Application of Gnitekram Marketing Pty Limited [2010] NSWSC 1328

1 HIS HONOUR In this application, which is made under the Trustee Act 1925, s 63, the second Defendant, Gnitekram Marketing Pty Limited, as trustee of the Nasrat Family Trust, in conformity with the course commended by the High Court in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66, at [74], seeks advice on the following questions: (a) Whether the second defendant would be justified in: i. doing all things necessary or reasonably incidental to conducting the defence of proceedings 2010/317164 in relation to all defences raised as set out in the Defence filed in those proceedings; ii. in conducting the claims made in the Cross Claim filed in those proceedings; and iii. on such other basis as it may be advised from time to time up to and including the entry of judgment in those proceedings. (b) Whether the second defendant, in its capacity as trustee, would be justified in paying out of the trust estate the Defendants' costs of their Defence of the proceedings and their Cross Claim, to the extent that costs are not recovered from the Plaintiffs. The Present Application 2 There has been read on this application, a notice of motion filed 29 October 2010, a statement of facts also dated 29 October 2010, the pleadings, and two affidavits, one of Alexander Richard Martin sworn 29 October 2010 and one of Roger Hardinge Braham sworn 2 November 2010. I have also been shown a copy of an opinion of counsel going to some aspects of the substantive proceedings. 3 The Plaintiff, in those proceedings, by Statement of Claim, filed pursuant to orders made by Windeyer AJ on 8 October 2010, seeks declaratory and consequential relief, relating to the transfer of the sole share in the second Defendant, to her father, the first Defendant. Broadly, she alleges that the transfer of the share by her to him, which occurred on, or about 1 July 2009, should be set aside upon the basis that the transfer was procured by the undue influence of the first Defendant, or upon the basis that he engaged in conduct that was, in all the circumstances, unconscionable. 4 The Plaintiff has sought, and obtained, an injunction restraining the first Defendant from selling, or otherwise dealing with, the sole share in the second Defendant without her consent. The injunction has been varied to permit a sale of certain land at Tenterfield, New South Wales ("the Tenterfield Property") which is the only property held by the second Defendant. However, the injunction, as varied, prevents the proceeds of sale or any part thereof, being disbursed. 5 In a defence, filed on behalf of both the Defendants, on 29 October 2010, it is asserted that the second Defendant is the trustee of the Nasrat Family Trust, which trust was settled by Deed dated 24 March 2005. As such, it is asserted that the second Defendant does not have any beneficial interest in the Tenterfield Property. In the alternative, it is asserted that the second Defendant holds the Tenterfield Property on resulting trust in favour of the first Defendant. 6 I was informed from the Bar Table that the application had been served on the Plaintiff. Ms Finnerty, solicitor, appeared as city agent for the Plaintiff's former solicitors, to inform the court that a Notice of Ceasing to Act had been filed by the solicitors formerly acting for the Plaintiff. Otherwise, there was no appearance on behalf of the Plaintiff. 7 The Deed of Trust reveals that the trust is a discretionary trust. The Statutory Framework, Legal Principles and the Application 8 Section 63 enables a trustee to 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. The section provides: "63 Advice (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. (3) Rules of court may provide for the use, on an application under this section, of a written statement signed by the trustee or the trustee's Australian legal practitioner, or for the use of other material, instead of evidence. (4) Unless the rules of court otherwise provide, or the Court otherwise directs, it shall not be necessary to serve notice of the application on any person, or to adduce evidence by affidavit or otherwise in support of the application. [(5) - (7) Repealed] (8) Where the question is who are the beneficiaries or what are their rights as between themselves, the trustee before conveying or distributing any property in accordance with the opinion advice or direction shall, unless the Court otherwise directs, give notice to any person whose rights as beneficiary may be prejudiced by the conveyance or distribution. (9) The notice shall state shortly the opinion advice or direction, and the intention of the trustee to convey or distribute in accordance therewith. (10) Any person who claims that the person's rights as beneficiary will be prejudiced by the conveyance or distribution may within such time as may be prescribed by rules of court, or as may be fixed by the Court, apply to the Court for such order or directions as the circumstances may require, and during such time and while the application is pending, the trustee shall abstain from making the conveyance or distribution. (11) Subject to subsection (10), and subject to any appeal, any person on whom notice of any application under this section is served, or to whom notice is given in accordance with subsection (8), shall be bound by any opinion advice direction or order given or made under this section as if the opinion advice direction or order had been given or made in proceedings to which the person was a party." 9 Referring to the purpose of s 63, in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand Gummow, A-CJ, Kirby, Hayne and Heydon JJ, at [71]-[72], said: "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." 10 A trustee's application for judicial advice about whether to defend or sue by cross-claim, is not only directed to the personal protection of the trustee. Proceedings for judicial advice also has the no less important purpose of protecting the interests of the trust. 11 The role of the court was explained by their Honours, at [74], in the following passage: "A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceeding. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the principal proceedings." 12 Barrett J gave consideration to s 63 in Australian Pipeline Limited [2006] NSWSC 1316; (2006) 60 ACSR 625. His Honour there dealt with an application for judicial advice on the question whether the Defendant was justified, as a trustee, in defending proceedings against it in which the plaintiff raised allegations of breach of trust. His Honour said: "23 … 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." 13 "Management or administration of property" includes taking steps to preserve the property, and taking steps to make the property financially productive. The words refer to both the manner in which trust property is managed, administered, handled, directed or controlled, and the actual carrying out of those functions. In addition, the words include transferring part, or all, of it, as required, to those who have become entitled to it. The words are not confined to the continued holding of the property in question: Stein v Sybmore Holdings [2006] NSWSC 1004 at [59]. 14 Uniform Civil Procedure Rules ("UCPR"), rule 55.1, provides: "55.1 Statement (1) A statement under section 63 of the Trustee Act 1925: (a) must be divided into consecutively numbered paragraphs, and (b) must state the facts concisely, and (c) must state the question for opinion, advice or direction. (2) Despite rule 6.12 (2), the originating process in proceedings under section 63 of the Trustee Act 1925 need not state the question for opinion, advice or direction." 15 UCPR r 55.2 provides that an opinion, advice or direction given under s 63 "shall be given by way of order". However, such an order is permissive in nature, its usual form being that the trustee "would be justified" in taking certain action. As such, the order does not carry with it the usual consequences of an order made by the Court in adversarial proceedings, regardless whether parties have been given notice of the application under s 63(4). Thus, it does not create a res judicata. It does not finally determine the rights of parties. Indeed, it does not, of itself, determine any rights, although, it has the potential to affect the rights of the parties given notice under s 63(4). It does not carry with it the consequences of breach, including, e.g. the exposure to contempt proceedings should an order be disobeyed: Macedonian Orthodox Community Church St Petka Inc v Petar [2006] NSWCA 160; (2006) 66 NSWLR 112. 16 UCPR r 55.4 provides that an appeal lies to the Court of Appeal from an opinion, advice, direction or order given or made by the Supreme Court under s 63, including an opinion, advice, direction or order given or made by an associate Judge. 17 Subject to the Rules referred to above, the way in which the application should be presented to the court, may be summarised as follows (see: for example, Application of Perpetual Trustee Company Ltd [2003] NSWSC 1185 per Young CJ in Eq (as his Honour then was) and on appeal, Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar, the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand & Anor [2006] NSWCA 160; (2006) 66 NSWLR 112; and also [2007] NSWCA 150): (a) The procedure pursuant to s 63 is summary in character. However, the application of the section will tend to vary with the type of trust involved and, as a consequence, the context of the application for advice will be important. (b) The trustee's evidence should be given by witness statement. In order to ensure that, if directions are given, the trustee is properly protected by the order, it must ensure full disclosure of relevant matters, even if the case is to proceed with the participation of beneficiaries as defendants. It is not necessary for the trustee must "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 (Crnjanin v Ioos; Ioos v Crnjanin [2010] NSWSC 750, per Lindgren AJ, at [28]). (c) The evidence should include the advice of an appropriately qualified lawyer as to the prospects of success and other matters relevant to be taken into account, including a cost estimate for the proceedings and any known facts concerning the means of the opposite party to the proceedings, a draft of any proposed statement of case, the value of the trust assets, the significance of the proposed litigation, or other course of action for the trust, and why the court's directions are needed. (d) It is not the role of a Statement of Facts necessarily to set out the arguments relied upon in favour of, or against, any particular advice or direction sought. Ultimately, it is a matter for submission and argument and not the Statement of Facts to set out the competing arguments as to what advice should be given. (e) A person served with documents under s 63 is not a party to the proceedings. (f) If a beneficiary of the trust is a party to the litigation about which directions are sought, with an interest opposed to that of the trustees, that beneficiary should be a defendant to the trustees' application, but any material which would be privileged as regards that beneficiary in the litigation should be put in evidence as an exhibit to the trustee's witness statement, and should not be served on the beneficiary. However if the trustee's legal representatives consider that no harm would be done by the disclosure of all, or some part, of the material, then that material should be served on that defendant. That defendant may also be excluded from part of the hearing, including that which is devoted to discussion of the material withheld. (g) There is nothing in s 63 that deals with the manner in which material is to be put before the court and where the rules of court do not expressly or impliedly abrogate the privilege (assuming, without deciding, that a procedural rule could do so). It follows that there is nothing in a s 63 application that can, or does, undermine the substantive right of legal professional privilege. (h) Ordinarily, the provision to a trustee of an indemnity from trust assets must be determined on the final adjudication of the litigation. An indemnity should not be provided in advance under colour of private judicial advice.

Determination 18 The Plaintiff does not make any allegations against the second Defendant in the statement of claim. The allegations relate to the conduct of the first Defendant personally. Furthermore, the second Defendant does not, on any basis, assert any beneficial interest in the Tenterfield Property. Its assertion relates only to the ownership of the Tenterfield Property as trustee. 19 In the defence, which has been filed on behalf of both Defendants, whilst admitting that the Plaintiff is the daughter of the first Defendant, they deny the assertions made by the Plaintiff as to undue influence and unconscionable conduct. They also deny that the Plaintiff is entitled to any relief claimed in the Statement of Claim. 20 The Defendants have also filed a cross-claim, in which a declaration is sought that the second Defendant holds the Tenterfield upon trust for the Nasrat Family Trust; in the alternative, that it holds the Tenterfield property upon a resulting trust for the first Defendant; an order vesting the Tenterfield Property in the first Defendant, or alternatively, in the Plaintiff, the first Defendant and Kamil Schumann (the first Defendant's step-son), in such proportions as the Court determines, pursuant to s 71 of the Trustee Act; and costs. 21 No defence to the cross-claim has, as yet, been filed or served. 22 The first question posed by the second Defendant that requires consideration is whether it is proper for the second Defendant to continue the defence of the substantive proceedings. Those proceedings involve the identity of the person in control of the first Defendant. The answer to that question is relevant to the management, if not, the administration of the trust. 23 However, it is likely that only the first Defendant, or persons to whom instructions were given in respect of the transfer of the share in the second Defendant, could give evidence about the matters the subject of the proceedings. In other words, the first Defendant is the natural and proper contradictor in respect of most, if not all, of the relief claimed in the statement of claim. 24 In answer to the first question upon which advice is sought, I have reached the conclusion that the second Defendant would not be justified in doing all things necessary, or reasonably incidental, to conducting the defence of proceedings 2010/317164 in relation to all defences raised as set out in the Defence filed in those proceedings. 25 I have reached a different conclusion in relation to the second question posed in the Statement relied upon. The question as to the beneficial ownership of trust property is one that falls within the management and administration of a trust for the purposes of s 63(1) of the Trustee Act. 26 In the cross-claim, the relief that is sought will determine the beneficial ownership of property held in the name of the second Defendant. Even though the second Defendant does not make a claim that it has any beneficial interest in the Tenterfield property, on whose behalf the Tenterfield Property is held is a matter that is of concern to the administration and management of the Trust. 27 However, it may be necessary for the cross-claim to be amended, so that the proper cross-Defendants would be the first Defendant and the Plaintiff. Counsel accepts that they are the persons who might be affected by the determination of who has the beneficial ownership and that they would be the natural and proper contradictors. 28 In answer to the second question, I have reached the conclusion that, subject to the amendment of the cross-claim, the second Defendant would be justified in continuing proceedings (although they may have to be reconstituted). 29 In answer to the third question, which relates to the payment of costs of conducting the defence and/or cross-claim, I do not consider that the second Defendant would be justified in funding the defence of the first Defendant out of the trust assets. There is no reason to do so, since the allegations that have been made appear to have been made against him personally. 30 Furthermore, the question of costs of the substantive proceedings ought not be determined at this stage. The provision to the second Defendant of an indemnity from trust assets must be determined on the final adjudication of the substantive proceedings. 31 Another reason for reaching this conclusion relates to the injunction, as varied, that has been made, which prevents the payment of costs out of the proceeds of sale in any event. 32 It may be that the third question may have to be re-agitated at a later time, if thought appropriate to do so. 33 Pursuant to Trustee Act, s 63, I order that the second Defendant: (a) would not be justified in doing all things necessary, or reasonably incidental, to conduct the defence of the proceedings in which it is the second Defendant; (b) would be justified in doing all things necessary, or reasonably incidental, to conduct the prosecution of the cross-claim, as amended, so far as that cross-claim seeks to determine the identity of the holder of the beneficial interest in the Tenterfield Property, on such bases as it may be advised from time to time, up to and including the entry of judgment in those proceedings; (c) would not be justified in paying costs of either Defendant of the defence, or of the cross-claim, as amended, out of the property of the trust. 34 I order that the second Defendant's costs of the application are payable out of the trust estate. However, this order should not be taken to be one that further varies the injunction that has been granted. 35 I reserve liberty to apply on three days notice. **********

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