Application by David Davidson Financial Services Pty Ltd & Ors (as trustees of various trusts) [2024] VSC 445 (31 July 2024)

1 The plaintiffs are corporate trustees of various trusts, which are sued in the Federal Court of Australia by entities associated with Mr Aaron Zelman ('Federal Court Proceeding').[1]

2 The plaintiffs bring this application pursuant to rule 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 ('the Rules') seeking directions to the effect that the various trustees are:

(a) justified in defending the Federal Court Proceeding;

(b) justified in paying the costs of defending the Federal Court Proceeding out of the assets of the respective trusts; and

(c) entitled to have their costs of this application paid from the assets of the respective trusts.

3 The plaintiffs rely on the affidavit of their solicitor, Ms Heather Richardson, dated 19 June 2024 ('Richardson Affidavit').

4 The plaintiffs submit that the Court should give the directions sought on the basis that their prospects, as trustees, in defending the Federal Court Proceeding are, at least, sufficient to justify their defence of it. Additionally, they submit that there is no reason for the costs of such defence to be paid other than from the assets of the respective trusts of which they are a trustee. Further, it is submitted that the costs of this application should be paid from trust assets as it is brought in respect of the trustees of each of those trusts.

5 The principles which govern applications of this kind, commonly referred to as Beddoe applications,[2] are well settled. It is, nevertheless, helpful to set out some of the key propositions established by the authorities.[3]

6 First, the High Court has recognised that it is desirable for trustees to seek advice in relation to litigation:[4]

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.

7 Secondly, in terms of the material to be put before the Court, this Court has stated that:[5]

In making an application for judicial advice, the plaintiff must point to the existence of a question relating to the management or administration of the trust, or relating to the interpretation of the trust instrument. The trustee must then place all relevant material before the court and seek judicial advice as to whether, in those circumstances, the trustee would be justified in taking a certain course. However, a trustee is not required to 'prove facts' according to 'a certain standard of proof to enable findings of fact to be made as would be the case in adversarial litigation'. Indeed, it is not necessary for the court to determine the factual matters on an application for judicial advice. Rather, there must be sufficient information to enable the court to be satisfied that judicial advice should be given.

8 Thirdly, there is a recognised distinction between 'justification orders' (that is, orders that a trustee is justified in instituting or defending a proceeding) and 'indemnity orders' (that is, orders that a trustee be indemnified out of the trust in respect of the costs of the proceeding).[6]

9 In relation to justification orders, Lyons J observed in Hopkins that:[7]

... the court has to determine whether the proceeding or defence is justifiable: i.e. that there are sufficient prospects of success or that it will not be fruitless based on the material provided by the trustee. This usually involves establishing that:

(1) the trustee has taken proper legal advice and that a reasonable trustee might well abide by that advice; and

(2) the trustee's advice that it is more likely than not that it will be successful in the litigation and that in pursuing the litigation the trustee will be acting in the best interests of the trust, having regard to the likely costs of the proceeding and whether they are proportionate to the issues and the significance of the case.

This analysis by Lyons J has been cited with approval in this Court.[8]

10 The nature of the inquiry for the purposes of applications of this kind was described differently, but to the same effect, by McMillan J:[9]

In general terms, in an application for judicial advice where a party seeks such declarations or orders, the Court's task is to determine whether, on the material presently available, it would be proper for an applicant to defend the relevant proceeding.

In determining this issue the Court is not bound to investigate the evidence in order to make a finding as to whether the related proceeding would be successful or not or to determine the issues in the relevant proceeding. The Court's role is to determine whether the defence of the proceeding is justifiable. This means the Court should satisfy itself that the defence of the relevant proceeding will not be fruitless. The Court is entitled to make a determination based on legal advice obtained by the applicant that canvasses the prospects of success in the relevant proceeding, as well as whether the likely costs are proportionate to the issues and the significance of the case.

Generally, the issue is whether the applicant seeking the advice of the Court has a legitimate interest in defending the relevant proceeding. Whether there is a legitimate interest in defending the proceeding depends on the nature of that proceeding and the circumstances of the particular case. The focus is on the impact of the relevant proceeding as a whole.

11 The primary material which the plaintiffs rely upon in this application is the confidential legal advice of counsel, Messrs Herskope and Tehan, which is exhibited to the Richardson Affidavit. Without in any way canvassing the contents of that advice in any detail it is of assistance in the provisions of the reasons for determining this application to make reference to the background to the Federal Court Proceeding as set out in the plaintiffs' submissions.[10]

12 The first applicant ('Zelman') worked in conjunction with David Davidson and Bradley Gecelter in an insurance broking business. Davidson and Gecelter are the fourth and fifth respondents. The second, third, seventh and eighth respondents are trustees of trusts associated with them or their families. The first respondent ('Trustee') is the trustee of a unit trust ('Trust') through which the insurance broking business was conducted.

13 When Zelman joined the business in 2016, there were a number of operative documents (although Zelman denies their validity, alternatively the proper construction, of some of them). First, there was a Trust Deed which governed the operation of the Trust. Secondly, there was a Heads of Agreement between Davidson and Zelman. Thirdly, there was a Term Sheet between Davidson (and his associated entities) and Zelman. Fourthly, there was an Employment Agreement between Zelman and the Trustee.

14 Between 2016 and 2019, Zelman worked in the business. He received a salary, superannuation and distributions of profit. While he was in the business, his entity, Kowman Pty Ltd (in its capacity as trustee for the Zelman Discretionary Family Trust) held 15% of the units in the Trust. Davidson and Gecelter (through their respective family trusts, namely Davidson Nominees Pty Ltd in its capacity as trustee for the Davidson Holdings Trust and as trustee for the David Davidson Financial Services Trust and BASR Enterprises Pty Ltd as trustee for the Bramanda Family Trust) held the remaining units.

15 At various stages throughout the period between 2016 and 2019, Zelman's performance was the subject of review and management.

16 On 26 June 2019, after a meeting which occurred earlier that day, Zelman provided a notice of resignation.

17 Following his resignation, there was a series of communications between Zelman and Davidson/the Trustee (and their respective lawyers) about the resignation, the making of various payments to Zelman, and the treatment of clients which Zelman had brought to the business. Ultimately, by about November 2019, Zelman had been paid his share of profits for the period up to his resignation, and Zelman had transferred his units in the Trust.

18 By November 2019 the Trustee had entered into an agreement to sell, and then sold, the insurance broking business to Perpetual. This resulted in entities and trusts associated with Davidson and Gecelter receiving proceeds from the sale of the business.

19 Zelman alleges that discussions to sell the business to Perpetual had occurred prior to him offering his resignation on 26 June 2019. He alleges that the discussions were not disclosed to him, in breach of various duties and statutory obligations; that had the discussions been disclosed, he would not have resigned or transferred his units; and that his employment was not able to be terminated. Zelman also alleges that this was part of an overarching 'Strategy' to remove him from the business so that the business could be sold and the proceeds shared between only Gecelter and Davidson.

20 Zelman also makes some allegations against Gecelter and Davidson's trusts (as well as allegations against Gecelter's wife), including Barnes v Addy[11] allegations as knowing recipients or knowing assisters. Zelman seeks a variety of remedies stemming from these allegations, but broadly he seeks what he alleges would have been his share of the sale proceeds.

21 Zelman makes separate allegations about some further discrete matters, including entries in the Unit Register of the Trust, the distribution of payments under the Trust, and the payment of non‑Trust expenses by the Trust.

22 The advice sets out, in broad terms, the nature of the claims made in the Federal Court Proceeding. In relation to those claims, the advice establishes for the purposes of this application that it is reasonable for each of the trustees to defend the Federal Court Proceeding. I accept that this is because, amongst other matters:

(a) the amounts at stake are large;

(b) there are viable defences available (and weaknesses with the claims made against the trustees); and

(c) the failure to defend the proceeding would have significantly adverse consequences for the trusts.

In these circumstances, I accept that the trustees have no choice but to defend the claims made against them in order to protect the trusts and their assets and to represent those trusts in the Federal Court Proceeding.

23 Insofar as the indemnity application is concerned, the Trust Deeds each contain an indemnity provision.[12] I accept that this is an indication that the trusts were established on the assumption that the trustees would be entitled to indemnification in acting as trustees in defending proceedings, such as in the present circumstances. Moreover, I accept that the nature of the claims made against the trustees is such that if a justification order were made, it would follow that the costs of the justified defence of the Federal Court Proceeding should be borne by the trust assets of each of the trusts.

24 Shortly before the hearing of this application, Aaron Zelman and Kowman Pty Ltd, plaintiffs in the Federal Court Proceeding, sought to be joined as parties to the present proceeding for the purpose of opposing the application. More particularly in that context, they sought to obtain details of the nature and monetary value of the assets of the trusts and the estimated costs and expenses likely to be incurred by those trusts in the Federal Court Proceeding.[13]

25 Having regard to the nature of the present application, namely an application by trustees for confidential advice from the Court, and in the absence of any substantive basis advanced by these plaintiffs in the Federal Court Proceeding as parties to the Originating Motion in opposition, that proceeding was dismissed with costs. The gravamen of this opposition was on the general basis that, as these parties to the Federal Court Proceeding claim to be beneficiaries of these trusts, or some of them, it follows that they have an interest in opposing the trustees expending money out of trust assets which, ultimately, may be to the detriment of beneficiaries. However, this is potentially the position with respect to any application of this kind by trustees for judicial advice and so, without more, there is no basis for a claimed beneficiary to intervene in an application such as the present.

26 In any event, for the reasons indicated, I am of the opinion that the trustees ought properly defend the Federal Court Proceeding and that having regard to the nature and variety of claims made in those proceedings and without a detailed investigation of the evidence and arguments it would be very difficult to form any realistic assessment of likely costs.

27 Additionally, as emphasised in the course of the hearing of this application, it must be remembered that a justification order does not mean the trustees can spend whatever they like on defending a proceeding. Rather, it is well established that such expenditure must be reasonable and proper in all the circumstances, hence it is subject to the oversight of the trial court in this respect. In all the circumstances this is a significant protection to claimed beneficiaries, such as Aaron Zelman and Kowman Pty Ltd. They are also able to protect their own interests to a significant extent by ensuring their own compliance with the provisions of legislation and Court rules requiring focussed and cost‑effective pursuit of real issues in dispute in litigation.[14]

28 Finally, it is submitted that the costs of this application should follow the event: namely the relief sought being granted and that the trustees should be entitled to indemnification from trust assets. For the preceding reasons, I am of the view that this is the appropriate course.

29 For the preceding reasons, orders were made as sought in the Originating Motion in this proceeding and a confidentiality order was made in respect of the confidential advice exhibited to the Richardson Affidavit.[15]

DAVID DAVIDSON FINANCIAL SERVICES PTY LTD (ACN 088 380 223) AS TRUSTEE FOR THE DAVID DAVIDSON FINANCIAL SERVICES UNIT TRUST TRADING AS PRIORITY LIFE AND MEDIBROKER

DAVIDSON NOMINEES PTY LTD (formerly known as PRIORITY LIFE PTY LTD and also formerly known as DAVIDSON HOLDINGS (AUST) PTY LTD) (ACN 125 403 170) AS THE TRUSTEE FOR THE DAVIDSON HOLDINGS TRUST AND AS THE TRUSTEE FOR THE DAVID DAVIDSON FINANCIAL SERVICES TRUST

BASR ENTERPRISES PTY LTD (ACN 609 470 804) AS THE TRUSTEE FOR THE BRAMANDA FAMILY TRUST

DAVIDSON PROPERTY INVESTMENTS PTY LTD (formerly known as DEVELOPMENTS PTY LTD) (ACN 156 162 711) AS THE TRUSTEE OF THE DAVIDSON YARRAMAN TRUST

DAVIDSON BELMONT PTY LTD (ACN 630 293 453) AS THE TRUSTEE OF THE DAVIDSON BELMONT TRUST

[1] On 20 December 2023, Zelman, Kowman Pty Ltd (ACN 126 021 001) as trustee for the Zelman Discretionary Family Trust and Mankow Pty Ltd (ACN 159 677 764) as trustee for the Zelman Discretionary Trust 2 commenced a proceeding in the Federal Court of Australia, Victoria registry against each of the plaintiffs (No VID 1090 of 2023).

[3] Generally, the governing principles have been recently summarised by this Court in Re Balsa Rejus Pty Ltd & Anor [2022] VSC 223, [2]-[3]; [12]-[20] (Delany J).

[4] Macedonian Church v Eminence Petar [2008] HCA 42; (2008) 237 CLR 66, [71]-[72].

[5] Re Care Super Pty Ltd [2021] VSC 805, [24] (Lyons J) (citations omitted).

[6] Hopkins v Edwards [2020] VSC 456, [192] ('Hopkins').

[7] Hopkins, [195] (citations omitted).

[8] See, for example, Application by Eastwood Retirement Pty Ltd [2022] VSC 568, [16] (Elliott J).

[9] Application by GAV (Vic) Pty Ltd [2022] VSC 516, [12]-[14].

[10] Outline of Submissions of the Plaintiffs (1 July 2024), [12]-[27] (references to applicants and respondents are references to parties in the Federal Court Proceeding).

[11] [1874] UKLawRpCh 20; (1874) 9 Ch. APP. 244.

[12] See clause 50 of the trust deed for the first plaintiff, clause 15 of the trust deed for the second plaintiff; clauses 6 and 7 of the trust deed for the third plaintiff, clauses 9 and 15 of the trust deed for the fourth plaintiff, and clauses 11.10 and 11.11 of the trust deed for the fifth plaintiff.

[13] Originating Motion Between Parties (17 July 2024), S ECI 2024 03660 ("the Originating Motion in opposition").

[14] See, for example, legislation such as the Victorian Civil Procedure Act 2010.

[15] The confidentiality order was made in the following terms:

The joint opinion of Mr Herskope and Mr Tehan of counsel dated 13 June 2024, prepared on behalf of the Plaintiffs who are respectively the First, Second, Third, Seventh and Eighth Respondents in the Federal Court of Australia proceeding No VID 1090 of 2023 shall be sealed and marked confidential, and shall not be opened unless pursuant to an Order of this Court.