The right to reimbursement or indemnification
45 It is common ground that a trustee will normally be entitled to reimbursement or indemnification from trust property for charges and expenses properly incurred in the execution of the trust. In Turner v Hancock (1882) 20 Ch D 303, Sir George Jessel MR (at 305) spoke of the rights to all proper costs incident to the execution of the trust being curtailed only by such inequitable conduct on the part of the mortgagee or the trustee as may amount to a violation or culpable neglect of duties. These words are borrowed from Lord Selborne's judgment in Cotterell v Stratton (1872) 8 Ch App 295. The suggestion made by Lindsey LJ in Re Beddoe [1893] 1 Ch 547 (at 558) was that certainly in the case of gratuitous services, and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by 'him' personally. 'Properly incurred' is generally regarded as meaning 'not improperly incurred'. That is, not incurred with culpable neglect and inequity. Bowen LJ (at 562) described 'properly' as meaning 'reasonably as well as honestly' incurred. In Re Raybould [1900] 1 Ch 199, Byrne J in 1899 in the Chancery Division considered the negligence of a trustee commencing work on one of the testators collieries in consequence of which land of neighbouring buildings fell away such that the adjoining only recovered judgment against the trustee for a substantial sum. Byrne J (at 202) said that he was not prepared to say that the injury done to the applicants' land was occasioned by reckless or improper working or otherwise than by the ordinary and reasonable management of the colliery and came to the conclusion that the trustee was entitled to be indemnified out of the assets of the estate in respect of the damages recovered by the neighbour.
46 A more modern summary is found in Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 where Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ said (at [47] and [49]) (footnotes omitted):
47 In Worrall v Harford, Lord Eldon LC said:
"It is in the nature of the office of a trustee, whether expressed in the instrument, or not, that the trust property shall reimburse him all the charges and expences [sic] incurred in the execution of the trust."
The entitlement of a trustee who has borrowed moneys for application to trust purposes has been described as follows:
"Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration."
In aid of that right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied. In that sense, the entitlement to reimbursement or exoneration confers a priority in the further administration of the trust. Accordingly, in an administration action, if it appears probable that the trust fund will be insufficient for the full recoupment of the trustee, the trustee is entitled to the insertion in the order for administration of a direction that there be payment in the appropriate order of priority.
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49 The entitlement to reimbursement and exoneration was identified by Lindley LJ as "the price paid by cestuis que trust for the gratuitous and onerous services of trustees". The right of the trustee has been described as a first charge upon the assets vested in the trustee, as one upon the "trust assets", and as conferring upon the trustee an "interest in the trust property [which] amounts to a proprietary interest".
47 More recently again in Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] ATPR 41-864 Spigelman CJ said (at [4], [10] and [15]-[17]):
4 The case law is replete with references to the fact that the right of indemnity attaches to all liabilities "incurred in the proper performance of duties or exercise of powers". (See e.g. Vacuum Oil Co. Pty Ltd v Wiltshire (1945) 72 CLR 319 at 335; Stott v Milne (1884) 25 Ch 710 at 715; In Re Beddoe [1893] 1 Ch 547 at 558; In re Grimthorpe (Deceased) [1958] 1 Ch 615 at 623; R.W.G. Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 396; Ron Kingham Real Estate Pty Ltd v Edgar [1999] 2 Qd R 439 at 442. See generally Hay "Trading trusts and creditors' rights" (1993) 67 LIJ 510.)
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10 As Sir George Jessel MR said in In Re Chennell (1878) 8 Ch 492 at 502 (quoted in this context in Jacobs' Law of Trusts in Australia, 6th ed. (1997) par [2104]):
"It is … a violent exercise of the Court's discretion to deprive a trustee of his charges and expenses."
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15 To similar effect is the observation of Lord Selborne LC with respect to the contractual rights of indemnity of a mortgagee or trustee:
"These rights, resting substantially upon contract, can only be lost or curtailed by such inequitable conduct on the part of the mortgagee or trustee as may amount to a violation or culpable neglect of his duty under the contract." (Cotterell v Stratton (1872) 8 Ch 295 at 302.)
16 This passage was quoted with approval by Griffiths CJ, then Chief Justice of Queensland, in Corrigan v Farrelly (1897) QLJ 105 at 111-112, in a context where a challenge was made to the right of an executor to recover costs and expenses arising from his failure to prove a will in solemn form. His Honour applied the test in the following terms at 112:
"The only question, therefore, is whether the executors' conduct in this case has been such as to amount to a violation or culpable neglect of their duty."
17 I find this general approach more helpful than the use of conclusory terminology of whether or not conduct was "proper" or "reasonable" as if it were a test.
48 Mason P (at [40]-[42]) said:
40 A right of indemnity is not lost merely because the loss to the estate is caused by the trustee's personal default. Byrne J recognised this expressly in Re Raybould [1900] 1 Ch 199 at 201 ("either by himself or his agent") and this is entirely consistent with the general principle embodied in the maxim qui facit per alium facit per se.
41 The corporate trustee had power to carry on a business (Deed of Discretionary Trust, cl 7(i)). It obviously had to use agents. The conduct that attracted the award of damages in the Federal Court was hardly commendable, but unremarkable in its heinousness. The individual agents were acting in the course of their employment in the trust enterprise. In these circumstances, it is not unjust for the trust assets to take the burden of the consequences of the respondent's conduct, just as it would have taken its benefit (cf generally Balkin v Peck (1998) 43 NSWLR 706 at 712).
42 I prefer to express no view on the broader issue whether a trustee's conduct must be "reasonable" and/or "proper" before the right of indemnity will be upheld (cf IIIA Scott on Trusts (4th ed 1988) at ss244-247). The terms are notoriously open-ended, but I would need to be persuaded that they are meaningless in the present situation. Like all such terms, they embody judgments to be made in context. Some outer limit needs to be drawn in order to recognise that certain types of grossly improper frolics by trustees will put them outside the presently uncertain boundary of the right now in question.
49 Meagher JA in the same case (at [46]-[47]) said:
46 It is well settled that this right to indemnification extends to reimbursement of the trustee for damages awarded against him for torts committed by him in the course of carrying on the trust business. The cases most usually cited for this proposition are Benett v Wyndham (1862) 4 DF&J 259; 45 ER 1183 and in re Raybould [1900] 1 Ch 199. In the present case the trustee argued successfully that damages under the consumer protection provisions of the Trade Practices Act should, for this purpose, be equated with damages for common law torts. I quite agree with this submission.
47 What are the limits to be placed on this right to indemnification? This is a matter which has rarely engaged the attention of either the Australian or the English Courts. Presumably if the activity which generated the liability in question were a breach of trust, the right to an indemnity under the general law would no longer exist; similarly if it were criminal in nature, but no criminal offences were charged against NKH, its associates or officers. Again, one must in principle incline to the view that if the activity in question had been fraudulent the law would withhold the right to indemnification; but in the present case Tamberlin J expressly negatived fraud. I find it difficult to formulate any other limitations. United States authorities, to which Hamilton J refers, might be read as establishing either or both these propositions: (a) that the activity in respect of which indemnity is claimed must be "reasonable", and (b) that the activity must be "proper". In my view, neither such limitation exists in Australian law. As to the former, it is in the circumstances, meaningless; no conduct has to be castigated as "unreasonable" unless one has a clear criterion of what constitutes reasonableness, and here there is none. As to the latter, it is almost as meaningless to endeavour to apply some hypothetical standard of propriety in ordinary commercial life, absent fraud and crime. I find it difficult to view occasional breaches of Trade Practices legislation as anything other than incidental aspects of ordinary commercial life.
50 As indicated in the advice from its solicitors, the company employed an officer to manage funds forming part of the Schemes. The officer made an honest error in making payments only to the holders of the burnt woodlots and not to all of the holders of the relevant woodlots. Errors simpliciter are not disentitling. The conduct was not unreasonable, dishonest or improper. There is no precise evidence available as to how the error was made in the first place. The plaintiffs are liquidators. The error was made by the officers of the company employed by it at the time. Those officers and employees are no longer employed by it and there would be, in practical terms, limitations on the ability of the liquidators to adduce evidence of what happened some years ago. But there is no proper basis for drawing an inference other than that there was a belief, arguably reasonable, that the payments should be made to those who had actually suffered the loss. There are no suggestions to the contrary. The only argument is the proper characterisation of that error.
51 Nothing set out in s 601GA(2)(b) CA or cl 20.1(t) of the relevant Scheme Constitutions purports to modify the state of pre-existing law applicable at the time of GSMA discharging its duties as trustee. The question is whether there was any evidence or any other basis to infer that any of GSMA's rights to reimbursement of indemnity were lost by conduct of a sufficiently culpable nature.
52 In my view it cannot be said that the inadvertence would qualify as being dishonest or inequitable conduct on the part of GSMA, let alone a violation or culpable neglect of duty as advanced by PSL. There can be no suggestion on the state of the evidence that GSMA was acting dishonestly. The only reasonable inference is as asserted by Mr Saker, that some of the payments were made on an erroneous understanding of the obligations under the Schemes. I infer that when GSMA incurred each relevant expense, it did so in a belief that there was an obligation to do so. There is even a measure of logic in distributing the insurance proceeds to the growers who were directly affected by the fire damage rather than to all of the growers, albeit that this was not the provision specified in the Scheme documents and therefore was a payment not made in accordance with the Scheme documents. There has been no suggestion, nor could there be, that GSMA acted in any way in its own interest in making such a payment.
53 Having acted, I infer, promptly and precisely in accordance with responsible legal advice once the error was detected, it seems to me, and given that PSL has an ongoing right to recover the overpayments from those growers who have not refunded them, that it would inequitable for GSMA not to be reimbursed or indemnified in respect of the payment from its own funds into the Mossgrove Insurance Account.
54 I do not consider any part of the conduct of GSMA was such as to disentitle it to its rights to reimbursement or indemnity. To do so would result in a windfall gain to those growers who were overpaid resulting in an unjust enrichment at the expense of GSMA and its creditors.