Business Computers Ltd v Anglo-African Leasing Ltd

IN THE MATTER OF GREAT SOUTHERN MANAGERS AUSTRALIA LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 083 825 405) ANDREW SAKER, DARREN WEAVER, JAMES STEWART AND MARTIN JONES AS LIQUIDATORS OF GREAT SOUTHERN MANAGERS AUSTRALIA LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 083 825 405)

JUDGE: MCKERRACHER J DATE: 23 AUGUST 2011 PLACE: PERTH

INTRODUCTION 1 As noted in Re Great Southern Managers Australia Ltd (2010) 190 FCR 501 (GSMA 1), the plaintiffs are the liquidators of Great Southern Managers Australia Ltd (GSMA). They seek directions in relation to funds formerly under the control of GSMA which was the Responsible Entity (RE) of several managed investments schemes. It has been replaced as RE in those Schemes by Primary Securities Ltd (PSL). PSL, as the new ongoing RE, seeks access to funds formerly held by GSMA. The plaintiffs resist such access. 2 In GSMA 1 I addressed the more urgent aspects of the questions raised in this litigation. These reasons address the balance of the issues. 3 The directions sought by the plaintiffs are pursuant to s 511 of the Corporations Act 2001 (Cth) (CA) in respect of questions arising in the winding up of GSMA. That section provides: 511 Application to Court to have questions determined or powers exercised (1) The liquidator, or any contributory or creditor, may apply to the Court: (a) to determine any question arising in the winding up of a company; or (b) to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. (1A) APRA may apply to the Court under subsection (1) in relation to a company that is a friendly society within the meaning of the Life Insurance Act 1995 and which may be wound up voluntarily under subsection 180(2) of that Act. (2) The Court, if satisfied that the determination of the question or the exercise of power will be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just. 4 There are two broad issues, the first relates to an insurance question and the second to management fees and a claimed set-off against those fees. For reasons expressed below, I consider that the argument advanced by the plaintiffs in relation to the insurance question is to be accepted. The plaintiffs should draft orders to reflect that outcome, taking into account the current position concerning funds in various accounts. On the set-off question, for reasons discussed below, it is not presently possible or desirable to answer the questions raised. I will adjourn that question and order that PSL, should it wish to do so, file submissions in response to the plaintiffs' submissions 'In Reply'.

BACKGROUND 5 As noted in GSMA 1, GSMA has been since its inception a wholly owned subsidiary of Great Southern Limited (Receivers and Managers Appointed) (in liquidation) (GSL). Before the appointment of external controllers to GSL and its subsidiaries, including GSMA, the companies were engaged in the promotion and conduct of a variety of agricultural managed investment schemes. Those schemes are the Mossgrove Scheme, the Hamilton Scheme, the Jeremy 1 Scheme and the Jeremy 2 Scheme. Each of the Schemes has a Trust Maintenance Fund, a Trust (Management) Fund, a Trust (Proceeds) Fund and a Trust (Insurance) Fund. As noted in GSMA 1, Mr Saker together with Messrs Weaver, Stewart and Jones were appointed as administrators of GSMA on 16 May 2009. Two days later, its debenture holder, ANZ Fiduciary Services Pty Ltd (ANZ Fiduciary) appointed Messrs Thackeray, Nicol, McGrath and Read to be receivers and managers of, amongst other things, property of GSMA. Those persons assumed control of all of the books, records and assets of GSMA and conducted meetings of creditors. In March 2010, ANZ Fiduciary varied the scope and terms of its appointment of receivers and managers of the property of GSMA such that the plaintiffs were permitted by the receivers and managers to commence taking control of property to which GSMA was or appeared to be entitled.

The questions 6 In relation to the accounts (described in [5]), the remaining questions posed are these: 5. A determination of whether the plaintiffs, as liquidators of [GSMA], should: (a) pay to PSL; and/or (b) retain and apply in accordance with Chapter 5 of the Act, any portion(s) of the funds in the Mossgrove Thinnings Account and if so, what portion(s). 6. A determination of whether the plaintiffs, as liquidators of [GSMA], should: (a) pay to PSL; and/or (b) retain and apply in accordance with Chapter 5 of the Act, any portion(s) of the funds in the Mossgrove Insurance Account and if so, what portion(s). 7. A determination of whether the plaintiffs, as liquidators of [GSMA], should: (a) pay to PSL; and/or (b) retain and apply in accordance with Chapter 5 of the Act, any portion(s) of the funds in the Mossgrove Salvage Account and if so, what portion(s). 8. A determination of whether the plaintiffs, as liquidators of [GSMA], should: (a) pay to PSL; or (b) retain and apply in accordance with Chapter 5 of the Act, the portion of the funds in the Hamilton Account referred to in paragraph 38 of the Second Saker Affidavit. 9. A determination of whether the plaintiffs, as liquidators of [GSMA], should: (a) pay to PSL; or (b) retain and apply in accordance with Chapter 5 of the Act, the portion of the funds in the Jeremy 1 Account referred to in paragraph 40 of the Second Saker Affidavit. 10. A determination of whether the plaintiffs, as liquidators of [GSMA], were justified in causing $70,211.23 of the $259,353.57 referred to in paragraph 80 of the Saker Affidavit and paragraph 20 of the Second Saker Affidavit to be paid to PSL. 10A. A determination that $189,142.34 of the $259,353.57 referred to in paragraph 80 of the Saker Affidavit, and paragraphs 19 to 23 of the Second Saker Affidavit, was not payable and should not have been paid to PSL. 7 Questions 8 to 11 (inclusive) are framed by reference to a 'Second Saker Affidavit'. It is necessary, therefore, to extract the substance of the issues from that (and other) affidavits in order to give meaning to these reasons. In doing so, as will be seen below, the substantive issues for determination break into two areas: first, whether GSMA is entitled to certain indemnities. Principally, the question is whether the liquidators on behalf of GSMA are entitled to recover from PSL a sum in the order of approximately $190,000 by reason of GSMA having a right to be indemnified out of the property of the Mossgrove Scheme (as defined in GSMA 1). That topic has been described as the indemnity question. There is also an insurance salvage question. The liquidators are unclear as to whether the company should pay certain salvage proceeds to the insurer, Agricola Underwriting Management Pty Ltd (Agricola). The event which gave rise to those questions was closely connected with the facts giving rise to the main aspect of the indemnity questions; and second, whether the liquidator should retain or pay to PSL various sums of money which the liquidators consider that the company may be entitled to retain as management fees (the management fee question).

THE EVIDENCE 8 In support of the plaintiffs' application, Mr Young, counsel for the plaintiffs, read affidavits of Mr Andrew John Saker, sworn on 8 September 2010, a second affidavit sworn on 10 December 2010 and a third affidavit sworn on 21 March 2011. The third affidavit updated information concerning bank balances so as to update the position for the purposes of the hearing. Additionally, Mr Young referred to an affidavit of Mr Randall Robert James Lourey sworn on 18 January 2011. 9 From those affidavits, the funds (as at the date of hearing) held in the various accounts the subject of the hearing were revealed. The amounts and source of those funds is set out in the table below in respect of the individual accounts. Further explanation follows. Mossgrove Thinnings Account Hamilton Account Jeremy 1 Account Mossgrove Insurance Account Mossgrove Salvage Account Total Cash at Bank 23,299.36 28,676.73 46,807.98 226,140.05 197,482.24 522,406.36 GSMA -21,244.17 -9,319.12 -5,250.47 -53,004.04 -9,874.11 35,813.76 Management Fee -2,055.19 -18,398.66 -39,716.75 -8,656.80 -187,608.13 58,115.41 Insurance Premiums -500.00 -164,479.21 53,504.04 Loan 2,055.19 Indemnity 18,530.90 Salvage Costs 352,087.34 Agricola PSL 0 958.95 1,340.76 - - 2,299.74 Total previously transferred to PSL 189,142.34 64,514.51 5,696.72 259,353.57 Total reclaimed from PSL * 189,142.34

Mossgrove Insurance Account 10 The account described as the Mossgrove Insurance Account is, in fact, a Trust (Insurance) Fund in respect of the Mossgrove Scheme, which was to be established under cl 39 of the Mossgrove Constitution. 11 On 25 August 2010 this account contained $399,822.64 made up of: (a) $177,382.76 being Mossgrove Scheme (thinning) proceeds (including interest); (b) $169,435.84 being Mossgrove Scheme (salvage) proceeds (including interest); and (c) $53,004.04 being money deposited into the Mossgrove Insurance Account by GSMA from its own funds. 12 GSMA made the following deposits (totalling $390,369.13) of its own funds into the Mossgrove Insurance Account: (a) on 31 October 2005, the sum of $4,000; (b) on 23 July 2008, the sum of $327,741.72; and (c) on 8 August 2008, the sum of $58,627.41. 13 The reason for deposit (a) was to prevent the Mossgrove Insurance Account from becoming overdrawn. In relation to the deposits (b) and (c), as will be explained below, insurance proceeds received as a result of a fire were not distributed by GSMA in proportion to the relevant growers' interests as required by the Mossgrove Constitution but, rather, to some growers only. GSMA later recognised this error and deposited its own funds (deposits (b) and (c)) into the Mossgrove Insurance Account to ensure that there were sufficient funds available to make appropriate distributions to other growers.

Mossgrove Salvage Account 14 The account entitled as the Mossgrove Salvage Account is another Trust (Proceeds) Fund in respect of the Mossgrove Scheme which was to be established under cl 40 of the Mossgrove Constitution. This account contains $194,665.77 comprising Mossgrove Scheme (salvage) proceeds and interest on those proceeds. 15 Mr Saker's investigations revealed that GSMA had procured a policy of insurance in respect of the Mossgrove Scheme Plantations. On 19 December 2006 there was a fire near Oberon in New South Wales causing loss and damage to pine trees growing in the Mossgrove Plantation. GSMA claimed under the policy. Agricola later agreed to indemnify GSMA the sum of $2,013,901.40. Payments were made in two tranches, the first being a payment of $1 million. In consideration for settlement on that basis, GSMA gave a release to Agricola by which it agreed to repay to Agricola all salvage amounts received for timber harvested from the plantation, with those payments to be made on a quarterly basis (the insurance salvage question). (Obligations at law and equity would require repayment of such recoveries in any event). 16 At dates in 2005 and in 2008 GSMA deposited some of its own funds into the Mossgrove Scheme's insurance account ($390,369.13). When the first tranche of payments came from Agricola, GSMA as RE erroneously distributed those proceeds to only the woodlot holders whose lots were burnt, that is, those who were directly affected by the fire. 17 Subsequently, it was realised that those growers were not entitled to the direct proceeds in respect of the burnt trees. Under the terms of the Constitution, the $1 million in the first tranche should have been equitably distributed amongst all investors in the Scheme but it was not. That error was, however, realised before the second distribution was made. 18 Before the second distribution was made GSMA contributed its own funds into the Mossgrove Insurance Account to enable the distribution to be made to those who had not received distributions so that all parties thereby had the requisite distribution of the $1 million. Some, however, still had more than they were entitled to by reason of the error. GSMA then took steps to recover the overpaid portions. Some of that money was recovered. 19 It is not in dispute that GSMA (and now PSL) retained the right to recover the money so paid. It can still set-off that right to recover against any claims that the overpaid investors or holders might have to future distributions. The money, therefore, is not lost to the Trust. 20 The Mossgrove salvage account as at the time of the originating process contained some $194,665.77 and the Mossgrove insurance account, some $222,439.88. Agricola indicated that it expected to be paid the salvage proceeds. Therefore, it follows that the salvage question and the indemnity question interact.

Management fees 21 The plaintiffs undertook to pay $259,353.57 to PSL on the cross-undertaking given by PSL to GSMA, the plaintiffs and to the Court, that if any part of that sum was later determined by the Court not to have been payable, then PSL would repay it. $189,142.34 was also transferred from the Mossgrove Thinnings Account to a bank account nominated by PSL. 22 Mr Saker reassessed his preliminary view, and now believes that the sum of $189,142.34 (plus any future interest) should in fact be retained by GSMA in partial satisfaction of its right to an indemnity in the amount of $390,369.13. 23 Taking into account the sum of $53,004.04 (which related to the deposit of GSMA's funds into the Mossgrove Insurance Account) and the sum of $189,142.34 paid to PSL, the balance of the $390,369.13 in respect of which GSMA is entitled to an indemnity is $148,222.75. 24 Mr Saker contends that the sum of $2,239.56, which is the balance of the Mossgrove Thinnings Account after deduction of the management fee, should be retained by GSMA in partial satisfaction of its right to an indemnity. There are currently no other funds in any of the Mossgrove scheme accounts which are available to satisfy the remainder of the sum in respect of which GSMA is entitled to an indemnity, being $145,983.19.

CONTENTIONS FOR PSL 25 PSL, as the current RE for all the Schemes, contends that GSMA is not entitled to the funds referable to the insurance dispute or to management fees. 26 The contentions for PSL are developed in the following manner.

Mossgrove Scheme Investors 27 PSL argues that it is entitled to set-off against the amount of the claimed indemnity, the total quantum of the losses suffered by investors in the Mossgrove Scheme as a result of non-performance by GSMA from about May 2009 of maintenance, and management services in relation to the Mossgrove Scheme. It contends that the losses so sustained are self-evidently so large as to entirely extinguish the plaintiffs' claim for an indemnity in the amount of $390,369.13. PSL relies upon the principles explained by Giles J in Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439 (at 465), as follows: Equitable set-off is available where the defendant establishes an equitable ground for being protected from the plaintiff's claim. That has been expressed in language to the effect that the defendant's set-off goes to the root of or impeaches the title of the plaintiff's claim, but also in language to the effect that the counter-claim is so directly connected with the claim that it would be unjust to allow the plaintiff to recover without taking into account the defendant's counter-claim. 28 In Cathedral Place Pty Ltd v Hyatt of Australia Ltd [2003] VSC 385 (at [39]) Nettle J offered the following summary of the principles which govern the availability of equitable set-off: The essential ingredient of the sort of equitable set-off which is referred to - which is allowed when a party seeking the benefit of the set-off can show some equitable ground for being protected against his adversary's demand - is that the set-off actually go to the root of, be essentially bound up with or in other words "impeach" the title of the plaintiff. It is not sufficient that there be countervailing claims or that they be mutual or even that countervailing claims arise out of the same transaction. (footnotes omitted) 29 Gummow J in James v Commonwealth Bank of Australia (1992) 37 FCR 445 (at 458) also observed that 'the requirement of "impeachment" and the phrase "title to the legal demand" have not been narrowly construed'. This passage was recently cited with approval by the Full Court (Jacobson, Nicholas And Yates JJ) in Norman; in the matter of Forest Enterprises Limited v FEA Plantation Limited [2011] FCAFC 99 (at [142]). 30 PSL argues that although the general statements of principle concerning a set-off on the basis of mutuality are generally expressed in terms of parties to a proceeding such as a plaintiff and a defendant, the principles would equally apply to PSL which is effectively a contradictor to the proposals advanced by the plaintiffs. I would accept this argument at least in the present situation. 31 What is more contentious, however, is the PSL submission that 'there is such a close connection' between the plaintiffs' claim to an indemnity in the amount of $390,369.13 and the investors' cross-claim for GSMA's default in performance of management and maintenance services that it would be unconscionable for PSL not to be protected. 32 PSL argues that the plaintiffs should pay to it all funds currently held by them in connection with the Mossgrove Scheme which it seeks in the proceeding to apply in satisfaction of the claimed indemnity in the amount of $390,369.13. PSL also argues that it is not liable to pay GSMA the sum of $189,142.34 for the purpose of satisfying, in part, that indemnity. 33 As an alternative argument, PSL asserts that the claimed indemnity did not relate to the proper performance of GSMA's duties as RE for the Mossgrove Scheme contrary to s 601GA(2) CA and/or the expenditure which the plaintiffs say gives rise to the indemnity was not reasonably, honestly or properly incurred by GSMA in the course of its role as RE for the Mossgrove Scheme. PSL argues that the sum of $386,369.13 in respect of which the plaintiffs claim an indemnity was not expended by GSMA in the due, proper or honest performance of its role as RE for the Mossgrove Scheme. Rather, it says the payment was the consequence of GSMA's failure to properly familiarise itself with the constituting documents of the Mossgrove Scheme, a failure to interpret the relevant provisions of the constituting documents and a failure to operate the Scheme in conformity with cl 39 of the Constitution for the Mossgrove Scheme as it stood in about October 2007. That clause provided: 39. TRUST (INSURANCE) FUND 39.1 The Responsible Entity shall accept and hold any and all moneys received by it pursuant to any insurance policy procured by it, or the Manager pursuant to paragraphs 2.6(a)(i) and (iii) and 2.6(d)(i) and (ii) of the Lease and Management Agreement, (whether such moneys are received pursuant to a claim under a policy, by way of refund of premium or otherwise), together with all moneys payable to the Responsible Entity as representative of the Lessee(s) pursuant to Clause 12(m) of this Constitution, or being compensation for any loss, damage or destruction to the Pinus radiata on the land leased by the Lessee(s) due to any other cause whatsoever plus all additions and accretions thereto, on trust for the Lessee(s) and the registered proprietor of the unleased portion of the Plantation. 39.2 The Responsible Entity shall hold such moneys in a separate fund for the Plantation. 39.3 The proportionate interest of each Lessee in the relevant Trust (Insurance) Fund shall be the same proportion as the number of hectares leased by the Lessee bears to the total number of hectares in the Plantation according to the Prospectus. 39.4 The proportionate interest of the registered proprietor in the relevant Trust (Insurance) Fund shall be the same proportion as the number of unleased hectares in the Plantation bears to the total number of hectares in the Plantation according to the Prospectus. For the purpose of this Clause 39 the "registered proprietor" means the registered proprietor for the time being of the unleased hectares of the Plantation to which the relevant trust fund relates and "unleased hectares" means those hectares in the Plantation in respect of which neither a Lease and Management Agreement has been entered into by the Manager nor an Application for the same been accepted by the Manager pursuant to sub-clause 3.3 of the Trust Deed. 39.5 The moneys held by the Responsible Entity pursuant to Clause 39.1 hereof shall, after payment of all costs and expenses incurred in connection with the event giving rise to the receipt of moneys under a policy or recovery of those moneys pursuant to Clause 16.3, be applied within 5 business days of the Responsible Entity being satisfied that such moneys represent cleared funds by paying to each Lessee and registered proprietor that amount which represents their proportionate interest (determined in accordance with sub-clause 39.3 and 39.4 respectively) in the relevant Trust (Insurance) Fund. 34 PSL argues that any agreement or arrangement made by the RE which purports to confer a right of indemnity 'in violation of' provisions within the constituting documents or the proper performance of duties is of no effect. The payment into the Mossgrove Insurance Fund in consequence of its misapplication of the insurance proceeds from the 2006 fire, it says, 'violates' either or both of the conditions referred to above. The claimed right of indemnity was said to violate the first condition because cl 20.1(t) of the Mossgrove Constitution did not, in its terms, confer on GSMA a right to be indemnified for expenses or liabilities incurred as part of efforts to remedy an improper distribution of fire insurance proceeds. Further, cl 39 of the Mossgrove Constitution provided that a proportional share of any insurance proceeds should be paid from the actual proceeds received from Agricola not from funds contributed to the Mossgrove Scheme by the RE. Further, it was argued in a letter from PSL's solicitors to GSMA's liquidators solicitors dated 16 December 2010, and adopted by PSL in its submissions, that the claimed right of indemnity also violates the second condition because the effect of such an indemnity would be to keep GSMA harmless against losses it suffered as a result of an improper distribution of fire insurance proceeds. As the fire insurance proceeds were initially distributed by GSMA only to those growers whose woodlots were affected by the fire, it was in breach of cl 39 of the Mossgrove Constitution and any claim of a right to an indemnity in respect of expenditure incurred by GSMA to remedy this erroneous distribution could not fairly be described, PSL says, as being in relation to the 'proper performance' of GSMA's duties as RE for the Mossgrove Scheme. 35 Specifically, PSL argues that GSMA's failure to read or properly interpret the Constitution for the Mossgrove Scheme before distributing fire insurance proceeds 'amounted to a violation or culpable neglect in its duties as a trustee and [RE] for the Mossgrove Scheme'. It argues that any responsible trustee of a managed investment scheme must take steps to acquaint itself with the provisions of a document founding that scheme before embarking on a distribution of proceeds of an insurance claim amongst scheme investors.

Investors in the Jeremy 1 Scheme, Mossgrove Scheme and Hamilton Scheme entitled to a set-off against the plaintiffs' claim to management fees 36 In relation to the claim for management fees totalling $35,813.76 in these particular Schemes and accounts, PSL similarly asserts that its investors are entitled to a set-off on the same principles advanced in relation to the indemnity payment.

Claim for insurance premiums unpaid by investors in the Hamilton Scheme and the Jeremy 1 Scheme invalidated by lack of information from the plaintiffs as to identity of the defaulting investors 37 In this claim GSMA seeks reimbursement for the amount of $58,115.41 in respect of insurance premiums it paid on behalf of defaulting investors from the Hamilton account ($18,398.66) and the Jeremy 1 account ($39,716.75). PSL says that no such recovery should be permitted in the absence of information which would enable PSL to identify the investors who allegedly failed to pay the premiums. However, PSL accepts that it would abandon its denial of the plaintiffs' claim for payment in respect of those insurance premiums on condition that the plaintiffs provide to PSL details of the investors in the Hamilton Scheme and the Jeremy 1 Scheme who are in breach. 38 I accept that these details should be provided. If they are provided, the reimbursement should also be provided.

Generally - quantum of losses suffered by investors in the Templegate Schemes 39 PSL argues that GSMA's inability to perform its management responsibilities was the fact that gave rise, at a meeting of investors, to PSL's appointment as the replacement RE for the Templegate Scheme. PSL became registered with the Australian Securities and Investments Commission (ASIC) as the RE for the Templegate Schemes in April 2010 pursuant to Pt 5C.2 CA. 40 On its appointment, the Templegate Schemes made the transition to contributory schemes in the sense that investors became liable to pay PSL regular fees for its services as a contracted RE. Those fees have exceeded, to a material degree, the amounts charged by GSMA to perform the role of RE for the Templegate Schemes. As to the quantum of the additional fees for which investors in the Templegate Schemes are liable to pay PSL for the performance of its role as replacement RE, PSL points to the fact that the countervailing claims against GSMA 'far eclipse' the sum of $35,813.76 which Mr Saker says remains owing to GSMA by way of management fees. 41 In an affidavit of Mr Robert Gaden-Smith, solicitor and Managing Director of PSL, he said that in respect of the period from the date of appointment of PSL as the RE for the Schemes until 30 June 2010, the lessees were collectively required to pay to PSL $66,000 plus GST per Scheme for carrying out interim services pursuant to subcl 16.1 of the respective replacement Constitutions for the Schemes (Replacement Constitutions). For each financial year from 1 July 2010 until the termination of the Schemes, the lessees collectively were required to pay to PSL an annual RE service fee of $75,000 plus GST per Scheme pursuant to subcl 16.1 of the Replacement Constitutions. For each financial year from 1 July 2010 until termination of the Schemes, the lessees were also collectively required to pay an annual management fee to PSL equal to the sum that PSL estimated as being the likely cost of management of the relevant plantation in respect of the following 12 months plus GST, pursuant to subcl 16.1 of the Replacement Constitutions. 42 In addition, PSL was also entitled, pursuant to subcl 16.3 of the Replacement Constitutions, to a fee equal to 5% of all amounts paid into the Trust (Proceeds) Account. This sum alone would exceed the amounts claimed as management fees. Mr Gaden-Smith deposed to his belief that those fees were expenses that the lessees would never have been called upon to pay if GSMA had performed its obligations under the Constitution and lease and management agreements. The lessees, he says, are entitled to set-off against the amounts referred to in Mr Saker's affidavit, the total sum of the fees that they would pay to PSL until the termination of the Scheme.

Findings on the insurance questions 43 The findings I make on the state of the evidence advanced in the affidavit material are that in or about November 2007, GSMA made an error in distribution of the insurance proceeds totalling $958,289.91. Early in 2008, it recognised the error and sought and obtained legal advice from external solicitors. It was advised by reputable external solicitors (Freehills), amongst other things, to pay its own funds into the Mossgrove Insurance Account to rectify the error in payment which had been made. In and after June 2008, GSMA acted in accordance with the advice so received and paid $386,369.13 of its own funds into the Mossgrove Insurance Account, made a second and correcting distribution of insurance proceeds to growers, wrote to overpaid growers requesting the overpaid amounts be repaid and recovered some of those overpayments. 44 Further, it remains the position that PSL is the ongoing RE of the Mossgrove Scheme since in or about April 2010 and is entitled to take steps to recover the remaining overpayments from overpaid growers. Alternatively, it may simply deduct such overpayments from future distributions to such growers.

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. … 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.) … 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." … 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.

Set-off 55 There is a preliminary issue concerning the set-off argument raised by PSL. 56 Section 511 CA has been set out above (at [3]). 57 Not every question that is asked should necessarily be answered. Alternatively, it should not necessarily be answered immediately. Two difficulties arise at present. The first is that on the original argument in relation to these questions, the plaintiffs did not file any written submissions in advance. As a consequence of that, I permitted an adjournment following oral presentation of the plaintiffs' case for PSL to consider the plaintiffs' arguments and to file written submissions in response. PSL pursued that course. The plaintiffs then filed written submissions in reply which developed with a considerable degree more sophistication, the arguments on which the plaintiffs sought to rely to justify an entitlement to access the management fees which had been earmarked. PSL did not seek to and has not filed any written submissions dealing with those more detailed arguments advanced by the plaintiffs in their submissions in reply. In my view, if it wishes to advance the broad proposition that it is so obvious that PSL or the growers it represents are entitled to set-off claims for mismanagement against GSMA, that argument needs to be more fully developed by reference to evidence and needs to specifically address the legal issues advanced in GSMA's submissions in reply. Alternatively, if it wishes to contend on any basis, that those questions should not now be answered, then it should also advance argument to support that position. On that aspect (alone), the plaintiffs should have a right of reply. 58 I have touched on the plaintiffs' arguments below but at present, it does not appear to me that it would be either 'just or beneficial' within the meaning of s 511(2) CA to answer the question either favourably or negatively to the plaintiffs. The factual information before the Court as to the substance of PSL's asserted claim and PSL's more detailed response to the arguments which GSMA seek to advance are not before the Court. 59 At present, in my view, it remains desirable that the questions be answered, if it is possible to answer them for a number of reasons, not least of which would be that to simply accept the plaintiffs' argument that they are entitled to the management fees regardless of any set-off without also considering argument for PSL would mean that if there is substance in the PSL argument, it would be difficult to accommodate any adequate compensation for PSL at a subsequent time. At present, however, it is simply not possible to either accept or reject the arguments made for the plaintiffs and I do not consider that PSL has had sufficient an opportunity to adequately respond to those arguments. I will make provision for that by ordering that if PSL wishes to file arguments in response to the issues raised below, it should do so within 21 days. 60 In this regard, I am mindful of the approach (in the context of fixing liquidators' fees) taken by Barrett J in Re Walker (2005) 189 FLR 467 (at [32] to [34]). While the application in that instance was dismissed, I would see benefit in this instance in affording PSL an opportunity to deal with the points raised by the plaintiffs. In that way it may then be 'just and beneficial' to answer the question. Equally it may be that the question should not be answered which the CA also contemplates. Although the section is to be construed liberally, the Court's role is to decide disputes according to law - see Young J in Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd [1997] 42 NSWLR 209. Young J noted that there are many questions where the only order that the Court should make is that the liquidator or the claimant proceed in the ordinary courts in the ordinary way for the determination of a dispute.

The arguments to be addressed 61 The plaintiffs argue that the management fees are not Scheme property but have passed in this instance to GSMA as the RE. Because the funds appropriated are held as GSMA's own, it makes no money claim against PSL or any growers. (This is not taking into account the special arrangements existing in respect of the $189,142.34 plus interest created by the cross-undertakings given by and between the plaintiffs and PSL and the undertakings given by each of the plaintiffs and PSL to the Court on 23 August 2010). 62 The plaintiffs say there can be no set-off as a set-off relates to the setting off of money claims against each other in order to produce a balance. There will be cross-demands. In this instance there is no demand made by the plaintiffs against PSL or the growers. Rather, the plaintiffs seek confirmation from the Court that they are entitled to appropriate the funds which hold for management fees. This is not the same as 'the right of a debtor who is owed money by his creditor on another account' or 'securing payment for what is owed to him by setting this off in reduction of his own liability' to adopt the wording appearing in Gullifer L (ed), Goode on Legal Problems of Credit and Security (4th ed, Sweet & Maxwell 2008), at [7-01], see also Derham R, Derham on the Law of Set-off (4th ed, Oxford University Press 2010), at [1.01]. At a technical level there are no countervailing debts or money claims thus there can be no set-off equitable or otherwise. 63 The plaintiffs argue that there is a further difficulty in the set-off argument. ANZ Fiduciary appointed the receivers and managers on 18 May 2009. As such, floating charges given by GSMA in favour of ANZ Fiduciary crystallised as at that date. From that date, therefore, ANZ Fiduciary became entitled in equity to GSMA's relevant assets including its cash at bank and the benefits of its rights to reimbursement and indemnity. The plaintiffs point to the fact that the growers' asserted claim for damages, if it be well-founded, would be the sole responsibility of GSMA, not that of ANZ Fiduciary. ANZ Fiduciary simply takes the benefit of the assets as crystallised at the date of the appointment of the receivers. It does not step into the shoes of GSMA and incur any outstanding obligations that it has accrued at that stage. 64 To the extent that the claim by the growers is evident from the submissions made by PSL, it appears to be the case that the claim arose only after the receivers were appointed because it is said to be a consequence of the appointment of receivers and managers to GSMA. Therefore, the circumstances facing the growers are similar to those considered in Business Computers Ltd v Anglo-African Leasing Ltd [1977] 2 All ER 741, (particularly at 745-747) where Templeman LJ concluded that there was a lack of relevant mutuality which could give rise to any set-off. 65 The plaintiffs contend that in the present case, there is no evidence that there is any, let alone any sufficient, connection between GSMA's relevant rights to reimbursement, indemnity and management fees and the claim for damages asserted on behalf of growers. On the contrary, GSMA's relevant rights to reimbursement, indemnity and management fees and the claim for damages asserted on behalf of growers are unconnected in both time and nature. 66 It follows, the plaintiffs say, that there is no proper basis that the unparticularised claim for damages asserted on behalf of the growers is such that all of GSMA's legal rights to reimbursement, indemnity and management fees are 'impeached' in the relevant sense.

CONCLUSION 67 For the preceding reasons, I make the following order: 1. The plaintiffs do file within 10 days a minute of orders reflecting these reasons including an order that if Primary Securities Ltd wishes to file further submissions in response to the issues raised on the plaintiffs' reply submissions, it do so within 21 days. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.