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Judgment 1HER HONOUR : Before me for hearing on 30 May 2011 was an application brought by the executors of the estate of the late Maxwell Walter Allen Frost, seeking judicial advice as to two questions relating to the pursuit of proceedings in relation to the estate: (a) Would the plaintiff executors be justified in pursuing an appeal from the judgments of Perram J (in proceedings determined by his Honour in [2010 FCA 1159) to the Full Federal Court of Appeal on the grounds set out in the advice from Counsel? (b) Would the plaintiff executors be justified in incurring the costs of the estate in pursuing an appeal to the Full Federal Court of Appeal, with such costs to be recouped from the funds of the estate, but subject to any direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy to pay such funds to the plaintiff executors? Background Facts 2The background to this application relates to ongoing litigation between various members of the Frost family in relation to a dispute originally arising in respect of the late Mr Frost's will. Mr Frost died on 26 November 2002 leaving a will dated 19 July 2002. On 2 May 2003, probate of the will was granted to the executors named in the will, Alan Maxwell Frost and Diana Catherine Fallon (his son and daughter). The whole of the deceased's estate (which amounted to $835,000.00) was left to the Australian Cancer Research Foundation. 3In 2004, the deceased's sister (Mrs Monica Catherine Bovaird) brought proceedings in this Court (2211/04) (the Family Provision Act proceedings) against her brother's estate, claiming provision for her maintenance and advancement in life pursuant to the now repealed Family Provision Act 1982 (NSW). 4Also in 2004, Mrs Bovaird's son (Mr Leon Lewis Macgillivray Bovaird) brought proceedings (3159/04) in this Court against the estate of his uncle in relation to the alleged breach of a contract said to have been entered into in May 2001 with his late uncle in relation to the provision of finance in the sum of $880,000.00, for the purpose of the redevelopment of Mrs Bovaird's then home in Gordon, and for the payment of moneys in relation to aged care accommodation for Mrs Bovaird. In 2006, Mrs Bovaird brought her own proceedings (1923/06) in this Court against the estate of her brother in relation to the alleged breach of that contract. The claims for breach of contract were also brought against a company, AFM Developments Pty Ltd, said to have been a party to the agreement. (These two proceedings, I will refer to as the breach of contract proceedings). 5The Family Provision Act proceedings and the two breach of contract proceedings were heard together by Brereton J on 2-5 February 2009. The executors were necessary parties to those proceedings, representing the deceased's estate. His Honour delivered judgment in those proceedings on 30 April 2009 ( Bovaird v Frost [2009] NSWSC 337). 6Brereton J, at [116] - [123], found that the deceased had entered into an agreement (that was intended to be binding) with his sister and nephew (but to which AFM was not a party), that agreement being "at least to fund Monica's retirement accommodation, at whatever level might reasonably be required from time to time, and all the expenses associated with her care at that accommodation, and to provide to Leon an interest free unsecured loan of $880,000 for a term of 10 years, to fund the redevelopment of [the property at Gordon]" but that there was no intention that the deceased be bound to enhance his sister's estate with capital, whether in the form of an asset in a retirement unit or otherwise. (His Honour noted that although defences of unconscionability, undue influence and under the Contracts Review Act had been pleaded, they were properly not pressed by the defendants.) 7As his Honour held that AFM was not, and did not become, a party to the contract, the case against it failed. Brereton J found for Mrs Bovaird on her breach of contract claim that she was entitled to damages against the deceased's estate in the sum of $541,268 (being the care fees, and interest and retention in respect of the accommodation bond, incurred at a particular nursing home in Terrey Hills to January 2009, and thereafter capitalised for her life expectancy of 3.25%, and the cost of raising a loan to provide the accommodation bond) but did not allow damages in respect of certain outstanding and ongoing fees due in respect of accommodation in a unit at Lindfield, nor for gratuitous care or for medical expenses over and above those provided as part of the Terrey Hillls aged care facility). For breach of the redevelopment loan term of the contract, his Honour held that Mrs Bovaird was entitled to damages against the estate in the sum of $590,379 (being the cost of a substitute loan on commercial terms at then prevailing interest rates of about 6.5%, for a term of ten years on a loan of $880,000 and borrowing costs). Although his Honour found that there had been a breach of the contract with Mr Bovaird in relation to the redevelopment loan, his Honour considered that Mr Bovaird was entitled only to nominal damages (of $1). 8In light of the award of damages that Mrs Bovaird was to receive on her contract claim, his Honour considered that she had not been left with inadequate provision and therefore no further order was necessary or appropriate in the Family Provision proceedings. (Had the matter fallen for consideration only under the Family Provision Act , his Honour would have made an order for provision for Mrs Bovaird out of the deceased's estate by way of a legacy in the sum of $235,000 (approximately equivalent to the total charges incurred to January 2009 in respect of care and accommodation at Terrey Hills Nursing Home, less the benefit conferred on her of her interest in the Lindfield unit), and an indexed annuity of $6,250 per month (to cover those fees for the remainder of her life).) 9His Honour gave the parties the opportunity to make submissions as to matters of arithmetic, interest and form in relation to the proposed orders. They did so and, on 4 September 2009, Brereton J published his reasons in relation to the final orders made for the disposition of the proceedings ( Bovaird v Frost [2009] NSWSC 917). 10His Honour dismissed the Family Provision Act proceedings (with an order that the executors pay Mrs Bovaird's costs of those proceedings); gave judgment for Mrs Bovaird in her breach of contract proceedings and ordered that the executors pay her the sum of $1,239,110 (but also gave judgment for AFM on her claim against it in those proceedings (ordering that the executors, in their capacity as executors of the estate, pay Mrs Bovaird's costs but that Mrs Bovaird pay AFM's costs); and gave judgment for Mr Bovaird in his separate breach of contract proceedings (for payment in the sum of $1) and judgment for AFM in the claim against it in those proceedings (ordering that the executors, in their capacity as executors of the estate, pay Mr Bovaird's costs and that Mr Bovaird pay AFM's costs). 11Relevantly, for present purposes, Brereton J refused applications made on behalf of Mrs Bovaird and her son for orders that costs in their favour be payable by the executors on an indemnity basis and that the executors be denied indemnity from the estate both for their own costs and for the costs payable by them to the respective plaintiffs. 12At [18] - [21], his Honour said: On behalf of Monica, it was submitted that the costs payable to her should be assessed on an indemnity basis, by reason of what is said to be the unreasonable conduct of the estate in defending her claim. In particular, it was submitted that the executors knew of Max's promises and obligation to support Monica, yet unreasonably put her to proof of her case, and that the unreasonableness of the defence is illustrated by the fact that while many of her witnesses were initially required for cross-examination, their evidence was ultimately not the subject of challenge. However, while the executors had some knowledge that Max had formed an intention to make provision for Monica, insofar as that knowledge was derived from Max the evidence does not establish that he conveyed any binding commitment to do so, and insofar as any promise was conveyed the source was Leon, whose assertions the defendants were entitled to have subjected to close scrutiny. The argument that the defence was unreasonable overlooks, first, that the primary duty of an executor in these circumstances is to defend the estate and uphold the will [ In The Will of lanfear (1940) 57 WN (NSW) 181; Re Hall [1959] SR (NSW) 219, 226; Vasiljev v Public Trustee [1974] 2 NSWLR 497, 503-4]; secondly, that executors are entitled to have courts closely scrutinise claims made against the estate based on the evidence of the claimant of an arrangement said to have been made during life [ Plunkett v Bull [1915] HCA 14, (1915) 19 CLR 544, 548-9]; and thirdly, that there were respectable arguments, although they were ultimately unsuccessful, that the arrangements were not intended to be contractual, or not sufficiently certain to be given contractual effect; and, in respect of the family provision claim, that Monica was not dependent upon the deceased so as to be an eligible person, or that there were not factors warranting the making of her application, or that having regard to her separate resources she had not been left with inadequate provision. Moreover, it is a mistake to infer from the reasonable and economic conduct of a defence at trial, including the abandonment of issues once they have been refined and explored, that the defence has thitherto been conducted unreasonably. The plaintiffs criticise the defendants' failure to cross-examine many of the plaintiffs' witnesses at trial. To the contrary, in my view that involved a responsible conduct of the defence. Litigants should not be deterred by fear of an adverse costs order from making responsible decisions in the course of litigation to abandon or not press issues originally raised but later appearing unsustainable or insignificant. Although, ultimately, my conclusions on the issues of intention to contract, eligibility, circumstances warranting and inadequacy of provision were adverse to the estate, those were legitimate and arguable issues to be raised by the estate. It is true that some defences that were ultimately unviable were pleaded - including the Contracts Review Act and unconscionability - but these were not pursued at trial, and did not materially increase the costs of the litigation. 13At [52] his Honour said: The executors' defence of the proceedings was not unreasonable . Insofar as they defended the proceedings on behalf of the estate (as distinct from on behalf of AFM), the executors were not acting in their personal interests. Had judicial advice been sought, it would probably have been that they were justified in defending the proceedings. The beneficiary being a charity, it was reasonable for the executors not to require it to fund the defence of its interest. I am not prepared to make an order under r 42.25 to the effect that the defendants not be entitled to their costs out of the estate. (my emphasis) 14At the time that the orders were made by Brereton J on 4 September 2009, the estate did not have sufficient monies to meet the respective awards of damages and costs made in favour of Mrs Bovaird and her son. The executors therefore petitioned the Federal Magistrates Court to administer the estate under the provisions of Part XI of the Bankruptcy Act 1966 (Cth) and orders were made to that effect on 23 October 2009, on which date the estate passed into the hands of the trustee in bankruptcy (initially Mr Steve Nicols, then Mr Giles Woodgate and now Mr Max Donnelly). 15Both Mrs Bovaird and her son then sought leave in the Federal Court to appeal from certain of the findings made by Brereton J (in essence as to the components of the damages claim on which they had failed and in Mr Bovaird's case as to the finding that he was entitled only to nominal damages). Mrs Bovaird also sought to maintain an appeal in relation to the Family Provision Act finding (i.e. the order that his Honour would have made but for the success of the breach of contract claim) in the event that the Court of Appeal might hold that the contract claim had not been made out (asserting that the provision should have been larger). The finding that AFM was not a party to the contract was also the subject of the appeal sought to be brought by the Bovairds. 16The appeal by the Bovairds also challenged the costs orders made by Brereton J; in particular that the executors should have their costs of the proceedings out of the estate and that the plaintiffs should not have their costs on an indemnity basis. An order is sought in the appeal proceedings that the executors be denied any indemnity from the bankrupt estate of the deceased both for their own costs and for the costs payable by them as executors to the appellants. 17Leave of a bankruptcy court to maintain the appeal was necessary, as the estate was bankrupt. Accordingly, Mrs Bovaird and her son each commenced proceedings in the Federal Court of Australia (NSD 1394/2009 and NSD 1395/2009) (the leave application proceedings) for that purpose. 18Subsequently, further proceedings have been commenced by Mrs Bovaird and her son in this Court (the devastavit proceedings), in which allegations are made against the executors to the effect that they had wrongfully depleted the assets of the estate (by the payment out of the estate of substantial sums to third parties, including the deceased's estranged wife, Mrs Margaret Frost). In those proceedings (2010/418888), Mrs Bovaird and her son seek compensation personally from the executors for the loss caused to them by the making of those alleged payments. (No leave was initially sought by the Bovairds for the commencement of these proceedings.) 19Two separate applications were then brought by the executors in the Federal Court of Australia: an application (NSD 470/2010) for a permanent stay of the devastavit proceedings (the Stay proceedings) and an application (NSD 283/2010) for declarations in relation to their right of indemnity as executors out of the estate assets (in particular, seeking declarations as to the discharge of their right of indemnity in priority to all other creditors and claims and as to the right to indemnification for their future legal costs in defending the various sets of proceedings by then on foot by the Bovairds), to which I will refer as the Indemnity proceedings. (In the Indemnity proceedings a dispute was also raised as to the remuneration of the previous trustee in bankruptcy, Mr Woodgate.) 20Senior Counsel for the executors, Mr Cotman, notes that the executors do not have control of the funds of the estate and, accordingly, cannot be paid their costs of the various proceedings in the absence of a direction given by a court with bankruptcy jurisdiction. (They have, however, already been paid their costs of the proceedings before Brereton J.) 21As at August 2010, therefore, there were the following proceedings on foot: (i) the 3 Appeal proceedings in this Court brought by the Bovairds in respect of certain aspects of the decisions made by Brereton J in the Family Provision Act and breach of contract proceedings heard in 2009 (2010/298569; 2010/288580 and 2010/298581); (ii) the 2 Leave Application proceedings brought in the Federal Court by the Bovairds seeking leave to prosecute the Appeal proceedings against the bankrupt estate (NSD 1394/2009 and NSD 1395/2009); (iii) the devastavit proceedings brought by the Bovairds in this Court against the executors personally, seeking compensation for the tort of devastavit (2010/41888); (iv) the Stay proceedings brought by the executors in the Federal Court seeking a stay of the devastavit proceedings (NSD 470/2010); and (v) the Indemnity proceedings brought by the executors in the Federal Court seeking declarations as to their rights to indemnification (and priority in that regard) out of the estate for their costs as executors in defending the various sets of proceedings (NSD 283/2010). 22On 13 August 2010, the applications referred to in the respective Federal Court proceedings ((ii), (iv) and (v) above) were heard by Perram J in the Federal Court. His Honour handed down his reasons for judgment on 27 October 2010 ( Bovaird v The Trustee of the Bankrupt Estate of Maxwell Walter Allen Frost [2010] FCA 1159) and, subsequently, on 3 May 2011, Perram J entered formal orders in those proceedings, including orders for costs ( Bovaird v The Trustee of the Bankrupt Estate of Frost (No 2) [2011] FCA 465). 23In summary, Mrs Bovaird and her son were granted leave to maintain, as against the bankrupt estate of the deceased, their appeal in respect of the judgments of Brereton J, except insofar as the relief sought by them concerned the quantum of damages awarded against the bankrupt estate of the deceased. They were also given leave to proceed with the devastavit proceedings. The executors were unsuccessful in seeking a stay of the devastavit proceedings and were unsuccessful in obtaining the orders they sought in relation to the indemnification of their costs out of the estate. 24Perram J, at [21], considered the scope of the devastavit proceedings and said: The claims made by the executors have been filed in the Equity Division but it is quite obvious that the executors pursue the common law claim and are not seeking an order for account on a wilful default basis in an administration suit (cf. Juul v Northey [2010] NSWCA 211 at [188]ff per McColl JA). The creditors plead in their statement of claim that they are creditors of the estate and it is that allegation which founds their standing, in tort, to pursue the claim. Further, the whole point of the action is to assist them in making up the shortfall in what they will receive in the administration and what was originally owed to them under the original provable debt. 25His Honour held that the devastavit proceedings were proceedings to which s 249(3)(b) of the Bankruptcy Act 1966 (Cth) applies and that, absent the leave of the court, those proceedings were incompetent. His Honour noted that the fact that no leave had been obtained (or sought) for the commencement of those proceedings was the first basis on which the executors had applied for a stay of the devastavit proceedings (the second basis being a question raised as to the standing of the Bovairds to pursue those claims). 26As to the first matter, after having considered factors relevant to the exercise of the discretion conferred by s 249(3)(b) (namely, whether the proceedings had been commenced before the bankruptcy, the prejudice to all parties caused by a stay of proceedings already substantially advanced, the willingness of the trustee in bankruptcy to bring the same proceedings, and the ability of the Court, by means of conditions imposed on the grant of leave, to ensure that one creditor did not obtain any advantage over the others), his Honour was prepared to grant the requisite leave. 27In that context, his Honour noted the potential saving to creditors of the expense of the proceedings if they were not conducted by the trustee in bankruptcy and said (from [25]): The real concern of the executors, as I understand it, relates to their position as secured creditors of the estate and the position of Monica and Leon as unsecured creditors. If the trustee in bankruptcy were to recover from the executors any verdict for waste the executors say they would be entitled to payment pursuant to their indemnity and that that payment would be secured over the estate assets by reason of their lien. But, they submit, if the creditors are permitted to recover from them in devastavit then the moneys thus recovered will not form part of the estate and the funds available to them under their lien will be correspondingly reduced. Standing back from the whole situation, so they say, the creditors will, in substance, have defeated their lien. I think this is a valid concern, however, I do not think it requires the refusal of leave. Assuming that the trustee in bankruptcy could maintain a suit against the executors for breach of duty, the present devastavit proceedings provide the potential for prejudice to the secured creditor. The risk is potential - it is not plain at this stage whether the executors will be entitled to be indemnified or, if so permitted, for how much. Further, it is possible that the two claims may not come into conflict. However, these matters cannot be known at this stage. In the circumstances, what I propose to do is to impose conditions similar to those imposed in Fraser which will require the creditors to undertake not to oppose any application by the trustee to be joined to the devastavit proceedings and also to undertake to keep the trustee informed of the orders which are to be sought. 28As to the second basis for the stay, his Honour rejected the argument that only the trustee had standing to pursue the devastavit claims, noting that s 134(l)(j) does not give to the trustee in bankruptcy causes of action; rather, it permits the trustee to commence proceedings in respect of already existing legal or equitable rights and therefore that it would be necessary for the executors to point to some other place from which the trustee's right to make a claim in devastavit might derive (which they had not done) and why it was suggested that any rights vested in the creditors (the Bovairds), not being rights against the bankrupt estate as such, were thereupon divested to the trustee in bankruptcy. 29After addressing a further argument based upon the principle of reflective loss discussed in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (which his Honour considered might or might not ultimately succeed), Perram J was of the view that the argument as to standing was one that should not be considered until all of the evidence was before the court. His Honour observed that, leave having been granted for the maintenance of the devastavit proceedings, this Court could on the trial of the devastavit proceedings in due course determine whether the creditors have standing, in light of the Prudential point, to pursue those devastavit proceedings (by which time the evidence as to who are the creditors are and, in particular, whether the executors are entitled to the status of creditors and their extent of their claim, would be clearer). 30As to the questions posed by the executors' application in the Indemnity proceedings, his Honour said at [34] - [37]: The issue which is pending in the Court of Appeal is whether the executors are entitled to an indemnity out of the estate for the costs of the proceedings before Brereton J. That matter has been determined at first instance in favour of the executors but is now the subject of an appeal. For reasons I have already given that appeal is not frivolous. The material referred to in the devastavit proceedings may lend credence to the creditors' contention that the executors have misused their offices to pay third parties substantial sums and to conduct litigation which may not have been in the estate's interests. Certainly, it shows payments were made to third parties. Those matters, which appear largely to have come to light only after the appointment of the trustee in bankruptcy, may be material to the issues in the Court of Appeal. It would be premature until that Court determines whether the executors have abused their office in defending the proceedings before Brereton J for the trustee in bankruptcy to meet costs to which it may ultimately transpire they are not entitled. So too, insufficient is known at this stage to say, in advance, that the executors' conduct of the appeal will be reasonable. If the Court of Appeal were to conclude that the executors were unreasonable in defending the proceedings before Brereton J it is not difficult to see that a similar attitude might be taken to their defence of that position in the Court of Appeal itself. Very much the same remark may be made about the devastavit proceeding. It is possible that the executors will be vindicated but it is also possible that they will not. It would be inappropriate to permit payment of their legal expenses in advance of a determination by the Court hearing that matter of the issue of whether the executors have engaged in the conduct alleged. 31Accordingly, his Honour was of the view that the trustee in bankruptcy would not be justified, at least at this stage, in meeting the executors' legal costs in any of the Supreme Court proceedings (i.e. those already determined by Brereton J), the Appeal proceedings or the devastavit proceedings. His Honour went on to say: ... If it transpires that the executors' conduct of the underlying proceedings is such that they should not have been pursued then a similar position is likely to be taken to what is occurring in this Court. Until the Court of Appeal determines that question it would be premature for the trustee to permit the estate assets so to be used. 32In all four sets of proceedings heard by Perram J, his Honour made orders for costs against the executors in favour of Mrs Bovaird and her son, but stayed all of the costs orders pending the determination of the Appeal proceedings. (His Honour permitted a distribution of four cents in the dollar to Mrs Bovaird and her son as creditors of the bankrupt estate). 33Following the judgment handed down by Perram J, the executors sought advice as to the prospects of an appeal from those parts of the decision relating to the executors' costs of defending the forthcoming Appeal proceedings and devastavit proceedings, namely as to their right to an indemnity out of the estate for those costs and their claim for priority in relation thereto (the latter being a matter not addressed by Perram J in light of the findings made as to the costs indemnity generally). That advice (provided by Mr Cotman) was before me on the present judicial advice application. 34Mr Cotman has concluded, for the reasons set out in his written opinion, that there are reasonable prospects of such an appeal (though raising an issue as to the utility of such an appeal if the Appeal proceedings in this Court were to be determined in advance of the Federal Court appeal proceedings). (Mr Cotman notes in that regard that the devastavit proceedings seem unlikely to be determined more quickly than appeal proceedings in the Full Federal Court, in the ordinary course of events, and therefore the priority issues are likely to arise at a time that would render the Federal Court appeal proceedings of some utility even if the Appeal proceedings had been heard by then. There is also a question as to whether the priority question would be dealt with by the Full Court and not, if the appeal on this point were to succeed, or remitted back to his Honour for consideration.) Mr Cotman notes that once the Appeal proceedings in this Court are heard and determined, then the question of priorities in the bankrupt estate will become pressing. 35The executors have already filed their Notice of Appeal from the judgment of Perram J (having done so in advance of this judicial advice application due to the limited time period within which such an appeal was to be brought). Grounds of Appeal 36The grounds of appeal, as noted above, relate to the dismissal of the executors' application for a direction that the trustee in bankruptcy indemnify the executors for their costs, as and when incurred, of defending the Appeal proceedings and the devastavit proceedings. 37In the grounds of appeal it is contended that Perram J erred in refusing to direct the trustee in bankruptcy to indemnify the executors for their costs in defending the respective proceedings in circumstances where Brereton J had determined, inter alia, the executors' right of indemnity from the estate assets in relation to the proceedings the subject of the appeal from the decision of Brereton J by the Bovairds; there was no basis, or no adequate basis, for finding that the propriety of prospective conduct by the executors of the devastavit proceedings, or the prospective outcome of the devastavit proceedings, could have a bearing on the question of the executors' entitlement to indemnity in relation to costs of the proceedings before Brereton J or the appeal from Brereton J's decision in the Court of Appeal; there was no basis, or no adequate basis, for finding that the propriety of prospective conduct of the executors as respondents in the Court of Appeal proceedings could have a bearing on the question of the executors' entitlement to indemnity for costs of the proceedings before Brereton J; and there was no basis, or no adequate basis, for finding that the propriety of prospective conduct of the executors in the Court of Appeal proceedings or the devastavit proceedings or any prospective outcome of those proceedings could have a bearing on the question of the executors' entitlement to indemnity for their costs incurred in respect of proceedings before his Honour. 38As to the question of priorities, which arises if the first ground of appeal is successful, it is contended that his Honour erred in refusing to make a finding that the right of indemnity of the executors for their legal costs in the four proceedings before his Honour was a right in priority to any right of indemnity of the trustee in bankruptcy and the rights of indemnity of any other statutory priority creditors from the bankrupt estate and in finding that an apparent sufficiency of assets in the estate was a basis not to deal with the question of priority. (As to the latter, the grounds of appeal note that the circumstances in which this finding was made are that the trustee in bankruptcy remained at liberty to withdraw finds from the estate assets; and it is further contended that there was no adequate basis for finding that there were sufficient assets in the estate to cover existing and future liabilities including for costs of the estate.) Advice on prospects of appeal 39As to the question of the executors' indemnity for costs, Mr Cotman notes that Brereton J had refused, in a carefully reasoned decision on costs, to order that the Bovairds' costs be payable on an indemnity basis and had, in refusing the orders sought by the Bovairds that the executors be denied their indemnity from the estate for their own costs and for the costs payable by them as executors to the Bovairds, held that the executors' defence of the proceedings was not unreasonable; that, insofar as they defended the proceedings on behalf of the estate (as distinct from on behalf of AFM) the executors were not acting in their personal interests; that, had judicial advice been sought, it would probably have been that they were justified in defending the proceedings; and that, whatever might be the position if the competing interest was that of an individual beneficiary, in circumstances where it was a charity it was reasonable for the executors not to require it to fund the defence of its interest. 40Mr Cotman notes that, insofar as Perram J said at [37] that the trustee in bankruptcy would not be justified, at least at this stage, in meeting the executors' legal costs in the proceedings before Brereton J, that issue does not arise, because the executors have already been paid their own costs out of the estate, and no restitutionary claim has been asserted in relation to those costs. He also notes that the effect of Brereton J's orders upon the estate was that it thereby became insolvent (resulting in the appointment of the trustee in bankruptcy) and hence that insofar as the executors have been ordered in that capacity to pay the plaintiffs' of the proceedings before Brereton J, those costs have not been paid and are the subject of a proof of debt lodged by the Bovairds with the trustee in bankruptcy. 41Mr Cotman identifies various issues in relation to the reasoning that led Perram J to the conclusion his Honour reached in relation to the claimed indemnity for costs. 42First, that it is inconsistent with the ordinary principle that a successful party is entitled to the fruits of his/her victory (citing McBride v Sandland (No 2) (1918) 25 CLR 369 at [374] per Barton J). It is contended that the effect of Brereton J's order is that, in relation to those proceedings, a right of indemnity exists and that the Appeal proceedings are to be treated as part of those proceedings (noting that the same position is adopted by the executors in the Appeal proceedings as was adopted before Brereton J). Mr Cotman contends that the "merely negative observation" that the appeal is "not frivolous" does not constitute a sound reason sufficient to justify the refusal to order the trustee in bankruptcy to indemnify the executors in fulfilment of their "apparent right" under the Brereton J orders. He submits that Brereton J's judgment findings ought to be treated as conclusive unless tainted with obvious error or unless and until overturned by the Court of Appeal. 43It is submitted that the starting (or default) position of the executors in relation to costs is that they are entitled to their costs out of the fund either because of Uniform Civil Procedure Rule 42.25(1) (though noting that this was doubted by Perram J because "trustee" in Rule 42.25 is not defined to include legal personal representative) or, if the Rule does not apply, generally under their ordinary right of indemnity and that this must apply equally to the Appeal proceedings as well as the devastavit proceedings (and to the proceedings before Perram J). 44Emphasis was placed by Mr Cotman on the determination by Brereton J that there were no grounds that would sustain that default position being overturned, thus submitting that there is both a positive and a negative reason why the executors should be entitled to indemnity from costs incurred by them in their position as executors. 45Mr Cotman is of the view that there is a reasonable prospect for the appeal on the ground that his Honour had materially misdirected himself as to matters of fact and law by reason of the matters referred to above and having to pointed to no 'compelling reason' why those matters did not require the payment of costs of the executors unless the contrary had been shown. 46As to the assumption that findings as to the propriety of conduct in, or the outcome of, one set of proceedings (in this instance the devastavit proceedings) will affect a determination as to an entitlement to indemnity in another set of proceedings (the proceedings at first instance before Brereton J), Mr Cotman points to the fact that Brereton J's reasoning on costs was itself founded upon the manner in which the executors conducted themselves in the proceedings before his Honour but contends that even if there were to be an adverse finding of devastavit, (in separate proceedings subsequently determined) would or should not be taken into account by the Court of Appeal in determining whether Brereton J was correct in ordering costs on the basis of the manner in which other proceedings were conducted before his Honour. (In this regard, Mr Cotman emphasises that there were no allegations of wrongdoing against the executors in relation to the matters in the subsequent devastavit proceedings when the matters were before Brereton J (or indeed up until the costs argument). 47As to the uncertainty to which Perram J referred as to how the executors will conduct themselves in the Appeal proceedings or the devastavit proceedings, Mr Cotman contends that this is no sound basis for denying an indemnity to executors or trustees ahead of the determination of proceedings (since, if so, it would apply in every case) but that in any event, Brereton J found that the executors had conducted themselves reasonably in the proceedings before him. Mr Cotman contends that there is no sound basis for suggesting that the executors will conduct themselves unreasonably in either the Court of Appeal or the devastavit proceedings. 48For those reasons Mr Cotman has concluded (and has advised the executors accordingly) that there are reasonable prospects of success that the Full Court of the Federal Court will set aside the decision of Perram J on this point and that the "default position" ought to follow, namely, an order that the trustee in bankruptcy indemnify the executors for their costs in the Court of Appeal proceedings and the devastavit proceedings, as and when they are incurred. 49As to the question of priorities, his Honour noted that: Although there is an interesting question of priorities between the executors' right of indemnity and the trustee's right of indemnity there are sufficient assets in the estate at this stage such that that question does not presently - and may never - require resolution. 50Mr Cotman contends that his Honour should have addressed this issue (which is said to have been a live issue before his Honour) noting that his Honour was requested to make such a declaration, that the parties made submissions on the issue, and that the question whether there were sufficient assets to cover the costs of both the trustee and the executors (on the basis of which his Honour apparently considered the question to be hypothetical) was not the subject of argument before Perram J. 51In making a finding that there were sufficient assets, Mr Cotman contends that there are a number of matters that his Honour does not appear to have taken into account (including that the trustee in bankruptcy remains at liberty to withdraw funds from the estate, the possibility of adverse costs orders against the executors, the potential effect of tax payable by the estate, the fact that as at the date of the hearing on 13 August 2010 no current statement of assets and liabilities of the estate was before the Court, and the possibility that estate assets consisting in part of ASX listed shares are likely to alter in value). (Mr Cotman in his opinion also notes that Mr Woodgate had resigned as trustee and it seems there was and that there may still be a dispute about his outstanding fees.) Mr Cotman refers to the fact that there will also have been continuing remuneration for the trustee in bankruptcy and that it is not known what will be the costs in the devastavit proceedings. 52Mr Cotman's advice also refers to the fact that, before his Honour on 3 May 2011 for argument as to costs and orders, there was an affidavit sworn by the executors' solicitor on 29 April 2011 which sought to update the financial position of the estate and went to the question of the "burn rate" of estate assets (and which it is said showed that the trustee had declined to provide full information about the sufficiency of assets and current claims on the bankrupt estate and that the earlier estimate of costs on 23 March 2010 did not include any provision for adverse costs orders). Mr Cotman contends that the considerations raised in that evidence show that it was not appropriate for his Honour to make a finding as to the sufficiency of assets in the absence of full argument. (Mr Cotman raises the possibility that it may be necessary to seek to adduce further evidence before the Full Federal Court on the question of sufficiency of assets in the estate.) 53In the circumstances, Mr Cotman's advice is that the positive finding that there are sufficient assets to cover all the costs that will have been incurred by the trustee and the executors is not one that can be made with any confidence and is not a compelling reason for the Court not to dispose of a question posed for determination; and that the declarations that were sought cannot be said to have been inutile. 54If the first ground of appeal succeeds, then the executors would be entitled to ongoing payment of their own costs in defence of the Court of Appeal proceedings and the devastavit proceedings. Mr Cotman notes that if those costs are to be paid on an ongoing basis, then the question of priority needs to be determined. His advice addresses countervailing arguments as to this issue, noting that there appears to be no authority precisely in point on the question of priority as between the executors and the trustee in bankruptcy. 55The executors' argument for such a priority is that they have been sued in that capacity. Reliance is placed on the judgment of Hamilton J in Metropolitan Petar v Mitreski [2006] NSWC 336 to the effect that if a trustee in defending a suit for the benefit of a trust estate, also defends his own character and actions as trustee, he is not disentitled from claiming his costs from trust assets. 56The position in regard to the indemnity relied upon by the executors is that the order for administration does not remove it and that the right subsists into the future. The right is said to be in the nature of an equitable proprietary right in the nature of a first charge or a right of lien over trust assets. The vesting of administration property, which occurs upon the making of an order, is said to be subject to any equitable interest that may be asserted against the trustee in bankruptcy ( Sonenco (No 77) Pty Ltd v Silvia (1989) 24 FCR 105 at [112] and [117]; Parsons v McBain (2001) 109 FCR 120 at [123] - [124]). 57Mr Cotman then notes that an assignee of a beneficiary's interest with notice of the trustee's unsatisfied indemnity takes that interest subject to the trustee's unsatisfied charge ( Re Knapman; Knapman v Wreford (1881) 18 Ch D 300; Re Jones; Christmas v Jones [1897] 2 Ch 190 at [1895] -[1899]; All ER Rep 1084; Re Pain; Gustavson v Haviland [1919] 1 Ch 38; Cock v Aitken (1912) 15 CLR 373 at [384] per Isaacs J; National Trustees, Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at [276] per Starke J, at [280] per Williams J; Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 18 ATR 893 at [898] - [899] per Derrington J, SC (QLD)) and that the right to indemnity held by the executors gives rise to a beneficial interest in the administration assets with priority over any claims of the creditors and beneficiaries. 58It is also noted that the trustee's (and, Mr Cotman argues by analogy, so also would be the executor's) right of indemnity extends to liabilities which are 'incurred' but not yet paid ( Jennings v Mather [1901] 1 QB 108 (affirmed Jennings v Mather [1902] 1 KB 1; (1901) 85 LT 396; 50 WR 52); Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at [371] per Stephen, Mason, Aickin and Wilson JJ). Reference is made to the observation by Tobias JA (with whom Beazley and Macfarlan JJA agreed) in Agusta Pty Limited v Official Trustee in Bankruptcy (as trustee of estates of Feralla) [2009] NSWCA 129 at [18] that there is ample authority for the proposition that a trustee's right of indemnity arises when a relevant trust-related liability is incurred (referring to the judgment of Derrington J in Xebec Pty Limited (in liq) v Enthe Pty Limited (1987) 18 ATR 893 in which reference was made to Octavo Investments ) and that it was not in dispute that a trustee is entitled to indemnity in respect of any liability "which it might incur" in the performance of its duties and that it has a corresponding charge over the trust properties to support that indemnity. 59Reliance was also placed on the decision of Brereton J in Lemery Holdings Pty Limited v Reliance Financial Services Pty Limited [2008] NSWC 1344 and to the decision of Warren J in RMBL Investments Pty Limited v Salvus Quen Nominees Pty Limited [1999] VSC 44 to the effect that trustees are entitled under their lien to have their costs paid out of the trust by way of interim distribution. 60Mr Cotman thus contends that the executors' right to indemnity gives rise to a beneficial interest in the administration assets with priority over any claims of the creditors, including the trustee in bankruptcy, and that an equitable lien of this kind does not depend upon possession ( Hewett v Court [1983] HCA 7; (1983) 149 CLR 639). 61Insofar as the trustees, as recipients of property from the estate with knowledge of the debts of the estate being unsatisfied, are themselves liable to indemnify the executors or even the creditors directly for the estate debt out of the distributed assets ( Jervis v Wolferstan (1874) LR 18 Eq 18, discussed by Kitto J in Federal Commissioner of Taxation v Brown (Unreported Judgment, High Court of Australia, 11 March 1958) at [58] - [59]), it is contended that independent of the executors' charge on the assets in the hands of the trustee, the trustee's right of indemnity carries the estate debts to the trust assets by reason of the trustee's personal exposure. Reference is also made to the operation of a trustee's indemnity in relation to costs ( Miskelly v Arnheim [2008] NSWSC 1075 at [42]). 62As against the proposition for priority, Mr Cotman refers to the written submissions filed for the trustee in bankruptcy on 6 August 2010 to the following effect: A trustee in bankruptcy is commonly described as having the rights and obligations of a trustee under the general law, but, of course, subject to the Bankruptcy Act . Adsett v Berlouis (1992)37 FCR 201 at 208-212, especially 209-210; Wenkart v Pantzer (No 8) [2004] FCA 280 at [58]-[61] where it is pointed out that the right to remuneration is given by a statute; Wenkart v Pantzer [2006] FCAFC 140 at [43]; section 162 Bankruptcy Act. There can be no argument that the trustee is entitled to his costs, expenses and remuneration out of the estate. The issue, then, is one of priority. Cases such as Sonenco (No. 77) Pty Ltd v Silvia (1989)24 FCR 105 and Parsons v McBai (2001) 109 FOR 120 are not to the point as they concern rights to indemnity that arose prior to the bankruptcy, not rights of indemnity that arise during the course of the bankruptcy administration. If the Court finds that the executors have a continuing right of indemnity then it is not a higher right than that of the trustee. Arguably he has priority because he has the control and management of the funds. In any event, at worst, the executors, if entitled to a continuing indemnity and the trustee are each entitled an indemnity in the same priority. There is no basis at all for preferring the executors in the way they seek to be preferred. This would be consistent with Agusta v Official Trustee (as Trustee of estates of Ferella) [2009] NSWCA 129- the right to the indemnity arising at the time the liability is incurred. 63Mr Cotman concludes that, although there is no case in point, there are reasonable grounds for the argument that the executors are entitled to priority over the trustee in bankruptcy and hence is of the opinion that there is a reasonable prospect that, had Perram J determined the question of priority, the determination would have been in the executors' favour. It is further said that there is a reasonable prospect of success on the question whether Perram J ought to have dealt with the matter proposed to him for determination. 64Mr Cotman's advice concluded that there are reasonable prospects of success on both grounds of appeal, with the one practical matter being that of timing (it not being certain that the Full Court of the Federal Court will be able to deal with the appeal sufficiently quickly for the outcome to make a practical difference in terms of ongoing indemnity for costs in at least the Court of Appeal proceedings if not also the devastavit proceedings). It is further noted that if the Full Court were to remit the question of priorities to Perram J for determination then a resolution of that question may remain outstanding for a longer time. Advice 65The executors seek advice as to whether they are justified in seeking to propound the Federal Court appeal as to two aspects of the decision by Perram J: the present right of indemnity and the question of priority of that indemnity. Mr Cotman maintains that the presumptive position in the Appeal proceedings and in the devastavit proceedings is that since the executors are being sued in their capacity as executors then they have an entitlement to recoup their costs out of the estate and that the mere fact that an allegation has been made against them (or that there may be uncertainty as to how they will conduct the proceedings in future) does not displace that right of indemnity. 66There is certainly authority to support the proposition that if costs of the litigation are incurred as an incident of the administration of an estate, the trustee is entitled to be indemnified in respect of them, even where trustees are sued by beneficiaries complaining of some act or omission. In Fay v Moramba Services Pty Ltd [2010] NSWSC 725, Brereton J at [4] held that the trustee is entitled to defend his or her conduct as an incident of administration and to be indemnified in respect of the costs of so doing. While there is authority to the contrary, that a trustee who defends an action for his/her removal thereby represents his/her own interests and not those of the trust estate, and therefore should not be indemnified out of trust assets as the defence of such proceedings is not part of the proper administration of the trust (see, for example, Miller v Cameron (1936) 54 CLR 572 per Latham CJ at [578]), the predominant view seems to be that expressed by Brereton J in Fay v Moramba (above) (see National Trustees v Barnes at [278] - [279]; Arena Management Pty Ltd (Rec & Mgr Apptd) v Campbell St Theatre Pty Ltd [2011] NSWCA 128; Kation Pty Ltd v Lamru Pty Ltd; Lewis v Nortex Pty Ltd (In Liq) [2009] NSWCA 145 at [213] per Hodgson JA). It has, of course, also been held that a lack of reasonableness in defending proceedings may disentitle a trustee to his or her costs ( Drummond v Drummond [1999] NSWSC 923 at [44]-[47] per Austin J). 67Insofar as the present application is concerned, Brereton J in the very proceedings the subject of appeal noted that it was both desirable and prudent for a trustee promptly to obtain judicial advice as to possible proceedings, "lest it otherwise be suggested that they have been gambling with money that is not their own" ( Bovaird v Frost [2009] NSWSC 917 at [32] per Brereton J). Therefore, the conduct of the executors in seeking advice as to whether to prosecute the appeal now on foot in the Full Federal Court cannot be criticised. 68In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66; 82 ALJR 1425; 249 ALR 250, the High Court held at [70] - [72] that: In particular, trustees who are sued, particularly for breach of trust, may sometimes experience uncertainty about whether they will be able to obtain indemnity as to the costs of their defence under s 59(4) in any event. Perhaps they will if their breach is excused under s 85(2); but they cannot be sure, in advance, that the court's discretionary power to excuse the breach will be exercised in their favour, and one of the matters to be excused is their failure to obtain the court's direction under s 63 or otherwise. This points strongly to the conclusion that an application under s 63 by a trustee sued for breach of trust (including a breach of trust alleged to arise in the very defence of the proceedings) is not to be seen as one which should rarely if ever succeed. Instead it should be seen as a standard instance to which s 63 can in appropriate circumstances apply. In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee's fear of personal liability for costs. It is, therefore, not right to see a trustee's application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust. (my emphasis) 69The question, therefore, is whether it is appropriate for the executors to pursue the proposed appeal. That involves an assessment as to whether there is a reasonable basis or reasonable grounds for the appeal and as to whether they would be acting reasonably in so doing having regard to their responsibilities as executors. An indication of the kind of circumstance where an executor (or trustee) would not be justified in commencing or defending proceedings can be seen from the cases in which indemnity for the costs of those proceedings has been denied. 70So, for example, the inappropriateness for a trustee to litigate "unreasonably" or without "good grounds" is reflected in the fact that a trustee may lose the right to be indemnified for the costs of the proceedings out of the trust assets in such circumstances. It has been held that trustees who have unnecessarily applied to the court ( National Trustees v Barnes ), have litigated unreasonably ( Dixon v Williams (1875) 13 SCR (NSW) Eq 7), have incurred unnecessary expense in the proceedings before the court ( Thomas v Walker (1854) 18 Beav 521; 52 ER 205; Wells v Malbon (1862) 31 Beav 48; 54 ER 1055), have commenced legal proceedings without good grounds ( Re O'Donoghue [1998] 1 NZLR 116), or have made an application which holds little or no merit or has little or no chance of success ( Re Estate of Roberts (1983) 20 NTR 13 at [19]; 70 FLR 158 at [163] per O'Leary J), will be denied an indemnity for legal costs. 71In Re O'Donoghue , Hammond J stated at [122] that: The notion that a trustee must act ``reasonably'' is necessarily qualified in various ways. First, it has never been thought unreasonable for a trustee to hire a properly qualified person to carry out work which the trustee is not qualified to undertake. Second, the trustee does not have a limitless ability to resort to the law: his function is to assert the interest of the beneficiaries only to a point where there is a judicial ruling on something that is properly required, such as the construction of a fairly debatable point in an instrument, or whether the trustee ought to take a certain course. And, it has been said that a trustee has to have very good grounds before that trustee can justify an appeal, especially if costs were awarded against the estate in the Court below (see for instance Smith v Beal (1894) 25 OR 368). Third, a trustee is not entitled to expenses arising out of his own misconduct. (my emphasis) Finally, on the law under this head, it must surely be the case that where, on the face of things, the trustee's actions appear regular enough the burden of proving unreasonableness falls on the party alleging the same. There are cases in the books where the onus has been discharged. See, for instance, Re Knox's Trusts [1895] 2 Ch 483. There, the English Court of Appeal thought the scheme of the particular estate was "a simple one, and [the trustee] ought to have concurred in it, and not to have tried to thwart it"' per Lindley LJ at p 487. (my emphasis) 72Here, it is not for me to express any opinion on the merits of the appeal sought to be propounded by the executors; rather it is necessary to assess whether there are reasonable and arguable grounds for the appeal that has been instituted such that it would be proper and appropriate for the executors to prosecute that appeal. (Indeed, Re O'Donoghue suggests that there should be very good grounds established for the prosecution of an appeal, at least where a costs order has already been made against the estate). 73To the extent that the refusal by Perram J to make the orders sought was in the exercise of his Honour's discretion, there is a heavy onus on a party seeking to disturb an order made in the exercise of a discretionary power ( Philip Morris v Adam P Brown Male Fashions Pty Ltd (1980) 31 ALR 232 at [253.3]; Permewan Wright Consolidated Ltd v Attorney-General (NSW) (1978) 35 NSWLR 365 at [367E] applying Gamser v Nominal Defendant (1977) 136 CLR 145.) 74That said, in Drummond , Austin J referred to the tenderness which is exhibited to persons holding office such as that of a trustee at [43], saying that: In Re Weall; Andrews v Weall (1889) 42 Ch D 674 at 677, Kekewich J spoke of the "tenderness which the Court is anxious to exhibit towards trustees honestly exercising discretion in discharge of their duties, often difficult and still more often thankless". In Re Jones; Christmas v Jones [1897] 2 Ch 190 at 197 the same judge said that "a man who fulfils the difficult duties of an administrator, executor or trustee is, in common sense and common justice, entitled to be recouped to the very last penny everything that he has expended properly - that is to say, without impropriety - in his character of administrator, executor or trustee ...". Thus it is normally the case that an executor who commences or defends an action in the capacity of executor is entitled to be indemnified out of the estate for the costs incurred in doing so, even if the litigation is unsuccessful, the executor's conduct is found to have been mistaken, and the other party in the litigation is held to be entitled to an order for costs. (my emphasis) 75In Kation v Lamru , Hodgson JA said (at [213]) that: Where a trustee successfully defends a beneficiaries dispute against a particular class of beneficiaries, an appropriate costs order, in circumstances where the plaintiff beneficiaries were unable to pay the costs may be one in which the trustees obtain indemnification from the estate, with the shares of the unsuccessful beneficiaries to be used first in satisfying the right to indemnity: see National Trustees and Executors and Agency Co of Australasia Ltd v Barnes [1941] HCA 3; 64 CLR 268. 76In those circumstances, it seems to me that there has been shown a reasonable basis for the appeal now sought to be maintained against the decision of Perram J dismissing the executors' application for an order as to their entitlement to the costs of defending proceedings brought against them (particularly in relation to the Family Provision Act proceedings in which Brereton J found that there was no basis to deprive them of an order for costs out of the estate but also in relation to the devastavit proceedings where culpability has not been established at this stage and the matters relate to conduct in the administration of the estate). I also consider that there is a proper basis for seeking to have a determination made as to the issue of priority as between the executors and the trustee in bankruptcy and creditors of the estate (in circumstances where the sufficiency of assets in the estate to meet the respective costs and remuneration is not clear). 77As to the second question, namely as to the justification for incurring the costs of the estate in pursuing the appeal, the authorities referred to above seem to me to support the conclusion that it would be appropriate (subject to any direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy), for the costs of the appeal to be recouped from the funds of the estate in the first instance pending determination of, and any contrary order as to costs by, the Full Federal Court on the appeal). 78Accordingly, I answer the questions posed for judicial advice as follows:

1. The plaintiff executors would be justified in pursuing an appeal from the judgments of Perram J (in proceedings determined by his Honour in [2010] FCA 1159) to the Full Federal Court of Appeal on the grounds set out in the advice from Mr Cotman SC.
2. Subject to the qualification I make below, the plaintiff executors would be justified in incurring the costs of the estate in pursuing an appeal to the Full Federal Court of Appeal, with such costs to be recouped from the funds of the estate, but subject to any direction given by a court with bankruptcy jurisdiction to the trustee in bankruptcy to pay such funds to the plaintiff executors. 79The qualification I make is that if the decision in the Appeal proceedings were to be handed down in advance of the hearing of the Full Federal Court appeal and were to be such that the determination of the questions the subject of the Federal Court appeal might then reasonably be said to be inutile, it would not in my view be appropriate for the executors to continue to incur costs in the prosecution of that appeal without first seeking advice as to whether the further conduct of the appeal at that stage is warranted (and it may be that further judicial advice might then need to be sought).