Trustees Act 1962 (WA), s 89(1)

Orders for sale of land varied to permit short-term lease of the land and requiring defendants to give vacant possession for that purpose

Chief Commissioner of Stamp Duties for New South Wales v Buckle [1998] HCA 4; (1998) 192 CLR 226

Hillig v Darkinjung Local Aboriginal Land Council [2006] NSWSC 1371

Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550

Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360

Prior v Simeon [2010] WASC 382

Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99

Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246

1 The plaintiff is the registered proprietor of real property (the Land) held on trust for the first and second defendants. On 7 December 2010, I ordered that the Land be sold. The circumstances in which I made that order are set out in Prior v Simeon [2010] WASC 382.

2 The order was made to give effect to an equitable lien held by the plaintiff as security for a right to be indemnified by way of recoupment for payments made in execution of the trust over the Land. In particular, the plaintiff paid instalments due under loans made by Australian and New Zealand Banking Group Ltd (ANZ) for the purpose of acquiring the Land.

3 I made ancillary orders concerning the manner in which the Land was to be sold. Those orders directed a sale by private treaty with the plaintiff to have the conduct of the sale. The plaintiff was further directed to engage a qualified and licensed real estate agent carrying on business in the district in which the Land is located to assist with the sale. A reserve price was to be set by the agent and orders were made for an auction in the event that the Land could not be otherwise sold within a reasonable period. The defendants were ordered to give vacant possession of the Land within 14 days of the date stipulated for settlement in any contract for its sale.

4 The plaintiff now applies to vary the orders that have been made to allow him to lease the property for a short term pending its sale. Two reasons are given for the application: first, the plaintiff is unable to continue to meet payments due on the loans made by ANZ without the benefit of rental income from the Land and second, the state of the property market is such that it may take some time for the Land to be sold. The plaintiff's application necessarily requires that the orders previously made be varied to direct that the defendants give vacant possession of the Land to permit it to be leased.

5 I have concluded that the orders that I previously made should be varied to enable the plaintiff to lease the Land, subject to further directions concerning its sale.

6 The plaintiff supported his application with an affidavit in which he stated that:

(a) he had made an agreement with ANZ that it would not take any step to enforce its rights under a mortgage granted to secure its loans on the condition that he provide fortnightly updates regarding the sale of the Land and ensure that the loans continued to be repaid;

(b) an amount of $12,183.42 was payable each month in repayment of the loans made by ANZ;

(c) he could not afford to make the loan repayments and the defendants had advised that they would not make any payments to ANZ;

(e) he had obtained advice from a finance broker concerning borrowing further funds to meet the loan commitments to ANZ. The broker had suggested leasing the Land on a short-term basis to assist in funding the repayment of the ANZ loans.

7 The first defendant appeared on behalf of the defendants at the hearing of the plaintiff's application to vary the orders that have been made. As on previous occasions, he did not dispute the plaintiff's evidence. Rather, he submitted that the parties' interests would be best served by permitting him time to arrange finance to reimburse the plaintiff. That was an argument which I previously considered in concluding that it was appropriate to order that the Land be sold. The circumstances have not changed since that order; that is, there is no evidence that the defendants are in a position to obtain funding to reimburse the plaintiff for the payments that he has made to ANZ. It should be noted that the orders permit the defendants to purchase the Land if they are able to finance its acquisition and by that means, reimburse the plaintiff for his expenditure.

8 The first defendant also submitted that the Land had been listed for sale at a price that was too high and that letting the property may have an adverse effect on the attempts to sell the Land. No evidence was adduced in support of those submissions; in particular, there was no evidence to suggest that the Land had been listed for sale other than according to the orders that have been made, including the orders for fixing a reserve price. Further, the orders expressly gave the defendants liberty to apply to the court if they disputed the reserve price. They have not made an application in that regard.

The nature of the plaintiff's interest in the Land

9 The court's orders for the sale of the Land were expressly made to give effect to the plaintiff's lien. There is a question as to whether the court can now direct that the Land be leased in enforcing that security.

10 I was invited at the first hearing of this matter to make orders for the sale of the Land pursuant to s 89 of the Trustees Act 1962 (WA) (the Act) but expressly declined to do so, preferring to recognise the plaintiff's right to enforce his security. The plaintiff again looks to s 89 of the Act as the source of the court's power to make the orders that he now seeks. Briefly stated, his submission is that the lease of the Land is 'expedient in the management or administration of ...property vested in [the plaintiff as] a trustee...'

11 Whether a trustee's equitable lien is a possessory security is a question that has not been finally settled: see the discussion by Brereton J in Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd [2008] NSWSC 1344; (2008) 74 NSWLR 550. The issue in Lemery Holdings was whether a former trustee was entitled to retain, as against a new trustee, trust assets as security for an accrued right of indemnity out of those assets. Brereton J concluded that an equitable lien does not confer on the security holder any right of foreclosure nor any right to possession of the property. The lien creates an interest which the security holder can enforce by judicial sale or appointment of a receiver but the holder cannot bring an action for possession of the property the subject of the lien [46].

12 Three points about his Honour's conclusion should be noted:

(a) As his Honour recognised, there are authorities to the contrary. One such authority is the decision of the Full Court of the Supreme Court of South Australia in Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99.

(b) His Honour's concern in Lemery Holdings was with the right of a former trustee to possession of the trust property as against a subsequent trustee. His Honour recognised that the right of a trustee to possession of trust property as against a beneficiary may raise different considerations.

(c) It is well established that a trustee who is in possession of trust property may retain possession as against a beneficiary until its indemnity is exercised: Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360, 370; Chief Commissioner of Stamp Duties for New South Wales v Buckle [1998] HCA 4; (1998) 192 CLR 226. As Brereton J accepted, it is necessary to reconcile that position with the conclusion that an equitable lien is not a possessory security.

The trustee's lien is an equitable lien which confers on him a charge over the trust property, whether in his possession or not, for the purpose of protecting and enforcing the right of indemnity. It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity ... the right of possession of the trustee, until his right of indemnity is exercised, is superior to those of a new trustee or the cestuis que trust. The rights conferred by the lien passed to the liquidator. They would enable him to obtain and retain possession of the trust property until the right of indemnity has been exercised, and to realize the trust property in the course of exercising it. (emphasis added)

14 Jacobs J and Matheson J agreed with that part of the Chief Justice's reasoning on the nature of a trustee's interest in trust property pursuant to its right of indemnity.

15 Brereton J declined to follow Re Suco Gold in Lemery Holdings. He regarded the observations of King CJ in Re Suco Gold as obiter and noted that there were first instance New South Wales decisions to the contrary: Hillig v Darkinjung Local Aboriginal Land Council [2006] NSWSC 1371 and Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246. I am not so confident that I can discount a unanimous view expressed by the Full Court of the Supreme Court of another jurisdiction in determining this application.

16 In Lemery Holdings, Brereton J squarely addressed the question of whether his conclusion that an equitable lien was not a possessory security could be reconciled with the principle that a trustee is entitled to retain possession of trust property as against a beneficiary or an execution creditor pursuant to an accrued right of indemnity. His Honour stated:

At least as against a beneficiary, the answer is that that entitlement is a manifestation of set-off, in that once a trustee has an accrued right of indemnity, the trustee is entitled to set it off against the beneficiary's claim to the trust assets, and to refrain from distributing until the trustee's claim is satisfied. In the closely analogous field of the trustee's personal right of indemnity against a beneficiary, this was explained in Re Akerman [1891] 3 Ch 212 at 219 per Kekewich J:

'A person who owes an estate money, that is to say, who is bound to increase the general mass of the estate by a contribution of his own, cannot claim an aliquot share given to him out of that mass without first making the contribution which completes it. Nothing is in truth retained by the representative of the estate; nothing is in strict language set off; but the contributor is paid by holding in his own hand a part of the mass, which, if the mass were completed, he would receive back.'

As the authors of Jacobs' Law of Trusts point out (at 591 [211]): 'The beneficiary is treated as already having in his hands a portion of the assets and therefore is satisfied pro tanto.'

17 Brereton J also recognised that there was a second basis for distinguishing between a trustee's right of possession as against beneficiaries and execution creditors and its right to possession as against a new trustee. A distribution to a beneficiary or seizure by an execution creditor of trust property would be destructive of the security interest whereas transfer to a new trustee would not [49].

18 In Octavo Investments Stephen, Mason, Aitkin and Wilson JJ said at (369 - 370):

Property which is an asset of a trading estate carried on by a trustee is properly described as trust property ... however, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as 'trust property' inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust ...

19 In Commissioner of Stamp Duties (NSW) v Buckle the High Court said of a trustee's right of indemnity:

Until the right of reimbursement or exoneration has been satisfied, 'it is impossible to say what the trust fund is'. The entitlement of the beneficiaries in respect of the assets held by the trustee which constitutes the 'property' to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. The entitlement of the beneficiaries is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them. To the extent that the assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not 'trust assets' or 'trust property' in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries.

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'.

20 In this case, the defendants as beneficiaries of the trust have possession of the Land. An order has been made requiring them to deliver possession of the Land to the trustee at a particular point in time; that order having been made as a necessary order ancillary to the primary order for judicial sale. However, it appears to me that the plaintiff is entitled to an order for possession of the Land in aid of his accrued right of indemnity and not merely pursuant to a direction of the court made ancillary to an order for judicial sale. First, that is the conclusion reached by the Full Court of the Supreme Court of South Australia in Re Suco Gold and I regard myself as bound by that decision unless I conclude that it is plainly wrong (and I do not consider the decision to be plainly wrong). Second, as between trustee and beneficiary, it appears to me that the right of a trustee to recover possession of property the subject of an equitable lien from the beneficiary is consistent with the nature of the proprietary interest recognised by the High Court in Octavo Investments and Commissioner of Stamp Duties (NSW) v Buckle. As between the trustee and the beneficiary, it is the trustee who is entitled to possession of the property that is subject to its lien where there is an accrued right of indemnity.

21 Consequently, in my view, the plaintiff is entitled to request the court to vary its orders to provide for delivery up of possession of the Land. I further consider that in varying the order previously made, the court retains a residual discretion to order delivery up of possession on reasonable terms that allow for the fact that the Land is the defendants' residence.

22 It appears to me that on obtaining possession, the plaintiff is in a position to grant a lease over the Land; he has possession and he may give exclusive possession to another person as tenant. However, the disposition of the Land remains under the control of the court given that orders have been made for its sale. Accordingly, the term of any lease could not be such as to frustrate the order for sale that has already been made.

Section 89 of the Act

23 If I am wrong in the conclusions that I have reached regarding the plaintiff's right to possession of the land, I consider that it is appropriate that an order be made under s 89(1) of the Act for the lease of the land with a further order that the defendants deliver up possession of the land to the plaintiff. In my view, leasing the Land would be expedient in the management or administration of the Land as vested in the plaintiff as trustee. I consider that the nature of the interests of the plaintiff and the defendants in the Land as described by the High Court in Commissioner of Stamp Duties (NSW) v Buckle is not such as to the take the Land outside the purview of s 89(1); that is, the land remains 'property vested in a trustee' for the purposes of that section notwithstanding the change in the parties' interest in the Land effected by the existence of the plaintiff's accrued right to be indemnified by recoupment.

24 I will hear further from the parties as to the form of the orders that should be made to give effect to these reasons; in particular, as to the terms on which the Land should be leased consistent with the court's primary order for sale. In the circumstances that have arisen, I would be prepared to entertain a further application by the plaintiff to vary the orders that have been made to enable further time to seek a sale of the Land by private treaty, if that is what he wishes, and to enable the land to be leased in the interim.