Applicant IOOF AUSTRALIA TRUSTEES LIMITED (ACN 007 870 644):

Counsel: MR F G A BEAUMONT QC WITH MR M BLUE - Solicitors: FISHER JEFFRIES

IOOF AUSTRALIA TRUSTEES LTD AND THE TRUSTEE ACT 1936

[1999] SASC 461

1 DEBELLE J. (ex tempore) This is an application by IOOF Australia Trustees Ltd ("IOOF") that the court approve the terms of settlement of a number of actions in which it is a party. I will mention the actions in a moment. IOOF has compromised those actions on certain terms. It is implicit in the application that IOOF seeks an order approving the deed of settlement which embodies the compromise.

2 IOOF's application is for advice and directions pursuant to s 91 of the Trustee Act 1935 which, in turn, refers to ss 69 and 70 of the Administration and Probate Act 1919. Section 70 has no present application. The combined effect of s 91 of the Trustee Act and of s 69 of the Administration and Probate Act is that a trustee may, among other things, apply to a judge for advice and directions as to matters concerned with the administration of any trust: see s 69(1). Upon hearing the application, the judge may make any order, declaratory or otherwise, as he thinks fit as to the administration of the trust and also as to the costs of the application: see s 69(3).

3 The procedure of obtaining advice and direction is described by Napier CJ in re Hunter [1957] SASR 194 at 195 in these terms.

"The Administration and Probate Act preserves the jurisdiction formerly given by Sir George Turner's Act (see Forster v Schlesinger (1886) 54 LT 51; In re Mallen [1929] SAStRp 14; [1929] SASR 154 at 157). Under that procedure the affidavit, filed in support of the application, is equivalent to a case, stated for the opinion of the Court, in which the trustee vouches for the accuracy of the facts which he is putting to the Court, and asks for advice and directions. The direction given to him protects and indemnifies the trustee against any claim for breach of trust, provided always that the facts have been fully and fairly disclosed, but it leaves the question open as between beneficiaries who have not been cited to see the proceedings."

Neither s 91 of the Trustee Act nor s 69 of the Administration and Probate Act require all parties to be served. The question whether ex parte proceedings are appropriate will depend on many factors. It is the responsibility of the trustee to decide whether it is proper to make the application without notice to other interested parties: see re Martin [1958] SASR 365 at 379. An ex parte application is clearly appropriate in this case since the powers vested in IOOF as trustee are very wide in relation to matters the subject of the trust.

4 It is important to note that the application for advice and directions does not proceed to a final determination of the rights of parties. The procedure is not available for the determination of substantive issues between parties: re Hunter (supra) and re Union Trustee Co. of Australia Ltd (1936) QWN 6.

5 The procedure enables the court to advise the trustee whether it is lawful to exercise its discretion in a certain way but it cannot tell the trustee how to exercise that discretion or whether a proposed exercise of discretion is necessarily correct: see Gisborne v Gisborne (1877) 2 App Cas 300 per Lord Cairn at 307; re Osborne (1863) 2 SCR (NSW) Eq 89; re Driller and Nebneson [1972-1973] ALR 735; re Allen-Meyricks Will Trusts [1966] 1 WLR 499 at 503; and re Green [1972] VicRp 98; [1972] VR 848 at 850. There may be instances where the court will decide what will be in the best interests of the trust estate. Marley v Mutual Security Merchant Bank & Trust Co Ltd [1990] UKPC 44; [1991] 3 All ER 198 is an example. But, where the court is being asked for advice and direction concerning a compromise of litigation, the court can do no more than consider whether it is proper for the trustee to consider a compromise. The terms of the compromise will be for the trustee to determine.

6 One instance of the use of the procedure is where a trustee is faced with litigation, either as plaintiff or defendant, and desires advice whether he should institute proceedings or defend them: re Atkinson [1971] VicRp 73; [1971] VR 612, 615 - 616; re England's Settlement [1918] 1 Ch 24 at 31; and Chettiar v Chettiar (No 2) [1962] UKPC 1; [1962] 2 All ER 238 at 245. If the trustee fails to obtain the advice of the court, the trustee is at risk of being personally liable to pay the costs: re Brogden (1888) 38 Ch D 546 at 556 and re Atkinson (supra). The power may be used also to approve a compromise or any other transaction. The court, therefore, has power to determine whether it is lawful or proper for a trustee to compromise litigation. It is, of course, a matter for the trustee as to what it is willing to accept by way of compromise.

7 IOOF is trustee pursuant to two Trust Deeds. One was executed on 2 February 1934 and the other on 6 March 1964. These Trust Deeds have been made in respect of a scheme to raise funds for the purpose of growing pinus radiata forests. The scheme involves raising funds from the public, planting the trees, maintaining the trees, felling the trees and selling the timber. For a long time, investment by members of the public was made by purchasing covenants for specified areas of land which entitled the covenant-holders to an interest in the timber grown and felled from that land. IOOF is the trustee for the covenant-holders.

8 The company which initially implemented the scheme was called Perpetual Pine Forests Limited. It later changed its name to Southern Australia Perpetual Forests Limited. It is now called SEAS Sapfor Forests Pty Ltd. I will refer to it as the "Forest Company". The operations of the Forest Company grew and became more complex. A milling company was incorporated in 1935. A Tripartite Agreement was made between the Forest Company, the milling company, and the then trustee. The Tripartite Agreement and the then Trust Deed were amended from time to time. In 1964, the predecessor of IOOF became trustee and a new Trust Deed and Tripartite Agreement were made. In 1975 Cowells Limited acquired a controlling interest in the Forest Company and other companies in this group. Control of the group has changed from time to time. The corporate structure has become more complex. Additional companies have been incorporated for the purpose of operating the venture.

9 In 1988 the group was acquired by a company now called Auspine Limited. Since about 1991, there have been disputes between IOOF and Auspine and the companies it controls concerning the payment of proceeds of the sale of timber made to covenant-holders and matters affecting those payments. There are several aspects of the dispute.

1. Maintenance Beyond Covenant Period Claims. Pursuant to clause 24 of the Trust Deed, at the end of the covenant period, which may be 20 or 25 years, depending on the year in which the covenant was issued, if the Forest Company has agreed that the trees should be continued to be grown beyond the covenant period, they should give written notice to the trustee and thereupon the trustee may request the Forest Company to continue to maintain and tend the trees in any such plantation for such period as the trustee shall then advise. The Forest Company shall maintain and tend those trees in response to that request. The Forest Company is entitled to a fee per hectare for its maintenance. There has been a dispute between the parties as to what is the proper fee for maintenance. Since May 1992 the Forest Company has deducted from timber proceeds amounts substantially in excess of what the trustee believes to be a proper payment for maintenance. On 23 March 1993, IOOF instituted proceedings against the Forest Company seeking to recover moneys which had been withheld. Other companies were joined as defendants to that action. I will call these proceedings "the 1993 action".

2. Price Claims. IOOF claims that the covenant-holders have not been paid the proper price for timber which has been sold. Without descending into detail, and without examining the particular relationships between the defendant companies which affect this issue, the case of IOOF, shortly stated, is that clause 7 of the Tripartite Agreement requires that the best possible market price be obtained and that the defendants did not obtain that price. The matter is complicated by the fact that the Tripartite Agreement provides for the appointment in each year of a person called an evaluator to determine the price and for arbitration of disputes as to the manner in which evaluators have calculated that price. The issue has been the subject of arbitration proceedings between IOOF and the defendants. The issue is further complicated by issues as to the point of sale of the timber. On 24 June 1996 IOOF issued proceedings against the defendants. I will call these proceedings "the 1996 action". Included in the relief sought in those proceedings was a claim for the determination of the question of what price ought to be paid for timber.

3. Expense Claims. The 1996 action also claimed relief in respect of what expenses, which were necessarily incurred in connection with the felling, cutting, milling, manufacturing and selling of timber, should be deducted from the proceeds from the sale of timber. IOOF claims that excessive amounts, or at least amounts which are in excess of that allowed for in the Tripartite Agreement, have been deducted.

4. The Management Claim. IOOF claims that the Forest Company and another company in the group have abdicated their responsibility under the Tripartite Agreement by allowing Auspine Ltd to perform their functions and that Auspine Ltd is liable for any breaches of the Tripartite Agreements. The issues in this claim are also the subject of the 1996 action.

5. Information Claim. IOOF claims it is entitled to request certain information which it says the defendants have failed to provide. The allegation is denied. This is another aspect of the 1996 action.

10 On 9 December 1997, this court ordered that the 1993 action and the 1996 action be consolidated and heard together. The trial of the consolidated action commenced on 14 September 1998 before a judge of this court. To date, only two witnesses have completed their evidence. A third witness is being cross-examined. The hearing of evidence has been delayed at different times by time spent on legal argument. Other matters have also delayed the prosecution of the trial. It is unnecessary to go into detail.

11 While these proceedings were being heard, other actions were being instituted by or against IOOF.

12 The Injunction Action. Pursuant to clause 9 of the Tripartite Agreement, a company called SEAS Sapfor Harvesting Pty Ltd is obliged to pay the Forest Company the proceeds of the sale of timber not later than a specified date in each year. The Forest Company, in turn, is obliged to pay those proceeds to IOOF. The Forest Company did not pay IOOF the proceeds due in July 1999. IOOF informed the Forest Company that, if it failed to make the required payment, IOOF would appoint a manager to the Forest Company pursuant to the provisions of clause 13 of the Trust Deed. Notice was given to other companies in the group terminating the Tripartite Agreement on the basis of fundamental breach. On 6 August 1999 the Forest Company issued proceedings out of this court seeking an injunction against IOOF restraining it from appointing a manager. Since that time, the Forest Company has retained payments due to IOOF.

13 Federal Court Proceedings. On 27 July 1999 the Forest Company issued proceedings against IOOF out of the Federal Court of Australia. In those proceedings, it alleged that IOOF had engaged in misleading and deceptive conduct in breach of s 52 of the Trade Practices Act 1974 (Cth), in that its annual accounts sent to covenant-holders were misleading and deceptive.

14 The Trust Action. On 25 February 1998, Forests and certain covenant-holders instituted an action out of this court seeking the appointment of an inspector to IOOF pursuant to the provisions of the Trustee Act. It is alleged IOOF had failed to keep records in relation to the Trustee Act and was not a fit and proper person to be a trustee.

15 Each of those separate actions was on foot in August 1999.

16 Sometime in 1998, and while the trial of the consolidated action was proceeding, negotiations had commenced between the chief executive officers of IOOF and the defendants. On 20 August 1999, I ordered that a mediation be conducted between the parties concerning the issues in the consolidated action and any related issues. The related issues were intended to include the three actions. On 3 September 1999, the trial was adjourned to enable the mediation to occur. The mediation was conducted in late September 1999. The parties have now reached a compromise. The terms of the compromise have been disclosed to me. However, they will not be published until the public announcement of the compromise. It is this compromise which IOOF ask me to approve.

17 I have already mentioned that the procedure of seeking advice and direction enables the court to advise a trustee whether it is lawful to exercise its discretion in a certain way. The court does not go so far as to tell the trustee how to exercise that discretion. For that reason and for the reasons which follow, I do not think that it is proper for the court to approve the compromise. Instead, the function of the court is to advise IOOF whether, in its opinion, it is proper for IOOF to agree to the compromise, the terms of the compromise being a matter for IOOF to determine.

18 The additional reasons for my conclusion are these. The court does not have available to it all of the evidence which the parties might adduce. It is not aware of all of the facts. Questions of law have not been argued. The question whether it is prudent to agree to the compromise is, therefore, a matter for IOOF to decide. IOOF has a better understanding of, and a better appreciation for, the factual issues and its prospects of success than the court could have at this stage. In deciding whether to agree to the compromise, IOOF will have regard to those matters as well as to other issues such as the uncertainty of and risks inherent in litigation, the length of the trial so far, the manner in which the trial has been conducted by the parties, the likely length of the trial, the costs which have been incurred, the costs yet to be incurred and, as well, any potential liability IOOF may have to pay part or all of the defendants' costs. The costs for all parties to this point have been very substantial.

19 There is another very important factor, which in one sense overrides all others. The parties are, by terms of their commercial arrangements and, in particular, by the Tripartite Agreement, placed in a commercial relationship which must continue for a number of years yet. It is desirable that parties who must deal together almost on a daily basis be able to resolve their differences and reach an understanding as to the manner in which they will regulate their future dealings.

20 In short, IOOF will be called upon to make a commercial judgment having regard to all of these factors. The court can do no more than examine whether IOOF has had regard to those factors. The responsibility for making the decision whether to agree to the compromise is a matter for IOOF and not the court.

21 As already mentioned, the consolidated action has been already proceeding for some 12 months. It is estimated that it is quite likely that it will continue for a further 12 months. Costs incurred by the parties so far are very substantial. Those costs provide a very good indication of the costs yet to be incurred. Those are factors which might well induce any party to consider compromising an action. Plainly, a victory which leads to a sum recovered which is, to a large extent, if not entirely, eroded by costs is a Pyrrhic victory indeed. I do not mean to suggest that that would necessarily be the outcome in this case. All I seek to do is emphasise that the costs are extremely high when compared with the amount which might be recovered and that it is a relevant matter to consider.

22 The terms of settlement include amendments to the Tripartite Agreement which will affect the future legal and commercial arrangements between the parties. Those amendments remove issues which have been the subject of the present dispute, namely, the claims for the basis upon which timber should be sold, the disputes as to expenses, and the disputes as to maintenance beyond the covenant period. The settlement involves a payment of monies. It will enable recovery of amounts which have been withheld to date as well as other monies. The monies to be recovered are substantial. They will result in the payment of $12 million over the next six years to IOOF. After payment of the costs of the action, IOOF will be in a position to pay a substantial sum to its covenant-holders. In addition, the compromise brings to an end, not only the consolidated action, but also each of the other three actions. In short, all of the litigation between the parties is brought to an end.

23 It is important to remember that the court exists to determine disputes which parties cannot themselves resolve. IOOF has decided that it is desirable to resolve this long and complex litigation on certain terms. It has been able to reach this compromise assisted by the services of a mediator. The court would be very reluctant to suggest that IOOF was wrong in agreeing to the compromise.

24 For all of these reasons, I am satisfied that it is proper for IOOF to agree to a compromise of these actions. It is, however, for IOOF to determine what should be the terms of the compromise. The court should not descend to examine the question whether each of the separate terms of the compromise is an appropriate compromise of that particular aspect of the dispute. For that reason, any announcement by IOOF of the fact of the compromise should not state that the court has approved the terms of the compromise. Instead, IOOF may state that the court held that it was proper for IOOF to enter into the compromise and ordered that it was at liberty to do so.

25 For all these reasons, I am satisfied that an order should be made that IOOF is at liberty to enter into the compromise.

26 There will also be orders that the second affidavit of Kenneth Taplin, sworn on 15 October 1999 and Exhibit 2 to that affidavit, and the memorandum of advice of Mr FGA Beaumont QC dated 13 October 1999 be confidential and be placed in a sealed envelope and not to be opened except by order of a judge of this court.

27 The Deed of Settlement, which was Exhibit KT1 to a second affidavit of Mr Taplin sworn on 16 October 1999, will be confidential until the date for public announcement of the compromise. I direct the solicitors for IOOF to inform the court by letter in writing of the fact of the public announcement immediately upon the announcement being made. That can be done by a letter sent by facsimile transmission to my associate.

28 I order that IOOF is entitled to costs of this application, such costs to be taxed on a solicitor and client basis and be paid out of the proceeds of the compromise.

29 I direct the parties to bring minutes of order into court.