Drummond v Drummond

COUNSEL : B A Coles QC with D D Knoll (P) I G Harrison SC (D) SOLICITORS : Bartier Perry (P) Walsh & Blair (D) CATCHWORDS : Wills and executors - executor's duty of inquiry into status and ownership of assets - principles concerning executor's right or indemnity out of estate for costs; Corporations - companies - duties of directors and secretary - duty to maintain corporate records - duty to clarify records as to status and ownership of shares; Practice and procedure - costs - principles as to award of indemnity costs ACTS CITED : Supreme Court Act 1970 (NSW) s 76 Supreme Court Rules Pt 52A r 11 Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 Brown v McEncroe (1890) 11 LR (NSW) Eq 134 Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR para 41-383 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 CASES CITED : Miller v Cameron (1936) 54 CLR 572 Plimsoll v Drake (No.2) (Supreme Court of Tasmania, Zeeman J, unreported, 8 June 1995) Re Jones; Christmas v Jones [1897] 2 Ch 190 Re Weall; Andrews v Weall (1889) 42 ChD 674 Rouse v Shepherd (No.2) (1994) 35 NSWLR 277 Skrimshire v Melbourne Benevolent Asylum (1894) 20 VLR 13 Varga Group Investments (No.8) Pty Ltd v Geebung Investments Pty Ltd (Supreme Court of New South Wales, Abadee J, unreported, 15 November 1994) DECISION : Defendant to pay plaintiffs' costs of summons on indemnity basis; cross-claimant to pay cross-defendants' costs on cross-claim; no order for payment out of estate

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3798/96 - PETER MICHAEL DRUMMOND AND ROBYN ELIZABETH DEVINE V JOHN STEPHEN DRUMMOND

1 HIS HONOUR: This is a dispute amongst members of the Drummond family. John McPherson Drummond ('J M Drummond') died on 26 January 1989. He left his entire estate to his wife Elaine Lenore Drummond. Letters of administration cta were granted to his two sons and daughter who are the parties to the present proceedings. Elaine Drummond died on 18 July 1989. Probate of her will was granted to her two sons and daughter. She left a substantial estate. 2 Proceedings were instituted in October 1996, and a cross-claim was filed in June 1997. The plaintiffs/cross-defendants are one of the sons (Peter Michael Drummond) and the daughter (Robyn Elizabeth Devine). The defendant/cross-claimant is the other son, John Stephen Drummond. The plaintiffs sought orders that 7,000 cumulative preference shares and two ordinary shares in Drummond Investments Pty Ltd ('the Company'), which remained in the name of the Estate of J M Drummond, be distributed and transferred in accordance with the wills of J M and Elaine Drummond. The defendant as cross-claimant sought orders in respect of three matters: recovery of the sums of $200,143.04 and $20,793.67 alleged to be owing, and delivery up of two rings and one third of the other jewellery in Elaine Drummond's estate. 3 The case came before me for hearing on 15 December 1998. Counsel for the defendant informed me at the outset that since the preparation and delivery of a chronology and tender bundle in the previous week, the defendant was in a position to consent to the orders sought in the summons, subject to the question of costs. Further, counsel informed the Court that the defendant no longer sought relief in respect of the claim to $200,143.04, but persisted in the claim to $20,793.67 and the claim to the jewellery. Counsel for the plaintiffs then informed the Court that his clients were prepared to hand over the two rings which the defendant had demanded, not admitting any legal obligation to do so but in conformance with their mother's wishes expressed in a non-testamentary letter. With leave, he filed in Court an amended defence to the cross-claim which pleaded that the claim for $20,793.67 was statute-barred. Subsequently counsel for the defendant informed the Court that he had instructions to discontinue the cross-claim as regards the remaining jewellery and the sum of $20,793.67, though he asserted that the claim to that sum would be a possible issue later in the administration of the estates. 4 All substantive claims in the proceedings having being resolved by consent, the only outstanding issue related to costs. The case proceeded into evidence on that issue, on the basis that counsel would prepare draft orders to be made by consent. By orders made on 23 December 1998, the plaintiffs were granted relief substantially in accordance with the relief sought in the summons, except on the question of costs and with a minor variation in the order of registered ownership of two of the shares. It was noted that Robyn Devine had agreed, without admission of liability, to deliver up the two rings to the defendant. The cross-claim was dismissed except for the claims with respect to the sum of $20,793.67 and the claim for a declaration that Robyn Devine had wrongfully detained one third of the balance of the jewellery, and in respect of those matters leave was granted to the defendant as cross-claimant to discontinue. 5 Three questions were raised with respect to costs. First, should the defendant be ordered to pay the plaintiffs' costs of the summons and cross-claim? Secondly, should the defendant be permitted to recover his costs, and any costs ordered against him, out of the Estate of Elaine Drummond? Thirdly, if the defendant is ordered to pay the plaintiffs' costs, should those costs be awarded on an indemnity basis? 6 These issues were contested principally in relation to the summons rather than the cross-claim. I shall return to the cross-claim later. The submissions of the parties with respect to the costs of the summons require an investigation of the facts concerning the Company and the dispute between the parties about the transfer of its shares.

Facts and findings concerning the Company and the proposed share transfers 7 The Company was formed on 9 June 1970. It holds valuable assets including a portfolio of listed public company shares and a rural property known as Marila Park. Some documents prepared in the 1970s refer to folio numbers in the Company's share register, but the evidence before me indicates that the register, if it ever existed, cannot now be located. According to an historical company extract produced by the Australian Securities and Investments Commission on 25 November 1998, the issued share capital comprises 32 ordinary shares and 7,000 cumulative preference shares; all of the cumulative preference shares and two of the ordinary shares (which I shall describe together as 'the Estate Shares') are held beneficially by 'the Estate of John McPherson Drummond'; and the plaintiffs and the defendant each beneficially hold ten ordinary shares. 8 The evidence includes a copy of the memorandum and articles of association of the Company. J M and Elaine Drummond signed the memorandum as subscribers for one ordinary share each. Article 5 authorises the directors to issue shares with such preferred or other rights as the directors, subject to any ordinary resolution of the company, may determine. Article 10 gives every person whose name is entered as a member in the register of members an entitlement to receive a share certificate. Article 22 says that any member may transfer all or any of his shares by instrument in writing in common form or in the form approved by the directors. By article 25 the directors are empowered, but not required, to decline to register any transfer of shares unless, inter alia, the instrument of transfer is deposited together with the certificate of the shares to which it relates and such other evidence as the directors may reasonably require to verify the right of the transferor to make the transfer and the due execution of the instrument of transfer. By article 26 a person entitled to transfer a share in consequence of the death of a member is empowered to transfer the share to another member or certain other listed persons. Otherwise, the transfer of shares is subject to rights of pre-emption set out in article 28. By article 27 the directors are given the absolute discretion without assigning any reason, to refuse to register any transfer to a person of whom they do not approve. Article 30 provides that in the case of the death of a member, the legal personal representative is the only person recognised by the company as having any title to the shares, and by article 31 any person entitled to a share in consequence of the death of a member may upon producing appropriate evidence be registered or have his nominee registered as a member, but the directors have the same discretion to decline to register a transmission as they would have in the case of a transfer of the share. 9 Article 49 empowers any director to convene an extraordinary general meeting, and such a meeting may also be convened by requisitionists as provided by the Companies Act 1961 (NSW). Article 73 empowers the shareholders in general meeting to increase or reduce the number of directors by ordinary resolution, and article 75 empowers the shareholders in general meeting to remove any director and appoint a replacement, by ordinary resolution. 10 The evidence also includes a copy of a minute of an extraordinary general meeting of the shareholders of the Company held on 3 September 1970, at which several special resolutions were passed. One resolution converted 7,000 ordinary shares into cumulative preference shares, and set out the rights of the preference shareholders. The preference shares were not expressed to be redeemable, and the rights attaching to them varied during and after the lifetime of Edith Ethel Drummond, the mother of J M Drummond. Another special resolution of the same date amended the articles of association by providing that Edith Ethel Drummond and J M Drummond would be joint governing directors and setting out their powers. As far as the evidence in this case goes, the memorandum and articles of the Company remained in this form at all relevant later times. 11 During his lifetime J M Drummond was a director of the Company. The defendant was appointed secretary in 1979 and a director in 1983, and continued in those roles at all later relevant times. The Company was deregistered in 1991 for failure to lodge annual returns, and was restored to the register in November 1994. At that time it was necessary for John to arrange for the appointment of another director and at his request, Peter consented to join the board, his appointment taking effect in October 1994. Peter remained a director at all later relevant times. 12 On 5 June 1996, at a time when the parties were already in dispute over other matters, the plaintiffs wrote to the defendant asking the defendant to execute share transfers for the Estate Shares. The letter enclosed forms of share transfers by which the plaintiffs and defendant as administrators would transfer the shares from the Estate of J M Drummond to themselves as the executors of the Estate of Elaine Drummond, and would then transfer the shares as executors of the Estate of Elaine Drummond to themselves as the beneficiaries of that Estate, by transferring one third of the 7,000 preference shares to each beneficiary and transferring the remaining preference share and the two ordinary shares into the joint names of the three beneficiaries. The transfer forms were accompanied by a draft direction to be signed by the plaintiffs and defendant, addressed to themselves as administrators and executors and dealing with the distribution of the shares in this manner. The covering letter stated that it was 'not appropriate' that the shares remain registered in the name of the Estate of J M Drummond, that the matter 'needs to be tidied up' and that it would be 'in everyone's best interest to put the company's affairs on a proper footing'. 13 It seems to me that this request was a proper and reasonable one. As administrators and executors, the plaintiffs and defendant had the duty duly to administer the respective estates and after administration, to distribute the assets to the beneficiaries: generally, see J H G Sunnucks, J G Ross-Martyn and K M Garnett, Williams, Mortimer and Sunnucks on Executors, Administrators and Probate (17th ed, 1993), p 934. In the present case, the practical effect of the duty was that they ought cause title to the Estate Shares to be transferred to the beneficiaries of the Estate of Elaine Drummond. It is true, as the defendant asserts, that the distribution of the shares did not affect the control of the Company, since the plaintiffs already had ten each of the remaining 30 ordinary shares. Nonetheless, in my opinion, it was appropriate for them to seek to regularise the position, particularly having regard to the history of irregular administration of the Company's affairs. The fact that the distribution of the shares would not affect voting control of the Company was no justification for failing to attend to the due administration of the estates. 14 The defendant's solicitors eventually responded on 22 August 1996. They referred to article 25 which, they said, 'require[d] the production of the share certificates before the transfer may be registered in the share register'. This is plainly wrong, since article 25 merely gave the directors a discretion to refuse to register a transfer in the absence of the share certificate. The letter asked the plaintiffs' solicitors to forward duly executed share transfers and share certificates, to be dealt with by their client 'as a director of' the Company. It would obviously have been impossible for the plaintiffs to produce 'duly executed' share transfers unless the defendant signed them as administrator and executor respectively. The letter pointed out that the inventory of the Estate of Elaine Drummond did not specifically identify the shares as being an asset of the Estate, and asserted that it would be necessary to apply to 'amend the Probate as granted' so as to permit a subsequent transfer from that Estate. Again, this was plainly wrong, since item 7 of the inventory of the Estate of Elaine Drummond referred to an 'Interest in Deceased Estate' and noted that as the date of her death Elaine Drummond had not had any of the assets of the Estate of J M Drummond transferred to her. Therefore at the time of her death, Elaine Drummond had a right in personam to compel the administrators of the Estate of J M Drummond to attend to the due administration of the estate, the nature of that right being described in the inventory. The letter proceeded to claim, again wrongly, that it would be necessary for the Company to issue certificates in the name of the Elaine Drummond before any subsequent transfer may be approved and registered in favour of the beneficiaries. The letter concluded that legal proceedings would inappropriate and premature and the defendant would seek to have them struck out with costs. 15 On every significant point the letter of 22 August 1996 was wrong in law. Further, the letter proceeded on the basis that the defendant had no active duty to investigate the true position with respect to the shareholdings in the Company, notwithstanding that he was a director and secretary of the Company and an administrator and executor of the two estates respectively, as well as the person most closely involved in the affairs of the Company and the person who had (as I shall point out) signed annual returns which represented that the Estate Shares were held by the Estate of J M Drummond. In fact the defendant had a clear positive duty of inquiry, to which I shall return. 16 Either the author of the letter was ignorant of important legal principles or the letter was a reckless or deceptive attempt to stand in the way of the plaintiffs' proper request to their fellow administrator and executor to discharge their common duty to complete the administration of the two estates. The immediate author of the letter was the defendant's solicitor, but the defendant admitted in evidence that he prepared a draft of that letter and settled its contents with the solicitor. The defendant is a barrister-at-law who practises, amongst other areas, in commercial law, and so the letter of 22 August 1996 reflects very poorly on him personally. 17 In their letter of 11 September 1996 the defendant's solicitors compounded the errors which they and their client had previously made. They claimed that their earlier letter had 'clearly' stated the effect of article 25, namely that the directors may decline to register a transfer of shares in the absence of the certificate, and they said 'our client did not, nor does it assert that such production was mandatory'. And yet the letter of 22 August 1996 had purported to note that article 25 required the production of the share certificate before the transfer may be registered, and stated that 'in the absence of the relevant share certificates the transfers cannot be registered if executed'. 18 The letter of 11 September 1996 asserted that the defendant had not refused to transfer the shares, but had merely sought production of the necessary evidence to establish that J M Drummond was the registered holder. The letter claimed that the plaintiffs had no material to establish that the 7,000 preference shares were ever in fact issued to J M Drummond, and that a director would be in breach of his fiduciary duty to the Company to register a share transfer where there exists no evidence to support the alleged entitlement to the shares. Again, this assertion is wrong in law, as I shall explain more fully later. In my opinion the defendant's fiduciary duty to the Company as a director was to make reasonable and proper inquiries to clear up the uncertainty which he claimed to have arisen notwithstanding his continued endorsement of annual returns which represented that the shares existed and were held by the Estate of J M Drummond. The letter reiterated that in the defendant's opinion any proceedings would be inappropriate and premature and the defendant would move to have them struck out. 19 The defendant sought to explain his attitude to the transfer of shares in his affidavit and oral evidence at the hearing. He said that until he received the request by his brother and sister for share transfers, he assumed that the Estate Shares had been properly issued and belonged to the Estate of J M Drummond because his father had told him so on several occasions. Relying on those statements, he was principally responsible for preparing the inventory of assets on the basis of which letters of administration cta were issued to him and the plaintiffs in respect of their father's estate. The inventory showed the Estate Shares as belonging to J M Drummond. He said that at some time after the plaintiffs wrote to him on 5 June 1996, he examined the memorandum and articles of association of the Company and noticed that his father had subscribed for only one share, the other share being originally held by his mother. He was unable to locate any share register or other documentation which would establish that the preference shares were in fact issued to Edith Drummond or transferred to J M Drummond, or any similar evidence to show the transfer of one ordinary share from Elaine Drummond to J M Drummond, or to show the issue of ten ordinary shares to the plaintiffs and himself. He did, however, find a tax return for 1982 which stated that he and the plaintiffs each held ten ordinary shares and that J M Drummond held the Estate Shares. 20 The defendant's investigation of the shareholdings of the Company was within a very limited compass. It appears that he looked through the papers which he possessed with respect to his father's and mother's affairs. He said he undertook an examination of the books and records of the Company but it is not clear that it extended beyond the papers in his possession. The Company's accountant during the period from 1983 until March 1994 was Mr G J Newman. The defendant replaced Mr Newman with Nelson Thomas & Co, Chartered Accountants, in 1994, after he discovered that the Company had been deregistered. While Mr Newman was no longer acting for the Company in 1996, it was open to the defendant to inquire whether Mr Newman had any relevant corporate records, but he did not do so. He had previously written a letter to Mr Newman on 27 May 1994 which he described in his affidavit of 14 December 1998 as a request 'that he return to me all the records held by him on behalf of' the Company. But on examination, that letter merely asked for specified documents to permit the defendant to prepare his personal tax return, including 'documents in relation to dividend receipts' and 'books and records in respect to the operation of 'Marila Park'', but not the Company's minutes books, registers or corporate records. 21 Further, it was open to the defendant to conduct a search of public records of the Company held by the Australian Securities and Investments Commission, including microfiche records of the Registrar of Companies, but he did not do so. 22 The defendant's evidence is that since the investigations which he made were unsuccessful, the doubt which had been created by his discovery of the memorandum and articles of association remained and he therefore declined to execute share transfers in the absence of evidence which would remove his doubt. This is not a plausible explanation for his refusal to co-operate with his co-executors. An ordinary prudent person, let alone a barrister, would have realised that one of the original subscribers may have transferred her shares and that the Company's constitution made provision for the issue of new shares. Prudence would then require that any queries be pursued by proper investigation from those most likely to have relevant information - the Company's accountant at the time and the Commission. Quite apart from the duty which he had as legal personal representative, director and secretary, the defendant's failure to pursue any such inquiries renders implausible his evidence that he developed a doubt about the status and ownership of the Estate Shares. 23 On 25 March 1997, some months after the commencement of these proceedings, the plaintiffs' solicitors wrote to the defendant's solicitors proposing a round-table conference and mediation but insisting that the proper administration of the estates required registration of the share transfers as a prerequisite to any settlement conference. The letter gave the defendant the opportunity to consent to the transfer of the shares without penalty as to costs, but he did not do so. 24 Shortly before the hearing and in accordance with my pre-trial directions, the plaintiffs served a chronology and bundle of documents on the defendant. The documents included the historical company extract of 25 November 1998 to which I have referred, a bundle of photocopy returns tabbed 'Records of the Registrar of Companies', and some copies of documents tabbed 'Drummond Investments Pty Ltd - Other Corporate Records'. 25 The records of the Registrar of Companies were obtained by search of the public records presently maintained by the Australian Securities and Investments Commission. The Commission, formerly known as the Australian Securities Commission, is the successor to the National Companies and Securities Commission and the Corporate Affairs Commission of New South Wales, which in turn was the successor to the Registrar of Companies of New South Wales. The records of the Australian Securities and Investments Commission include records of documents filed with the predecessor entities. 26 The 'Other Corporate Records' were obtained by the plaintiffs from Mr Newman, the Company's former accountant, within the two months preceding the hearing. There was no obstacle to the defendant obtaining both sets of documents at a much earlier stage. 27 The defendant's evidence is that the documents were served on his counsel on 10 December 1998 and he had the opportunity to examine them in counsel's chambers on Sunday 13 December 1998, two days before the commencement of the hearing. At no time prior to 10 December 1998 had the plaintiffs informed him, directly or through legal advisers, that these documents were in the plaintiffs' possession. The defendant said that when he examined the documents he concluded that they established that the Estate Shares were properly to be considered as part of the Estate of J M Drummond. He therefore agreed to execute transfers of the shares as sought by the plaintiffs, subject to an adjustment of the order in which the holders of the two ordinary shares were to be recorded. 28 The records of the Registrar of Companies in the tender bundle of documents relate to the Company for the period 1970 to 1979, supplemented by ASIC records from 1990 to 1997. The 'other corporate records' relate to the Company for the period from 1970 to 1975. The former category of records (which I shall call the 'public records') indicates that: · an ordinary share was allotted to each of J M and Elaine Drummond upon the company's formation in June 1970, they being the subscribers to the memorandum; · an additional 7,030 ordinary shares were allotted on 3 September 1970, 7,000 to Edith Ethel Drummond and 30 to J M Drummond; · in the 1970 annual return of the Company J M Drummond was said to hold 31 ordinary shares in trust for Edith, Peter, John and Robyn, and Edith was said to hold one ordinary share and 7,000 cumulative preference shares; · in the annual return for 1971 Edith's shares were recorded as held by 'Estate of the late Edith Drummond' (she having died in September 1971); · in the annual return for 1972 all of the 7,032 shares were recorded as held by J M Drummond in trust for Peter, John and Robyn, and according to later annual returns that situation continued until at least 1979; · the 1990 annual return recorded that the same number of shares was on issue, but 10 ordinary shares were held by each of John, Peter and Robyn, with the remaining two ordinary shares and 7,000 cumulative preference shares held by 'the Estate of Drummond, John McPherson', and those holdings were repeated in the annual returns for the years 1991 to 1997 inclusive; · the annual returns up to 1979 were signed by J M and Elaine Drummond as directors, while the annual returns for 1990 to 1993 inclusive were signed by the defendant, in each case on 1 September 1994; · on 8 November 1994 the Company was restored to the register after a period of deregistration; · the annual returns for 1994 and 1995, showing the shareholding information noted above, were signed by the defendant on 2 February and 29 December 1995 respectively, and the annual returns for 1996 and 1997 showing the same information were lodged electronically. 29 The 'other corporate records' which are in evidence provide some corroboration of the public records. Some unsigned minutes of a meeting of directors of the Company on 3 September 1970 indicate that Elaine transferred her subscriber's ordinary share to Edith Drummond and J M Drummond declared a trust in favour of Edith Drummond over the other ordinary share which was registered in his name. Some copies of correspondence indicate that the trust referred to in the annual returns during the 1970s was probably a trust of only 30 of the issued shares, J M Drummond holding 10 shares for each of his children John, Peter and Robyn. 30 While the evidence of public and other corporate records is not complete nor entirely clear on some matters, it appears to me to establish that 7,032 shares of the Company were issued; the two ordinary subscriber shares were transferred and transmitted but eventually were held by J M Drummond; the 7,000 cumulative preference shares were also eventually held by J M Drummond; and the remaining 30 ordinary shares were at some point transferred or transmitted to each of the plaintiffs and the defendant in parcels of 10 shares. 31 ASIC's historical company extract issued on 25 November 1998 helps to overcome doubts which one might otherwise have about these conclusions, for it clearly states that the plaintiffs and the defendant each hold ten ordinary shares beneficially, while two ordinary shares and 7,000 cumulative preference shares are held by 'the Estate of Drummond, John McPherson'. The significance of the ASIC extract is explained by s 1274B(2) of the Corporations Law, which states: 'In a proceeding in a court, a writing that purports to have been prepared by the Commission is admissible as prima facie evidence of the matter stated in so much of the writing as sets out what purports to be information obtained by the Commission, by using a data processor, from the national database. In other words, the writing is proof of such a matter in the absence of evidence to the contrary.' 32 The historical company extract is a writing that purports to have been prepared by the Commission. It begins with the words 'Section 1274B This extract has been prepared by the Australian Securities and Investments Commission from information it obtained, by using a data processor, from the national database.' It follows that the historical company extract is prima facie evidence of, inter alia, the number of shares on issue and the identity of the shareholders in the Company. The earlier records of the Registrar of Companies and the other corporate records corroborate the information about shareholdings contained in the extract. 33 Taken together, all this evidence was sufficient to justify a decision by the executors to execute share transfers in order to distribute the shares to the beneficiaries of the Estate of Elaine Drummond.

The defendant's duty to clarify the status and ownership of the Estate Shares 34 I have found that the letters written on behalf of the defendant on 22 August and 11 September 1996 contained errors of law which implied either that the author was ignorant of important legal principles or was acting recklessly or deceptively in an attempt to obstruct the plaintiffs' proper request to their fellow administrator and executor to complete the administration of the estates. I have also found that the defendant's explanation for developing a doubt as to the issue and ownership of the Estate Shares is implausible. 35 The demand by the defendant for the production of share certificates was impossible to sustain for some additional reasons. At the time of the letter of 22 August 1996:

(a) as an administrator of the Estate of J M Drummond and an executor of the Estate of Elaine Drummond, the defendant had a duty (which I have explained) to attend to the due administration of those estates and in so doing, to distribute any shares which were part of either estate to the appropriate beneficiaries;

(b) as a director of the Company since 1983, he had a fiduciary duty to act in the best interests of the shareholders of the Company, which implied a duty to clarify any uncertainty which may exist as to the proper allotment and issue of the Company's shares, for in the absence of clarification the Company could not adequately discharge its statutory and other obligations to its shareholders (such as the obligation to pay any dividend which may be properly declared and to give notice to shareholders of any general meeting), and the director himself could not adequately to discharge his duty to consider the shareholders' interests;

(c) as a director and the secretary of the Company since 1979, he had a duty to the Company to ensure that it complied with its obligations under the Corporations Law to keep proper books and records, including the register of members required to be kept by s 169 of the Corporations Law, and a risk of personal liability as a person knowingly concerned in a contravention by the Company in the event that the relevant statutory obligations of the Company were not discharged (a risk enhanced by the reversal of the onus of proof contained in s 83(2));

(d) therefore, if he had any real doubt as to whether shares had been properly issued or registered in the name of his late father, he had a duty to the Company as a director and the secretary to carry out investigations with a view to removing that doubt;

(e) as the person primarily responsible for collation and preparation of information with respect to the estates, and (after his father's death) for the collation of information and maintenance of records of the Company, he was in a better position than either of the plaintiffs to ascertain whether share certificates had ever been issued, and to investigate and fill any deficiencies in information with respect to the Company's records of shareholdings;

(f) he personally signed as a director the annual returns for the period from 1990 to 1995, recording that the Estate of J M Drummond was the owner of the Estate Shares, thereby exposing himself to liability under s 1308(4) of the Corporations Law if he had failed to take reasonable steps to ensure that the statements in those returns about the Estate Shares were not false or misleading;

(g) he was principally responsible for preparing the inventory of assets in the Estate of J M Drummond which showed two ordinary and 7,000 preference shares as assets of the Estate;

(h) as a director and the secretary of the Company, he was in a position to obtain from Mr Newman, the Company's former accountant, copies of the documents which were eventually put in evidence in this case;

(i) the investigations which he might have carried out included company searches to obtain copies of the documents filed with the Registrar of Companies during the 1970s, which are now in evidence;

(j) he could also have obtained an historical company extract similar to the one dated 25 November 1998 which is in evidence, which would be prima facie evidence as to the statement of shareholdings under s 1274B of the Corporations Law;

(k) had he made appropriate investigations of these kinds, he would have been able to satisfy himself on the balance of probabilities that the Estate Shares had been properly issued and were legally and beneficially owned by J M Drummond at the date of his death.

Conclusion as to the transfer of the Estate Shares 36 My conclusion, therefore, is that the plaintiffs' demand that the shares be distributed to the beneficiaries of the Estate of Elaine Drummond was a proper demand in the performance of their duties as legal personal representatives, and one with which the defendant should have complied. The defendant's assertion that he developed a genuine doubt about the existence and ownership of the Estate Shares is implausible. However, if he had such a doubt, he should have made inquiries which would have provided evidence sufficient for him to rely on and armed with that evidence, he would have had no basis for refusing the plaintiffs' request. In the circumstances, therefore, his resistance and obstruction were unjustified and his behaviour was unacceptable.

Should the defendant be ordered to pay the plaintiffs' costs of the summons? 37 The defendant submits that he should not be ordered to pay costs because he was not aware of the contents of the records of the Registrar of Companies and the 'other corporate records' until shortly before the commencement of the hearing, and when he became aware of that information he instructed his counsel to consent to the orders sought in the summons. But as I have found, the defendant obstructed the plaintiffs' legitimate claim without justification, putting forward false propositions of law, and he failed to discharge his duty to make inquiries. Given his conduct, he has no basis for resisting the application of the normal rule that costs should follow the event. 38 The defendant's counsel submitted that the commencement of proceedings to compel the defendant to join in the distribution of the shares was a 'punctilious adherence to form' which would not confer any practical benefit on anyone. There were, in his submission, other courses of conduct which the plaintiffs could have taken which would have avoided litigation, and their institution of proceedings was therefore unreasonable, particularly since success by them would not affect the equity or control of the Company. In particular, counsel submitted that since the plaintiffs had effective control of the Company by virtue of holding 20 voting shares, they could have convened a special general meeting to remove the defendant as a director. This would have been a practical means of self-help. 39 I reject this submission. For the reasons I have given, the plaintiffs were entitled to compel their fellow administrator and executor to perform his duties. Where a duty which is owed by one person to another is not discharged and there are no extenuating circumstances, the person to whom the duty is owed is entitled to take proceedings for vindication. It is not necessary for that person to engage in some other form of self-help, particularly where that other course of conduct involves risk and potential delay. An attempt by the plaintiffs to remove the defendant from the board of the Company could well have led to litigation to challenge the validity of the plaintiffs' conduct - for example, on the ground of oppression or unfairly prejudicial conduct under what is now s 246AA of the Corporations Law. Given the antagonism between the parties, the plaintiffs could have no assurance that this method of 'self-help' would be any more effective or less expensive than the course which they chose to pursue, which was the most straightforward way of asserting the rights which they believed, correctly, that they had against their co-executor. 40 Counsel for the defendant also submits that there is an important difference between the material now before the Court and the affidavits which were filed earlier in the proceedings. The defendant has consented to orders upon being presented with the material which is now in evidence, but in the absence of that material at an earlier time he was entitled as a fiduciary to bring forward a concern about the absence of source material for the asserted shareholding. But this submission overlooks the primary duty which the defendant had to make reasonable and proper investigations. He was not entitled to sit back and expect the plaintiffs to do so. The fact that he may only have seen the evidence just before the trial does not exonerate him from his failure to make the proper inquiries which would in all probability have unearthed the evidence at a much earlier stage. The inquiries which he made, set out in his affidavit of 15 May 1997, were clearly inadequate because they did not involve proper interrogation of the Company's former accountant or a proper search of public records held by ASIC.

Should the defendant's costs, including costs awarded against him, be recoverable from the Estate of Elaine Drummond? 41 The defendant contends that he has a right of indemnity out of the Estate of Elaine Drummond, so that costs on the summons, including any of the plaintiffs' costs which he may be ordered to pay, should be borne by the estate. 42 Under s 76 of the Supreme Court Act 1970 (NSW), costs are generally in the discretion of the Court. However, the discretion must be exercised judicially and the ordinary rule is that costs follow the event, except where it appears to the Court that some other order should be made: Supreme Court Rules, Pt 52A r 11. An order that the costs of an unsuccessful party in litigation concerning a trust or the estate of a deceased person be paid out of the trust fund or estate operates as an exception to the general rule: Williams, Mortimer and Sunnucks on Executors, Administration and Probate, p 437. 43 In Miller v Cameron (1936) 54 CLR 572, 578, Latham CJ explained that 'as a rule, a trustee is allowed his costs out of the trust estate if his conduct has been honest, even though it may have been mistaken.' In Re Weall; Andrews v Weall (1889) 42 ChD 674, 677, Kekewich J spoke of the 'tenderness which the Court is anxious to exhibit towards trustees honestly exercising discretion in discharge of their duties, often difficult and still more often thankless.' In Re Jones; Christmas v Jones [1897] 2 Ch 190, 197 the same judge said that 'a man who fulfils the difficult duties of an administrator, executor or trustee is, in common sense and common justice, entitled to be recouped to the very last penny everything that he has expended properly - that is to say, without impropriety - in his character of administrator, executor or trustee …'. Thus it is normally the case that an executor who commences or defends an action in the capacity of executor is entitled to be indemnified out of the estate for the costs incurred in doing so, even if the litigation is unsuccessful, the executor's conduct is found to have been mistaken, and the other party in the litigation is held to be entitled to an order for costs. 44 This exception to the normal rule that costs follow the event, which permits an executor to recover costs from the estate, is itself subject to some exceptions, as is plain from Latham CJ's reference to honest conduct and Kekewich J's reference to impropriety. There are two 'sub-exceptions' which are arguably relevant to the present case. 45 The first is the sub-exception for 'impropriety'. As Kekewich J made clear in Re Jones, cases of impropriety include an executor taking or defending proceedings in breach of trust, or conducting the proceedings in such a way that the Court, on a general view of the case, regards the executor's conduct as 'not honestly brought forward' ([1897] 2 Ch 190, 198). Additionally, recourse to the estate may be denied to an executor 'where the claim is of monstrous character, that is, one which no reasonable man could say ought to have been put forward' (at 198). In Re Weall the trustees allowed a solicitor to deduct fees which were not properly chargeable to the life tenant from the rental income of the estate. Kekewich J observed that while mistakes or errors in judgment would not disentitle the trustees to an indemnity, the beneficiaries were entitled to expect 'reasonable prudence' of the trustees (42 ChD at 678-9). 46 In my opinion the present case falls squarely within the 'sub-exception' as articulated by Kekewich J in these two cases. In the present case the defendant acted obstructively, unreasonably and in disregard of his clear duty, during the period from June 1996 until just prior to the hearing. I do not find that he acted dishonestly in any positive sense, but he defended the summons on a basis which no reasonable person could say should be put forward, by an executor or otherwise. 47 Secondly, the rule which gives an executor the prima facie entitlement to be indemnified out of the estate for costs relates only the costs incurred in the administration and distribution of the estate. Such costs are to be distinguished from costs incurred by an executor in furtherance of a personal interest: Miller v Cameron (1936) 54 CLR at 578-9; Re Jones [1897] 2 Ch at 197-8; Plimsoll v Drake (No.2) (Supreme Court of Tasmania, Zeeman J, unreported, 8 June 1995). Executors who pursue personal interests in litigation are 'not fighting for the estate any more than if they were not executors at all': Skrimshire v Melbourne Benevolent Asylum (1894) 20 VLR 13, 18 per Madden CJ. An executor who prosecutes or defends proceedings in the capacity of, say, creditor or beneficiary of the estate rather than in the capacity as executor cannot expect to recoup the costs of litigation from the estate simply on the basis that he or she is also an executor. In Miller v Cameron Latham CJ took the view that a trustee who defended an action for his removal was thereby representing his own interests and not those of the trust estate. In Plimsoll v Drake Zeeman J reached a similar conclusion where a trustee unsuccessfully asserted the right to demand a release before distributing the trust estate to the beneficiaries. 48 In the present case the defendant claims that he refused to execute the share transfers which would distribute the Estate Shares to the beneficiaries of the Estate of Elaine Drummond because he was not satisfied that those shares had been properly issued and were held by J M Drummond at the date of his death. That concern, if it existed, related to the discharge of the defendant's duties as administrator and executor of the estates. On the material before me I cannot conclude that in defending the proceedings on this ground, the defendant was acting in his personal interest rather than the capacity of executor. Therefore, while this sub-exception applies to the cross-claim for the reasons which I shall explain, my opinion is that it has no application to the defence of the summons. 49 There is another exception to the normal rule that costs follow the event, which is arguably relevant in the present case. The Court may on some occasions permit a person who conducts litigation in a private capacity to recoup costs from a trust fund or estate. The principles are set in Williams, Mortimer and Sunnucks on Executors, Administrators and Probate at 437-441. The situation which is arguably relevant to the present case is where the litigation has been caused by the conduct of the testator. In Brown v McEncroe (1890) 11 LR (NSW) Eq 134 the plaintiffs propounded a will which treated the deceased's widow harshly. After she died, the administrator of her estate contested the application for probate on the ground of testamentary incapacity. Although there was evidence that the testator had been an alcoholic, the Court held that the challenge to his testamentary capacity had failed. However, Owen CJ in Eq held that the defendant's costs should be recovered out of the testator's estate. The testator, by reason of his conduct, was considered to be the cause of the litigation which occurred after his death (at 145). 50 In my opinion this principle has no application in the present case. Although the evidence indicates that J M Drummond did not properly attend to the administration of the affairs of the Company before his death, the defendant was his co-director from 1983 onwards, and was the company secretary from 1979. Therefore the defendant shared the responsibility for failure to maintain proper corporate records and registers. Moreover, in my opinion the direct cause of the present litigation was the defendant's failure to make property inquiries when confronted with the plaintiffs' request for execution of share transfers in 1996, rather than any events prior to J M Drummond's death. 51 I conclude that there is no basis for ordering that the defendants' costs on the summons be borne by the Estate of Elaine Drummond.

Indemnity costs 52 The plaintiffs contend that the defendant should be ordered to pay their costs on an indemnity basis. They seek to rely on cases such as Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR para 41-383; and Rouse v Shepherd (No.2) (1994) 35 NSWLR 277; Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359; and Varga Group Investments (No.8) Pty Ltd v Geebung Investments Pty Ltd (Supreme Court of New South Wales, Abadee J, unreported, 15 November 1994). 53 The principles relating to the award of indemnity costs were discussed by Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248. He distilled the following proposition from his review of the cases (at 256): 'In consequence of the settled practice which exists, the court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the court in departing from the usual course. …' 54 One of the grounds for departing from the usual course, exemplified by Woodward J's judgment in the Fountain Selected Meats case (at 400), is where a litigant's conduct is vexatious in the sense that proceedings are commenced or pursued, or a defence is made or persisted in when there are no sufficient grounds to do so. Further, if one party to litigation puts the other on notice that it regards the latter's conduct of the litigation as misconceived, and sets out detailed reasons for so thinking, and the other party nevertheless proceeds without indicating any proper justification for doing so and fails, indemnity costs may well be justified: Davids Holdings at 440, 303 per Drummond J. Rouse v Shepherd was a case where the defendants denied liability until the second day of the hearing. Badgery-Parker J found that their change of stance indicated either that the plaintiffs' case, as revealed on the first day of the hearing, was so overwhelming (and unexpectedly so) that the defendants suddenly decided they had no possible chance of success, or that they had some ulterior motive in delaying the admission of liability until that stage. On the evidence he concluded that the latter was the more cogent explanation. In the Varga Group case Abadee J ordered the defendants to pay costs on an indemnity basis because they should have known they had no chance of success, if properly advised, and he was inclined to the view that the defendants knew that their defences were totally frivolous and/or thoroughly unjustified. 55 In my opinion each of these cases is useful in terms of general principle. Here, an order that the defendant pay the plaintiffs' costs on an indemnity basis is amply justified by the facts which I have set out, and in particular, by the obstructive and unreasonable letters by the defendant's solicitors of 22 August and 11 September 1996, the defendant's failure to make reasonable and proper inquiries in the circumstances, and his failure to take advantage of the offer of 25 March 1997 which would have enabled the question of transfer of the shares to be resolved without any penalty as to costs on his part. 56 At the very least, the defendant, if properly advised, should have known that the defence to the summons had no chance of success. The defence was so thoroughly unjustified as to be close to frivolous, and was vexatious in the sense described in the Fountain Selected Meats case. By their solicitors' letter of 2 September 1996, the plaintiffs put the defendant on notice that the defence was misconceived. I am not able to find, on the facts before me, that the defendant acted out of an ulterior motive, but in the absence of an ulterior motive I can see no rational explanation for his conduct other than an alarming ignorance of the law. 57 My conclusion therefore is that I should order the defendant to pay the plaintiffs' costs on the summons on an indemnity basis.

The cross-claim 58 Comparatively little evidence was tendered on the cross-claim, since (as I have mentioned) it was partly dismissed and partly discontinued by consent. The outstanding issues are whether the plaintiffs' costs should be paid by the defendant, whether (as the defendant submits) the defendant's costs (including any costs of the plaintiffs which the defendant may be ordered to pay) are recoverable out the Estate of Elaine Drummond, and whether the plaintiffs' costs should be assessed on an indemnity basis. Before expressing my findings on those matters, I shall set out the facts which are supported by the limited evidence which is before me. 59 Elaine Drummond's jewellery was part of the residue of her estate to be divided equally amongst her children John, Peter and Robyn. However, she left an undated letter expressing her wishes concerning the distribution of certain specified items. The letter allocated a solitaire diamond ring, a sapphire and diamond ring and a large silver tray to the defendant. On 4 March 1996 the defendant wrote to his sister, Robyn Devine, in South Australia asking her to bring the two rings and the tray with her to a meeting which was scheduled to take place on 8 March 1996. He said that there would remain a number of smaller items which would require equitable distribution, but that could be done at a later date. Robyn replied by letter of 7 March 1996 saying that she was unable, due to the lack of notice and time, to give him the two rings which he had requested. 60 On 15 November 1996 the defendant's solicitors wrote to the plaintiffs' solicitors asking them to obtain instructions in relation to 'some matters which remain outstanding in relation to the Estate of the late E L Drummond', including delivery of the two rings and one third of the balance of Elaine Drummond's jewellery. The letter noted that Robyn Devine had retained custody and safe keeping of all of the estate's jewellery but had refused 'despite repeated requests' to deliver the requested items to the defendant. There is no evidence of 'repeated requests'. On the face of it, it was not unreasonable for Robyn Devine to decline to bring the jewellery with her to the meeting on 8 March 1996, in response to a letter written on 4 March 1996. 61 The plaintiffs' solicitors replied on 25 March 1997, saying that the jewellery was the major realisable asset in the Estate of Elaine Drummond and should not be distributed at that stage, since it may be necessary that the jewellery be sold to pay any debts, including the debts claimed by the defendant. 62 In their letter of 15 November 1996 the defendant's solicitors asked the plaintiffs' solicitors to obtain instructions in relation to another matter which was said to remain outstanding in the Estate of Elaine Drummond, namely payment of the sum of $200,143.04, being moneys due to Banarway Pastoral Co. The letter referred to an affidavit of J Murray of 29 August 1996 in proceedings No. 4235/95. The plaintiffs' solicitors responded on 25 March 1997, saying that Mr Murray's conclusion was fanciful and that there was no debit in the late Mrs Drummond's account in Banarway Pastoral Company. Mr Murray's affidavit and report are not in evidence in the present proceedings, but the evidence before me includes a report by Pannell Kerr Forster dated 9 December 1998 which critically reviews Mr Murray's report. In cross-examination it was put to the defendant that he had dropped the claim to recover this amount because he appreciated that the claim had no justification of any kind. He disagreed with that proposition, saying he had an expert's report that supported the figure which he claimed. He said the report contained an assumption which, upon reflection, he did not consider would be sustainable. 63 The defendant's solicitors' letter of 15 November 1996 raised a third matter in relation to the Estate of Elaine Drummond. This was 'payment to our client of the sum of $20,793.67 being monies paid by him on behalf of the Estate of the late Dr J M Drummond and Mrs E L Drummond being payments made prior to the grant of Probate on both Estates (see Scheduled [sic] attached).' The schedule attached to the letter, which also appears as an annexure to the cross-claim, particularises seven items by date, payee, cheque number and amount, the dates ranging from 2 February 1989 to 20 December 1990. In their reply dated 25 March 1997 the plaintiffs' solicitors asked for documentation in support of the payments allegedly made, and specifically invoices, cheque butts and bank statements in relation to those payments. The letter acknowledged that if the payments were made they would be a debt of the respective estates, but asserted that any such debt could be set off against the defendant's share of a debt owed to the late Dr Drummond by the Banarway Pastoral Company. Under cross-examination the defendant admitted that the documentation to support the payments requested by the plaintiffs' solicitors had not been provided. 64 The cross-claim was partly dismissed and partly discontinued, and costs should follow the event unless there is some good reason for departing from the usual rule. Far from providing any such reason, the meagre facts which I have set out tend to support the view that the defendant should pay the plaintiffs' costs of the cross-claim. 65 The next question is whether orders should be made to permit the defendant to recover from the Estate of Elaine Drummond his own costs of the cross-claim and the plaintiffs' costs which he is liable to pay them. In my opinion this depends upon whether, according to the principles previously discussed, the cross-claim was brought by the defendant in his capacity as an executor or in a personal capacity in order to obtain a personal benefit. The facts do not justify the conclusion that either J M or Elaine Drummond by their conduct caused the cross-claim to be brought. 66 The cross-claim as regards the sum of $200,143.04 asserts that the Estate of Elaine Drummond is indebted to Banarway Pastoral Company, and therefore appears to be a form of representative suit on behalf of the partnership. To the extent that the defendant is a partner, the cross-claim would have benefited him personally had it been successful. The claim to that amount could not be characterised as a claim by an executor for due administration of the estate. Rather, it is a claim against the estate, to recover a benefit. The same is true of the claim to recover the sum of $20,793.67 from both estates. It is asserted that the defendant personally made payments on behalf of those estates. He now seeks recoupment out of those estates. It is likely that when properly understood, this claim asserts a right of reimbursement or recoupment of the defendant in his capacity as executor or trustee, but nevertheless the assertion of the right is intended to produce a personal benefit for the defendant. Similarly, the claim with respect to the jewellery is a claim to receive a distribution from the estate rather than a claim by one executor against co-executors to enforce due administration of the estate. 67 Since, therefore, the cross-claim was brought for the defendant's personal benefit, rather than to discharge his duties as an executor of the estate, it would not be appropriate to make any order for his costs to be paid out of the estate, and in any case I see no proper basis for doing so having regard to the conduct of the defendant which I have described. 68 The final question is whether the plaintiffs' costs should be ordered to be paid by the defendant on an indemnity basis, like the costs of the summons. In my view there is insufficient evidence before me to justify my making such an order. As to the jewellery, it is not easy to discern any proper legal basis for the defendant's attempt to give partial effect to an apparently non-testamentary expression of intention by his mother, but it is understandable for the claim to have been made in litigation between the children of the deceased, and the outcome was that the two rings which the defendant claimed have been delivered up, though without admissions. As to the claim for $200,143.04, it appears that the defendant's position was supported by an accountant's report, and since that report is not in evidence, I am not in a position to conclude that the claim was so unjustified that costs on an indemnity basis would be called for. As to the claim for $20,793.67, while the plaintiffs' request for documentary support of the alleged payments was reasonable and has not been met, I am not prepared on the evidence before me to infer that the payments could not be proved in any some other way. I note that the claim for this sum has been discontinued rather than dismissed, and it may be that evidence will emerge sufficient to persuade the legal personal representatives of the two estates to admit the claim. The limitation point which was raised in the amended defence to the cross-claim was not argued and I am not in a position to express any opinion on it.

Conclusion 69 I propose, therefore, to order that the defendant pay the plaintiffs' costs of the summons on an indemnity basis, and that the defendant as cross-claimant pay the costs of the plaintiffs as cross-defendants on the cross-claim. The defendant is not entitled to an indemnity out of the estate in respect of any of those costs or his own costs, and so I shall not make any order permitting any costs payable by the defendant to be recovered out of either estate. * * * * * * * * * *

Last Modified: 09/13/1999 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.