Alsop Wilkinson (a firm) v Neary

Supreme Court of NSW|2014-03-21|Before: Brereton J, Mr P

Judgment 1The applicants Uncle's Joint Pty Ltd and Darren Adam Pernice are defendants in other proceedings in this court - respectively, proceeding 2013/360586 and proceeding 2013/360672 (together, "the trust proceedings") - in which Frances Rita Maloof (Frances), Tiba Clementine Maloof (Tiba) and Sarah Mariel Maloof (Sarah) (together, "the plaintiffs"), contend that each applicant has not been duly appointed as and is not the trustee of, respectively, the CJ Maloof Family Trust ("the CJM Trust") and the Einasleigh Trust. By this application, the applicants seek advice pursuant to (NSW) Trustee Act 1925, s 63, as to whether they would be justified in defending the claims against them in the trust proceedings; and, if so, whether they would be justified in using the resources of the relevant trust to do so.

Background 2The following summary is derived from the Statement of Facts, and inferences drawn from it. 3The trusts in question are discretionary family trusts, established by Clement Joseph Maloof ("the deceased") in the 1970s. 4The deceased died on 9 November 2009. He was survived by eight children: the plaintiffs Frances, Sarah, and Tiba; Helen May Pernice, (whose husband Darren is one of the applicants); and Clement George Maloof, Anthony Joseph Maloof, Michael Peter Maloof and Alberta Jane Rashid. 5At the date of the deceased's death, the trustee of the CJM Trust was Einasleigh Nominees Pty Ltd, and the trustee of the Einasleigh Trust was the deceased's brother Peter Maloof ("Peter"). By his will made on 17 July 2006, the deceased gave 18 shares in Einasleigh Nominees each to five of his children (including the plaintiffs) and 2 shares to his wife Rabiha (from whom he was, by the date of his death, estranged). However, by a codicil made on 4 November 2009 - only a few days before his death - the deceased substituted a new clause, giving 25 shares to Frances, 22 to Tiba, 10 to Sarah, and the balance (in smaller shares) to some others of his children. 6Although probate was, initially, contested by Helen, the will and codicil were admitted to probate, in solemn form, on 28 May 2012, pursuant to an order made on 17 May 2012, with Frances and one John Kellert as the executors. 7In 2010, each of the plaintiffs and Helen commenced family provision proceedings in respect of the deceased's estate. The applicants have been joined as defendants in the proceedings commenced by Frances, on the footing that the assets purportedly held by them on trust are liable to be designated as notional estate of the deceased. Tiba and Sarah have foreshadowed that they might make a similar claim. The applicants have also been joined, of the Court's own motion, as defendants in the family provision proceedings commenced by Helen. While this is relevant background, the present application does not seek advice as to whether the applicants would be justified in defending the family provision proceedings. Quite different considerations would inform such advice than those that inform this advice. 8In 2011, steps were taken with respect to both trusts which, on their face, had the result that Uncle's Joint replaced Einasleigh Nominees as trustee of the CJM Trust, and Darren replaced Peter as trustee of the Einasleigh Trust. The plaintiffs have no involvement in Uncle's Joint: the equal shareholders in Uncle's Joint are the five children of the deceased other than the plaintiffs, a number of whom are the directors. 9In the case of the CJM Trust, this was purportedly effected on 14 January 2011, by authority of the board of directors of Einasleigh Nominees, constituted by Peter and Darren, through (1) a deed of variation of the trust deed, which empowered the trustee (then Einasleigh Nominees) at any time to appoint a new trustee and to retire as trustee, and (2) a deed of retirement and appointment of new trustee, by which Einasleigh Nominees appointed Uncle's Joint as new trustee, and itself retired as trustee. In the case of the Einasleigh Trust, it was effected by Peter (as trustee and appointor, purportedly pursuant to a deed of appointment of successor appointor made by the deceased on 17 July 2006, the purport of which was to appoint Peter as successor appointor from the date of the deceased's death), on 26 October 2011, by deed of retirement and appointment of new trustee, appointing Darren as trustee and himself retiring as trustee. 10It appears that these steps were taken largely at the initiative of Peter, who has since himself died, on 1 October 2013. At the risk of oversimplification, in the case of the CJM Trust, it is said that these steps were intended somehow to safeguard the trust assets - in particular its shareholding in Albert & May Pty Ltd (nine of the twelve shares in which are property of the CJM Trust) - from what was perceived to be the risk of dissipation through the costs of litigation and ongoing dispute; in the case of the Einasleigh Trust, it is said to have been to avoid the suggestion that Peter, to whom the Einasleigh Trust was indebted for $1,000,000, would be in a position of conflict of interest and duty if while trustee he were to repay to himself that debt. 11In the trust proceedings, which were instituted by statements of claim filed 29 November 2013, the plaintiffs challenge, on multiple grounds, the validity of the steps by which the applicants were purportedly appointed as trustees. The defendants in those proceedings, in addition to the applicants, are Einasleigh Nominees and Albert & May. By orders of the court made (by consent) on 5 and 19 December 2013, the applicants were restrained from taking any action as trustees until further order. Pleadings have closed, although the plaintiffs have recently by leave amended their statements of claim and amended defences are to be filed shortly. At a directions hearing in the Expedition List on 7 March 2014, the Court listed for 2 and 3 April 2014 the hearing of separate questions, though separate questions have not yet been stated; it is contemplated that the questions would not address those parts of the defences which raise an estoppel against Frances or which contend that in any event Einasleigh Nominees should not be appointed trustee of either trust. On the same day, having regard to the interlocutory orders of 5 December 2013, the applicants applied for permission to use trust funds to obtain judicial advice. The plaintiffs opposed this, but on 12 March 2014, the Court gave leave for the trust funds to be used in this way: Maloof v Uncle's Joint Pty Ltd [2014] NSWSC 210. The trust proceedings are listed for further directions on 25 March 2014, to consider whether to state separate questions in a form proposed to the Court by the plaintiffs. 12The applicants' solicitors have provided advice as to the likely costs of the trust proceedings. The costs incurred to 19 March 2014 attributable to the defence of the trust proceedings by the applicants are $68,000 to $78,500, depending on the apportionment of the total expenses as against the other defendants. Assuming a two-day hearing of separate questions, the solicitors estimate further costs attributable to the defence by the applicants of $38,500 to $50,500. Assuming a five-day hearing (if it is not possible to state separate questions involving only legal issues, so that significant factual issues must be determined), the solicitors estimate further costs attributable to the defence by the applicants of $79,500 to $107,000. If the Trust Proceedings are not resolved following a separate determination of the matters presently being contemplated - in other words, if there remain for determination matters such as the alleged estoppel against Frances and the contention that in any event Einasleigh Nominees should not be appointed trustee of either trust - the solicitors estimate that the costs referable to the applicants incidental to the resolution of those matters would be a further $29,250 to $33,750. Accordingly, taking into account costs incurred to 19 March 2014 and the solicitors' estimates, the combined costs exposure of both trusts is estimated to be up to $219,250. 13As trustee of the CJM Trust, Uncle's Joint holds 9 of the 12 shares in Albert & May Pty Ltd, the total equity in which as at 31 December 2013 was $4,180,832. In addition, as at 31 December 2013, the CJM Trust had net assets of $21,757. 14As at 31 December 2013, the Einasleigh Trust had net assets of $1,232,560. Peter's estate is liable to Darren as trustee of the Einasleigh Trust in the amount of $485,005. 15Uncle's Joint holds all its assets as trustee of the CJM Trust. It holds no assets in its personal capacity. Darren has net assets of approximately $18,000. It follows that, without recourse to the trust assets, the applicants will not have the resources to fund the defence of the trust proceedings.

Issues 16Three main issues require consideration: first, whether the applicants have standing to seek judicial advice, when their status as trustees is in question; secondly, whether the defence of the trust proceedings is reasonable and the costs proportionate; and thirdly, whether the advice sought should be given, having regard to the context of the trust proceedings.

Standing 17In Application of Macedonian Orthodox Community Church St Petka Inc (No 2) (2005) 63 NSWLR 441 ("St Petka (No 2)"), Palmer J held that the court has no power to give judicial advice under s 63 to a person who does not establish to the Court's satisfaction that he or she is in fact a trustee. That was in the context that the applicant (the Association) denied that it was a trustee, and sought to utilise the assets for the purpose of resisting the claim that it was a trustee. In the present case, the applicants contend that they are trustees, and have been acting as trustees. As Barrett J (as his Honour then was) observed in Lombe v Wagga Leagues Club Ltd (2006) 56 ACSR 387, in a case where the applicant was quite prepared to be a trustee and the answer to a question as to whether the fund was a trust fund would also answer the question whether the applicant was a trustee, "it would be unrealistic to expect him to make some preliminary showing of the necessary standing before considering the substantive issue". There is a material distinction with the present case, because the question whether the applicants are trustees will not be answered in this proceeding. However, the present applicants contend that they are trustees, have purportedly been appointed as trustees, and have been acting as trustees. They are, at the least, trustees de son tort, and as such constructive trustees, within the scope of s 63. In my view, the applicants have the necessary standing to apply to the court for judicial advice.

Reasonableness of defence 18On a judicial advice application of this kind, where advice is sought as to whether a trustee is justified in prosecuting or defending proceedings, the court does not undertake a preliminary trial of the substantive case. As Palmer J explained in Re Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247 ("St Petka (No 3)") (at [80]), in a judicial advice application in which the trustee asks whether it is justified in prosecuting or defending litigation, all the court does is to reach a view as to whether the opinion of counsel satisfies it that there are sufficient prospects of success to warrant the trustee in proceeding with the litigation. Whether, in the light of counsel's opinion - which must address the facts necessary to support the legal conclusions reached and must demonstrate that the propositions of law relied upon for those conclusions are properly arguable - there are "sufficient" prospects of success calls for a judgment, founded upon such considerations as the nature of the case and the issues raised; the amounts involved, including likely costs; whether the likely costs to be incurred by the trustee are proportionate to the issues and the significance of the case; the consequences of the litigation to the parties concerned; and (in the case of a charitable trust) any relevant public interest factors. The question is whether the trustee would be justified in defending the proceedings in its capacity as such, not whether it will ultimately succeed, and the circumstance that the trustee has what on its face appears to be careful, competent and considered advice from senior and junior counsel as to the viability of its defences is a powerful consideration [cf Re Lenyco Pty Ltd [2010] NSWSC 1094, [7]]. 19In this case, senior and junior counsel have, in a comprehensive and careful advice, concluded that, in the case of each trust, on the evidence which they have put forward, the applicants have sufficient prospects of success to warrant proceeding with the defence of the claims against them. 20That is not to say that the applicants will succeed. Counsel's advice is confidential, and I will not endeavour to summarise it. There is scope for argument on at least a couple of the issues addressed in the advice. In particular, I consider that there are serious difficulties, albeit not so far pleaded by the plaintiffs, with Peter's appointment as "successor appointor" of the Einasleigh Trust by the deed of 17 July 2006. I do not consider that, in the light of the Einasleigh Trust Deed - which provided that the power of appointment of a new trustee in the place of the existing trustee, and also the power to remove any trustee, shall be vested "in Clement Joseph Maloof during his lifetime or such person or persons as he by will may nominate" - the deceased could, by an inter vivos instrument rather than by will, nominate a person in whom the power was vested to take effect upon his death; such a nomination had to be by will. However, there is a reasonable argument that Peter's appointment can be supported on the alternative basis that the deceased nominated him by will to be the appointor after his death: the appendix to the deceased's will, which was admitted to probate, expressed the intention that Peter be the trustee and successor appointor of the Einasleigh Trust. 21Ultimately, I see no such defect in counsels' opinion as would undermine the conclusion that the defence has sufficient prospects of success, and that the estimated costs are not disproportionate.

Should advice be given? 22The third issue, however, is whether the advice should be given, having regard to the nature of the substantive proceedings. 23The substantive proceedings are analogous to the second class of trustee litigation described by Lightman J in Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 (at 1223-1224), namely disputes between the trustee and one or more of the beneficiaries (although, in this case, not with respect to the propriety of the trustee's actions as such, but as to whether the trustee was validly appointed in the first place). In this class of case, the trustee is not litigating to defend or enhance the trust assets, but only in his or her personal interests. While there is authority that in such a case the trustee is not entitled to invoke the right of indemnity in respect of legal costs incurred [Miller v Cameron (1936) 54 CLR 572, 578-9; cf Alsop Wilkinson v Neary, 1224; Frost v Bovaird [2012] FCAFC 60, [70]; 203 FCR 95, 106], the prevailing view is that a trustee who is exonerated or has acted properly in defending a claim made by a beneficiary against him or her is entitled to be indemnified out of the trust estate to the extent that a party/party costs order does not afford an adequate indemnity [National Trustees Executors and Agency Company of Australasia Ltd v Barnes (1941) 64 CLR 268, 278-279; Fay v Moramba Services Pty Ltd [2010] NSWSC 725, [4]; 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, [213]; Application of Frost and Fallon [2011] NSWSC 591, [66]]. 24Typically, as in National Trustees Executors and Agency Company of Australasia Ltd v Barnes, trustees will be allowed their costs out of the estate in this type of case only after the proceedings against them have been resolved in their favour. Thus in Armitage v Nurse [1998] Ch 241, Millett LJ, with the concurrence of the other members of the court, said (at 263): In my judgment the respondents should have the right to recoup themselves out of the trust fund but only if and when the action against them is discontinued or dismissed. 25In Frost v Bovaird, the full Federal Court rejected (at [79]) the submission that in the case of beneficiaries disputes the trustee was, pending the determination of the claim and without more, entitled to use the trust funds to meet legal costs incurred in defending the claim, the prima facie position being, as stated by Lightman J, that a trustee's legal costs incurred in defending a beneficiaries dispute do not come out of the estate. However, the Court acknowledged (at [75]) that the judgment of the High Court in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 ("St Petka") recognised that it was open to trustees faced with an allegation of misconduct by a beneficiary to apply for judicial advice, pursuant to which they might be entitled to resort to trust assets for their defence. 26Of course, that does not mean that they will invariably be given such advice. As Palmer J, at first instance, explained in St Petka (No 3), in a passage that received the endorsement of the High Court in St Petka (at [84]), where a trustee seeks advice that it is justified in defending a claim against the trust estate by recourse to the trust assets for the costs of the litigation, the question is whether it is more practical and fair to leave the competing claimants to the beneficial interest to contest the litigation among themselves at their own risk as to costs, with the trustee a necessary but inactive party, or whether it is more practical and fair that the trustee be the active litigant, with recourse to the trust fund for the costs of the litigation. This judgment will depend on the particular circumstances of each case and relevant considerations may include whether the beneficiaries have a substantial financial interest in the defence of the proceedings, the financial means of the beneficiaries to fund it, the merits and strengths of the claim against the trust estate, the extent to which recourse to the trust estate for defence costs would deprive the successful claimant of the fruits of the litigation, and (If the trust is a charitable trust rather than a private trust) the public interest. 27This was reflected in the High Court's articulation In St Petka of its sixth observation about judicial advice proceedings (at [63]); Sixthly, the application of s 63 will tend to vary with the type of trust involved. Where there is a non-charitable private trust involving a conflict between beneficiaries, or between beneficiaries alleging a breach of trust out of which a trustee has profited and that trustee, and where the defendants in those proceedings have a personal capacity to fund the defence, it might not be correct to give the trustee an opinion, advice or direction. The position is not necessarily the same where the trust is for a charitable purpose ... 28Counsel for the applicants emphasises, rightly in the context of what the High Court said, that in this case it appears that the trustees do not have a personal capacity to fund the defence of the trust proceedings. On the material before the Court, the trustees do not have the personal resources necessary to fund the defence of the trust proceedings. Moreover, in St Petka, the High Court rejected (at [93]) the proposition that the financial position of the applicant was irrelevant, particularly where, as here, advice was sought that the trustee was entitled to have recourse to the trust property to pay its reasonable costs, endorsing Palmer J's view that in that context, the financial capacity of the parties in trust estate litigation was central to what is practical and fair and concluding (at [94]) that once it was decided that it was in the best interests of the trust for the proceedings to be defended, it would be vacuous to leave the matter there without considering how, in the then circumstances, the proceedings were to be defended as a matter of practicality. 29However, the circumstances in St Petka were quite different from the present case. 30First, while I accept, conformably with counsels' opinion, that there are sufficient prospects of success to warrant defending the trust proceedings, that is not the same thing as concluding that it is in the interests of the trust that the proceedings be defended. The interests of the trust as a whole are not significantly affected by the identity of the trustee, although the separate interests of various of the beneficiaries may be affected. The trustee has, or should have, no particular interest in being trustee. In this case (unlike a removal suit) the trustee's conduct is not impugned, so it does not have even the interest that a trustee whose conduct is impugned has in resisting allegations of impropriety made against it. In substance and reality, those who have an interest in upholding the appointment of the applicants as trustees are the appointors who appointed them, and those members of the class of objects of the trusts who wish them to remain in office. Accordingly, in contradistinction to the position in St Petka, I am not satisfied that it is in the interests of the trust as a whole that the trust proceedings be defended. 31Secondly, in substance, the trust proceedings are one element of a wider dispute between the children of the deceased, who are the beneficiaries of the trust, the probate proceedings and the family provision proceedings being other aspects of that wider dispute. In such a case, to borrow the words of Lightman J in Alsop Wilkinson (a firm) v Neary [1996] 1 WLR 1220 (at 1225), the duty of the trustee is to remain neutral and, in the absence of any court direction to the contrary, offer to submit to the court's directions, leaving it to the rivals to fight their battles. The plaintiffs, who dispute the validity of the appointment, must rely on their own resources to fund the litigation, subject to the possibility of receiving a costs order, if successful, in due course. I see no justice or fairness in permitting their opponents to have recourse to the trust assets to fund the litigation, while the plaintiffs do not. The position is analogous to that of a majority having recourse to company funds to defend an oppression suit brought by the minority, which the law regards as oppressive [cf Re D G Brims and Sons Pty Ltd (1995) 16 ACSR 559 (Byrne J); Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688, 732-4 (Young J)]. 32Thirdly, if this results in the trust proceedings being undefended by the applicants, that does not mean that there will be no proper contradictor. The appointors who appointed the applicants, and/or a representative of the class of discretionary beneficiaries who wish the applicants to remain in office, would be appropriate contradictors, and can apply to be joined as defendants. Alternatively, they can fund the applicants' defence of the proceedings. There is no evidence that those of the beneficiaries who support the trustees do not have the resources to fund their defence. Even if they do not, I see no fairness or justice in permitting them, to the exclusion of the plaintiffs, to have recourse to the trust fund to do so. (A possible solution may be to make a distribution among the beneficiaries such that each would receive the same amount, which could be applied at that beneficiary's discretion to fund the litigation). 33As I have sought to explain above, the prima facie position is that the applicants' costs of the trust proceedings are not payable out of the estate, although if they succeed they may well be entitled, pursuant to Trustee Act, s 93 or UCPR r 42.25, to be indemnified by the trust estate to the extent that a party/party order is inadequate. For the three reasons set out above, I conclude that the considerations of fairness and practicality, referred to by Palmer J, do not favour enabling them to have recourse to the trust fund for the purpose of funding their defence at this stage by giving the directions sought; to the contrary, to do so would produce an unfair and unjust result. That does not mean that they should not defend the proceedings, nor that if ultimately successful they would not be entitled to be indemnified out of the trust; but that in the meantime, any defence should be funded in the first instance other than by the trust.

Conclusion 34For the foregoing reasons, I have reached the following conclusions. 35The applicants have standing to seek the advice of the court pursuant to (NSW) Trustee Act, s 63. 36The defence has sufficient prospects of success, and the estimated costs are not disproportionate. 37However, in the context of a family dispute, where the trustees ought to be neutral, and those with a real interest in defending the appointment of the applicants are the appointors who appointed them and/or those of the beneficiaries who wish them to retain office, it would be unjust to permit the applicants to have recourse to the trust fund for the purposes of funding their defence before the conclusion of the proceedings. 38I therefore decline to give the advice sought. 39THE COURT ORDERS that the summons be dismissed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 March 2014

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