Orders made for sale of trust property and removal of caveat

Agusta Pty Ltd v Official Trustee in Bankruptcy [2008] NSWSC 685

Apostolou (as trustee of the Vasiliou Family Trust) v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84

Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226

Custom Credit Corporation Limited v Ravi Nominees Pty Ltd (1992) 5 WAR 42

Giacci v Giacci Holdings Pty Ltd [2010] WASC 349

Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480

Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153

1 By a deed made on 30 March 2007, the plaintiff (Mr Prior) declared that he held property located at 30 Reynolds Road, Applecross (the Property) on trust for the first and second defendants (Mr and Mrs Simeon). Mr Prior, in his capacity as trustee, subsequently expended money on the Property, principally by paying instalments due under a loan made by Australian & New Zealand Banking Group Ltd (ANZ) for the purpose of acquiring the Property. He sought an order for the sale of the Property to create a fund from which he could be reimbursed by way of indemnity.

2 On 7 December 2010, I ordered that the Property be sold and made ancillary orders for that purpose. These are my reasons for making those orders.

3 Mr and Mrs Simeon were represented by solicitors at the time that they entered an appearance to the originating summons by which these proceedings were initiated. However, they acted in person from 30 June 2010. Mr Simeon appeared on behalf of himself and his wife at each of the directions hearings convened in this matter and at the hearing of the originating summons.

4 Mr Prior relied on three affidavits in support of his application: affidavits sworn by himself on 16 April 2010 and 17 November 2010 and an affidavit sworn by his solicitor, Ms Martino on 26 May 2010.

5 Mr Simeon prepared two documents in the form of submissions prior to the hearing of the originating summons. Each submission substantially contained statements of fact and annexed relevant documents. Mr Simeon confirmed on oath at the hearing of the originating summons that the statements contained in the submissions were true to the best of his knowledge and belief.

6 Mr Simeon did not dispute any of the matters stated in the affidavits relied on by Mr Prior and there was no fact in contest between the parties on which I was required to make a finding. In particular, Mr Simeon did not dispute the existence or terms of the trust or that Mr Prior had expended money on the Property in his capacity as trustee. His primary position throughout the proceedings, including at the hearing of the originating summons, was that he should be given time to arrange finance to repay Mr Prior and to discharge or take over a mortgage granted to ANZ to secure the loan made for the acquisition of the Property.

7 Consequently, I make findings in terms of the facts that are stated in what follows.

8 Consistent with the declaration of trust, Mr Prior is the registered proprietor of the Property. He borrowed money from ANZ for the purchase of the Property in his capacity as trustee. The loan was secured by mortgages granted over the Property and Mr Prior's residence in Bedfordale (see annexure 'JP 2' to the affidavit of Mr Prior sworn on 16 April 2010).

9 There was no issue between the parties as to the making of the deed of trust or as to its meaning and effect. The deed recited that Mr Prior had purchased the Property at the request and cost of Mr and Mrs Simeon. In addition to a declaration of trust over the Property, the deed provided that Mr and Mrs Simeon would at all times keep Mr Prior indemnified against all loss, damage, expense, cost or liability of any nature which he might incur by reason of the Property being and remaining registered in his name and to pay all costs and expenses incurred by him in the execution of the trusts contained in the deed (attachment 'JP 1' to the affidavit of Mr Prior sworn 16 April 2010).

10 Mr Prior stated in his affidavit of 16 April 2010 that Mr and Mrs Simeon had no money to pay the expenses associated with the Property and so he expended money on the Property in the period commencing on 30 March 2007. Annexure 'JP 3' to Mr Prior's affidavit of 16 April 2010 was a schedule of payments made by Mr Prior between 30 March 2007 and 25 May 2009. The schedule disclosed that he had paid a total of $365,837.77. Annexure 'JP 2' to Mr Prior's affidavit sworn on 17 November 2010 provided an updated schedule of payments. That stated that Mr Prior had spent $473,895 up to 1 November 2010.

11 Mr and Mrs Simeon acknowledged and agreed in a document that was undated but was said to have been made in mid to late 2009 that Mr Prior had assisted them with repayment of the ANZ loan and with payment of expenses such as rates and taxes. The acknowledgment annexed a schedule of payments made by the plaintiff which corresponded with the schedule being attachment 'JP 3' to Mr Prior's affidavit of 16 April 2010.

12 It was not disputed that Mr Prior had made the payments summarised in the schedules to his affidavits or that the payments were made in his capacity as trustee for the purpose and benefit of the trust; that is, there was no suggestion that the payments were made for expenses improperly incurred.

13 In August 2009, Mr and Mrs Simeon lodged a caveat against the title to the Property (the Caveat), the estate claimed being their beneficial interest in the Property as evidenced by the deed containing the declaration of trust (see attachment 'NS 3' to the affidavit of Nicholas Simeon sworn 15 March 2010 in CIV 1362 of 2010).

14 Mr Prior stated that in late 2009 he had become extremely concerned about recovering the amounts that he had expended in respect of the Property. He caused the registrar of titles to send to Mr and Mrs Simeon a notice under s 138B of the Transfer of Land Act 1893 (WA) in anticipation of selling the Property. The notice was dated 22 February 2010.

15 On 15 March 2010, Mr and Mrs Simeon obtained an order in CIV 1362 of 2010 extending the operation of the Caveat until further order of the court. Mr Simeon provided a written undertaking as to damages in support of the application to extend the Caveat.

16 On 16 April 2010, the plaintiff commenced these proceedings seeking orders that:

(b) the Caveat be removed for the purpose of enabling the sale;

(c) Mr Prior be indemnified for the liabilities, expenses and costs incurred and paid by him on behalf of Mr and Mrs Simeon pursuant to the deed of trust;

(d) Mr and Mrs Simeon pay Mr Prior's costs of the proceedings on an indemnity basis.

17 The matter first came before me on a directions hearing on 8 June 2010. Orders were made by consent for the completion of interlocutory steps.

18 The matter next came before me on 3 August 2010. By that time, Mr and Mrs Simeon were acting in person. The matter was adjourned and there were subsequent adjourned hearings on 3 and 25 August and 28 September 2010. The adjournments were by consent and following advice from Mr Simeon that he was negotiating with various persons, including ANZ, to obtain funds to repay the amounts that had been expended by Mr Prior and to discharge or take over the mortgage granted to ANZ.

19 I made orders programming the originating summons for hearing at the directions hearing on 28 September 2010 but it was agreed at the request of Mr Simeon that there would be a further directions hearing on 30 November 2010 to ascertain whether he had been successful in obtaining finance. At the directions hearing on 30 November 2010, I ordered that the originating summons be heard on 7 December. In doing so, I refused an application by Mr Simeon that the hearing be deferred to late January 2011 to provide him with further time in which to seek finance. I did so as ANZ, through its solicitors, had served notices of default on Mr Prior in respect of the mortgages he had granted and had foreshadowed taking enforcement proceedings by, among other things, exercising its rights in respect of the mortgage granted over his Bedfordale residence. I also considered that Mr Simeon had endeavoured for some time to raise finance but had been unsuccessful and the resolution of Mr Prior's application could not longer be deferred.

The relevant principles on a trustee's right of indemnity

20 The principles relevant to a trustee's right to resort to and apply trust funds to discharge liabilities incurred in the authorised conduct of the trust are well-established. They are conveniently summarised in the judgment of Owen J in Custom Credit Corporation Limited v Ravi Nominees Pty Ltd (1992) 5 WAR 42 at 52 - 53 (with whom Malcolm CJ and Walsh J agreed) and more recently, in the judgments of Austin J in Trim Perfect Australia Pty Ltd (in liq) v Albrook Constructions Pty Ltd [2006] NSWSC 153 and Nicholas J in Agusta Pty Ltd v Official Trustee in Bankruptcy [2008] NSWSC 685; see also Heydon JD and Leeming MJ, Jacobs' Law of Trusts in Australia (7th ed, 2006) [2104] and following and Ford HAJ and Lee WA, Principles of the Law of Trusts (Loose-Leaf Edition) [14.110] and following. I gratefully adopt the summaries provided by Owen J, Austin J and Nicholas J, each of which is consistent, in substance, with the other.

21 It is not necessary to further discuss the relevant principles other than to note that:

(a) A trustee is personally liable for the debts it incurs as trustee. However, where it incurs expenses or becomes subject to a liability in the course of executing the trust, it has a right of indemnity out of the assets of the trust in respect of those expenses or that liability. The right of indemnity takes the form of either a right of recoupment (reimbursement) of expenditure made by the trustee or a right of exoneration from the liability to make expenditure which has not yet been expended.

(b) The right of indemnity is supported by an equitable lien over the trust assets (it is sometimes referred to as an equitable charge but it arises as a matter of law rather than by agreement between the parties). The right of indemnity so secured confers upon the trustee a proprietary interest in the trust property to the extent of the indemnity; the corollary being that the beneficiary's interest in the trust property is diminished to that extent: see Perpetual Trustees WA Ltd v Kelly (1993) 8 WAR 480, 486 (Anderson J).

(c) The trustee's equitable interest in the trust property to the extent of the right of indemnity takes priority over the beneficial interest of the beneficiaries: see Ford and Lee at [14.210] and following. The nature of the interests of the trustee and the beneficiary in the trust assets where there is a right of reimbursement or exoneration is explained in Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226 at 246 - 247:

Until the right to reimbursement or exoneration has been satisfied 'it is impossible to say what the trust fund is'. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries...

The term 'trust assets' may be used to identify those held by the trustee upon the terms of the trust, but, in respect of such assets there exist the respective proprietary rights, in order of priority, of the trustee and the beneficiaries...the trustee's right to exoneration or recoupment 'takes priority over the rights in or in reference to the assets of beneficiaries' ...the enforcement of the [equitable] charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee.

(d) A trustee may have recourse to a trust fund to satisfy its right of indemnity without curial intervention. However, an equitable lien (or charge) does not grant title to the property that is subject to the lien; it is a mere hypothecation and consequently, does not carry with it a power of sale and may only be enforced by judicial sale or the appointment of a receiver where it is necessary to deal with property to create a fund from which the trustee may be indemnified: and see Apostolou (as trustee of the Vasiliou Family Trust) v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84 [38] - [39].

(e) The right of indemnity accrues at the time the obligation is incurred, although it may subsequently become either a right of recoupment or a right of exoneration depending on how the trustee responds.

22 Mr Prior's right to enforce his lien in equity by seeking an order for the sale of the Property provides a sufficient basis upon which to determine this application. It is not necessary to consider whether the court should confer a power of sale on Mr Prior pursuant to s 89 of the Trustees Act 1962 (WA).

23 The effect of the principles that have been briefly summarised when applied to the circumstances of this matter is that:

(a) Mr Prior has a right of reimbursement out of the trust property;

(b) Mr Prior has an equitable lien over the Property which may be enforced by an order for its sale so as to create a fund from which he can be reimbursed;

(c) Mr Prior's equitable interest will be preferred over Mr and Mrs Simeon's beneficial interest in the Property.

24 Consequently, at the hearing of the originating summons I made orders for the sale of the Property having regard to the nature of Mr Prior's proprietary interest in the Property, the amount expended by Mr Prior, the time over which and the circumstances in which he had expended money in connection with the Property, the terms of the trust, the apparent inability of Mr and Mrs Simeon to satisfy the indemnity that they had granted Mr Prior under the deed of trust and the fact that the creation of a fund from the sale of the Property represented the only means by which Mr Prior could be reimbursed given that Mr Simeon had been unable to obtain finance within a reasonable time.

25 The orders for the sale of the Property dealt with the matters raised by O 53 Rules of the Supreme Court 1971 (WA). Directions were given about the manner in which the Property is to be sold that were similar to those made by EM Heenan J in Giacci v Giacci Holdings Pty Ltd [2010] WASC 349 [105]. Provision has been made for the parties to apply to the court should questions arise about the execution of those directions.

26 The orders that were made at the hearing included an order for the removal of the Caveat. Obviously, Mr and Mrs Simeon had an interest in the Property that supported the Caveat. However, that interest must yield to the interest of Mr Prior to the extent of his right of indemnity. That follows from the nature of the interests of Mr Prior and Mr and Mrs Simeon in the Property and the balance of convenience plainly favoured removing the Caveat to enable Mr Prior to enforce his lien.