The trustee may then be held to account far more strictly, in all senses. Conventionally a contrast is drawn with the performance of what have been called proscriptive and prescriptive duties such as the duty to keep and render accounts, the duty not to allow a conflict between duty and interest and the duty not to obtain an unauthorised benefit from the trust. Again it seems to have been accepted that a higher standard is demanded, subject to any statutory provisions, when making investments on behalf of the trust: see, eg, Re Whiteley [(1886) 33 Ch D 347 at 355 (Lindley J)]. For present purposes one may mention only one further strict duty recently described in the High Court as the duty "to adhere to the terms of his trust in all things great and small, important, and seemingly unimportant": see Youyang Pty Ltd v Minter Ellison Morris Fletcher [(2003) 212 CLR 484 at [33]]. The fact that such breaches can now be excused under s 67 of the Trustee Act 1958 was there noted by the High Court as indicating merely the strictness of the obligation and the need for legislation to relieve trustees who breached it. It would follow that expenses or liabilities incurred as a result of a breach of that duty [the duty to adhere to the terms of the trust] must ordinarily be characterised as improperly incurred, without regard to the reasonableness of the trustee's acts. It is obvious that there would be other breaches of these stricter duties which would lead to expenses and liabilities which were incapable of indemnification because each could be said to have been improperly incurred.
[53] A test, therefore, based on whether a cost, expense or liability has been "properly incurred" takes on some meaning, even if the answer depends on an analysis of the act which gives rise to the particular cost, expense or liability and the duty whose performance or breach may have led to that consequence. Naturally the vast majority of costs and expenses will not arise out of any breach of trust but will be merely incurred in the ordinary day to day management of it, but some will arise out of breaches of trust many of which will lead to a denial of indemnification because the relevant breach of duty will be characterised as having been improperly incurred. There will remain, nevertheless, some breaches of duty giving rise to expenses and liabilities about which that cannot be said automatically, so that one must examine those particular breaches individually in the context of the stated duty or power.
60 As Ormiston JA explained in Nolan, the conventional reference to costs and expenses being "properly incurred" was converted by Bowen LJ in Re Beddoe in stating (at 562) that "the word 'properly' means reasonably as well as honestly incurred". In Re Beddoe, Bowen LJ went on to say (at 562) that:
While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse.
61 Re Raybould [1900] 1 Ch 199 was decided not long after Re Beddoe. In the course of finding that the trustee was entitled to be indemnified in respect of his liability to a third party following damage to neighbouring buildings and machinery due to coal working, it was found that the working had been reasonable and not improper having regard to the advice obtained. In the course of confirming the availability of the indemnity, Byrne J referred (at 201) to Benett v Wyndham (1862) 4 DF&J 259; 45 ER 1183 as showing that (emphasis added):
if a trustee in the course of the ordinary management of his testator's estate, either by himself or his agent, does some act whereby some third person is injured, and that third person recovers damages against the trustee in an action for tort, the trustee, if he has acted with due diligence and reasonably, is entitled to be indemnified out of his testator's estate.
62 In Nolan, Ormiston JA doubted that (as Bowen LJ appeared to suggest in Re Beddoe), "reasonableness" is a qualifying criterion attaching to the availability of a trustee's indemnity. His Honour explained that a test of "unreasonableness" "goes beyond what equity would demand", as follows (at [53]):
The negative test is the relevant test, that is to allow indemnification for what has not been shown to have been improperly incurred. Thus it may be shown that a particular act is either outside the relevant power, done in bad faith, or exercised with an absence of the care and diligence that a person of ordinary prudence should exercise. I believe that, if carefully read, the judgment of Brooking J in RWG Management [Ltd v Commissioner for Corporate Affairs [1985] VR 385] merely expresses the possibility that impropriety may be established in a variety of different ways according to the nature of the duty or power exercised by a trustee. It would follow that the test of "reasonableness" is primarily concerned with the standard of ordinary diligence and care required in the management of trust affairs which might be expected of a trustee as objectively but not over zealously enforced. That is why Bowen LJ insisted that in matters of management and the like "mere errors of judgment" should not deny the right to indemnification but, with the greatest of respect, his insistence on a test of unreasonableness goes beyond what equity would demand. So far as costs and expenses are concerned, at least those which are the subject of taxation as "indemnity costs", no question of reasonableness applies in the first instance as to the nature of the costs and expenses which the trustee may claim (at least in ordinary cases), but the test of reasonableness is imposed on the quantum of the amount claimed by a trustee which the Taxing Master should properly allow. Otherwise I reiterate what I have said above in [51].
63 Benett v Wyndham, to which Byrne J referred in Re Raybould, was another case in which a trustee was entitled to be indemnified in respect of liability to a third party. There, the third party was injured when a bailiff employed by the trustee ordered woodcutters to fell trees and a bough fell on a passer-by. The reported reasons of Bruce LJ (with whom Turner LJ agreed) record that the trustee appears to have "meant well, to have acted with due diligence, and to have employed a proper agent" to do an act within the due discharge of his duty. That was enough to warrant a conclusion that, as between trustee and the estate, the burden of the liability was to be borne by the estate. It may be noted that there was no discussion of "reasonableness" as a distinct qualifying criterion.
64 Nolan, and other authorities, were considered by Gordon J (then a judge of this Court) in Australian Securities and Investments Commission v Letten (No 17) (2011) 87 ACSR 155; [2011] FCA 1420 (Letten 17). As her Honour drew out in analysing the authorities, while breaches of some duties will almost invariably result in the indemnity not being available - the duty to keep and render accounts, the duty not to allow a position of conflict between duty and interest, the duty not to obtain an unauthorised benefit, and the duty to adhere to and carry out the terms of the trust - when the duty that has been breached concerns the day-to-day management of the trust, trustees are held to less exacting standards (at least insofar as the loss of the indemnity is concerned). Her Honour summarised the position as follows (at [18]):
At a practical level, a breach of certain "core" duties will as a matter of course result in a loss of the right of indemnity. For all other breaches, the answer will depend on the terms of the trust deed and whether that breach was in bad faith, outside the relevant power and exercised with an absence of care and diligence that a person o[f] ordinary prudence should exercise.
65 Pausing there, the matters identified by the liquidator as giving rise to liability to the investors do not involve the breach of core duties of the kind that have been identified as generally resulting in the loss of the trustee's indemnity. The liquidator submitted that "TVM engaged in the contravening conduct in good faith and honestly (in the sense that there was no culpability or deception), although it acted unreasonably". After referring to some aspects of the factual narrative, the liquidator submitted that TVM's conduct was "negligent, rather than dishonest or in bad faith" and noted the following matters in support of that contention:
(a) First, there is no evidence that TVM knew of the impairments prior to receiving the letters from Waters Dace and Price Gibson. That is consistent with the view expressed in the limited scope report that the board did not regularly review non-performing loans or consider the need for provisions.
(b) Secondly, the evidence is consistent with the view that, after receiving the letters from Waters Dace and Price Gibson, the board disagreed with their assessment and honestly believed (albeit, incorrectly), that TVM's loan book was not impaired.
(c) Thirdly, throughout the Relevant Period, TVM's board reaffirmed its view that representations made in the financial reports and in its PDS remained accurate, and the making of these representations was supported by the unqualified audit opinions that it received from Price Gibson throughout the period.
66 The contraventions identified by the liquidator involve misleading or deceptive conduct under statute, relating to TVM's failure to impair the value of the commercial loan book. The liquidator has, as I have set out, not identified matters that lead him to consider that the trustee acted in bad faith or knowingly (cf the position in Letten 17 where Gordon J referred to the trustees knowingly permitting investor funds to be used for non-trust purposes). Nor do the matters in issue raise the "clear accounts" rule, which was the principal basis upon which the indemnity was unavailable on the facts in Letten 17.
67 In QB4, the Full Court said (at [90], emphasis added):
[90] There is a great number of cases concerning the meaning and application of the question whether expenses have been "properly incurred". As we have noted above, the starting point is often taken to be the decision in Re Beddoe [1893] 1 Ch 547. It is sufficient for present purposes to refer to the judgment of the Full Court in Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, in which it was said, adopting the language of Bowen LJ in Re Beddoe, that the word "properly" means reasonably as well as honestly incurred (at 212). As the Full Court said (at 212), if the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is "not properly incurred". No argument was put to us in the appeal that the Full Court's reasoning should not be followed. The respondents referred briefly in their written submissions to the NSW Court of Appeal's reasoning in Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd [2002] NSWCA 29; (2002) ATPR 41-481, which involves a major departure from the orthodoxy adopted in Adsett v Berlouis, and we adhere to that orthodoxy, both because it has the authority of the Full Court, and also because the criticisms by Ormiston JA of Gatsios are well made: see [Nolan at [44]-[57]].
68 In QB4, the Full Court referred to the orthodoxy as set out in the earlier Full Court decision in Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201 (Adsett). Adsett involved an appeal against orders of Pincus J that prevented a trustee in bankruptcy from having recourse to the assets of the bankrupt estate in relation to the costs (including an adverse costs order) in respect of contempt proceedings that the trustee had initiated unreasonably and orders that the trustee bear his own costs in relation to certain other applications.
69 The Full Court's decision in QB4 endorsed Nolan and did not suggest that Gatsios was, on the facts, wrongly decided (as distinct from endorsing the criticisms made in Nolan of the reasoning in Gatsios). Gatsios concerned the former trustee of a trust operating a business, which was found to have made false and misleading statements in contravention of s 52 of the Trade Practices Act 1974 (Cth) (the trustee was removed from office prior to the award of damages against it). The former trustee sought, and obtained, a declaration that it was entitled to be indemnified from trust assets for its liability to pay damages. In the course of confirming the availability of the indemnity, members of the New South Wales Court of Appeal made some observations in their reasons that have subsequently attracted criticism.
70 In particular, in Nolan, Ormiston JA (with whom Batt and Vincent JJA agreed) drew attention to a passage in the reasons of Spigelman CJ in which his Honour concluded that no "test" could be framed for when a trustee is entitled to receive indemnity by asking whether the conduct was "proper" or "reasonable", on the basis that those expressions generally record conclusions reached on other grounds: Nolan at [44], referring to Gatsios at [8]. Attention was also drawn by Ormiston JA to passages in the reasons of Meagher JA in which his Honour considered that it was difficult to formulate limits on the indemnity beyond saying that fraudulent conduct would be disqualifying, and that a proposition that the activity must be "reasonable" and "proper" did not exist in Australian law, being meaningless, or, in the case of the latter, it being meaningless to apply some hypothetical standard of propriety in ordinary commercial life, absent fraud and crime: Nolan at [44], referring to Gatsios at [47]. Justice of Appeal Ormiston observed that it was not clear why the majority of the New South Wales Court of Appeal had sanctioned "so significant a departure from accepted principle as to leave the trustee's right largely unconstrained", and preferred "to confine what was said in that case to liabilities in tort incurred by trustees and the circumstances in which they should be so indemnified": Nolan at [45] and [50] (Batt and Vincent JJA agreeing).
71 What underlies the various formulations found in the cases is the need to focus on the duty in question, and to assess the nature and gravity of the trustee's conduct in context. This emerges most clearly from Nolan. In Nolan, the liability to a third party arose from the trustee's failure to realise, when mortgaging a trust property that had been sold but not yet transferred to a buyer, that the document being executed was an "all moneys" mortgage. Had the trustee acted with due diligence and care, it should have restricted the mortgage to the liability for which the buyer had accepted responsibility. However, the Court of Appeal upheld the trustee's right of indemnity. While acknowledging (at [54]) that it could be said that the trustee acted "negligently", and did not carry out the transaction with the level of care and diligence a person of ordinary prudence would exercise, Ormiston JA was of the view that:
such an analysis cannot here determine whether a trustee can fairly seek indemnification from the assets of a trust in circumstances where something has happened to go wrong.
72 Such a lack of diligence, and negligence, was not sufficient to disentitle the trustee to access the indemnity. That was because, as Ormiston JA (with whom other members of the Court agreed) determined, it had not been shown that the trustee's conduct was "improper", and the conduct was "not sufficiently heinous" to justify withholding the indemnity: Nolan at [55] and [57]; see also CB Darvall & Darvall v Moloney (2006) 236 ALR 796; [2006] QSC 345 at [47] (Wilson J).
73 In my view, it is appropriate to make the direction sought regarding recourse to the assets of the BDT. In considering whether to make the direction sought, I am mindful that the Court is not tasked with determining whether, in fact, TVM acted unreasonably, or in a way that may attract other adjectives found in the authorities concerning when trustees will not be indemnified from trust assets. Rather, the question I have to consider is whether the liquidator has a reasonable basis for proceeding, as he proposes to, such that he should be exonerated.
74 I have no hesitation in concluding that the liquidator has amply justified his view that the results of proceeding without recourse to the BDT's assets to meet the claims of Affected Investors would be most unfair. I also accept, again without hesitation, that this is not a case where the question of recourse to trust assets to meet the claims against a trustee arises in circumstances that merely involve shifting a burden from trust assets to a trustee. In many cases, where a trustee has no recourse to trust assets, the trustee will be required to bear the costs personally, and the issue is one of burden shifting. But here, the trustee is insolvent and is in liquidation. If the liquidator of TVM has no access to the trust assets in respect of the claims of Affected Investors, those claims will go unmet, and the assets of the BDT will be distributed to unitholders in a way that the liquidator regards as inequitable.
75 Those matters constitute compelling reasons why the direction sought should be given if there is no obvious flaw in the liquidator's rationale for proceeding on the basis that the indemnity is available.
76 As the authorities emphasise, it is only where it has been shown that the indemnity is not available that a trustee should be deprived of it, and in cases of doubt, the trustee should not be deprived of recourse to the indemnity. Here, it is not clearly the case that the indemnity is not available. Therefore, the liquidator would be acting reasonably in having recourse to the assets of the BDT.
77 I say it is not clearly the case that the indemnity is not available, recognising that the authorities would not preclude an argument that TVM was deprived of the indemnity by having acted unreasonably. However, in my assessment, the state of the authorities is not such that the liquidator's characterisation of certain aspects of TVM's conduct as unreasonable necessarily renders the indemnity unavailable, such that I should decline to give the direction sought. In my view, upon careful consideration of the authorities, references to reasonableness in cases discussing the availability of a trustee's indemnity do not suggest that, at least in cases of indemnification for statutory or tortious liability to others, the indemnity will only be available if the conduct giving rise to the liability can be characterised as "reasonable" in all respects; a more qualitative analysis is required.
78 For completeness, I should note that the contradictor submitted that the liquidator would be justified in proceeding on the basis that the conduct of TVM was not such as to disentitle it from being indemnified from the BDT assets. Accordingly, the contradictor submitted that the Court should make the direction sought. In arriving at this conclusion, the contradictor's submissions noted that it was not contended that TVM had acted beyond power or in bad faith and "[a]t worst, the Impugned Conduct might be susceptible to being thought to display a want of the care and diligence that would be expected of a person of ordinary prudence". The same was said of the facts in Nolan.
79 All told, and notwithstanding the liquidator's view, expressed in his affidavit evidence, that the directors of TVM had acted unreasonably in failing to respond to warnings issued by the company's auditors and accountants, and the characterisation (in submissions) of TVM's conduct as unreasonable, this is not a case in which it has been clearly shown that the trustee acted improperly, so as to be deprived of the indemnity. Accordingly, the liquidator would be justified in proceeding on the basis that the indemnity remains available and that recourse may be had to the assets of the BDT in the manner proposed.