First Plaintiff v First Defendant

"be entitled, as a priority to all others including Aileen Pty Ltd[1], to be paid from the balance of proceeds of sale of the Property[2] (including the Deposit[3] or such balance then remaining) all of his proper and reasonable costs and disbursements calculated on an indemnity basis associated with the carrying out of his obligations pursuant to the Order of the Court dated 2 June 2006."

2 The application relates to a trust ("the Trust") known as the One Hawker Holdings Trust that was set up during his lifetime by John Adrian Wilson, deceased ("the deceased"),[4] for the benefit, inter alios, of his son (the second plaintiff) and his daughter (the first plaintiff). Although the summons seeks an order as set out above, it is clear that the relief sought by Mr Hughes is an order that would permit him to take from the Trust fund both his past proper costs and expenses and his future proper costs and expenses as trustee, in priority to the claims of Aileen Pty Ltd (which was the former trustee). Other relief is also sought in the summons but is not the subject of the present application, having been dealt with earlier.

3 The parties before the Court are as follows. The first plaintiff is an infant, who appears by her litigation guardian, and who is, as I have said, a beneficiary of the Trust. The second plaintiff, who is also, as I have said, a beneficiary of the Trust, is an undischarged bankrupt. His solicitor appeared and sought leave to represent him on this application, but leave was refused without prejudice to his right to renew the application. At the conclusion of the submissions of the other parties, the solicitor for the second plaintiff indicated that he did not seek to renew his application for leave to be heard. I note that the interests of the beneficiaries were in any event represented by counsel for the first plaintiff. The first defendant ("the former trustee") was the trustee of the Trust immediately prior to the appointment in its place of Mr Hughes. The second defendant was joined in the same interests as the first defendant and was represented by the same counsel and nothing more needs to be said about him.

Facts

4 The Trust was created by a deed of settlement dated 31 May 2002. The settlor was one Christopher Bollinger ("Bollinger"). The original trustee was One Hawker Holdings Pty Ltd ("OHH"). The deceased was the appointor and one of the corpus beneficiaries. The first and second plaintiffs were the other corpus beneficiaries. Clause 6(h) of the deed empowers the trustees to pay out of the Trust fund all costs charges and expenses incidental to the management of the Trust fund which the trustees may at any time incur. Clause 8 of the deed, headed "TRUSTEES MAY CHARGE FOR SERVICES", provides that "[a]ny trustee being engaged in any profession or business ... may be so employed ... and shall be entitled to be paid such remuneration as the trustees shall consider reasonable for being so employed ... in connection with the trusts hereof". Clause 20(b) of the deed provides that "[t]he Trustees shall be indemnified out of the Assets of the Trust Fund for all liabilities incurred by them in the course of acting for the trust."[5] It was common ground that the deed entitled both the first defendant, as the former trustee, and Mr Hughes, as the new trustee, to be paid reasonable remuneration for such work as either of them had properly carried out in a trustee capacity and entitled both of them to be indemnified for liabilities properly incurred in connection with the Trust. Apparently the land, the sale of which is hereinafter referred to, was transferred by the deceased to the Trust on 20 June 2002.

5 After the death of the deceased on 11 February 2003, disputes arose between the deceased's executor (Bollinger), his said son (the second plaintiff), OHH, and the deceased's de facto wife ("Hansen"). The details of the disputes are not presently relevant. A deed of arrangement was entered into between the second plaintiff, OHH and Hansen on 17 December 2003. The first plaintiff, who was entitled to a legacy of $200,000 under the deceased's will, was affected by this deed, although not a party thereto. Again the details are not relevant to the present application. It would seem that the firm of Harding & Co acted for the executor and also for OHH (which was then controlled by the executor). It would appear that complaints were made by or on behalf of the deceased's children, who came to be represented by the firm of Kempsons, about the conduct of the executor and OHH, and Harding & Co on their behalf, in relation to the estate and the Trust and disputes about these matters continued - again the details are not presently relevant. At some point the executor who apparently became, in that capacity, appointor under the Trust, removed OHH as trustee and replaced it by another company formerly controlled by the deceased and then controlled by the executor, namely the first defendant Aileen Pty Ltd. A dispute about the validity of this appointment came to this Court in proceeding number 5955 of 2005 and the validity of the appointment was confirmed by an order of Williams J dated 10 April 2006.[6]

6 The present application by Mr Hughes was not initiated by an originating motion but by a summons in an existing proceeding (No. 6488 of 2006). That proceeding had been commenced by the first and second plaintiffs on 23 May 2006 in which the originating motion sought removal of Aileen Pty Ltd as trustee of the Trust and its replacement by the first plaintiff's litigation guardian and the second plaintiff as new trustees. The originating motion set out grounds for the removal application which included an allegation that the sale of the Property by a contract of sale dated 25 June 2005, had been needlessly jeopardised, delayed and obstructed by the conduct of Aileen Pty Ltd. The originating motion was supported by an affidavit of Peter Ruston Kempson sworn 9 May 2006. The affidavit raised a number of contentious matters including an allegation that there had been a defalcation by Harding & Co of the sum of $200,000 due to the first plaintiff under the will of the deceased and that a claim had been made for that amount on the Solicitors' Fidelity Fund. I hasten to add that there has been no judicial determination of that serious allegation one way or the other.

7 Paragraph 11 of Mr Kempson's affidavit deposed that it was accepted by all parties that the property of the Trust should be sold, that is Lot 1 and also Lot 3, 5-11 Hawker Street, Airport West (hereinafter called "Lot 3") and that both Lot 1 and Lot 3 had in fact been sold and were "due to settle" on 25 January 2006 and 8 May 2006 respectively. Mr Kempson went on to complain that these settlements had been "continually frustrated" by Harding & Co and that certain Terms of Settlement had not been honoured. Other allegations were made in relation to Aileen Pty Ltd and Harding & Co in Mr Kempson's affidavit. There was also a reference to claims having been issued by the first and second plaintiffs, and by Hansen, against the estate of the deceased pursuant to Part IV of the Administration and Probate Act 1958.

8 On 22 May 2006 Mr Hughes was telephoned by Mr Kempson who asked Mr Hughes whether he would act as trustee of the Trust. Mr Hughes said that he would accept such appointment. By letter from Mr Hughes to Kempsons dated 24 May 2006, Mr Hughes advised that he consented to act as the trustee of the Trust should the Court so order or the parties to the proceeding so agree. He said in the letter that, should he be appointed as trustee, his fees would be charged in accordance with the Practitioner Remuneration Order and/or the appropriate Supreme Court Rules depending on what actions he needed to implement in carrying out his duties as trustee.

9 Mr Kempson's affidavit was answered by an affidavit of Antony James Scott sworn 25 May 2006 denying the allegations made by Mr Kempson and explaining in detail the reasons for the alleged delays and for other matters the subject of complaint.

10 The principal proceeding (i.e. No. 6488 of 2006) was resolved by an agreement recorded in a document dated 2 June 2006 entitled "Heads of Agreement" and also referred to in some of the affidavits as "Terms of Settlement". This document was signed by the solicitor for the first plaintiff, the solicitor for the second plaintiff, the solicitor for OHH and by the second defendant (who is also a solicitor) on behalf of Aileen Pty Ltd and himself. It appears that the Heads of Agreement had been signed by all parties at or about 1 pm on 2 June 2006. At about 1.32 pm on that day Mr Hughes received an email from the barrister for the second plaintiff but he was not aware of the email (or the attached Heads of Agreement) at that time. Before receiving the email he received a telephone call from the barrister for the first plaintiff at about 2 pm asking if he had read the Heads of Agreement. Then at about 2.15 pm he received a telephone call from the barrister for the second plaintiff telling him about the email. Mr Hughes then read the email and noted that the Heads of Agreement had already been executed. Mr Hughes scanned the Heads of Agreement during his conversation with the barrister for the second plaintiff who also referred Mr Hughes in particular to clauses 3, 5(a), 11 and 12 of the Heads of Agreement. Mr Hughes did not notice the terms of clause 13 of the Heads of Agreement (see below). Mr Hughes then reiterated that he would accept the appointment.

11 The recitals to the Heads of Agreement refer to the establishment of the Trust, the appointment of Aileen Pty Ltd as replacement trustee and the confirmation of the validity of that appointment by this Court. The recitals further state that the principal assets of the Trust are "Lot 1" and "Lot 3" and that the settlement of the sale of each lot is "overdue or imminent". The recitals also refer to such land as being subject to a mortgage and that the first mortgagee had issued a notice to pay and a notice to quit. The recitals refer to Mr Hughes as the new trustee and the first and second plaintiffs are said to warrant that the new trustee "has agreed to accept appointment as the new trustee". The final recital states that "[w]ithout any admissions of liability and without any party releasing any other party, save as hereinafter provided, the parties have agreed to resolve this proceeding on the following terms."

12 Clause 1 of the Heads of Agreement then provides that Aileen Pty Ltd shall resign as trustee, remove its caveat over the land, do all things necessary to have the new trustee registered as proprietor of the land and "as soon as reasonably practicable give details to the new trustee of its claim for its indemnity".

13 Clause 2 of the Heads of Agreement provides that the new trustee be appointed by order of the Court, provided that the new trustee (who of course was not a party to the Heads of Agreement) agrees to be bound by clauses 3[7], 5(a), 11[8] and 12.

14 Clause 5 of the Heads of Agreement provides:

(a) Aileen is entitled to be paid its costs and expenses properly incurred, in accordance with the principle in Re Beddoe (1893) 1 Ch 547, as trustee in the conduct of the administration of the [Trust] up to 26 May 2006 which, in the absence of agreement, are to be taxed on an indemnity basis. In the event that the said costs and expenses are to be taxed then the taxing master shall allow unpaid counsel's fees and all other unpaid disbursements upon an undertaking that such unpaid disbursements will be paid within 14 days of the said costs and expenses being taxed and paid;

(b) Aileen proposes to claim funds to satisfy this indemnity from the [Trust] assets fund hereinafter defined as the fund;..."

15 Clause 7 of the Heads of Agreement provided that the settlement of the sale of Lot 1 and Lot 3 should be completed as soon as was reasonably possible. Clauses 9 and 10 of the Heads of Agreement dealt with the disposition of the proceeds of the sale of Lot 1 and Lot 3 as follows. After providing for payment in discharge of the first mortgage, payment of another creditor and of costs associated with the sale, a sum of $385,000 was to be paid "on account of the second mortgage" into an interest-bearing trust account in the name of the solicitors for four persons (namely the first defendant, Bollinger, OHH and the first plaintiff) - this last payment is described as being made "in accordance with Terms of Settlement dated 31 March 2006 in proceeding No. 5955 of 2005".[9] After all of the foregoing payments, the Heads of Agreement provide for the balance of the proceeds of sale to be paid into an interest-bearing trust account to be administered by the new trustee (i.e. Mr Hughes).

16 Clause 12 of the Heads of Agreement provides that, subject to clause 5(a) thereof and save for the costs and expenses due to the first defendant, no monies shall be paid from the Trust fund save by agreement between the plaintiffs and the first defendant, or Court order. Clause 13 provides that the matters set out in clause 12 "do not detract or affect in any way any charge or priority in payment of its indemnity from the Fund which Aileen [Pty Ltd] may have as a matter of law."

17 On 2 June 2006 Warren CJ ordered by consent, inter alia, that, pursuant to s.48(1) of the Trustee Act 1958, the first defendant be discharged as trustee of the Trust and Mr Hughes be appointed as the replacement trustee. The evidence does not show precisely when the order was made on 2 June 2006 but, if it matters, it seems very probable that it was made in the afternoon of that day after Mr Hughes had had the Heads of Agreement drawn to his attention.

18 On 7 June 2006 Mr Hughes had a conference with Messrs Harding and Scott of Harding & Co in which they briefed him as to the background of the matter and handed him relevant documents. They told Mr Hughes that the balance of funds available to meet the costs and disbursements claimed by the former trustee (viz their client) might not be sufficient and a shortfall could arise. They said to Mr Hughes that the Heads of Agreement had been worded in such a way that the former trustee obtained priority above everybody else.

19 On 16 June 2006 Mr Hughes wrote to the solicitor for the first plaintiff and the solicitor for the second plaintiff concerning a number of matters relating to the Trust. In that letter he stated:

"I note in the Heads of Agreement there is no mention of the payment of my fees for acting as Trustee. Whilst the Agreement refers to payment of the costs of Aileen [Pty Ltd] pursuant to paragraph 5, do these costs rank in priority to mine? It has been put to me by Hardings that on current calculations of the costs and disbursements which have been claimed in relation to the sales of the properties, a shortfall could occur. I am not comfortable with the thought that my position is not protected."

20 On 28 July 2006 Harding & Co sent a fax to Mr Hughes stating, inter alia:

"We advise that we estimate that our cost to be in excess of $250,000.00 plus disbursement of approximately $140,000.00, totalling $390,000.00. We are arranging for a cost consultant to prepare an itemised account and will forward this when it is completed."

21 On 31 July 2006 Mr Hughes sent a fax to Harding & Co, in effect challenging the former trustee's claim to priority, stating inter alia that the balance of purchase money after various agreed payments would be held on account of: "1 my costs, 2 costs and disbursements [of the sale] ..., 3 Aileen's costs and disbursements as set out in clause 5(a)."

22 On 9 August 2006 Harding & Co sent a fax to Mr Hughes stating inter alia that "Aileen ... is entitled to be indemnified out of the assets of the Trust in priority to all other claims."

23 On 15 August 2006 the settlement of the sales of Lot 1 and Lot 3 took place. After making the various payments required by the Heads of Agreement (including the abovementioned sum of $385,000), a sum of $215,394.85 remained as the balance of the proceeds of sale and the only funds of the Trust. I note that Mr Hughes has had an ongoing problem in relation to the deposit received by an estate agent in relation to Lot 1. The problem with the deposit necessitated the obtaining by the new trustee of an order from this Court and involved Mr Hughes in considerable correspondence both before and after the making of that order. Mr Hughes has ultimately received monies from that estate agent, or the estate agent's solicitor, but it appears that there is still a dispute as to the precise amount that the agent is obliged to pay to him.

24 On the same day as the settlement of the sales (15 August 2006) Mr Hughes sent a fax to Harding & Co advising of the settlement and stating inter alia:

"In relation to my remuneration, please note I was not a party to the Order and further my acceptance was in relation to the tasks to be undertaken as set out in the terms of settlement. It is my understanding that as trustee I have a right of indemnity which ranks in priority to your entitlement ... It may be necessary for me to seek Court directions as to my remuneration if agreement can not be reached."

25 On 17 August 2006 Harding & Co sent a fax to Mr Hughes stating that the advice of senior counsel had been obtained and that:

"A trustee who has rights of recoupment from the trust has equitable rights over the trust assets as against the beneficiaries and any new trustee. His equitable interests prevail over those of the subsequent trustee by reason of the equitable principle 'where the equities are equal, the first in time prevails'."

26 The fax from Harding & Co went on to argue the matter at some length and concluded:

"In the event you persist in your suggestion that your take in priority to our client's clear claim for costs and disbursements, then you will certainly need to make an application to the court for directions. However, we would want to be heard on such an application and we will use this letter on the issue of costs, as it is our view that such an application cannot succeed and is unnecessary.

It is our view that the issue of priority is very clear. Consequently, should you seek to apply to the court for such directions, we put you on notice that we shall ask that the court to order that you pay the costs of such application, including our client's cost, personally rather than from the trust assets."

27 In his affidavit sworn 17 November 2006 filed herein, Mr Hughes in effect responded to the position taken by Harding & Co on behalf of the former trustee by deposing:

"54. At the time of my acceptance of the appointment as trustee, I was not informed that my remuneration would rank behind that of Aileen Pty Ltd's and further I was not aware of and no disclosure had been made by any party of any potential shortfall in the funds which would leave my remuneration at risk. In the circumstances my consent to act as trustee was obtained without being fully informed of all the facts.

55. It was always my implicit understanding that as my appointment was being made pursuant to a Court Order, my remuneration would take priority over all other claims relating to the balance of funds held in the trust after payment of all mortgages and other selling costs as outlined in the terms of settlement. If this was not the case, as a Court appointed trustee I have been required to undertake a significant amount of work with the real possibility of no reward and my appointment was accepted without full disclosure by all of the parties to this proceeding and without full knowledge of all the relevant facts."

28 In a second affidavit sworn 6 December 2006 Mr Hughes summarised the substantial work that he had done as trustee between 2 June 2006 and the date of the affidavit. He went on to depose that, should his role as trustee continue, there were various further matters to be done by him before he would be in a position to distribute the funds of the Trust. He added that he had found his task as trustee to have been "complicated and contentious, as parties have asserted various rights and sought to become involved."

29 Antony James Scott swore a further affidavit herein on 6 December 2006 responding to Mr Hughes' first affidavit. The affidavit is in part argumentative and it is unnecessary to refer to that part of it. The affidavit otherwise raises contentious matters that were not referred to by counsel before me and accordingly it is unnecessary to consider the contents of this affidavit at all.

30 In a third affidavit sworn 5 April 2007, Mr Hughes deposed that, by letter dated 19 February 2007 from Harding & Co, he had received a bill of costs of the former trustee in the sum of $238,486.50, comprising costs of $126,383.52 and disbursements of $112,102.98. Mr Hughes deposed that he had engaged a costs consultant, John White Consultancy Pty Ltd. A letter from that consultant dated 30 March 2007 is exhibited in which it is stated that the bill of costs of Harding & Co had been prepared by a well-respected costs lawyer but that having reviewed that bill of costs "amounts totalling at least $14,000 would be taxed off should the bill proceed to taxation of costs on an indemnity basis ...".

31 Mr Hughes' cost consultant also provided a certificate of assessment of Mr Hughes' costs (excluding disbursements) up to 6 March 2007 in the total sum of $48,091.40. Mr Hughes deposed that his disbursements in that period totalled $7,870.40 and that since 6 March 2007 he had incurred further costs and disbursements estimated to be in the order of $17,500 (including counsel's fees).

32 Attached to the cost consultant's certificate of assessment of Mr Hughes' costs is a "breakdown of costs incurred in accepting the appointment [as the new trustee] and acting as replacement trustee of the ... Trust". A perusal of the said breakdown shows that it is divided between items assessed on a so-called "Supreme Court Scale" and items assessed in accordance with the Practitioner Remuneration Order. In relation to the items assessed on the Supreme Court Scale, it appears that these costs include the costs of Mr Hughes acquainting himself with the matter such as perusing the court documents in proceeding no. 6488 of 2006 and the Heads of Agreement and then all the costs involved in the current application. Although it is not possible to understand the nature of each item so assessed on the Supreme Court Scale, it is apparent that the bulk of the items relate either to Mr Hughes' initial appointment or to this present application. When one turns to the costs assessed in accordance with the Practitioner Remuneration Order, it is not possible to understand the nature of the many attendances, letters, facsimile transmissions, perusals and other matters listed but it is reasonably obvious that many of them, if not the bulk of them, relate to the actual administration of the Trust.

33 In his third affidavit Mr Hughes went on to depose that, if he continued to act as trustee, significant further costs and disbursements would be involved because of anticipated work in relation to the following matters:

• Dealing with the claim for costs by the former trustee (including objections by the beneficiaries);

• Managing and distributing the sum of $391,384.02 held in a separate account;

• Further investigating the position with the estate agent;

• Dealing with claims made by the second plaintiff;

• Dealing with Trust tax issues including the lodging of income tax returns;

• Possible involvement in an appeal by OHH to set aside a judgment relating to the existence of the Trust[10];

• General administration of the Trust.

34 In relation to the abovementioned matter of taxation, Mr Hughes deposed that this could involve a significant amount of work as the financial affairs of the Trust prior to his appointment remained unclear - for example, it appeared that income generated by properties owned and leased by the Trust may have been received directly by the second plaintiff. A tax file number would have to be obtained and liabilities relating to GST and so on would need to be ascertained and paid; an accountant would need to be retained and paid.

35 Finally, in his third affidavit, Mr Hughes deposed that there was $290,130.51 in the trust account maintained by him for the Trust.

36 It appears that the present financial position of the Trust is uncertain but might be summarised as follows:

Net proceeds of Trust fund before payment of trustees' claims

Possible deficiency (before allowing for future costs and expenses)

Submissions

37 Mr Graham of counsel for Mr Hughes accepted that, upon the assumption that the costs and expenses of the former trustee had been properly incurred (an assumption that he did not seek to challenge for the purposes of this application), the former trustee had a right of indemnity and a charge or lien over the Trust property that arose prior to the like rights of Mr Hughes as the new trustee. He accepted that, where the former trustee had handed over the Trust assets, its charge might be enforceable in equity against the new trustee who took the Trust property subject to the former trustee's prior right of indemnity. However Mr Graham submitted that that was not the end of the matter because there was another equitable principle that was relevant. In that regard he relied upon a number of authorities to which I will now refer.

38 Mr Graham referred to the well-known decision of In re Universal Distributing Company Ltd (in liq) in which Dixon J said:[11]

"If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets ... The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must by borne by it ...

In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property. In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which inure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it."

39 I note that the principle of In re Universal Distributing Co Ltd was applied by the Full Court of this Court to the case of a receiver appointed out of court in Moodemere Pty Ltd (in liq) v Waters[12] in which Tadgell J said[13] that where realisation was achieved by the intervention of a liquidator or a receiver appointed out of Court or by suit or otherwise, the expense attendant on the realisation was thrown upon the fund being realised and was ultimately extracted from the proceeds of its realisation (in that case in priority to the rights of the chargee as creditor).

40 In In re Berkeley Applegate (Investment Consultants) Ltd (in liq)[14] the business of a company had involved the holding of monies by the company on trust for certain investors. The company went into voluntary liquidation and the liquidator applied for the determination of the question whether any part of his expenses and remuneration could be paid out of the trust assets. The court held that the liquidator was entitled to know, before he incurred further expense, whether his proper expenses and proper remuneration for his work would be met from the trust assets in the event of the company's own assets proving insufficient and the court held that, although the liquidator was not in a position of a trustee, the court had a discretion to require an allowance to be made out of the trust property for the costs incurred and skill and labour expended by the liquidator in the administration of the trust property. Edward Nugee QC sitting as a Deputy High Court Judge said:[15]

"The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest ... or by a receiver appointed by the court whose fees would have been borne by the trust property ... and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity ..."

41 In Shirlaw v Taylor[16] a provisional liquidator was appointed to a company that was trustee of a trading trust. Subsequently, on a creditor's petition, a court appointed another person as liquidator. The provisional liquidator asserted an equitable lien over the fund in his hands in respect of his remuneration and expenses, but the liquidator contended that the provisional liquidator's claim ranked below his own. In referring to the provisional liquidator's claim to an equitable lien, the Full Federal Court (Sheppard, Burchett and Gummow JJ) referred to the position of a trustee's lien saying:[17]

"Even though the trust has come to an end, the trustee will not be compelled to transfer the trust property to the beneficiaries until he is paid or secured for his proper expenses in administration of the trust ... His right is a first charge on the trust property ... This is the price the beneficiaries must be prepared to pay for ... 'the gratuitous and onerous services of trustees' ... Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund..."

42 In Shirlaw v Taylor, the Full Federal Court went on to refer to the need to protect the position of an officer appointed by a court and then said:[18]

"In addition to the anxiety of the court to protect the position of its officer, in particular, lest there be in the future an absence of persons willing to take such appointments, the claims of the officer under a court appointed administration may be seen as in the nature of 'salvage'. The principle is that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it." [Reference was then made to In re Berkeley Applegate and to In re Universal Distributing Co Ltd.]

43 The Full Federal Court concluded that the provisional liquidator was entitled to satisfy his equitable lien out of the fund in his hands but that if further assets were brought into the winding up by the liquidator any claim by the provisional liquidator against those assets was deferred to the costs of winding up. The result in part depended upon statutory interpretation.

44 In Collie v Merlaw Nominees Pty Ltd (in liq)[19] Warren J (as she then was) said that it was well-established that a trustee was entitled to be reimbursed out of the trust property in respect of all charges and expenses properly incurred in the execution of the trust and that the right of reimbursement and indemnity was a first charge or lien on the trust property. Her Honour went on to say that if a trustee is removed and relinquishes possession of trust assets the lien or charge still subsists against the trust assets and the new trustee takes the trust property subject to the right of indemnity of the predecessor of the new trustee - the former trustee's lien over the trust assets will be enforceable in equity proceedings against the successor trustee.

45 In ASIC v John McKenney Consulting Pty Ltd[20] winding up orders had been made in relation to a group of companies some of which had previously been under administration. The court held that the equitable lien of a liquidator attaching to the realisation of assets in the winding up took priority over the administrator's statutory lien in that it would be unconscionable for the administrators to benefit from the fruits of the liquidator's labour. Warren J (as she then was), in reaching that conclusion, referred to In re Universal Distributing Co Ltd and to Shirlaw v Taylor.

46 Mr Graham contended that at the time of Mr Hughes' appointment the trust assets were in jeopardy. Settlement of the sales of property owned by the Trust had been delayed and it appeared that the delay was at least in part due to a dispute between the beneficiaries and the former trustee. Mr Hughes, having been appointed, did what was contemplated by the Heads of Agreement and oversaw the settlement of the sales and got the money in. Mr Graham said that Mr Hughes' cost of doing this was necessarily attendant upon the request by the parties in the Heads of Agreement that he do so and that the tasks involved had been quite complex.

47 Mr Graham submitted that the former trustee needed the assistance of equity to make good its claim to an equitable lien and that when the assistance was so invoked another principle came into operation, namely the principle referred to in In re Berkeley Applegate and in In re Universal Distributing and that a condition of the former trustee receiving its remuneration and expenses should be an allowance for the costs incurred by Mr Hughes in getting in the funds. It had been agreed by the parties that Mr Hughes should be appointed for this purpose and now it was said that he should not be paid for doing it. Mr Graham submitted that it would therefore be unconscionable for Mr Hughes' rights to be deferred to those of the former trustee. Mr Graham accepted that Mr Hughes had been informed, shortly after his appointment, that there was likely to be a shortfall after the former trustee's costs and expenses were paid, and that he had proceeded to incur substantial costs between that time and when he made the present application, but Mr Graham submitted that this did not detract from his client's position.

48 In the alternative, in addition to the Court's inherent jurisdiction, Mr Graham relied upon the Court's power under s.66 of the Trustee Act 1958 which provides:

"The Court may order the costs of expenses of and incident to any application for an order appointing a trustee, or for a vesting order or of and incident to any such order, or any conveyance or transfer in pursuance thereof, to be raised and paid out of the property in respect whereof the same is made ... or to be borne and paid in such manner and by such persons as to the Court seems just."

49 Mr Miller who appeared as counsel for the first plaintiff supported Mr Hughes' position and adopted Mr Graham's submissions.

50 Mr Colman, who appeared as counsel for the former trustee, submitted that the former trustee's claim had priority. It was true that the new trustee had been appointed by Court order but it was a consent order and there had been no adjudication. Mr Hughes had been aware of the contents of the Heads of Agreement and, soon after his appointment, when only a small amount of costs had been incurred, was informed about a possible shortfall in the Trust estate because of the former trustee's claims. Mr Hughes having been so informed and also having been told of the former trustee's claim to priority elected to proceed without attempting to secure his position by approaching the Court or otherwise. Mr Colman submitted that the equitable principle upon which Mr Hughes relied related to a context of trustee versus beneficiary. Mr Colman contended that it would be unfair and inequitable to put the former trustee in the position that for every dollar expended or incurred by the new trustee, the former trustee would lose a dollar. The equities were equal and the first in time should prevail - a principle which had been recognised in the cases[21] and in the textbooks[22] as applicable to the position as between a former and a replacement trustee.

Reasons

51 It is clear in this case that the new trustee either accepted his appointment with notice of the former trustee's prior equity or, at least, had such notice on the same day as his appointment and before all but negligible costs had been incurred by him. Once the Heads of Agreement had been brought to the attention of Mr Hughes, he had notice of the former trustee's claim against the Trust fund and therefore notice of the prior equity. This is of significance in itself as, in general, an equitable interest acquired with notice of an earlier equitable interest will be postponed to the earlier equitable interest.[23] There was some debate with Mr Colman as to whether the equities were "equal" or whether the new trustee, although second in time, had a better equity. Mr Colman, as I understood it, conceded that a Court of Equity had a discretion in this regard, no doubt having in mind such statements as were made in Heid v Reliance Finance Corporation Pty Ltd by Mason and Deane JJ: [24]

"For our part we consider it preferable ... to accept a more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances. It will always be necessary to characterise the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest."

52 In the present case although Mr Hughes had notice of the prior equity at the time of his appointment, he was not informed until shortly after his appointment of a likely shortfall or, expressly, of the former trustee's claim to a priority in those circumstances. It would have been appropriate for the parties to make a full disclosure to Mr Hughes prior to his appointment and no doubt he would have refused to accept the appointment unless they agreed to his having priority. The parties would then have had to decide whether there was any feasible alternative, as to which one can only speculate. The former trustees would have been faced with the prospect that the Court might appoint a receiver,[25] in the absence of agreement upon a new trustee or some other resolution between the parties. By failing to fully inform Mr Hughes prior to his appointment, the parties placed Mr Hughes in an invidious position. He had the option of resigning once so informed or he could have then approached the Court for directions. Of course the former trustee also had the option to seek declaratory relief immediately upon it being aware that Mr Hughes disputed its priority but, instead, it acquiesced in Mr Hughes proceeding to administer the Trust with the dispute as to priority unresolved.

53 I should say that I do not think that Mr Hughes can simply rely upon the fact of his appointment "by the Court" because he was not appointed as an officer of the Court and did not stand in the same position as a court-appointed receiver,[26] a provisional liquidator or a liquidator or even an administrator with statutory functions (although not appointed by a court).[27] The appointment was made under s.48(1) of the Trustee Act 1958 which provides that the Court may appoint a new trustee whenever it is expedient to do so and it is found inexpedient, difficult or impracticable so to do without the assistance of the Court. Such a new trustee has the same (and no more) powers, authorities and discretions as if he had been originally appointed under the trust deed.[28] He was free to resign without approaching the Court, as the Heads of Agreement confirmed. For these reasons I do not think that there is any policy question involved about not deterring persons from accepting court or statutory appointments.

54 However, I do not think that Mr Hughes was in the same position as a new trustee appointed to replace a former trustee for the purpose of merely carrying on the ongoing administration of a trust. He was appointed to resolve an impasse between the beneficiaries and the former trustee with a specific mandate to complete the sale of the properties of the Trust and to get in and apply the proceeds of sale in a particular way, in effect, to distribute the Trust funds. He was asked to do this by agreement both of the beneficiaries and the former trustee and for the benefit of each of them. Until his allotted tasks were completed there were and are no funds available to pay the former trustee or the beneficiaries. I consider that, in this context, the equitable principle invoked on behalf of Mr Hughes is of relevance. The parties invited Mr Hughes to take on the duties of trustee and to perform the tasks specified by the Heads of Agreement. They did so for their own benefit and in order that they might avoid the expense and inconvenience of the pending litigation (i.e. the removal application). In those circumstances, I consider that it would be unconscionable to expect the new trustee to proceed at the risk of non-payment of his reasonable remuneration and necessary expenses.

55 It was and remains clear that the former trustee will not be paid and could never be paid any remuneration and expenses to which it was entitled until some person, whether it be Mr Hughes or someone else, carries out the task of achieving settlement of the sales of the properties and the payment of liabilities[29] out of the sale proceeds. It seems to me to be a reasonable expectation that the necessary and reasonable cost of carrying out those tasks should be recoverable from the funds collected by that person, in advance of any payment to such former trustee. To frustrate that expectation would be unconscionable. The principle or principles applied in In re Universal Distributing Company (in liq)[30] and In re Berkeley Applegate[31] are in my opinion directly applicable.

56 It is unnecessary to say anything about the Court's power under s.66 of the Trustee Act 1958 but I note that, at least on first blush, the power is a somewhat narrow one.

57 I conclude that Mr Hughes is entitled, out of the fund collected by him and in priority to the former trustee, to reasonable remuneration in respect of the work necessarily performed by him to complete the sales of Trust property and to get in the proceeds thereof and in respect of the work yet to be performed by him to establish the net amount available for distribution after payment of all liabilities (such as tax liabilities), and also the necessary and reasonable expenses incurred or to be incurred in performing that work. The costs of the present application are not necessarily covered by that conclusion - those costs are a matter lying in the discretion of the Court as in any other piece of contested litigation and I have not yet heard argument about them.

58 I will hear submissions as to the precise orders to be made and as to costs.

[1] The first defendant.

[2] Defined in the summons as "the whole of the land contained in Certificate of Title vol 20758 fol 126 and known as Factory 1, 67 Matthews Avenue, Airport West in the State of Victoria" - hereinafter called "Lot 1".

[3] Defined as "the deposit held in respect of the sale of the Property".

[4] The deceased died on 11 February 2003.

[5] See too s.36(2) of the Trustee Act 1958.

[6] The reasons for judgment may be found in Aileen Pty Ltd v One Hawker Holdings Pty Ltd [2006] VSC 135.

[7] Clause 3 deals with the procedure for resignation of the new trustee or any subsequent trustee.

[8] Clause 11 deals provides that the new trustee is an independent trustee and bound by the terms of the trust deed.

[9] I am not concerned in the present proceeding with the status of this sum of $385,000 which is apparently held by Mr Hughes as a stakeholder, or so I was told.

[10] This matter was not adverted to by counsel before me and I am unaware of its significance.

[11] [1933] HCA 2; (1933) 48 CLR 171, 174-5.

[12] [1988] VicRp 31; [1988] VR 215.

[13] [1988] VicRp 31; [1988] VR 215, 229.

[14] [1989] Ch 32; see too In re Sutherland [2004] NSWSC 798; (2004) 50 ACSR 297 at [15] to [16] per Campbell J.

[15] [1989] Ch 32, 50-51.

[16] [1991] FCA 415; (1991) 102 ALR 551.

[17] [1991] FCA 415; (1991) 102 ALR 551, 557-557.

[18] [1991] FCA 415; (1991) 102 ALR 551, 560.

[19] [2001] VSC 39; (2001) 37 ACSR 361, 370.

[20] [2002] VSC 527; (2002) 43 ACSR 458. An appeal against this decision was dismissed: Lockwood v White [2005] VSCA 30; (2005) 11 VR 402.

[21] Reference was made to Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 87 ATC 4570; Global Funds Management (NSW) Ltd v Burnes Philp Trustee Co Ltd (in prov liq) (1990) 3 ACSR 183, 186; Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226, 245-246.

[22] See Ford: Principles of the Law of Trusts at 14-1053 and 14-1060.

[23] See for example Moffett v Dillon [1999] VSCA 32; [1999] 2 VR 480.

[24] [1983] HCA 30; (1983) 154 CLR 326, 341.

[25] As to the position of a receiver, see 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377, 381-2 per Finkelstein J.

[26] See 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [1999] FCA 144; (1999) 30 ACSR 377, 381-2 per Finkelstein J.

[27] See Shirlaw v Taylor [1991] FCA 415; (1991) 102 ALR 551; Weston v Carling Constructions Pty Ltd (in prov liq) [2000] NSWSC 693; (2000) 35 ACSR 100.

[28] See s.50 of the Trustee Act 1958.

[29] In the case of taxation liabilities, still as yet unascertained.

[30] [1933] HCA 2; (1933) 48 CLR 171.

[31] [1989] Ch 32, 50-51; see too Australian Guarantee Corp (NZ) Ltd v CFC Commercial Finance Ltd [1995] 1 NZLR 129, 140-141 (New Zealand Court of Appeal).