The applicant, Eurolinx Pty Limited (the Trustee), which is the trustee of the Colbert Security Trust (the Trust), seeks judicial advice under s 63 of the Trustee Act 1925 (NSW) (the Trustee Act). Section 63 of the Trustee Act relevantly provides that 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.
The Trust was established by a Trust Deed made on 2 April 1980 between Mr Brian McCleane (as Settlor) and the Trustee, then known as Chamade International Pty Ltd, as trustee. Under cl 2(b) of the Trust Deed, the Trust Fund is to consist of the sum of $10 paid by the Settlor to the Trustee and any further amount or other property that the Settlor or any other person may from time-to-time give, transfer or make over to the Trustee to be held on the trusts contained in the Trust Deed, together with any accumulations of money empowered under the Trust Deed and any investments from time-to-time acquired with or out of such amount or amounts.
The Beneficiaries are identified in the Fifth Schedule to the Trust Deed. Paragraph (i) of the Fifth Schedule refers to Ms Julie Colbert, then wife of Mr Damien Colbert. Paragraph (ii) of the Fifth Schedule refers to the children of Damien Colbert and paragraph (iii) refers to the grandchildren of Damien Colbert. The Beneficiaries also include any company in which at least one share is beneficially owned by any one or more of the persons referred to in pars (i) and (ii), amongst others, and any trust in which any one or more of those Beneficiaries is an absolute, contingent, presumptive or prospective beneficiary.
Damien Colbert died on 27 August 2005. He had four children, each of whom is one of the Beneficiaries referred to in par (ii) of the Fifth Schedule. Three children, Jamey Colbert, Leia Hemphill and Dana Colbert, are the children of Julie Colbert. Following the divorce of Julie and Damien Colbert, Damien Colbert and Ms Paula Fragar had a child, Mika Colbert, who was born in 2004. The three older children are now adults. Mika is still an infant. It will be convenient to refer to members of the family by their first names, without intending any disrespect.
Damien, Jamey and Leia were the directors of the Trustee until Damien's death. Jamey and Leia have continued to be directors of the Trustee and are presently the only directors of the Trustee.
Under cl 3 of the Trust Deed, the Trustee is to hold the Trust Fund upon trust to invest the same in any investment, whether or not authorised by law, for the investment of trust funds, which the Trustee, in its absolute discretion, considers suitable for the investment of the Trust Fund, as if the Trustee were the absolute owner of the Trust Fund, with full power to vary any such investments at any time or from time-to-time as the Trustee, in its absolute discretion, considers fit. The Trustee has the power to manage, administer and deal with the Trust Fund as the Trustee, in its absolute discretion, sees fit as if the Trustee were the absolute owner thereof.
In its capacity as trustee of the Trust, the Trustee conducts the business of importing and distributing high-end kitchen products, specialising in free-standing and built-in kitchen appliances, including cooktops, ovens and range hoods, which are handmade and of premium quality. The Trustee has an exclusive licence to distribute the Italian brand "ILVE" in the Australia-Pacific region. The business of the Trust was founded by Damien following his attendance at a trade fair, when an agreement was reached with ILVE S.p.A of Italy for the exclusive import of ILVE branded household electrical appliances into Australia and New Zealand. The headquarters of the business are in Sydney and it operates nationally under the trading name "ILVE Appliances". The Trustee has showrooms displaying the products to end-consumers in Brisbane, Melbourne, Perth and Sydney and makes products available across Australia by means of a number of large and speciality retailers. The Trustee has more than 50 employees with offices and sales personnel in Sydney, Melbourne, Brisbane and Perth. The three oldest children of Damien are employed in the business.
Under cl 5(a) of the Trust Deed, the Trustee is required to pay the income of the Trust Fund to all or such one or more exclusively of the other or others of the Beneficiaries and in such shares or proportions, whether varying or uniform, as the Trustee, in its absolute discretion, may from year-to-year determine. In making any such payment or application of income arising from the Trust Fund, the Trustee is empowered, in its absolute discretion, to exclude any one or more but not the whole of the Beneficiaries from participation in any such payment or application of income arising from the Trust Fund. In default of any effective determination having been made by the Trustee as to the distribution of the income derived from the Trust Fund, the Trustee is to hold the income, or so much thereof as has not been effectively distributed, upon trust to pay the same to those of the Beneficiaries referred to in pars (i) and (ii) of the Fifth Schedule.
Under cl 5(b) of the Trust Deed, the Trustee must in each accounting period pay, apply or set aside the whole of the net income of the Trust Fund for such accounting period to or for the benefit of such of the Beneficiaries in such proportions as are authorised by the Trust Deed. Under cl 1(e), the term "set aside" in relation to a Beneficiary includes placing sums to the credit of such Beneficiary in the books of the Trust. The term "pay" includes transfer, assign and convey.
Under cl 5(d) of the Trust Deed, any amount set aside for any of the Beneficiaries pursuant to cl 5(b) is not to form part of the Trust Fund but, upon such setting aside, is to become the sole absolute property of the Beneficiary and be thenceforth held by the Trustee as a separate trust fund in trust for such Beneficiary absolutely. The Trustee has power, pending payment of such amounts to such Beneficiary, to invest or apply or deal with such separate fund in any manner authorised by the Trust Deed.
Distributions made under the Trust Deed to Damien's children since his death have been unequal. The amounts distributed for the benefit of Jamey and Leia have been substantially greater than the amounts distributed for the benefit of Dana and Mika.
In 2014, three separate proceedings were commenced in the Equity Division of the Supreme Court in which the Trustee was joined as a defendant in its capacity as trustee of the Trust. The proceedings are as follows:
Mika, by her tutor Paula Fragar v the Trustee 2014/203375 (the Mika Colbert Proceedings);
Moka Nominees Pty Ltd as trustee of the Mika Colbert Security Trust (Moka Nominees) v the Trustee 2014/215448 (the Moka Nominees Proceedings);
Softbreeze Ltd v the Cattle Company Pty Ltd and the Trustee 2014/210379 (the Softbreeze Proceedings).
On 20 October 2014, following service of the statement of claim in the Softbreeze Proceedings, the Trustee sought further and better particulars of the allegations made in the statement of claim. On 3 March 2015, the solicitors for Softbreeze served a draft amended statement of claim and, on 6 March 2015, the Court granted leave to file the amended statement of claim. One of the amendments was to remove the Trustee as a defendant. The plaintiff was ordered to pay the costs thrown away by reason of the amendments. That order inures for the benefit of the Trustee but has not yet been enforced.
The statement of claim in the Mika Colbert Proceedings was filed on 10 July 2014 and served on the Trustee on 21 August 2014. The defendants, in addition to the Trustee, are Jamey and Leia. No defence has yet been filed on behalf of the defendants.
In the Mika Colbert Proceedings, it is asserted that the Trustee acted in breach of trust in its capacity as trustee of the Trust. The following claims are made against the Trustee:
From 2005 to 2012, the Trustee made or purported to make Distributions (as defined) and Payments (as defined) from the Trust to the disadvantage of Mika;
In making the Distributions and Payments, the Trustee breached its duty to act honestly and in good faith, to treat the Beneficiaries even handedly and to give real and genuine consideration to the position of and needs of Mika;
As a consequence, the Distributions made to Jamey, Leia and Dana were unlawfully distributed, to the extent that they received more than 25% of the Distributions;
As a consequence of the alleged breach of duties, the Distributions and Payments were void and of no effect and were not the subject of an effective and valid determination by the Trustee, with the result that the funds continue to be held on trust pursuant to cl 5(a) of the Trust Deed;
In breach of cl 5 of the Trust Deed, the Trustee made the Distributions and Payments to Jamey and Leia in amounts that exceeded the 25% entitlements.
The statement of claim in the Moka Nominees Proceedings was filed on 22 July 2014 and served on the Trustee on 21 August 2014. The defendants, other than the Trustee, are Jamey and Leia. No defence has yet been filed on behalf of any of the defendants.
In the Moka Nominees Proceedings, the following allegations are made against the Trustee in its capacity as trustee of the Trust:
In breach of its obligations, the Trustee failed to pay the outstanding remainder of declared Distributions from the Trust to Moka Nominees;
If any part of the Trust Fund was set aside for Moka Nominees, the Trustee holds that part on trust for Moka Nominees and must therefore pay it on demand;
Demand has been made by Moka Nominees and the Trustee has failed to pay;
As a result, the Trustee has breached its obligations under cl 5(a) and cl 5(d) of the Trust Deed;
Insofar as the Distributions were lent by Moka Nominees to the Trustee, the Trustee was not authorised to borrow from Moka Nominees and was not entitled to enter into such a dealing that advantaged it to the disadvantage of Moka Nominees;
Any such loan constituted a breach by the Trustee of its duties as trustee and is voidable and Moka Nominees has avoided such loans;
If the alleged loans are valid, Moka Nominees has demanded repayment;
The Trustee was unjustly enriched as a result of having retained trust moneys at the expense of Moka Nominees.
[2]
These Proceedings
By its amended summons dated 6 September 2017, the Trustee seeks:
Advice that the Trustee would be justified in defending the Mika Colbert Proceedings;
Advice that the Trustee would be justified in defending the Moka Nominees Proceedings;
Advice that the Trustee would be justified in paying out of the assets of the Trust its costs incurred in the Softbreeze Proceedings;
An order that the Trustee's costs of these proceedings be paid out of the assets of the Trust.
The application by the Trustee is supported by a statement of facts dated 1 September 2017 (the Statement of Facts), together with a written opinion of Ms Jane Needham SC and Mr Sebastian Hartford Davis dated 6 September 2017 (the Opinion). I have also received written submissions from counsel on behalf of the Trustee (the Submissions). Both the Opinion and the Submissions are the subject of non-disclosure orders.
The plaintiffs in the Mika Colbert Proceedings and the Moka Nominees Proceedings (the Plaintiffs) have been notified of the present application by the Trustee and, with the leave of the Court, have made submissions to the Court. Neither the Plaintiffs nor their counsel have been given access to the Opinion or the Submissions. The Plaintiffs contend that, in the circumstances of the present application, the Court should decline to give judicial advice to the Trustee. They contend that the Court should decline to exercise its discretion under s 63 since both the Mika Colbert Proceedings and Moka Nominees Proceedings are adversarial and involve a dispute between the Trustee and some Beneficiaries as to the propriety of action that the Trustee has taken in the past rather than the management or administration of the Trust in the future. The Plaintiffs rely on the fact that their respective claims relate to past conduct of the Trustee, as trustee of the Trust, and that their claims encompass complaints that the Trustee acted in breach of trust and, in some respects, did not act honestly and in good faith.
The Plaintiffs also impugn the adequacy of the Statement of Facts. Of course, if the Statement of Facts is inadequate or does not make full disclosure, any judicial advice obtained by the Trustee would be of no benefit to it.
[3]
Relevant Principles
The only jurisdictional bar to relief under s 63 is that the applicant must be able to demonstrate the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument. [1] Accordingly, a trustee may obtain judicial advice about the defence of litigation, since obtaining judicial advice may resolve doubt about whether it is proper for a trustee to incur the costs and expenses of defending the litigation. The interests of the trust will, in that case, not be subordinated to the trustee's fear of personal liability for costs. [2]
Accordingly, a trustee who is sued may therefore be wise to 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, the Court must determine whether, on the material available, it would be proper for the trustee to defend the proceedings. Of course, the question of whether it would be proper for a trustee to defend proceedings instituted in relation to the trust is totally different from the questions that are to be agitated in the proceedings in which the trustee has been joined as a defendant. [3]
A trustee who is sued, particularly for breach of trust, may sometimes experience uncertainty about whether it will be able to obtain indemnity as to the costs of the defence of the proceedings. For example, a trustee cannot be sure, in advance, that the Court's discretionary power to excuse a breach would be exercised in its favour. One of the matters to be excused would be a failure to obtain the Court's direction or advice under s 63. Thus, an application under s 63 by a trustee sued for breach of trust, including a breach of trust alleged to arise in the very defence of the proceedings, should be understood as a standard instance to which s 63 can, in appropriate circumstances, apply. [4]
An application under s 63 of the Trustee Act must concern the management or administration of the trust property or the interpretation of the trust instrument or both. If a trustee is minded to seek judicial advice on a question related to the defending of legal proceedings, the trustee may properly do so only if the legal proceedings are themselves concerned with those matters. Where the concern of a trustee is with the question of potential personal exposure of the trustee because of past acts and a completed course of conduct on the part of the trustee, that requirement will not be satisfied. If the determination of the question of whether particular proceedings should be defended will not contribute to any particular outcome related to the management or administration of the assets of the relevant trust, there will be no basis for the Court to give judicial advice under s 63. Where the question confronting a trustee is how it should deal with an allegation of past misconduct that, if established, will entail personal liability for breach of trust, it would not be appropriate for advice to be given under s 63. Section 63 assumes that the matter on which judicial advice is sought would involve some aspect of a trustee's duty as trustee, as it relates to the future conduct of that trustee in relation to the relevant trust. 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, is not performing a duty as trustee. The decision by a trustee accused of a breach of trust whether to contest the allegation is not related to any aspect of that trustee's duty as trustee. Rather, the matter at stake is the personal liability of the individual trustee. [5]
The Court is not bound to give judicial advice merely because a trustee has a right to apply for it. Particular care may need to be exercised in dealing with questions relating to the construction of trust instruments. The fact that a question of construction may involve controversy, referrable to underlying facts or law, may be a ground for the refusal of relief under s 63. The Court may properly decline to give judicial advice if a contested construction suit, constituted by the disputing parties and resolved by a Court acting on evidence, is a more apt means of resolving a question concerning the interpretation of a trust instrument. [6]
[4]
Advice is Appropriate in the Present Case
The Mika Colbert Proceedings concern Distributions between 2006 and 2012 pursuant to the absolute discretions conferred on the Trustee by the Trust Deed, as indicated by highlighting above. The proceedings raise questions about the operation and effect of cl 5 of the Trust Deed, including whether the absolute discretions vested in the Trustee in fact constitute limited powers, requiring equal distributions between those Beneficiaries who are children of Damien. In addition, the proceedings raise questions as the consequences, for all Beneficiaries, of ineffective purported Distributions. The proceedings also raise questions about the effectiveness and consequences of the accounting treatment in the accounts of the Trust of what are described in the pleadings as "negative drawings".
The Moka Nominees Proceedings concern the effectiveness and legal consequences of Distributions that have been effected by crediting the accounts of Beneficiaries in the books of the Trust. That is an important matter in the administration of the Trust, both as to its past practice as well as to its future practice. The treatment of the loan account of Moka Nominees, as a Beneficiary, will have wide ramifications for the Trust generally and, in particular, as to how the Trustee is to manage its business affairs in the future. If the Trustee is required to pay all of the purported Distributions on demand, it will be necessary to reconsider how to approach the issue of future Distributions, having regard to the capital requirements of the business being conducted by the Trustee on behalf of the Trust.
If Mika succeeds in establishing breaches of trust concerning the Distributions that are in issue, questions will arise as to how the Trustee is to treat other Distributions, how the alleged breaches are to be rectified and how the Trustee should approach the exercise of the absolute discretions in the future. On one view of the claims made in the Mika Colbert Proceedings and the Moka Nominees Proceedings, contradictory and conflicting obligations are asserted. Thus, in the Mika Colbert Proceedings, it is asserted that certain of the Distributions to Beneficiaries were ineffective and void. On the other hand, the claim in the Moka Nominees Proceedings is that the Distributions made to trusts of which the children Beneficiaries are beneficiaries are valid and that Moka Nominees is immediately entitled to payment of those Distributions. A possible outcome is that, if Mika succeeds in the Mika Colbert Proceedings, all of the Distributions, including those to Moka Nominees, will be ineffective and void.
At its highest, Mika's claim in the Mika Colbert Proceedings would appear to be for 25% of all of the Distributions from 2006 to 2012. One possible consequence of Mika succeeding in the Mika Colbert Proceedings is that substantial sums would be payable to her. If Mika fails in the Mika Colbert Proceedings but Moka Nominees succeeds in the Moka Nominees Proceedings, the Trustee would be liable to pay a substantial sum forthwith. Questions may then be raised as to the capacity of the Trustee to pay those significant sums in circumstances where the net assets of the Trust are minimal. Thus, both the Mika Colbert Proceedings and the Moka Nominees Proceedings raise serious questions about the present financial circumstances of the Trust, its capacity to pay and the consequences for its business operations and, possibly, its immediate solvency.
In all of those circumstances, I consider that this is an appropriate case for the Court to consider the Trustee's application for judicial advice. I am satisfied that the questions raised are concerned with the management and administration of the Trust and the proper construction of the Trust Deed. While questions of past breach will be agitated in both the Mika Colbert Proceedings and the Moka Nominees Proceedings, the Trust continues on foot and the Trustee is engaged in the day-to-day operation of the business of the Trust, as briefly described above. I consider that the questions raised are sufficiently connected with the future conduct and administration of the Trust and the Trust Fund to justify entertaining the application under s 63 of the Trustee Act.
I propose to reject the application on behalf of the Plaintiffs for summary dismissal of the proceedings. However, it is appropriate that any advice that is provided under s 63 of the Trustee Act in response to the application remain confidential to the Trustee, at least for the time being. Therefore, the advice that I propose to give to the Trustee and the reasons for that advice will be set out separately. I will order that publication or other disclosure of the advice and reasons be prohibited until further order and that the advice and reasons be placed in a sealed envelope and marked "Suppressed - Not to be opened by anyone other than by a judge of the court".
[5]
Costs
As a general rule, a trustee is entitled to have the costs of an application under s 63 paid out of the trust property. Section 93 of the Trustee Act relevantly provides that the Court may order the costs, charges and expenses of, and incident to, any application under the Trustee Act to be paid out of the property in respect of which the application is made. Rule 42.25 of the Uniform Civil Procedure Rules 2005 (NSW) relevantly provides that a person who is or has been a party to any proceedings in the capacity of trustee is entitled to be paid its costs in the proceedings, insofar as they are not paid by any other person, out of the fund held by the trustee. However, the Court may order that such costs are not to be so paid if the trustee has acted unreasonably or the trustee has in substance acted for its own benefit rather than for the benefit of the fund.
Up to and including 6 March 2015, the Trustee incurred costs of $14,909 in connection with the Softbreeze Proceedings. Those costs were properly incurred and there is no basis for concluding that the Trustee acted either unreasonably or substantially for its own benefit in incurring those costs. The fact that the Trustee was subsequently removed as a defendant in the Softbreeze Proceedings indicates that the steps that it took were of benefit to the Trust. The Trustee was entitled to take those steps to understand the case made against it and it was prudent to request and consider the particulars of the claim before obtaining a written Opinion from counsel and approaching the Court. The Court has jurisdiction to give advice concerning recourse to trust property for costs incurred in proceedings prior to the seeking of judicial advice. [7] In the circumstances, I am satisfied that the Trustee would be justified in paying out of the assets of the Trust the costs incurred by it in relation to the Softbreeze Proceedings, less any amounts that it recovers from Softbreeze under the order for costs made in the Softbreeze Proceedings.
The Court should be mindful not to discourage trustees from seeking judicial advice in appropriate cases by exposing them to the risk of having to pay their costs personally rather than from the assets of the relevant trusts. As a general rule, a trustee is justified in taking the opinion of the Court at first instance and the trustee's costs of such an application for advice will normally be paid out of the trust fund as between solicitor and client. [8] In the circumstances, it is appropriate to order, pursuant to s 93 of the Trustee Act, that the Trustee's costs of this application be paid out of the Trust Fund.
[6]
Orders
In the circumstances, I propose to make orders as follows:
The application for summary dismissal of the proceedings be refused.
Pursuant to s 63 of the Trustee Act 1925 (NSW), advise Eurolinx Pty Limited that it would be justified in paying from the Trust Fund of the Colbert Security Trust the amount of costs incurred by it in proceedings brought against it by Softbreeze Ltd, 2014/210379, of $14,909, less the amount of costs recovered from Softbreeze Ltd.
Pursuant to s 63 of the Trustee Act 1925 (NSW), advise Eurolinx Pty Limited that it would be justified in conducting the defence of proceedings 2014/203375 brought against it in the Equity Division by Mika Colbert, by her tutor Paula Fragar, in accordance with the confidential reasons and conclusions of the Court dated 28 September 2017.
Pursuant to s 63 of the Trustee Act 1925 (NSW), advise Eurolinx Pty Limited that it would be justified in conducting the defence of proceedings 2014/215448 brought against it in the Equity Division by Moka Nominees Pty Ltd in accordance with the confidential reasons and conclusions of the Court dated 28 September 2017.
Publication or other disclosure of the confidential reasons and conclusions of the Court dated 28 September 2017, other than to Eurolinx Pty Limited and its legal representatives, be prohibited until further order and the reasons and conclusions be placed in a sealed envelope marked "Suppressed - Not to be opened by anyone other than by a judge of the Court".
Pursuant to s 93 of the Trustee Act 1925 (NSW), the costs of Eurolinx Pty Limited of this application be paid out of the Trust Fund of the Colbert Security Trust.
[7]
Endnotes
See Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at [58]; [2008] HCA 42.
See Macedonian Orthodox Community Church at [71].
See Macedonian Orthodox Community Church at [74].
See Macedonian Orthodox Community Church at [70].
See Re Australian Pipeline Limited [2006] NSWSC 1316 at [23]-[25].
See Re Estate of Cow Cho-Poon [2013] NSWSC 844 at [43]-[44].
See Re Rosewood Research Pty Ltd [2014] NSWSC 449 at [29].
See Australian Incentive Plan Pty Ltd v Attorney-General (Vic) (No 2) (2012) 44 VR 661; [2012] VSCA 251 at [8].
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Decision last updated: 28 September 2017