Barnes v Addy

Judgment 1By a Summons filed on 7 August 2013 the plaintiff seeks the opinion, advice and direction of the Court pursuant to s 63 of the Trustee Act 1925 in connection with certain proceedings in this Court to which it is a party. 2The plaintiff is the trustee of a unit trust known as The Gladstone Road Trust ("the Trust"). On 22 December 2011 the plaintiff commenced proceedings 2011/412149 in the Common Law Division of this Court against Michael Mayne and Kim Mayne (together referred to as Mr and Mrs Mayne). Those proceedings, which have since been transferred to this Division, concern two main issues. These are, first, whether a claim for $69,000 made by Mr and Mrs Mayne against the plaintiff has been released by virtue of either clause 10.1 or 10.3 of a Deed entered into by the parties on 18 July 2008 ("the Release issue"); and, secondly, whether the proceeds of sale of a property at Gladstone Road, Castle Hill should be distributed amongst the beneficiaries of the Trust in the proportions specified in the Deed, or on some different basis ("the Distribution issue"). 3On 5 April 2012, Mr and Mrs Mayne filed a Cross-claim in the proceedings by which relief was sought to the contrary of that claimed in the Summons in respect of both the Release issue and the Distribution issue. 4Subsequently, an Amended Cross-claim was filed by Mr and Mrs Mayne which sought the removal of the plaintiff as trustee and an order for an inquiry and account in respect of the Trust. In August 2012 Mr and Mrs Mayne filed a Statement of Cross-claim which sought additional relief against the plaintiff, including orders for restoration of the Trust fund, equitable compensation and an account of profits. Mrs Donna Cunneen was added as the second cross-defendant. Equitable compensation and an account of profits was sought against her. However, the claims against Mrs Cunneen were later discontinued. 5On 12 June 2013 a Further Amended Cross-claim was filed. This time, Mr Gregory Cunneen was named as the second cross-defendant. Relief was still claimed against the plaintiff in respect of the Release issue and the Distribution issue. The removal of the plaintiff as trustee and the taking of accounts was now claimed by way of interim relief, or else following the hearing of those issues as separate (and presumably preliminary) questions. The claims which were made against Mr Cunneen were based upon allegations that he was liable as a constructive trustee in accordance with the principles enunciated in Barnes v Addy (1874) LR 9 Ch App 244. I was informed that Mr Cunneen is separately represented in the proceedings. 6In the present proceedings the plaintiff essentially seeks orders to the effect that it would be justified in continuing to prosecute the proceedings which it commenced, and would be justified in defending the Cross-claim which has been brought against it, and also that it is entitled to be indemnified out of the assets of the Trust for its costs in so doing. 7The summons for judicial advice was set down for a hearing to take place on 19 September 2013. On 16 September 2013, Mr and Mrs Mayne filed a Notice of Motion, returnable on 19 September 2013, seeking orders that they be joined as defendants to the proceedings. This was opposed by Mr Sulan of counsel, who appeared for the plaintiff. He indicated, however, that the plaintiff had no objection to Mr and Mrs Mayne (for whom Mr Alexander of counsel appeared) participating in the hearing, including by placing material before the Court and making submissions, provided only that they not obtain access to certain material to be relied upon by the plaintiff which was confidential and/or subject to legal professional privilege, and provided further that they would not seek to later assert that any privilege had been lost by the use of the material. Mr Alexander indicated that his clients would not seek to later assert that any privilege had been lost. 8I queried Mr Alexander as to why, in those circumstances, it was necessary or appropriate for Mr and Mrs Mayne to be made parties to the proceedings. He submitted that being parties may assist them in obtaining orders for costs. I did not regard that as a sufficient basis for the proposed joinder, so I declined to make the orders sought in the Notice of Motion. However, the hearing proceeded with Mr Alexander present, save for a short period when it was necessary to close the Court in order to discuss the contents of a confidential advice of counsel. 9The material which was placed before me at the hearing consisted of an Amended Statement of Facts (in both a redacted and an unredacted form), a folder of documents which are referred to in the Amended Statement of Facts, a folder of documents entitled "Defendants' Supplementary Bundle", income tax returns in respect of the Trust for 2010 and 2011, two tax invoices issued by Kemp Strang to the plaintiff, and a memorandum of advice of Mr Sulan dated 4 July 2013. The contents of the unredacted Amended Statement of Facts, the Kemp Strang tax invoices and the memorandum of advice of Mr Sulan are confidential and/or the subject of legal professional privilege. They have been put into an envelope marked "Confidential" which has been placed on the Court file. 10It appears from the material that since about 1994 Mr Mayne and Mr Cunneen had been involved together in the building industry, through a company they established called Cunneen and Mayne Building Construction Pty Ltd. The Trust was established in 2000. The Unit Holders of the Trust were Donna Cunneen, Kim Mayne and the Cunneen and Mayne Superannuation Fund (the trustees of which, since 2001, have been Mr and Mrs Cunneen and Mr and Mrs Mayne). 11The Trust Deed confers upon the trustee a power of investment "upon such terms and conditions as the Trustee shall in its absolute discretion think fit" (see clause 42(1)), and a power to "lend money on such terms with or without security or interest as the Trustee shall deem fit" (see clause 42(3)). Clause 48 provides that the Trustee must exercise all due diligence and vigilance in protecting the rights of Unit Holders provided "that no Trustee shall be responsible for ... any breach of duty or trust whatsoever ... unless it shall be proved to have been committed under personal conscious fraudulent bad faith by the Trustee". Clause 49 provides that the Trustee is entitled to be indemnified out of the assets comprising the Trust Fund "against liabilities incurred by them in execution ...of the trusts authorities powers and discretions of this document or by virtue of being the Trustee of this document". 12In 2000, the plaintiff as trustee of the Trust purchased a property in Gladstone Road, Castle Hill for $455,000. A portion of the price ($66,589.33) was provided by Mr and Mrs Mayne. It is not entirely clear whether this contribution was by way of purchase of units in the Trust or a loan to the Trust. It appears that at least Mrs Mayne considers it to be a loan. 13In 2008 the working relationship between Mr Mayne and Mr Cunneen appears to have broken down. Mr Mayne commenced proceedings in the Federal Court in which he sought, inter alia, orders for the winding up of the plaintiff. A settlement was reached in July 2008 and the parties (which included Mr and Mrs Mayne, Mr and Mrs Cunneen and the plaintiff) entered into a deed. The deed provided, in clause 2, for the sale of the Gladstone Road property (referred to as the "20/6" Property). Clause 2.2 provided: The net proceeds of sale of the 20/6 Property, after deduction of all amounts for the legal costs for selling the Property, commission and any adjustments in relation to the 20/6 Property, shall be distributed as follows: (a) 54% of the net sale proceeds to the Cunneen and Mayne Superannuation Fund; (b) 23% of the net sale proceeds to Kim; and (c) 23% of the net sale proceeds to Donna. 14The deed also contained various releases and indemnities including the following: 10.1 Other than with respect to any acknowledgments and covenants given under this deed, Michael and Kim jointly and severally hereby release Greg, Donna, and the Companies and each of them from all Claims, which Kim and/or Michael has or may have, or, but for the provisions of this Deed could or might have had, against Greg, Donna, or the Companies, or any of them whatsoever, including, without limitation, any Claim, arising out of, or relating to, or in connection with any of the matters recited above including the 5/4 Property and this Deed may be pleaded in answer to such Claim. ... 10.3 Greg shall indemnify Michael from any debt owed by any of the Companies to a Creditor of the Companies, other than any Claim of Michael or Kim as against the Companies (which are released under this Deed). "Companies" is defined to mean the plaintiff and Cunneen Building Construction Pty Ltd. 15The Gladstone Road property was sold in October 2010 for $720,000. In November 2010, whilst settlement of the purchase was pending, Mr and Mrs Mayne lodged a caveat over the property claiming an interest on the basis of "a substantial contribution to the purchase of the property". In August 2011 the solicitor for Mr and Mrs Mayne wrote to the solicitor for the plaintiff asserting that the original amount of $66,589.33 had increased to $69,000 "with lending costs and interest". It was further contended that the amount of $69,000 was payable as an adjustment in relation to the property, as envisaged by clause 2.2 of the Deed. Whether that is so or whether the claim has been released by clauses 10.1 or 10.3 of the Deed is one of the issues in the principal proceedings. It arises on both the Summons and the Cross-claim, as does the question whether the distribution of the net proceeds of the sale should take place in accordance with the proportions set out in clause 2.2 of the Deed, or on some other basis. 16Settlement of the sale of the Gladstone Road property eventually took place in August 2011. In view of the disputes between the parties concerning the proceeds of the sale, the proceeds were paid into a solicitor's trust account on the basis that they are not to be distributed until the claims have been resolved by agreement, or by court determination. 17Section 63 of the Trustee Act 1925 relevantly provides: 63 (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. 18Only one jurisdictional bar to s 63 relief exists: the applicant must point to the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument (see Macedonian Orthodox Community Church St Petka Incorporated v Bishop Petar [2008] HCA 42; (2008) 237 CLR 66 at [58]). Once the jurisdictional requirement is satisfied the Court has a discretion to provide advice of the kind contemplated by the section. The discretion is confined only by the subject matter, scope and purpose of the legislation (see the Macedonian Church Case (supra) at [59] and [196]). Plainly, the interests of the trust estate is of cardinal significance (see the Macedonian Church Case (supra) at [104] - [105], [107], [125] and [196] - [197]). 19Mr Alexander accepted that the Court had jurisdiction to give advice as sought by the plaintiff in this case, but contended that the Court should in the circumstances decline to exercise the discretion to provide such advice. Mr Alexander conceded that the Release issue and the Distribution issue concerned the management or administration of the trust property, but maintained that the issue concerning the removal of the trustee and the issues concerning alleged breaches of trust and the ordering of an account, did not concern the management or administration of the trust property, and it would not be appropriate for the Court to give advice about those issues. 20Nevertheless, Mr Alexander further submitted, in relation to the removal of the trustee, that if the Court was to give advice it should advise the plaintiff not to contest the removal application. That submission seems to me to implicitly accept that the question of removal of the trustee is indeed a question concerning the management or administration of the trust property, as submitted by Mr Sulan. In any case, Mr Sulan's submission to that effect should be accepted. The principal grounds for the removal of the trustee were stated to be the making, in 2008, of loans out of the Trust funds to itself totalling $6700 (which sum has not been repaid), and the making of numerous advances out of the Trust funds between 2008 and 2012 to Mr Cunneen, or entities associated with him, totalling in excess of $950,000 (all of which appears to have been repaid, although there is a dispute as to whether a proper amount of interest has been received). Moreover, it was stated that the removal of the trustee would allow a new trustee to conduct an independent investigation into the alleged breaches of trust. It seems to me that the removal application does raise questions respecting the management or administration of the trust property. 21Mr Alexander's principal submission was that advice should not be given because the subject matter of the principal proceedings concerns past breaches of a private trust. In this regard he referred to the judgment of Barrett J (as his Honour then was) in Re Australian Pipeline Ltd [2006] NSWSC 1316; (2006) 60 ACSR 625 at 631-2 [23] - [25]. In that case, the Court declined to give advice to the trustee as to whether it would be justified in defending certain proceedings in which allegations of breach of trust were made against it. At [25] his Honour stated: 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. 22That passage was cited in the joint judgment in the Macedonian Church Case (supra) at [109]. At [110] their Honours continued: In understanding that passage, it must be remembered that Barrett J had earlier said in his reasons at [23] that a trustee could properly seek judicial advice relating to defending legal proceedings "if the legal proceedings are themselves concerned with the management or administration of the trust property or the interpretation of the trust instrument"... 23Mr Alexander also referred to the joint judgment in the Macedonian Church Case (supra) at [114] where a distinction was drawn between a charitable purpose trust on the one hand and a private trust on the other. Their Honours stated: Where, as here, the trust is a charitable purpose trust, identifying the dispute between the parties as centring upon allegations of breach of trust and claims for removal of a trustee is an incomplete description of the issues that are tendered in the litigation. It is an incomplete description because describing the dispute in this way suggests that the trustee has no more than a personal pecuniary interest in the outcome of the litigation. That may be the case where a trustee of a private trust is sued for breach of trust in managing the trust fund and beneficiaries claim compensation for losses allegedly sustained as a consequence. But in this litigation the interests at stake are larger and more complex than whether a defaulting trustee should make good the financial consequences allegedly flowing from mismanagement of a trust fund. There is a public aspect to those interests because they concern the administration of a charitable purpose trust. 24It was further submitted that the present case is on all fours with Re Australian Pipeline (supra). I do not agree. It seems clear that the principal proceedings are concerned to a very considerable extent with issues respecting the management or administration of the trust property, which stand apart from the questions concerning alleged breaches of trust and remedies therefor, which are also encompassed by the proceedings. Here, as in the Macedonian Church Case (supra), it would be an incomplete description of the principal proceedings to describe them as a dispute which centres upon allegations of breach of trust and claims for removal of the trustee. The existence of the Release issue and the Distribution issue means that the trustee has more than a merely personal interest in the outcome of the principal proceedings, and the present case is therefore distinguishable from Re Australian Pipeline (supra). In addition, as explained in the Macedonian Church Case (supra) at [70] - [73], a trustee's application for judicial advice about whether to sue or defend proceedings should not be seen as directed only to the personal protection of the trustee; such an application has another and no less important purpose of protecting the interests of the trust. 25Mr Alexander made further submissions to the effect that the alleged breaches of trust were clear and that the exculpatory provisions contained in the trust deed, although expressed widely, would not protect the trustee if it failed to act with honesty and good faith. Those issues are not, of course, to be decided on this application, where the central question is whether the Court should advise the plaintiff that it is justified in continuing to prosecute the Summons in the principal proceedings and in defending the Cross-claim brought against it (see the Macedonian Church Case (supra) at [74]). 26In accordance with the usual practice of the Court, I have received and considered a confidential memorandum of advice of counsel (in this case, Mr Sulan), aspects of which were further discussed in the course of a closed session of the Court. 27Having considered the advice and the matter generally in the light of the principles referred to above, I have concluded that, subject to the proviso that the plaintiff acts in accordance with the provisions of paragraphs 104(a), (d) and (e) of the confidential memorandum of advice of Mr Sulan, it would be justified in continuing to prosecute the Summons in proceedings 2011/412149 and defending the Cross-claim (as amended) in proceedings 2011/412419. I will make an order to that effect. I will also give the plaintiff liberty to apply on 5 days' notice. 28The plaintiff also seeks an order to the effect that it is entitled to be indemnified out of the assets of the Trust for costs it reasonably incurs in proceedings 2011/412419. In this context, Mr Sulan drew a distinction between the costs of prosecuting the Summons and the costs of defending the Cross-claim. He informed the Court that in relation to the costs of prosecuting the Summons the sanction of the Court was sought only prospectively, whereas in relation to the costs of defending the Cross-claim, the sanction of the Court was sought in relation to the period commencing in April 2012 when the original Cross-claim was brought. 29Mr Alexander submitted that it was not appropriate to deal with the question of the trustee's indemnity at this stage, citing Re Australian Pipeline (supra) at [26], and Application of Gnitekram Marketing Pty Ltd [2010] NSWSC 1328 at [30] (see also at [17(h)]). 30Mr Sulan, in response, referred me to a decision of White J in PILT Nominees Pty Ltd v Baltarna Pty Ltd [2009] NSWSC 656 where his Honour, after referring to the terms of trust deeds which provided for indemnity of the trustee, made orders to the effect that the plaintiffs were entitled to have recourse to the assets of the trusts for the purpose of paying their reasonable costs of defending certain proceedings. 31Nevertheless, it seems to me that in the circumstances of the present case it is preferable not to make any order at this stage on the question of indemnity. Any such order would have little or no practical effect in circumstances where the Trust funds are effectively frozen (or "ring fenced" as Mr Sulan put it) until the dispute is either resolved or determined by the Court. Also, such an order would not foreclose debate in the future as to the reasonableness of incurring particular costs. Finally, and making the assumption that it is open to the Court to make an order which has the effect of conferring an indemnity in respect of costs incurred in the past, an order which encompassed costs incurred in the past in defending the Cross-claim but not costs incurred in the past in prosecuting the Summons, has the potential to lead to difficulties due to the existence of overlapping issues. 32In all the circumstances, I think that the interests of the Trust are best served by leaving those questions of indemnity of the trustee to be determined in accordance with the relevant provisions of the Trust Deed (in particular, clause 49). 33I will, however, make an order that the plaintiff's costs of these proceedings be paid out of the assets of the Trust. The plaintiff has acted appropriately in bringing and conducting the proceedings. The payment of such costs should not occur, absent a pressing need being demonstrated, until the Trust funds are free to be disbursed following a resolution or determination of the dispute. 34I make the following orders: (1)Pursuant to s 63 of the Trustee Act 1925 I advise that, subject to the proviso that the plaintiff acts in accordance with the provisions of paragraphs 104(a), (d) and (e) of the confidential memorandum of advice of Mr Sulan dated 4 July 2013, the plaintiff would be justified in continuing to prosecute the Summons in proceedings 2011/412419 and defending the Cross-claim (as amended) in proceedings 2011/412419. (2)The plaintiff's costs of these proceedings are to be paid out of the assets of the Gladstone Road Trust. (3)Liberty is granted to the plaintiff to apply on 5 days' notice. 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: 22 October 2013