Alcock v Public Trustee

Supreme Court of NSW|2006-12-04|Before: Barrett J, Mr P

CITATION : Australian Pipeline Limited [2006] NSWSC 1316

CATCHWORDS : CORPORATIONS - registered managed investment scheme - responsible entity as trustee - resort to equitable jurisdiction by way of application for judicial advice - TRUSTS AND TRUSTEES - application by trustee for opinion, advice or direction of court - where proceedings on foot against trustee alleging past breaches of trust and statutory contraventions - trustee seeks judicial advice whether it would be justified in defending proceedings - proceedings concern trustee's personal position and responsibility - proceedings irrelevant to management and administration of trust estate - judicial advice refused

LEGISLATION CITED : Corporations Act 2001 (Cth), Chapter 5C, ss.48(2), 208, 232, 259C(1)(b), 601FC(1)(c), 601FC(2), 601LC, Trustee Act 1925, ss.5, 63

Alcock v Public Trustee (1936) 53 WN (NSW) 192 Application of Macedonian Orthodox Community of St Petka Inc (No 2) (2005) 63 NSWLR 441 Gray v Guardian Trust Australia Ltd [2003] NSWSC 704 Harrison v Mills [1976] 1 NSWLR 42 Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 CASES CITED : Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar, the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160 Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 Neagle v Rimmington [2002] 3 NZLR 826 Re Beddoe [1893] 1 Ch 547 Re England's Settlement Trusts [1918] 1 Ch 24 Re Mirvac Ltd (1999) 32 ACSR 107

PARTIES : Australian Pipeline Limited (in its capacity as responsible entity of Australian Pipeline Trust) - Plaintiff

SOLICITORS : Chang, Pistilli & Simmons - Plaintiff

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

6045/06 AUSTRALIAN PIPELINE LIMITED JUDGMENT 1 The plaintiff, Australian Pipeline Limited ("APL"), is the trustee and responsible entity of the Australian Pipeline Trust ("the Trust"), a managed investment scheme registered as such under Chapter 5C of the Corporations Act 2001 (Cth). By virtue of s.601FC(2) of that Act, APL holds the "scheme property" of the registered managed investment scheme "on trust for scheme members". That position is reinforced by the constitution of the Trust which, in clause 2.3, states that all the assets constituting the fund to which the constitution relates are held by APL "on behalf of the unitholders". 2 APL is thus a "trustee" within the meaning of that expression as defined by s.5 of the Trustee Act 1925. It is in that capacity that APL has approached the court seeking its opinion, advice and direction with respect to certain questions set out in an amended statement of facts filed on 1 December 2006. 3 APL thus invokes the jurisdiction created by s.63 of the Trustee Act, the leading provisions of which are: "(1) A trustee may apply to the Court for an opinion advice or direction on any question respecting the management or administration of the trust property, or respecting the interpretation of the trust instrument.

(2) If the trustee acts in accordance with the opinion advice or direction, the trustee shall be deemed, so far as regards the trustee's own responsibility, to have discharged the trustee's duty as trustee in the subject matter of the application, provided that the trustee has not been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion advice or direction." 4 The availability of the s.63 jurisdiction in relation to the responsible entity of a registered managed investment scheme has been recognised in a number of cases: see Re Mirvac Ltd (1999) 32 ACSR 107 and the several subsequent cases in which it has been applied. 5 At this stage, APL seeks the opinion, advice and direction of the court on one question only, being the question set out at paragraph 74(c) of the amended statement of facts: "Whether APL is justified in defending proceedings numbered NSD 2265 of 2006 commenced by Alinta LGA Limited in the Federal Court of Australia insofar as they raise allegations of breach of trust against APL." 6 In order to appreciate the significance of the question, it is necessary to recount the events which have culminated in the initiation of the Federal Court proceedings to which the question refers. The account I am about to give appears from the amended statement of facts. 7 To be qualified under the Corporations Act to act as the responsible entity of the Trust, APL must hold an Australian financial services licence. Such a licence is, and has been at all material times, held by APL. The licence is subject to conditions. One condition is that APL "must hold at least $5 million net tangible assets". The meaning and scope of the condition are amplified in the licence terms. In order to satisfy the licence condition in accordance with those terms, APL obtained the benefit of a financial undertaking given by a company admitted to the official list of Australian Stock Exchange Limited (or "ASX") - in fact, the company now named Alinta LGA Limited which was formerly The Australian Gas Light Company. The holding by APL of that undertaking satisfied the condition so long as Alinta LGA, the company by which the undertaking had been given, continued to have its ASX listing. 8 As a result of a merger consummated on or about 25 October 2006, Alinta LGA ceased to have an ASX listing. Shortly before that event, APL took action calculated to cause the licence condition concerning net tangible assets of at least $5 million to be satisfied in a different way. In summary, it caused its own issued share capital to be increased from its pre-existing level of $24 to $5,000,024 by the allotment and issue of 5 million shares in return for subscription moneys of $5 million. Those subscription moneys were provided by APT Pipelines Limited ("APTPL"). APL is itself the registered holder of all the shares constituting the issued share capital of APTPL but those shares are an asset of the Trust, with the result, it is said, that APL holds the shares non-beneficially and in a fiduciary capacity (these being matters that may be relevant to the operation of ss.48(2) and 259C(1)(b) of the Corporations Act). The fact that it is the shares making up the issued share capital of APTPL that are an asset of the Trust means, it is said, that the sum of $5 million provided by APTPL out of its own resources as subscription moneys for 5 million shares in APL was not, in a direct or immediate sense, an asset of the Trust. 9 The transaction under which APTPL subscribed for shares in APL which, in turn, allotted and issued the shares to APTPL was the subject of a deed made between those companies on 24 October 2006. It was acknowledged by that deed that the transaction was undertaken to satisfy the net tangible assets condition imposed by APL's licence. The deed contained a covenant by APL that it would "consider whether the Condition [that is, the licence condition] can be satisfied by another mechanism". That provision went on to say that, if APL could identify "an alternative mechanism to satisfy the Condition which it considers to be more beneficial to the unitholders of Australian Pipeline Trust", then APL would seek to implement that mechanism and the two parties would use reasonable endeavours "to have the Subscription Monies returned to APTPL, by a method which is most efficient to APTPL when considering taxation and other consequences". 10 APL's decision to enter into the transaction provided for in the deed of 24 October 2006 was made by its directors at a meeting held on that day. Draft minutes of the meeting suggest that the directors of APL considered no less than nine possible ways of approaching the impending problem with respect to the licence (that is, the problem flowing from the circumstance that the ASX listing of the giver of the undertaking was about to come to an end). The persons who are the directors of APL are also the directors of APTPL. In their capacity as directors of APTPL, those persons resolved, at a meeting also held on 24 October 2006, that APTPL should enter into the deed and transaction for which it provided. According to draft minutes of their meeting, the directors of APTPL recognised that the investment by APTPL of $5 million in shares in the capital of APL "would return an amount equal to the return on funds on deposit" - in other words, that the financial consequence of the investment, so far as ongoing income was concerned, would be the same as if the funds had been placed on deposit. The directors, according to the draft minutes, considered that return to be acceptable for reasons which are set out in the minutes and need not be canvassed here. 11 It is necessary to say something more about the ownership of shares in APL and units of the Trust. As things now stand, APTPL, by reason of the events I have mentioned, holds 5 million fully paid shares in APL. There are on issue an additional 24 fully paid shares of which 12 are held by Alinta LGA and the other 12, as to six each, are held by two partners of a firm of solicitors subject to contractual arrangements under which Alinta LGA has rights to acquire the shares. Alinta LGA also holds a substantial number of units of the Trust. Its holding represents about 25.4% of the units on issue. Other holders of significant parcels of units are Trewas Pty Limited (about 10.25%) and Petronas Pty Limited (about 10%). The balance of the units, accounting for something more than 50%, is widely held by numerous investors. 12 The Federal Court proceedings NSD 2265 of 2006 against APL, APTPL and the persons who are the directors of both those companies were commenced by originating process filed by Alinta LGA on 16 November 2006. A statement of claim was filed on 30 November 2006. At that point, Trewas was added as a second plaintiff and the claims against one of the natural persons were discontinued. The originating process and statement of claim make it clear that Alinta LGA relies on its capacity as both a holder of units of the Trust and a holder of shares in APL, while Trewas sues as a unitholder only. 13 The substance of the Federal Court proceedings, as now constituted as against APL, concentrates upon allegations of breach of trust and statutory contravention by APL. To the extent that it affects APL, the relief sought by Alinta LGA and Trewas is: * "A declaration that by causing APT Pipelines Limited to subscribe for 5,000,000 ordinary shares in APL for a consideration of $5,000,000 and issuing those shares to APT Pipelines Limited on or about 24 October 2006, APL: (a) contravened subsections 601FC(1) and (5) of the Corporations Act ;

(b) breached its duties as trustee of Australian Pipeline Trust; and

(c) contravened section 208 of the Corporations Act , as modified by Part 5C.7 of the Corporations Act ." * "A declaration that the issue to APT Pipelines Limited of 5,000,000 ordinary shares in APL on or about 24 October 2006 was oppressive to, unfairly prejudicial to or unfairly discriminatory against the Plaintiff." * "An order setting aside the issue to APT Pipelines Limited of the 5,000,000 ordinary shares in APL which occurred on or about 24 October 2006." * "An order requiring APL to rectify its register of members by removing APT Pipelines Limited as the holder of 5,000,000 ordinary shares and requiring APL to pay to APT Pipelines Limited $5,000,000." * "Alternatively …, an order requiring APL to reduce its issued share capital by cancelling the 5,000,000 ordinary shares that were issued to APT Pipelines Limited on or about 24 October 2006 and to pay to APT Pipelines Limited $5,000,000." * "An order restraining APL and each of the Directors from taking any further steps towards the issue of shares in APL to APT Pipelines Limited as contemplated by the announcement made by the Fifth Defendant, as Chairman of Australian Pipeline Trust, on 30 October 2006, or giving effect to the issue of shares as contemplated by that announcement." * "An order restraining APL and each of its Directors from applying any property of the Australian Pipeline Trust by way of subscription for shares in the capital of APL." 14 The subsequently filed statement of claim, insofar as it directly affects APL, contains allegations to the effect that: (a) assets of the Trust, to the extent of $5 million, were applied in acquiring the 5 million shares in APL for the benefit of APL and its directors rather than for the benefit of the unitholders of the Trust; (b) APL has breached the relevant condition of its Australian financial services licence and thereby breached the licence; (c) APL, as trustee of the Trust, breached the following duties: (i) a duty "at law" to exercise its powers with care and diligence in the bona fide belief that the exercise of power is in the best interests of the unitholders of the Trust and to avoid a conflict of interest and duty; (ii) a duty under s.601FC(1)(c) of the Corporations Act to exercise the degree of care and diligence that a reasonable person would exercise if in APL's position; (iii) a duty under s.601FC(1)(c) to act in the best interests of unitholders of the Trust and, in case of conflict between

the unitholders' interests and APL's interests, to give priority to the unitholders' interests; (d) by causing APTPL to subscribe for the 5 million shares in APL, APL gave to itself out of the property of the Trust a financial benefit within the meaning of s.208 of the Corporations Act as modified by s.601LC and thereby breached s.208 as so modified; (e) by reason of the matters referred to in the statement of claim, the issue of the 5 million shares by APL was, within the meaning of s.232 of the Corporations Act , contrary to the interests of the members of APL as a whole and oppressive to, unfairly prejudicial to or unfairly discriminatory against Alinta LGA as a member of APL. 15 All but the last of these allegations concern conduct of APL as responsible entity and trustee. Item (e) is unrelated to the trust estate and APL's status as trustee. It is a complaint made by Alinta LGA as a shareholder of APL. I therefore leave it to one side in the discussion that follows. 16 The application for judicial advice with which I am now dealing (see [5] above) does not pose directly the question whether APL, in undertaking the transaction of 24 October 2006, acted in accordance with the duties and obligations to which it was subject as a trustee. Particularly in light of the pending Federal Court proceedings in which issues of inconsistency with those duties and obligations are squarely raised (in the form of allegations of breach of trust and contravention of statutory provisions affecting responsible entities), the court would not be disposed to give judicial advice on such a question. In saying this, I am mindful of the observation of Sheller JA in Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at p.440 to the effect that where there is dispute and particularly dispute between trustee and beneficiary, it is generally inappropriate for the contest to be resolved by judicial advice. Sheller JA referred to Harrison v Mills [1976] 1 NSWLR 42 in which Needham J, at p.45, described s.63 as a provision entailing "advice by the Court to a trustee who is in doubt as to the propriety of a course of action which he proposes to take". 17 This element of guidance for the future as the proper province of judicial advice is emphasised in the case law. In Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198, Lord Oliver of Aylmerton said (at p.201): "A trustee who is in genuine doubt about the propriety of any contemplated course of action in the exercise of his fiduciary duties and discretions is always entitled to seek proper professional advice and, if so advised, to protect his position by seeking the guidance of the court." [emphasis added] 18 Also apposite is the observation of Paterson J of the High Court of New Zealand in Neagle v Rimmington [2002] 3 NZLR 826 at p.835: "Directions should direct trustees on how to proceed in a contemplated situation, where the facts are clear and no breach of trust is alleged." 19 Upon the present application, APL confines itself to a request for judicial advice on the question whether it is justified in defending the particular legal proceedings that have been brought against it in the Federal Court. In doing so, it frames the question by reference to future conduct, no doubt on the basis of the thinking behind the following passage in the discussion on s.63 of the Trustee Act in J.D. Heydon and M.J. Leeming, "Jacobs' Law of Trusts in Australia" (7th edition, 2006) at paragraph 2135: "Typical cases where the section is applicable are where a trustee is faced with litigation either as plaintiff or defendant and desires advice whether to sue or defend …" 20 A footnote to this passage refers to three cases. The first is Re England's Settlement Trusts [1918] 1 Ch 24, where one of two trustees, without reference to his co-trustee or to the beneficiaries, commenced an action in the name of himself and the co-trustee to recover damages for dilapidations from the tenants of a house which formed part of the trust property. The second case is Alcock v Public Trustee (1936) 53 WN (NSW) 192 in which the Public Trustee, as administrator of the estate of a deceased woman, was sued by the widower to recover certain assets of the estate which he said belonged to him by virtue of an agreement he had made with the deceased. The third case is the well-known decision of the English Court of Appeal in Re Beddoe [1893] 1 Ch 547 which concerned an action at law brought against the trustee of an estate to obtain title deeds to which the plaintiff considered himself entitled. 21 The three cases mentioned were cases in which the trustee's participation in legal proceedings related to protection, recovery or management of the trust estate. The function of the court in affording guidance to trustees clearly extends to giving advice as to whether litigious measures in relation to such matters should be taken. The court is disposed to assist trustees faced with the kind of dilemma described, in relation to a trustee unsure whether to initiate litigation, by Austin J in Gray v Guardian Trust Australia Ltd [2003] NSWSC 704 at [9]: "When confronted by beneficiaries who are urging them to sue, personal representatives are in a difficult position. If they take proceedings, they may be held personally liable for costs if they are considered to have acted unreasonably; and if they do not, they may be held personally liable for having failed to pursue a good claim of the estate: JHG Sunnucks, JGR Martyn and N Caddick, Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (Sweet & Maxwell, 2000), paragraph [60-10]. The Court will assist the personal representatives, upon application, to overcome their difficulty by giving advice and direction, thereby removing the risk that the Court may exercise its discretion to refuse recovery of costs out of the estate, provided that they followed the Court's directions: RS Geddes, CJ Rowland and P Studdert, Wills, Probate and Administration Law in New South Wales (LBC, 1996), paragraph [92.10]. The form of advice and direction given by the Court is commonly referred to as a Re Beddoe order ( Re Beddoe [1893] 1 Ch 547). Additionally if, in the circumstances, a personal representative is under a duty to litigate, the Court may give him or her an indemnity out of the assets of the estate for the costs of the litigation: Re Dallaway [1982] 1 WLR 756." 22 The rationale for what is now the statutory jurisdiction under s.63 of the Trustee Act is explained in a significant passage in the judgment of Palmer J in Application of Macedonian Orthodox Community of St Petka Inc (No 2) (2005) 63 NSWLR 441 (at pp.445-446) which was expressly approved by Beazley and Giles JJA in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar, the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160 (at [40]). Palmer J said:

"The advisory jurisdiction is an exception to the Court's ordinary function of deciding disputes between competing litigants. An application for judicial advice, whether under s.63 or under the general jurisdiction of equity, is in nature essentially a request for private advice: see e.g. Harrison v Mills [1976] 1 NSWLR 42, at 45 per Needham J; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, at 440 per Sheller JA. This exceptional jurisdiction, which is derived from the practice of the Court of Chancery under the general law in giving directions to those entrusted with the administration of property under the control of the Court, may now be regarded as affording special assistance to those, such as trustees, liquidators, bankruptcy trustees and receivers, who have no direct pecuniary interest in a fund but have assumed the onerous obligation of administering it for the benefit of others: see e.g. Re G.B. Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, at 677; Gardner v London Chatham & Dover Railway Company (No 1) (1867) LR 2 Ch App 201, at 211." 23 The concluding words of this passage are of particular importance. The pre-occupation of the court is with those who have the stewardship of property for the benefit of others. In terms of s.63, the court's role, consistently with that pre-occupation, is concerned with "the management or administration of the trust property" and "the interpretation of the trust instrument". It follows that, if a trustee is minded to seek judicial advice on a question related to the bringing or defending of legal proceedings, the trustee may properly do so only if the legal proceedings are themselves concerned with the management or administration of the trust property or the interpretation of the trust instrument. 24 The case before me is not of that kind. The trustee's concern, upon the present application, is with the question of potential exposure of the trustee personally because of past acts and a completed course of conduct of the trustee. Determination of the question whether the Federal Court proceedings should or should not be defended by APL will not contribute to any particular outcome related to the management or administration of the assets of the Trust. The question now confronting APL is how it should deal with an allegation of past misconduct which, if established, will entail personal liability for breach of trust or statutory wrongdoing. The trust property of which APL has stewardship will in no way be protected or enhanced by defence of the claim. If the beneficiaries, as plaintiffs in the Federal Court, are fully successful, the trust property will be seen to have been dealt with in the past in an impermissible way and the trustee will be brought to account accordingly. If the beneficiaries, as plaintiffs, are unsuccessful, the trust property will be seen not to have been misapplied by the trustee in the past. Either way, the result, so far as the trust estate is concerned, will do no more than reveal an historical position. The only consequence of an immediate kind having future implications will be as to the liability of the trustee (or the absence of liability). 25 It is necessary to bear in mind that an order under s.63 of the Trustee Act by which the court gives to a trustee its opinion, advice or direction produces the statutory consequence stated in s.63(2). If the trustee, having received judicial advice, acts in accordance with it, the trustee is "deemed to have discharged the trustee's duty as trustee in the subject matter of the application". The statute thus assumes that the matter on which judicial advice is sought will be one that involves some aspect of "the trustee's duty as trustee" as it relates to future conduct of the trustee. A trustee who is alleged by a beneficiary to have committed a breach of trust or statutory wrong and who defends legal proceedings in which that allegation is advanced does not thereby perform any "duty as trustee". A decision by a trustee accused of breach of trust whether to contest the allegation is unrelated to any aspect of "the trustee's duty as trustee". The matter at stake is the personal liability of the individual; and the course the individual follows will be dictated by a personal decision regarding the individual's own interests. 26 To the extent that the question on which APL seeks guidance includes an inquiry whether money of the Trust may properly be applied in defending the Federal Court proceedings, it accentuates the incompatibility of the question with the s.63 jurisdiction. If APL is found to have committed the breaches of trust alleged against it in the Federal Court, it could not expect to be indemnified out of trust property for the expenses incurred in defending the claims. Whether the indemnity is available will depend on the final adjudication of the inter partes proceedings. This court could not properly attempt, in advance, some form of pale substitute for such final adjudication by way of determination of a trustee's ex parte application for judicial advice. It is possible that the position would be different if notice of the application had been given to beneficiaries in such a way as to give them a status akin to that of parties and to cause them to be bound by the judicial advice pursuant to s.63(11): see, in particular, the observations of Hodgson JA in the Macedonian Orthodox Community Church case (above) at [66] to [68]. But even so, the fact that fully constituted and pleaded proceedings were pending elsewhere in which the subject matter was fully ventilated would most probably cause the court to take the view that a s.63 application, even with the involvement of the beneficiaries, was an inappropriate vehicle for consideration of the question of past breach of trust. 27 Although the question on which APL seeks the opinion, advice and direction of the court is, in the time-honoured way, framed as a question whether APL, as trustee, is justified in defending particular legal proceedings, those proceedings are not of such a kind as to make the s.63 jurisdiction exercisable. 28 The application for the opinion, advice or direction of the court on the question set out in paragraph 74(c) of the amended statement of facts filed on 1 December 2006 is refused. **********

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