Fay v Moramba Services Pty Ltd [2010] NSWSC 725 | Case summary

· The costs of the estate proceedings; · A cross-claim brought by the defendants in the estate proceedings against the plaintiffs for indemnity in respect of their costs, pursuant to deeds of indemnity executed by the plaintiffs and their sisters; · An application made by Leerac for judicial advice in proceedings 08/282225 ("the judicial advice proceedings"), in respect of its funding of the defendants' defence in the estate proceedings; and · The costs of the mortgage proceedings. Costs of the Estate Proceedings 2 In the estate proceedings, the defendants successfully resisted the plaintiffs' application that they be removed as trustees of the testamentary trust. The ordinary consequence of that outcome is that the unsuccessful plaintiffs should pay the successful defendants' costs [(NSW) Uniform Civil Procedure Rules 2005, r 42.1; Oshlack v Richmond River Council (1998) 193 CLR 72, [67] (McHugh J)]. This applies equally where the defendants are trustees [National Trustees Executors and Agency Co of Australasia v Dwyer (1940) 63 CLR 1; GE Dal Pont, Law of Costs, 2nd edition (2009), ¶10.2]. 3 For the plaintiffs, it was argued that there should be a departure from the ordinary rule, to the intent that there be no order as to costs, on the basis that there would be hardship to the plaintiffs (and particularly to Dallas) were a costs order made, and none to the defendants if no order were made (as their costs would in any event be recoverable from the estate, and had already been paid in large part by Leerac from the inter vivos trusts). However, the circumstance that an adverse costs order will occasion hardship, or even prove ruinous, to an unsuccessful plaintiff is hardly if ever sufficient reason not to make the order: it is a risk that the plaintiff assumes in bringing proceedings. The circumstance that the defendants may be indemnified from other sources to the extent that they do not recover their costs from the plaintiffs is not good reason to depart from the usual order, particularly where the practical effect would be to cast the burden of the defence of the plaintiffs' unsuccessful proceedings on the trust estate, to the detriment of the beneficiaries generally, rather than on the unsuccessful plaintiffs whose bringing of the proceedings caused the costs to be incurred. There is no sufficient reason to depart from the prima facie position that, as between the unsuccessful plaintiffs and the successful defendants, the plaintiffs should pay the defendants' costs. 4 Notwithstanding that order, there will in any event be practitioner/client costs not recoverable by the defendants against the plaintiffs; moreover, there appears to be a substantial likelihood that the plaintiffs may not be in a position to satisfy, at least in full, an adverse costs order. Having been party to the proceedings in their capacity as trustees, the defendants are entitled to an indemnity from the trust fund for all of their costs (not just party/party costs) on an indemnity basis [UCPR, r 42.25; National Trustees Executors and Agency Co of Australasia v Barnes (1941) 64 CLR 268; Bovaird v Frost [2009] NSWSC 917, [26]-[45]; Drummond v Drummond [1999] NSWSC 923, [43]-[47]]. Although the view has been expressed that a trustee who defends an action for his removal thereby represents his or her own interests and not those of the trust estate [Miller v Cameron (1936) 54 CLR 572, 578 (Latham CJ)], the predominant view is that if the costs are incurred as an incident of administration of the estate, the trustee is entitled to be indemnified in respect of them, and where trustees are sued by beneficiaries complaining of some act or omission, the trustee is entitled to defend his or her conduct as an incident of administration and to be indemnified in respect of the costs of so doing [In Re Llewellin; Llewellin v Williams (1887) 37 Ch D 317, 327; National Trustees Executors and Agency Co of Australasia v Barnes, 278-9]. It follows that to the extent that the defendants do not recover full indemnification of their costs from the plaintiffs, they are entitled to be indemnified by the trust estate. Here, the defendants were sued in their capacity as trustees of the testamentary trust, and are therefore entitled to be indemnified from the assets of that trust. 5 However, it seems likely that the testamentary trust will have insufficient funds for that purpose. In that context, the defendants contend that they are entitled to be indemnified out of the inter vivos trusts of which Leerac is trustee. (This is not entirely the same question as arises on Leerac's application for judicial advice, as to whether it as trustee would be justified in contributing to the defendant's costs.) 6 The law firm Corrs were retained to represent the defendants in the estate proceedings in October 2006. The partner responsible for the matter then gave advice that the costs of the proceedings should be borne by the estate (that is, the testamentary trust), and between December 2006 and 1 April 2008 the estate paid $138,183 in legal costs, being the whole of the costs incurred to that point. On 18 March 2008, the same partner gave advice to the defendants that, having regard to counsel's advice that part of the plaintiffs' complaints was that Leerac as trustee of the inter vivos trusts had failed to wind up those trusts and distribute capital and income to its beneficiaries, part of the costs of the estate proceedings should be met by Leerac as trustee of the inter vivos trusts. Subsequently, the partner advised that a reasonable percentage split of the costs between Leerac and the estate was 85:15, with the consequence that Leerac would need to reimburse the estate to the extent that the estate had to that point borne more than its fair portion. As a result, from 1 April 2008 until 15 September 2008, Leerac, via borrowings from Moramba Services, paid the defendants' costs and disbursements in respect of the estate proceedings in the amount of $355,552.66. This included $53,332 (being the estate's 15% share) by way of partial reimbursement of the amount that the estate had overpaid (on the 85:15 hypothesis). 7 On 4 September 2008, the High Court gave judgment in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. Subsequently, on 18 September 2008, I held that the estate proceedings were not "proceedings against Leerac" for the purposes of clause 17 of the inter vivos trust deeds [Leerac Pty Ltd v Garrick E Fay [2008] NSWSC 1082]. Thereafter, no further amounts in respect of the costs of the estate proceedings were paid. 8 For the defendants, it was submitted that the essential question was whether the costs which have been paid and/or are payable by Leerac to Corrs were properly incurred as an incident of the administration of the inter vivos trusts, or alternatively (adopting the terminology of (NSW) Trustee Act 1925, s 59(4), were incurred in and about the execution of the inter vivos trusts. I do not agree: the present question is not whether Leerac, which was not a party to the proceedings, properly incurred those costs, but whether the defendants - who are not trustees of the inter vivos trusts - are entitled to be indemnified by those trusts. Trustee Act, s 59(4) provides: (4) A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers. 9 Section 59(4) is concerned with indemnification of the trustee of a trust out of the trust property, in respect of costs incurred by the trustee. It is irrelevant as between the defendants and Leerac: the defendants, not Leerac, were parties to the estate proceedings; Leerac, not the defendants, was the trustee of the inter vivos trusts. The defendants did not defend the estate proceedings in any capacity as trustees of the inter vivos trusts. The defendants' costs in the estate proceedings were not expenses incurred by Leerac. Neither s 59(4), nor the principles in Barnes, would entitle the defendants to indemnity out of the inter vivos trusts, of which they were not trustees. Whether Leerac had an interest in the defence of the proceedings is not relevant to whether the defendants are entitled to indemnity from the inter vivos trust (although it may be relevant to whether Leerac would be justified in contributing to their costs). Nor is it relevant to that question, whether Leerac should have been joined; it was not and did not become a party, and it therefore did not incur defence costs. 10 The defendants also invoked Article 113 of the Articles of Association of Leerac, Moramba Services and Moramba Holdings, all being the equivalent provision from Table A, in the following form: Every director, managing director, agent, auditor, secretary and other officer for the time being of the company shall be indemnified out of the assets of the company against any liability incurred by him in defending any proceedings whether civil or criminal in which judgment is given in his favour or in which he is acquitted or in connection with any application under the Act in which relief is granted to him by the court in respect of any negligence default breach of duty or breach of trust. 11 In the principal judgment, I doubted whether Article 113 would avail Leerac or the defendants, because it was concerned with actions against directors etc in their capacity as such, and the estate proceedings were not proceedings against the directors in that capacity, but in their capacity as trustees of the testamentary trusts [see Fay v Moramba Services Pty Ltd [2009] NSWSC 1428, [146]]. Originally, the plaintiffs claimed declarations that the defendants in their capacity as directors of Leerac had committed breaches of their duties in connection with the inter vivos trusts, and an order that in their capacity as directors of Leerac they give due consideration to the winding up of the inter vivos settlements. However, in his opening address on 19 May 2008, the first day of the trial, Mr Grieve QC for the plaintiffs announced that those claims for relief were no longer pursued. Thereafter, the plaintiffs did not seek any remedy against the defendants in their capacity as directors. True it is they impugned conduct of the defendants in their capacity as directors, but only as evidentiary material said to reflect on their fitness to remain trustees of the testamentary trusts. The relief pursued from the commencement of the trial pertained only to the defendants' role as trustees of the testamentary trust, not as officers of the companies. The relevant claims for relief were formally deleted from the Second Further Amended Statement of Claim filed on 17 September 2008. 12 I remain of the view that Article 113 could not avail the defendants, after 19 May 2008, as after that date no costs could properly have been incurred in resisting the abandoned claims for relief against the defendants qua directors of Leerac. But prior to their abandonment, the position was otherwise. The claim for an order that the defendants in their capacity as directors of Leerac give due consideration to winding up the inter vivos settlements sought relief against them in their capacity as directors of Leerac, and was one which, while it remained on foot, could have attracted the indemnity under Article 113. That claim formed a substantial part of the plaintiffs' case: the defendants' solicitor's estimate of 85% was not challenged or contradicted, and on that basis I would hold that 85% of the defendants' costs up to 19 May 2008 were attributable to it. 13 However, a condition of entitlement to the indemnity is that there be (in the case of a civil proceeding) judgment in favour of the director, or (in the case of a criminal proceeding) an acquittal. In Emanuel Management Pty Ltd (in liq) v Emanuele (2002) 83 SASR 501, Wicks J (at 517) held that a permanent stay of criminal proceedings was not an acquittal or a judgment within the meaning of an identical article, observing: It must be stressed that indemnity out of the assets may be afforded to a director only where judgment is given in his favour. The order … was that the proceedings on the information be permanently stayed. There was no acquittal; nor was there a committal for a re-hearing. For these reasons, I am of the opinion that Article 118 of the plaintiff company's Articles of Association has no application in this matter. 14 In Porter v GIO Australia Ltd [2002] NSWSC 668, McClellan J (at [685]) applied that decision to conclude that a nolle prosequi was not an acquittal for the purpose of an equivalent provision. In Whitlam v National Roads and Motorists Association Ltd (2006) 58 ACSR 370, Bergin J (as her Honour the Chief Judge then was) referred to the debate in relation to the ambit of the indemnification allowed by s 237 of the Companies (NSW) Code and equivalent provisions (which like the Article under consideration used the formula "in which judgment is given in his favour or in which he is acquitted", including the discussion by I R Ramsay in "Liability of Directors for Breach of Duty and the Scope of Indemnification and Insurance", (1987) 5 C&SLJ 129, where the author doubted (at 129) whether a director was entitled to indemnity in respect of proceedings in which the director was a defendant and the proceedings were discontinued or settled. In my view, those doubts were rightly entertained. A discontinuance is not a judgment in favour of the defendant, any more than a nolle prosequi is an acquittal. 15 Here, the relevant claim did not go to judgment, but was abandoned and ultimately formally withdrawn by amendment to the pleadings; that is, in substance, a discontinuance. On the claim made against them qua directors, there was no judgment in favour of the defendants. The indemnity under Article 113 is therefore not enlivened. 16 The defendants invoke National Trustees v Barnes for the principle that any indemnity must be given effect in such a way as to make the burden fall upon the beneficiaries equitably having regard to the circumstances under which the costs were incurred. Barnes was a sequel to Dwyer, in which nine of thirty-seven beneficiaries had sued the trustees of certain will trusts alleging breach of trust and seeking their removal. The High Court held that there had been no breach of trust and ordered that the action be dismissed with costs. In Barnes, the successful defendants in Dwyer, having been unable to recover their costs from the plaintiffs, sought indemnity from the estate. The court said (at 279) that the order should provide that the trustees should recover so much of their costs as possible against the plaintiffs in the first instance, and insofar as they were not recovered from the plaintiffs the trustees should be authorised to retain them as between solicitor and client, first out of the shares of the nine plaintiff beneficiaries, and after those shares have been exhausted, out of those of the twenty-eight. 17 The defendants submit that the circumstance that in the present case the plaintiffs are merely discretionary beneficiaries only affects the analysis to the extent that it must be recognised that, if in the future a discretion be exercised in their favour to distribute income or capital from the inter vivos trusts, then the burden should fall upon the fund the subject of that discretion. However in this case (unlike in Barnes), the defendants were not trustees of the relevant trusts (namely, the inter vivos trusts) and are not entitled to indemnity from those trusts. In my view, the result in Barnes's case depended on the entitlement of the trustee defendants to be indemnified from the trust estate, and I therefore do not think that the principles that informed the outcome in Barnes are engaged here. 18 Moreover, the approach adopted in Barnes' case is not readily capable of application to a discretionary trust. In the case of a fixed trust, where the beneficiaries have a vested interest in the trust fund, the concept that the burden will be visited on the shares of one or more to the exclusion of others is comprehensible. But in the case of a discretionary trust, the burden is necessarily borne by the trust fund before distribution - although it may be that the trustees can take into account, in deciding how to exercise their discretion from time to time, that the plaintiffs had (albeit indirectly) inflicted a burden on the trust fund. I do not consider that in the present case it is appropriate to prescribe by order that the costs burden must be visited in the first instance on any distributions that might be made to the plaintiffs. Other approaches to this issue are considered in the judicial advice proceedings. The cross claim under the Deeds of Indemnity 19 On 21 May 2002, in circumstances referred to in the principal judgment (at [105] to [110]), each of the children executed deeds of indemnity in favour of the defendants. One, in relation to the testamentary trusts, indemnified them: To the full extent permitted by law against all claims, demands, liabilities, losses, costs and expenses of whatever nature (either actual or contingent) which the trustees may suffer, incur or sustain in connection with or arising in any way whatever out of any claim brought by any beneficiary (or their heirs, executors and assigns) of any one or more of the Lorraine Settlements or the Barnes CA Trusts concerning the estate and anything done, omitted or neglected by the trustees in connection with their administration of the estate to date. 20 The other, in relation to the inter vivos settlements, indemnified the defendants: To the full extent permitted by law against all claims, demands, liabilities, losses, damages, costs and expenses of whatever nature (either actual or contingent) which the Moramba Group and the directors may suffer, incur or sustain in connection with or arising in any way whatever out of any claim brought by any beneficiary (or their heirs, executors or assigns) of any one or more of the Lorraine Settlements and the Barnes CA Trusts. 21 On those deeds, the defendants brought a cross claim against the plaintiffs (but not their sisters) for indemnity in respect of their costs incurred in the defence of these proceedings to the extent that they are otherwise left out of pocket (whether because they were not entitled to an indemnity out of the trust funds, or because there were insufficient trust funds, or for some other reason). 22 The context of the deeds of indemnity was the children's request that the estate cease to reimburse Moramba Services for the payments it was making to Ms Tripp under the cohabitation agreement, and to obtain from Moramba Services a refund of all money so reimbursed to it by the estate since Mr Fay's death, so that retrospectively and well as prospectively payments to Ms Tripp under the cohabitation treatment would not be treated as charges against Mr Fay and his estate and debited as such to his loan account, but instead would be borne by Moramba Services and not by the estate. The defendants accept that, having regard to the rules relating to the construction of deeds of indemnity and release, the scope of the indemnity would be limited to the allegations relating to the failure to vest the inter vivos trusts by reason of the cohabitation agreement, but submit that those allegations were at the core of the proceedings against them. 23 For reasons that have already been explained, I do not consider that the defendants have in these proceedings suffered incurred or sustained losses, costs and expenses in their capacity as directors of the Moramba Group or of Leerac except to the extent of 85% of their costs incurred up to 19 May 2008; accordingly the indemnity in relation to the Barnes CA Settlements and the Lorraine Settlements is, except to that extent, not engaged. However, the defendants have unquestionably incurred costs and expenses in their capacity as trustees of the testamentary trusts. Those costs have been incurred in connection with the defence of the estate proceedings, which responded to a claim brought by two of the "beneficiaries", namely the plaintiffs, against them in their capacity as such trustees. Those claims concerned the estate and matters allegedly done omitted or neglected by the defendants in connection with their administration of the estate. 24 However, the deed of indemnity in relation to the estate is expressly confined to acts and omissions prior to the date of the deed, and that in relation to the inter vivos trusts implicitly so. The plaintiffs' complaint about the defendants' administration of the estate (and also in respect of the inter vivos trusts) did not pertain, in substance, to matters done omitted or neglected prior to the date of the deeds of indemnity, namely 21 May 2002. As explained in the principal judgment (at [69]), at the core of the plaintiffs' argument was the proposition that whereas by 2002 the defendants as directors of Leerac had determined to realise the assets of the Fay group of companies and vest the inter vivos settlements, since then for no good or sufficient reason they had failed to give proper consideration to acceleration of the vesting of the inter vivos settlements or the clause 3 Will Trust. The burden of the plaintiffs' case was about alleged omissions after 2002 - outside the scope of the indemnities. Accordingly, in my view, the indemnity under the deeds is not engaged, and the cross-claim must be dismissed, with costs. The Judicial Advice Proceedings 25 Question 1: Is Leerac Pty Ltd, in its capacity as trustee of the trusts, justified in paying out of the trust estate any of the defendants' costs of their defence of the proceedings, and if so, what percentage? The conclusion that the defendants were not as of right entitled to indemnity from the inter vivos trusts, does not conclude the question, which arises in the judicial advice proceedings, as to whether Leerac as trustee of the inter vivos trusts would, although the defendants had no right to indemnification from those trusts, nonetheless be justified as a matter of discretion in paying or contributing to the defendants' costs. Leerac has already in large measure done so, and ordinarily would not be given advice in relation to this question retrospectively, but there remains a question as to whether it would be justified in doing so in respect of the unpaid costs. In my view, Leerac would be justified in doing so, for the following reasons. 26 First, the plaintiffs impugned the conduct of the defendants in their capacity as directors of Leerac. Leerac had a real and legitimate interest in the defence of the estate proceedings, because the plaintiffs called into question the conduct of its directors in their capacity as such. The original claim for an order that the defendants in their capacity as directors of Leerac give due consideration to winding up the inter vivos trusts - abandoned only at the outset of the final hearing - was, in substance, an application for an order that Leerac itself give consideration to that course (the defendants being all the members of its corporate mind). The abandonment of that claim did not mean that Leerac's legitimate interest in the defence of allegations of misconduct against its directors in their capacity as such therefore entirely evaporated. Even after its abandonment, the plaintiffs maintained allegations that the defendants had breached a duty owed by them "as directors of Leerac" to act in the best interests of the beneficiaries of the inter vivos trusts by failing to give effect to an alleged determination to wind up the inter vivos trusts and distribute their capital and accumulated income to the beneficiaries, permitted the cohabitation agreement to be an impediment to the implementation of that determination, and failed and neglected to negotiate a compromise with Mrs Tripp in relation to her rights under the cohabitation agreement. Indeed, those allegations were central to the proceedings. I do not accept that a decision adverse to the defendants on those issues in these proceedings would have bound Leerac: while it is true that those allegations were made of the defendants concerning their conduct as directors of Leerac, that was (at least ultimately) for the evidentiary purpose of proving their unfitness as trustees of the testamentary trust. Nonetheless, they involved an attack on all those who constituted Leerac's board, in respect of their conduct as such, and thus an attack on the conduct of Leerac's primary organ. 27 Secondly, the defendants submitted that because they held the shares in Leerac as trustees of the testamentary trust, and thus were able to ensure that they remained directors of Leerac and in control of the inter vivos trusts, whereas had they been removed as trustees of the testamentary trusts Leerac would have come under the control of the new trustee, Leerac was entitled, having regard to the wishes of the settlor and the interests of the beneficiaries, to support the defendants in retaining office. This was said to be so on the bases first, that it was the deceased's specific wish, which Leerac was entitled to take into account, that the defendants remain in control of the inter vivos trusts; and secondly, that until after the commencement of the final hearing, the plaintiffs were proposing the appointment of Mr Whitten, Garrick Fay's solicitor and close friend, as replacement trustee. 28 Ordinarily, a corporation has no legitimate interest in determining who are to be its shareholders. However, this is not invariably so, particularly in closely held corporations where the constitution often impose restrictions on transferability and empower directors to refuse to register transfers. In the present case, the deceased had established a structure to effect his wishes, in which the testamentary trust, Leerac and the inter vivos trusts were inter-related and interdependent. Although the proceedings ultimately sought only the removal of the defendants as trustees of the testamentary trust, and (until well into the final hearing) their replacement by Mr Garrick Fay's best friend, confidant and solicitor Mr Whitten, the shares in Leerac were held by the defendants as trustees of the testamentary trust. Had the defendants been removed as trustees of the testamentary trust, the shares in Leerac would have vested in Mr Whitten as replacement trustee, who would then have had control of the composition of Leerac's board. While, in form, Leerac might have remained trustee of the inter vivos trusts, it would have done so under control radically different from that contemplated by the testator and settlor. In substance, though not in form, and albeit indirectly through the removal of the trustees of the testamentary trust, the proceedings as a matter of reality sought to change the control of the inter vivos trusts of which Leerac was trustee. Having regard to the wishes of the deceased, and to the wishes of the Fay sisters, Leerac was entitled to adopt the view that a change in control of the testamentary trust would be adverse to the interests of the inter-vivos trusts, and thus to support the defendants' resistance of the plaintiffs' claims to that end. 29 Thirdly, although it would have been preferable had Leerac sought judicial advice before expending trust funds in supporting the defence of the defendants in the estate proceedings, I do not think that the decision of the High Court of Australia in The Macedonian Church case means that a failure to seek such advice prophylactically disentitles a trustee from resorting to the trust funds if such resort is otherwise proper. It may well be advisable or prudent for the trustee to seek judicial advice prior to incurring costs, so as to avoid personal risk in the event that it ultimately be found that the costs were not "properly" incurred in the administration of the trust; but the absence of such advice does not reverse the prima facie position established by, for example, UCPR r 42.25, and Trustee Act, s 59(4) [see Bovaird v Frost, [32]]. 30 Accordingly, Leerac would be justified in funding the defendants' defence of the estate proceedings, to the extent that costs are not recovered from the plaintiffs pursuant to the party/party costs order against them, and are not recoverable from the estate pursuant to the defendants' right of indemnity against the estate. This does not involve any question of apportionment: it is not as if the estate on the one hand and Leerac on the other are jointly responsible in differing proportions for the defendants' costs; the estate bears prime responsibility, and only to the extent that it is insufficient would Leerac be justified in supporting the defence. But it would be justified in doing so to the full extent of any deficiency, not only in respect of a share of such deficiency. 31 Question 2: If the answer to (1) is "yes", is Leerac Pty Ltd, in its capacity as trustee of the trusts, prior to Leerac Pty Ltd causing Moramba Services Pty Ltd or Moramba Holdings Pty Ltd to pay dividends to Leerac Pty Ltd, justified in causing Moramba Services Pty Ltd to loan Leerac funds sufficient to pay those costs? As Leerac would be justified in having recourse to trust funds for the purpose of assisting the funding of the defendants' defence of the estate proceedings, then it is entitled to access them (as they were held by Moramba Services) via such reasonable arrangements with Moramba Services as it considers appropriate. 32 Question 3: If the answer to (1) is "yes", and to the extent that any order for costs made against the plaintiffs in the proceedings does not make good the trust estate, is Leerac Pty Ltd, in its capacity as trustee of the trusts, entitled to make good any difference between the costs paid out of the trust estate on account of legal costs in the proceedings and any entitlement to costs from the plaintiffs, from any distributions it would otherwise make to any of the plaintiffs in the proceedings? Although it is not entirely clear what this question is intended to encompass in distinction from Question 8 below, I assume that it envisages that Leerac might declare the dividends which it would otherwise have paid to the plaintiffs, but retain them for the benefit of the trust estate; or that Leerac might reduce the distributions it would otherwise make to the plaintiffs in order to recover any deficiency. 33 As to the first, I have already observed that the principle in Barnes is not readily capable of application in the context of a discretionary trust. Leerac invokes clause 9(a) of the inter vivos trusts deeds which, as amended, provides as follows: Power in respect of any beneficiary (whether or not a minor) who is absolutely contingently or presumptively entitled to any share of the capital or income of the trust funds (whether pursuant to the exercise of the trustees' discretion or otherwise) at the sole discretion of the trustee to pay or apply in such manner as the trustee thinks fit the whole or any part of such capital or income for or towards such purposes as may appear to the trustee in its absolute discretion to be or tend to be either directly or indirectly and in any way whatsoever to or for the present or future advantage ance education advancement or benefit of the beneficiary and whether by paying the same to the beneficiary or to any parent or guardian of such beneficiary or to the person with whom the beneficiary is for the time being residing or to the trustee or trustees of another trust or otherwise and without being bound to see to the application thereof. 34 Leerac (as distinct from the defendants) will not be a creditor of the plaintiffs pursuant to any costs order. Leerac will have no rights against the plaintiffs. Clause 9(a) could not authorise a payment to Leerac by way of restitution of the trust estate: such a payment (to Leerac) would not be for the benefit of the plaintiffs. (A payment to the defendants, if in reduction of the plaintiffs' liability for costs, might well be in a different category, and is encompassed by Question 8 below). 35 As to the second, it follows from what has been said above that any defence costs paid by Leerac would be paid, not as a matter of obligation, but as a matter of discretion. The concept of "distributions it would otherwise make to any of the plaintiffs" is an awkward one, because it cannot be known or predicted what distributions might have been made but for these proceedings and their costs consequences. The proper exercise of Leerac's discretion in respect of distributions of income and capital might well admit of consideration, as a relevant factor, of the impact on the trust estate resulting directly or indirectly from the plaintiffs' proceedings. But that is not the advice sought, and in any event the discretion could properly be exercised only on all the facts known, including the plaintiffs' financial circumstances, when the discretion falls to be exercised. There may well be circumstances in which the trustee would be justified in reducing the distributions it would otherwise have made to the plaintiffs by reason of the loss they may have inflicted, even indirectly, on the trust estate, but it cannot be said that that will invariably be so. 36 Accordingly, it is not appropriate to give the advice sought. 37 Question 4: Are the defendants' costs of defending the estate proceedings costs incurred by them in their capacity as directors of Leerac Pty Ltd, Moramba Holdings Pty Ltd and Moramba Services Pty Ltd to which the indemnity in clause 113 of the Articles of Association of each of those companies applies, and if so, to what extent? For the reasons given above, the defendants did not incur such costs in their capacity as directors of the companies mentioned only to the extent of 85% of the costs so incurred up to 19 May 2008. 38 Question 5: Have the defendants been successful in these proceedings for the purposes of clause 113 of the Articles of Association of Leerac Pty Ltd, Moramba Holdings Pty Ltd and Moramba Services Pty Ltd? For reasons already given, there was no judgment in favour of the defendants on the relevant claim, and accordingly the Article 113 indemnity was not triggered. 39 Question 6: Are any amounts payable by Leerac Pty Ltd, Moramba Holdings Pty Ltd and Moramba Services Pty Ltd to the defendants pursuant to the clause 113 indemnity costs incurred in or about execution of the inter vivos trusts? As no amounts are payable by Leerac or the Moramba companies pursuant to the clause 113 indemnity, this question does not arise. 40 Question 7: If the answer to (1) is "yes", should the burden of any costs paid or to be paid out of the trust estate pursuant to (1) above fall first upon any distributions which Leerac in its discretion resolves to make to the plaintiffs, in accordance with the principle in National Trustees Executors & Agency Company Limited v Barnes (1941) 64 CLR 268? For the reasons given in answer to Question 3, it is not appropriate to give this advice. 41 Question 8: Would Leerac Pty Ltd in its capacity as trustee of the trusts, be justified in exercising its discretion under clause 9(a) of the trusts to apply any distribution which Leerac Pty Ltd may in its discretion make to the plaintiffs in the future in reduction of any costs ordered to be paid by the plaintiffs to the defendants in the proceedings? The terms of clause 9(a) have been set out above. Ultimately, the question is whether application of distributions in that manner would be "directly or indirectly and in any way whatsoever to or for the present or future advantage etc of the beneficiary". That is a question that can be answered only having regard to all the circumstances at the time when the discretion comes to be exercised. It may well be that discharging liabilities of the plaintiffs to the defendants in that way would be to their benefit for the purposes of clause 9(a), but that is not necessarily so, depending upon their financial circumstances and status from time to time - for example, if a plaintiff were to become bankrupt and his costs liability extinguished by his bankruptcy, it is difficult to see how in those circumstances a payment to the defendants in reduction of outstanding costs would be for the benefit of a plaintiff who was no longer liable to pay them. It is therefore not appropriate to give this advice, devoid of the factual context obtaining when the discretion falls to be exercised. 42 Costs. Leerac's costs of the judicial advice proceedings on the trustee basis, and the defendants' on the party/party basis, should be paid out of each of the eight inter vivos trusts pro rata. Costs of the Mortgage Proceedings 43 Moramba submits that the costs of the mortgage proceedings should follow the event, and that there should be an order to the effect that the unsuccessful plaintiffs pay the successful defendants' costs. However, the second plaintiff Lisa Fay (Mr Garrick Fay's estranged wife) submits that she should not be responsible for costs after she ceased to have any real role in the proceedings on 30 November 2007. 44 Garrick and Lisa Fay separated on 20 January 2007. On 30 November 2007 Lisa withdrew instructions from the solicitor then acting for her and Garrick, Mr Whitten, who filed a notice of ceasing to act for her that day. The Statement of Claim filed by Whittens on 21 December 2007 was filed on behalf of Garrick only, and Lisa Fay thereafter played no role in the proceedings, although no notice of discontinuance was ever filed on her behalf. 45 Although it is true that Lisa formally remained a party, she played absolutely no role in the proceedings after 30 November 2007. Because relief in respect of a mortgage to which she was a party was sought, she would have had to be joined as a defendant, even had she ceased to be a plaintiff. In my view, her formal remaining on the record after 30 November 2007 added nothing to the costs of the proceedings. The appropriate order is that the plaintiffs Garrick Fay and Lisa Fay pay the defendants' costs of the mortgage proceedings up to and including 30 November 2007, and that thereafter the first plaintiff Garrick Fay pay the defendants' costs. Conclusion and Orders 46 For the foregoing reasons, I have reached the following conclusions: 47 As to the costs of the estate proceedings, there is no sufficient reason to depart from the prima facie position that, as between the unsuccessful plaintiffs and the successful defendants, the plaintiffs should pay the defendants' costs. 48 To the extent that the defendants do not recover full indemnification of their costs from the plaintiffs, they are entitled to be indemnified by the relevant trust estate; as the defendants were sued in their capacity as trustees of the testamentary trust, that means the estate, not the inter vivos trusts. 49 Neither Trustee Act, s 59(4), nor the principles in Barnes, would entitle the defendants to indemnity out of the inter vivos trusts, of which they were not trustees. 50 Article 113 does not avail the defendants, even though 85% of their costs up to 19 May 2008 were attributable to claims made against them qua directors of Leerac, because on those claims there was no judgment in favour of the defendants only a discontinuance. 51 In the present case, where the defendants were not trustees of the inter vivos trusts nor entitled as such to indemnity from them, and where those trusts were discretionary, it is not appropriate to prescribe by order that the costs burden be visited in the first instance on any distributions that might be made to the plaintiffs from those trusts. 52 As to the cross-claim under the deeds of indemnity, the burden of the plaintiffs' complaint about the defendants' administration of the estate (and also in respect of the inter vivos trusts) was not in respect of matters done, omitted or neglected prior to the date of the deeds of indemnity, namely 21 May 2002, but about omissions after 2002 - and thus outside the scope of the indemnities. The indemnities are not engaged, and the cross-claim must be dismissed, with costs. 53 As to the judicial advice proceedings, Leerac, in its capacity as trustee of the inter vivos trusts, would be justified in paying out of the trust estate the defendants' costs of their defence of the estate proceedings, to the extent that costs are not recovered from the plaintiffs pursuant to the party/party costs order against them, and are not recoverable from the deceased's estate pursuant to the defendants' right of indemnity against the deceased's estate. 54 Further, Leerac, in its capacity as trustee of the inter vivos trusts, would be justified in causing Moramba Services Pty Ltd to loan Leerac funds sufficient to pay those costs, prior to causing Moramba Services Pty Ltd or Moramba Holdings Pty Ltd to pay dividends to Leerac. 55 Eighty-five percent of the defendants' costs of defending the estate proceedings up to 19 May 2008 were costs incurred by them in their capacity as directors of Leerac, to which the indemnity in clause 113 of its Articles of Association is capable of applying. However, as there was no judgment in favour of the defendants on the claims against them in that capacity, the indemnity is not engaged. As the indemnity was not engaged, the question whether any amounts payable by Leerac, Moramba Holdings and Moramba Services to the defendants pursuant to the clause 113 indemnity are costs incurred in or about execution of the inter vivos trusts does not arise. 56 It is not appropriate to give advice as to whether Leerac in its capacity as trustee of the inter vivos trusts would be entitled, to the extent that any order for costs made against the plaintiffs in the estate proceedings does not make good the trust estate, to make good any difference between the costs paid out of the trust estate on account of legal costs in the estate proceedings and any entitlement to costs from the plaintiffs, from any distributions it would otherwise make to any of the plaintiffs in the proceedings; or to pay distributions in favour of the plaintiffs to the defendants to discharge any outstanding costs liability. There will not be any order for costs against the plaintiffs in favour of Leerac. While there may well be circumstances in which Leerac as trustee would be justified in reducing the distributions it would otherwise have made to the plaintiffs by reason of the loss they may have inflicted, even indirectly, on the trust estate, it cannot be said that that will invariably be so. And while payments to the defendants in reduction of outstanding costs liabilities may well be for the benefit of the plaintiffs for the purposes of clause 9(a), that is not necessarily so, depending upon their financial circumstances and status from time to time. It is therefore not appropriate to give this advice, devoid of the factual context obtaining when the discretion falls to be exercised. 57 Leerac's costs of the judicial advice proceedings should be paid on the trustee basis, and the defendants' on the party/party basis, out of each of the eight inter vivos trusts pro rata. 58 In the mortgage proceedings, the appropriate order is that the plaintiffs Garrick Fay and Lisa Fay pay the defendants' costs of the mortgage proceedings up to and including 30 November 2007, and that thereafter the first plaintiff Garrick Fay pay the defendants' costs. 59 It will be apparent from the above that while I have come to the conclusion that the defendants in the estate proceedings are not entitled, as a matter of right, to an indemnity from the inter vivos trusts, nonetheless I have also concluded that Leerac would be entitled, as a matter of discretion, to fund their defence to the extent that costs are not recoverable first from the plaintiffs, and secondly from the estate; and also that Leerac would be justified in doing so to the full extent of any deficiency after recovery from the plaintiffs and indemnity from the estate.

Fay v Moramba Services Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (21 paragraphs)

Parties

Cases Cited (12)

Cited By (10)