His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand & Anor v The Macedonian Orthodox Community Church St Petka Incorporated & Anor

His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand & Anor v The Macedonian Orthodox Community Church St Petka Incorporated & Anor - [2006] NSWCA 277 - NSWCA 2006 case summary — Zoe

[27]

6 October 2006 HIS EMINENCE METROPOLITAN PETAR, DIOCESAN BISHOP OF THE MACEDONIAN ORTHODOX CHURCH OF AUSTRALIA AND NEW ZEALAND & ANOR v THE MACEDONIAN ORTHODOX COMMUNITY CHURCH ST PETKA INCORPORATED & ANOR Judgment 1 THE COURT: This is a concurrent hearing of a Summons for leave to appeal and, if leave is granted, the appeal, from Injunctive Orders made by Hamilton J partially restraining the use of trust property for the payment of legal costs. The appellants contend that his Honour erred in giving limited injunctive relief only, and seek the re-exercise of discretion by this Court so as to give injunctive relief that restrains the use of the trust property for the payment of costs incurred prior to the date specified by his Honour and also to injunct the use of property in respect of which there continues to be a dispute as to whether it is impressed with the same trust as the property the subject of the injunction granted by his Honour. 2 For reasons given shortly, we propose to grant leave. 3 The matter is part of an extended dispute between his Eminence Metropolitan Petar, the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (Metropolitan Petar) and Father Mitrev, appointed by Metropolitan Petar as the parish priest of the St Petka Parish of the Macedonian Orthodox Church at Rockdale and, relevantly, the Macedonian Orthodox Community Church St Petka Incorporated (the Association). The Association is the successor in title to church land and property previously held upon trust by named individuals who had been appointed trustees under a Deed of Trust pursuant to a constitution adopted by the parishioners of the St Petka Parish (the parish organisation) in about October 1977. 4 It is convenient to refer to the appellants solely as Metropolitan Petar and the respondents as the Association, as they are the principal players in relation to the issues presently before the Court. 5 The Association was incorporated in 1992 under the Associations Incorporation Act 1984 (NSW). Following its incorporation, property previously vested in the trustees of the parish organisation was transferred to the Association. In 1997, a dispute arose between the Association and Metropolitan Petar and Father Mitrev, which has involved the Association repudiating the authority of Metropolitan Petar as Diocesan Bishop over the St Petka Parish and purporting to dismiss Father Mitrev as parish priest. 6 In 1997, Metropolitan Petar commenced proceedings against, inter alia, the Association, contending that the property vested in it (the property) was held on trust for the Macedonian Church (the principal proceedings). It is convenient to refer to the property in two categories, in accordance with usage adopted by the parties: the Schedule A property and the non-Schedule A property, the categories broadly but not wholly depending upon the date of acquisition. 7 The Schedule A property was acquired prior to the incorporation of the Association, and comprises the land upon which St Petka Church and the church hall stand; premises at Arncliffe used as a childcare centre; and two units at 64 Railway Street Rockdale, held as investment properties. Initially, the Association owned three units, units 1, 2 and 5 at 64 Railway Street Rockdale. However, the Court was informed that one of these units has been sold. 8 The non-Schedule A property comprises three other units in the building at 64 Railway Street Rockdale, also held as investment properties (units 4, 6 and 7); liquid funds in various bank and deposit accounts (the parish funds); and the altar, iconostasis, icons and other sacred objects with which the church buildings are furnished (the holy objects). 9 In his judgment dated 4 April 2003: Metropolitan Petar v Mitreski [2003] NSWSC 262, Hamilton J determined at [102] by way of a separate question that the Schedule A property was held upon trust as follows: "The property referred to in Schedule A was prior to the transfer of the legal titles to the sixth defendant [the Association] held upon trust to permit the trust property to be used by the Macedonian Orthodox Church St Petka Rockdale as a site for a church of the Macedonian Orthodox Religion and for other buildings and activities concerned with or ancillary to the encouragement, practice and promotion of the Macedonian Orthodox Religion." 10 His Honour found that that trust was a valid charitable trust and answered in the negative the question: "Whether effect [sic] of the vesting of the Property in the Sixth Defendant was that the Sixth Defendant thereafter held the Property free of either trust." 11 At the request of the parties, his Honour refrained from making a declaration in the terms of his determination. However, it will be convenient for ease of reference to refer to his Honour's determination as the 'declared trust'. Although it is not strictly relevant for the question presently under consideration, it appears that the terms of the declared trust continue to be in issue between the parties, notwithstanding Hamilton J's decision. 12 As yet, there has been no determination of the basis upon which the Association holds the non-Schedule A property. That question is a hotly disputed matter between the parties. Metropolitan Petar contends that it is held by the Association on the same declared trust as the Schedule A property is held, subject only to the right to challenge that formulation and to assert that the trust upon which the property is held is for the Macedonian Orthodox Church, not the Macedonian Orthodox Church Rockdale. The Association contends that the non-Schedule A property is not held by the Association on trust. 13 Following the determination of the separate question, the Association brought an application for judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) (the Trustee Act) in which it sought the advice of the Court as to whether it would be justified, inter alia, in using the Schedule A property, other than the property on which the Church and Church hall stand, for the payment of its reasonable costs of the proceedings. The application related to the future costs of the proceedings, which were estimated to be approximately $400,000. 14 Palmer J gave an advice in relation to that application on 7 May 2004, in which he directed that the Association was justified: (1) in having recourse to the real estate in Schedule A property for the purposes of paying legal costs in complying with outstanding directions of the Court and to prepare its case for trial, up to and including 9 July 2004; and (2) in obtaining counsel's opinion as to its prospects of success in defending the proceedings. The real estate to which recourse could be had for the payment of these costs was the Schedule A investment properties at 64 Railway Street Rockdale. 15 The application was otherwise stood over for further consideration and has not yet been finalised. 16 In addition to the estimated $400,000 for the future conduct of the litigation, the Association has outstanding legal costs, which as at 1 April 2005 amounted to approximately $600,000. The only source of funds available to the Association to pay those costs is the Schedule A and non-Schedule A property.

[42]

Decision of Hamilton J 27 Hamilton J correctly identified the principles of law that governed the use of funds by a trustee. Those principles apply to the Schedule A property. In relation to the non-Schedule A property, his Honour considered that the principle that applied was more akin to the principles that governed the grant of Mareva relief. On those principles, an injunction would not be granted to prevent the defence of proceedings, even where the effect of not granting the relief was that the funds were thereby likely to be used up: see Chandler v Church (unreported, Chancery Div, 21 December 1987); PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at 164 per Lloyd J. His Honour referred to the distinction drawn by Lloyd J in that case: "The distinction between the ordinary Mareva plaintiff … and the case where the plaintiff is laying claim to a trust fund on the so-called wider ground, is … clear. In the latter case, the whole object is to secure the trust fund itself so that it should be available if the plaintiff should prove his claim. In the former case by contrast the plaintiff is not entitled to any security. The purpose of the jurisdiction … is not to provide the plaintiffs with any form of pre-trial attachment. It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim." 28 Having determined that that was the principle to apply in relation to the non-Schedule A property, and having observed that the application was to restrain the use of funds on an interlocutory basis and that if the funds were utilised in a way that was ultimately determined not to be justified, the Association would be liable to repay them: see at [33]. 29 Hamilton J considered that the matter fell for determination under three heads. The first related to all property up to the time that it became clear that Metropolitan Petar was claiming that any use of the Association's property was a breach of trust. His Honour found that this was not until after receipt of a letter from Metropolitan Petar's solicitors dated 12 November 2003. The second related to the use of Schedule A property in the period after that time. The third related to the use of the non-Schedule A property in the period after that time. 30 In order to understand his Honour's approach, it is necessary to turn to some factual considerations that were in focus in the injunction proceedings. 31 It has already been mentioned that on 4 April 2003, Hamilton J found that the Schedule A property was the subject of the declared trust. On the same day, Metropolitan Petar's solicitors wrote to the Association's solicitors in the following terms: "We refer to the Judgment of Justice Hamilton delivered earlier this afternoon.

[52]

If this is so , and such monies have been spent on the defence of these proceedings, and in particular upon seeking to deny the trust , there is a monetary breach of trust that the Sixth Defendant will be required to make good." (Emphasis added) 34 After receipt of this letter, the Association's solicitors, after a conference with senior counsel, advised the Association that "denying the trust claimed by [Metropolitan Petar] did not constitute a breach of the trust found by Justice Hamilton": see affidavit of Keith Stevens McConnell, sworn 18 April 2005. Thereafter, costs continued to be incurred by the Association in relation to the proceedings. 35 On 12 November 2003, Metropolitan Petar's solicitors again wrote to the Association's solicitors, relevantly in the following terms: "In particular, our clients are concerned about the funding of your client's defence in these proceedings. On the face of it, funds that, on his Honour's findings, are required to be held for the purposes of a charitable trust are being expended on maintaining a defence that involves denying the existence of such a trust and, in the alternative, seeking to protect the Sixth Defendant's position as trustee. If His Honour finds that such expenditure is a breach of trust, the Sixth Defendant, and possibly others, will be liable to repay it. On the face of it, the Sixth Defendant lacks assets of its own from which it could meet such a liability. If you are able to correct this assumption, please do so." 36 Following receipt of this letter, Mr McConnell sought advice from senior counsel in relation to the allegation that by defending the proceedings and retaining his firm, the Association had acted and were acting in breach of "a charitable trust". 37 Mr McConnell deposed in his affidavit that after the letter of 12 November 2003 advice was sought from senior counsel. Mr McConnell also deposed that if at any time it had been alleged that the fact that the Association continued to defend the proceedings and apply funds to do so constituted a breach of trust, he would have advised the Association to seek advice from senior counsel as to the steps available to seek protection from being in breach of trust: see McConnell affidavit para 6. 38 Subsequently, on 16 April 2004, the Association filed its application seeking judicial advice. 39 At the time that the Association filed its application for judicial advice the statement of claim was in the form of the fourth further amended statement of claim which had been filed on 26 November 2003. However, it was not until the sixth further amended statement of claim, filed on 1 May 2005, that it was alleged in the statement of claim that the use of the Association's funds for the defence of proceedings constituted a breach of trust.

[53]

Schedule A property in relation to the period up until 12 November 2003 40 Hamilton J found at [36] that Metropolitan Petar had a "stronger prima facie" case in relation to Schedule A property as that had already been found to be held on the declared trust. His Honour also found at [39] that Metropolitan Petar had a weaker prima facie case in relation to the non-Schedule A property because it was hotly contested that this property was subject of the trust. 41 That then left for determination the question of the balance of convenience. 42 In relation to the period up until 12 November 2003, when, on the Association's case, it became clear that Metropolitan Petar was claiming that any use of the Association's property was a breach of trust, his Honour found that there were two particular factors which meant that injunctive relief ought to be refused. Those two factors were delay by Metropolitan Petar and hardship to the Association. His Honour said: "[36] … The plaintiffs [Metropolitan Petar], the applicants for relief, stood by for months on end before taking any objection to the use of trust property to fund the defence of the proceedings. The Attorney General, who is charged with supervision of the public interest in charitable trust funds and who is a party to the proceedings, has not joined in the plaintiffs' application, indicating in submissions made to the Court that he supports neither the plaintiffs nor the defendants. During the lengthy period which it took the plaintiffs to reach the stance they have now taken, the defendants continued to incur costs and their lawyers continued to do large amounts of work on the basis that the objection to this course had not been formulated. By reason of the course of action which the defendants and their lawyers have pursued since April 2004, there is no reason to doubt that, had their conduct been challenged earlier, they would have applied to the Court earlier for judicial advice in respect of the Schedule A property. The work having been done, it would inflict grave hardship on both the defendants and their lawyers to grant relief in respect of costs incurred on that basis. See Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed, 2002) [21-375], [21-380].

[59]

Alleged error 44 It is convenient to consider the errors alleged in respect of this part of his Honour's reasoning, before going to the non-Schedule A property in relation to the period after 12 November 2003. 45 Metropolitan Petar contends that his Honour erred because he accepted Mr McConnell's evidence that the Association had continued to incur costs and its lawyers continued to do large amounts of work on the basis that no objection to that course had been taken by Metropolitan Petar up until the letter of 12 November 2003. The error, it was contended, arose because his Honour made a final determination on a matter in issue without giving an opportunity to test that assertion. 46 On the hearing of the injunction proceedings, senior counsel for Metropolitan Petar had sought to cross-examine Mr McConnell in relation to his awareness or otherwise as to the appropriateness of expending Church funds. His Honour accepted that was a matter of central importance to the application and indicated his view that cross-examination on that topic should be allowed. In further discussion, senior counsel for Metropolitan Petar informed his Honour that the cross-examination would seek to attack Mr McConnell's credit. His Honour was informed that Mr McConnell was to be a witness at the trial and that the issue of the expenditure of moneys on legal expenses was to be a very real issue at the trial. Senior counsel for Metropolitan Petar reiterated that cross-examination was intended to go to Mr McConnell's credit. His Honour considered that those matters put a different light on the matter and thus refused the application to cross-examine Mr McConnell. 47 Senior counsel for Metropolitan Petar accepted that by refusing the application for cross-examination, his Honour was acting consistently with the principles in Kolback Securities Ltd v Epoch Mining NL (1987) 8 NSWLR 533 at 535. In that case, McLelland J, in relation to the grant of an interlocutory injunction, said: "Where a plaintiff's entitlement to ultimate relief is uncertain, the Court, in deciding to grant or refuse an interlocutory injunction, must consider what course is best calculated to achieve justice between the parties in the circumstances of the particular case, pending the resolution of uncertainty, bearing in mind the consequences to the defendant of the grant of an injunction in support of relief to which the plaintiff may ultimately be held not to be entitled, and the consequences to the plaintiff of the refusal of an injunction in support of relief to which the plaintiff may ultimately be held to be entitled … Where the uncertainty depends in whole or in part on a contested question of fact it is not appropriate for the Court to decide that question on the interlocutory application ." (Emphasis added)

[60]

McLelland J also indicated at 536 that, usually, the strength of the applicant's case would not be assessed on the determination of an application for an interlocutory injunction. 48 Senior counsel for Metropolitan Petar submitted that his Honour, having correctly identified the principles to be applied, relevantly, that it was not appropriate to determine contested questions of fact on the determination of an interlocutory injunction, proceeded to do exactly that, as he based his determination in respect of this period on the evidence of Mr McConnell, and in particular, on the uncontested evidence given in para 6 of his affidavit. 49 This submission is not precisely correct. In Kolback, McLelland J was referring to disputed factual matters relevant to the principal claim in the main proceedings. The complaint here, it seems, is that his Honour accepted Mr McConnell's assertion that he was not aware until late 2003 that Metropolitan Petar was, or at least was proposing, to allege a breach of trust in the use of the property for the purposes of paying legal expenses. In the principal proceedings, the question whether the use of the property to pay legal expenses constitutes a breach of trust will be in issue. However, it will be in issue regardless of when the allegation of breach was first made. If it is a breach of trust to use the property for the payment of legal fees, such breach of trust arises as and when the property is used for that purpose. The breach does not depend upon the time that breach is alleged. 50 Notwithstanding that the Court considers that his Honour did not err precisely in the manner alleged, Metropolitan Petar's complaint raises the question whether there was a denial of procedural fairness. That denial stemmed from his Honour accepting the evidence of Mr McConnell in circumstances where he had refused an application for cross-examination. 51 It is clear that his Honour accepted Mr McConnell's affidavit evidence that the Association continued to incur costs because it was not aware that any objection would be taken to that course. The acceptance of that evidence was central to his finding of delay and hardship which in turn was the essential basis upon which he determined the balance of convenience. As his Honour said at [36], the discretionary considerations arising from delay by Metropolitan Petar and the consequent hardship to the Association were such that it would inflict a "grave hardship" on the Association and its lawyers to grant relief in relation to costs incurred up to and including 7 May 2004. 52 However, it was apparent from the application to cross-examine Mr McConnell that the assertions in his affidavit were contested. In that circumstance, his Honour should have treated the evidence of Mr McConnell as being in dispute. He should then have assessed the matter by having closer regard to other objective considerations. The objective considerations included the proper interpretation of the correspondence between the parties, the question whether the balance of convenience favoured the non-expenditure of moneys on legal fees and whether the Association should have approached the Court for Judicial Advice at least once it was determined that the Schedule A property was held upon the declared trust. Approached in that way, the question of relevant hardship might have been assessed differently. 53 A further matter was referred to as arguably involving error in that his Honour appears to have taken into account an irrelevant consideration when he referred (at [36]) to the neutral stance taken by the Attorney-General. It is difficult to understand the relevance of that comment. It would not have been out of place for that comment to have been made at the commencement of the judgment as a matter of record. However, it seems misplaced in his Honour's reasoning relating to the balance of convenience. If his Honour took it into account against the grant of the injunction, then it was clearly an irrelevant consideration. The Attorney-General has maintained a neutral stance throughout these proceedings. It was not unusual that he would continue to do so in relation to the injunction. However, as the principal error made by his Honour was that referred to above, it is not necessary to dwell further on this particular aspect.

[61]

Non-Schedule A property in relation to the period after 12 November 2003 54 Metropolitan Petar submitted that his Honour's evaluation of the balance of convenience insofar as the case related to use of non-Schedule A property miscarried, and that for that reason also his Honour erred in such a way as to give rise to the need for appellate intervention. 55 His Honour dealt with the position in relation to the non-Schedule A property at [39]-[41]. His Honour considered that the application for an injunction in respect of the non-Schedule A property was more difficult because it had not yet been determined that that property was the subject of the same trust as the Schedule A property. His Honour accepted, however, that Metropolitan Petar had established that there was a serious question to be tried. His Honour also accepted that the Association had established "a countervailing case that [the non-Schedule A property] is not subject to the declared trust". This was not elucidated. Having said that, his Honour indicated that this was not one of those cases in which the relative strength of the cases ought to be determined on the interlocutory application: see Kolback. 56 His Honour then dealt with the balancing exercise which, he said, was to be determined "in the face of the competing prima facie cases". His Honour then set out the relevant considerations, referred to at [43] above. Amongst those considerations was what his Honour described as "doubts as to [the] recoverability" of any moneys expended on costs by use of the non-Schedule A property, should it ultimately be determined that that property was subject to the declared trust. His Honour concluded that "by reference to all the relevant considerations" there should be no injunctive relief in relation to the non-Schedule A property. 57 It was submitted that in approaching the question of the balance of convenience in this way, his Honour erred in principle in a number of respects. First, it was submitted that it was not relevant for his Honour to consider "competing prima facie cases". Rather, the issue for his Honour's determination was whether Metropolitan Petar had established a prima facie case. His Honour considered that that had been established. Senior counsel for Metropolitan Petar accepted that, on the question of the balance of convenience, it might have been relevant to consider the strength of Metropolitan Petar's case and an evaluation of that would include the likelihood of the Association's defence succeeding. However, his Honour did not engage in that process. On this submission, it was irrelevant for his Honour to consider the balance of convenience on the basis that there were competing prima facie cases. 58 It was next submitted that his Honour erred in his assessment of the recoverability of the money expended on costs. His Honour said there was a doubt as to recoverability. It was submitted that understated the position to such an extent as to amount to error. It was submitted that the evidence made it clear that the Association had no substantial assets apart from the Schedule A property and the non-Schedule A property to pay the costs. 59 Next, it was submitted that his Honour had approached the matter incorrectly as a matter of legal principle. His Honour, at [34] considered that the case in respect of the non-Schedule A property ought to be considered upon the same or similar principles to those that applied in relation to the grant of Mareva relief. However, in Cardile v LED Builders Pty Limited (1999) 198 CLR 380 at 394-401, the High Court held that the making of an asset preservation order had an entirely different juridical base from an injunction to protect property in which an applicant had at least a prima facie case for claiming a proprietary interest. 60 In our opinion, at least the second and third of these alleged errors have been made out. It was an understatement merely to express doubt as to the recoverability of moneys expended by way of costs out of non-Schedule A property. What appears certain in this case is that once moneys have been expended, subject only to the possibility of recovery from other persons involved in the payment or receipt of trust property, there are no other assets out of which there may be restitution of sums so expended. There was no explicit or even general evidence as to the financial worth of the natural persons involved in the conduct of the Association's affairs, but there was evidence to the effect that the proceedings could not be funded without access to the property, from which it may be inferred that they would not be in a position to make good the money expended if found liable to do so; in any event, claims against third parties should not be forced upon Metropolitan Petar if he is ultimately successful. The question of the recoverability of such funds was an important factor in the balance of convenience. The assessment by his Honour that the recoverability of such moneys was dubious, in circumstances where on the evidence such moneys would, subject to the possibility mentioned above, be irrecoverable, is sufficient to establish appellable error. 61 In our view, his Honour wrongly approached the question of principle by comparing the position, insofar as the injunction related to non-Schedule A assets, to the principles that apply to the grant of a Mareva relief. The context here is whether the non-Schedule A property is trust property, held on the declared trust. It is not a case where a party is seeking to prevent the abuse or frustration of the Court's process by an asset preservation order preventing another party from dissipating its assets prior to the Court's determination of the dispute. 62 As mentioned, his Honour approached the question of the balance of convenience against the background that there were competing prima facie cases. This was the first of the errors of which Metropolitan Petar complained. We have not considered it necessary to specifically deal with this issue as we have otherwise found error in the exercise of the trial judge's discretion. However, we would make the observation that as we understand his Honour's comment, it was that, because each party had established its case at a prima facie level, the strength of Metropolitan Petar's application was not a relevant consideration on the balance of convenience, as it otherwise might have been if his case was either strong, or alternatively was relatively weak. 63 In his oral submissions, senior counsel for Metropolitan Petar developed a more specific argument as to why his Honour's discretion miscarried. He said that even if it would impose hardship upon the Association to be deprived of funds to defend the proceedings, it was a wrong exercise of discretion to allow access to the non-Schedule A property where there was a prima facie case that it was trust property and it would not provide sufficient funds to enable the Association to pay all the costs of defending the proceedings in any event. Access to the non-Schedule A funds would only permit a partial discharge of its legal costs in the defence of the proceedings. It was submitted that in that case, the Court ought not to have permitted access to the non-Schedule A property in circumstances where that would discharge the costs for part only of the proceedings. The position would then be that the Association would still not be in a position to defend the balance of the proceedings, but the entirety of the prima facie trust property would have been utilised without any prospect of recovery. 64 As we understand the way this argument was put, it went to a matter of appellable error and was then the basis upon which Metropolitan Petar sought the exercise of this Court's discretion. Given that we have already considered that there is appellable error in his Honour's judgment, it is convenient to move to consideration of whether in the re-exercise of discretion, this Court ought to grant any different injunction to that granted by his Honour. In doing so, it is appropriate to maintain the distinction between the Schedule A and the non-Schedule A property.

[62]

Schedule A property 65 The injunction granted by his Honour restrained use of the Schedule A property for the payment of legal costs incurred after 7 May 2004, subject to the judicial advice and to another limited exception. Metropolitan Petar submitted that the injunction should have been granted as and from 4 April 2003, when his solicitors first wrote to the Association's solicitors following the handing down of his Honour's judgment on that day in which his Honour determined that the Schedule A property was held on the declared trust. Alternatively, and at the latest, the relevant date should have been 12 November 2003 when Metropolitan Petar's solicitors again wrote to the Association's solicitors. 66 It will be recalled that in the letter of 4 April 2003, Metropolitan Petar's solicitors requested undertakings from the Association's solicitors that they would not deal with Schedule A and non-Schedule A property otherwise than for the purposes of the Macedonian Orthodox Church. Those undertakings were refused on the basis that the Association's solicitors disputed Metropolitan Petar's solicitors' interpretation of his Honour's judgment. 67 It will also be recalled that Mr McConnell said in his affidavit that having received the next letter, namely that of 15 April 2003, he obtained legal advice that to deny the trust claimed by Metropolitan Petar was not a breach of the declared trust. 68 Mr McConnell did not refer in his affidavit to the letter of 4 April 2003 or to his response of 9 April 2003. However, as already mentioned, he said that if at any time it had been alleged that the use of funds to defend the proceedings constituted a breach of trust, he would have advised the Association to take steps to seek protection from being in breach: see Affidavit para 6. It is not clear whether that statement was intended to encompass the contents of the letter of 4 April 2003. 69 The letter of 4 April 2003 contained a clear warning that the use of the Schedule A property other than for the purposes of the Macedonian Orthodox Church would be a breach of trust. In making that assertion, the solicitors referred in particular to his Honour's judgment at [104]. That paragraph followed his Honour's answer to the separate question in which he found the declared trust. His Honour continued: "The situation at the moment is that [the Schedule A property] is vested in [the Association], but subject to the charitable trust which I have found to subsist. That means that [the Association] holds [the Schedule A property], but is obliged to deal with it in accordance with the provisions of the charitable trust. As that charitable trust is undoubtedly a charitable trust for conducting a church for the worship of the religion of the [Macedonian Orthodox Church] that church must be conducted in accordance with the tenets of the [Macedonian Orthodox Church]. " (Emphasis added) 70 The letter of 4 April 2003 further stated that Metropolitan Petar would be contending that non-Schedule A property was also subject to the trust that his Honour had found to exist. 71 In his letter of 9 April 2003, Mr McConnell asserted that his Honour's judgment did not say that the trust property "must be used for the purposes of the Macedonian Orthodox Church" (original emphasis). Mr McConnell referred to para [87] of his Honour's judgment. In that paragraph, his Honour said that: "… there was a gift to a trustee for a purpose. The purpose was to permit the use of the property for a church of the Macedonian Orthodox Religion by a specified entity, namely, the parish organisation denoted by the defined expression 'the proposed beneficiary'. It was not a gift for religious purposes of the Macedonian Orthodox Religion or the [Macedonian Orthodox Church] in general terms, but a gift to a trustee to permit the use of the property by the specified entity for a specified purpose, ie, its use as a church for the worship of the Macedonian Orthodox Religion, and ancillary purposes." 72 What is apparent from the letter of 9 April 2003 is that the Association asserts that it has the use of the property for a church of the Macedonian Orthodox religion. It was elicited in discussion with senior counsel for the Association that it is inherent in that assertion that the Association does not recognise the authority of Metropolitan Petar or his appointed priests in respect of the use of the property, including for conducting liturgical services at the Church. That remains very much the nub of the dispute between the parties, regardless of whether Metropolitan Petar continues to assert the trust for which he initially contended. 73 It seems, however, that the Association's stance, which is one it is entitled to take in the proceedings, has coloured its understanding of the letter of 4 April and that of 15 April 2003. Thus, although it appears that there will be a continuing dispute as to what is encompassed by the trust as declared by his Honour, the letter of 4 April 2003 was clear warning that Metropolitan Petar was asserting that the use of either category of property other than for Church purposes, would be a breach of trust. 74 If this point was not made clear in the letter of 4 April 2003, there could have been no doubt as to Metropolitan Petar's assertion in the letter of 15 April 2003. 75 However, there is a more fundamental point. As and from 4 April 2003, the Association knew that it was holding the Schedule A property in accordance with the declared trust. Up until that time, it had resisted that it was holding that property on trust or on trust for a charitable purpose. Once the manner in which it held the Schedule A property had been determined and even though that determination was not precisely in accordance with the trust originally asserted by Metropolitan Petar, there should have been no doubt in the Association's understanding that the use of Schedule A property to defend proceedings, including using that property to defend Metropolitan Petar's claim that the non-Schedule A property was also held on the same trust, was not, or at least was arguably not, a use of trust property for the encouragement, practice and promotion of the Macedonian Orthodox religion. That was the time at which the Association should have acted to seek protection in its continued defence of the proceedings out of the Schedule A property; and it was on notice that it should not use the Schedule A property to fund its defence without such protection. If it continued to incur costs in its defence it was put on notice of risk of restraint from paying the costs out of Schedule A property. 76 This raises another issue. Hamilton J referred to the law that governs a trustee's entitlement to recoup its costs defending matters relating to the trust out of trust property. His Honour's statement of the law is not disputed. There can be no doubt that the portion of the costs incurred to 7 May 2004 related to the defence of the case that the non-Schedule A property was held subject to a trust. In excepting from the injunction the period prior to 7 May 2004, his Honour did not distinguish between the costs incurred relating to the non-Schedule A property and the costs incurred relating to the Schedule A property. The authorities referred to by his Honour do not deal with the case where trust property is sought to be used, as it is here, to permit a defence to be conducted by the purported Trustee that asserts other property is not subject to the trust. It is not appropriate to venture a view as to the correct principles to apply in that case. The matter was not argued and it is likely to be an issue in the proceedings. However, that difference is another reason why his Honour ought not to have granted the injunction in the terms he did. 77 Accordingly, and principally for the reasons stated at [69] and [75], the injunction for the period considered by his Honour under the first head should apply to costs incurred after 4 April 2003.

[63]

Non-Schedule A property 78 In his oral argument on the appeal, senior counsel for Metropolitan Petar accepted, for the purposes of argument, that it would be a relevant hardship to be deprived of the ability to defend the case in circumstances where there was an arguable defence, by reason of moneys not being available to fund that defence. Metropolitan Petar contends that, on the evidence, making the non-Schedule A property available would not be enough to fund the defence. This submission proceeded upon the basis that the non-Schedule A property was worth approximately $560,000 and the defence costs that required funding were in the order of $1,000,000. Senior counsel for the Association reiterated that the Association only seeks to fund the pre-1 April 2005 costs out of non-Schedule A property and that future costs are to be governed by the outcome of the judicial advice application. The immediate figure is therefore (in round figures) $600,000, but it is relevant that further funding of approximately $400,000 will be required. 79 The non-Schedule A property together with the investment properties comprised within the Schedule A property are all security for borrowings by the Association which are now in a total amount of $750,000. $200,000 of that borrowing was for the purposes of legal costs. The total value of neither the non-Schedule A investment properties nor the Schedule A investment properties taken alone is sufficient security for that lending: the Schedule A investment properties having a total value of approximately $420,000 and non-Schedule A investment properties having a total value of approximately $560,000. 80 If the Schedule A investment properties cannot be used to pay the costs of $600,000, those costs will in the main have to be paid out of the non-Schedule A investment properties. It was not suggested that resort would be had to the holy objects, and the parish funds would not contribute greatly to payment of costs. With an allowance for some contribution from parish funds, perhaps by way of special fund-raising activities, assuming that they were available in full the non-Schedule A investment properties would be wholly used in payment of the costs. But they are not available in full. They stand as part of the security for the borrowings of $750,000, at least to the extent of approximately $330,000 ($750,000 (amount of borrowing) minus $420,000 (approximate value of Schedule A investment properties also part of security for borrowing)). That would leave available from non-Schedule A property an amount of $230,000 for the payment of costs ($560,000 value of non-Schedule A investment properties minus $330,000 (being the amount required for security for the loan of $750,000)). That would result in a deficiency of $370,000 ($600,000 (estimated costs) minus $230,000 (available non-Schedule A property)) if the costs of $600,000 were paid out of the non-Schedule A investment properties, and of the order of $300,000 if allowance be made for some contribution from parish funds. 81 There would be no more money to pay the future costs, estimated at $400,000. No doubt the level of defence costs could be decreased and there could be fund-raising activities, and funding for the future may be affected by judicial advice concerning use of the Schedule A property. But on the broad estimation appropriate and possible at this time it is most unlikely that the proceedings would continue with legal assistance. 82 Mr McConnell in his affidavit of 18 April 2005 has sworn that his firm will not continue to act for the Association unless it is able to pay its legal costs out of its assets or satisfactory arrangements are made to reduce or secure the indebtedness. He further stated in his affidavit that Mr Blake SC had advised him that he took the same stance in relation to payment of his fees. 83 There is therefore considerable force in the submission, as to the balance of convenience, that it would be pointless to permit payment of the past costs out of the non-Schedule A property - that it would be a waste of alleged trust funds to no purpose because the defence could not be funded to completion. 84 There must be a balancing exercise, as was succinctly captured in the Attorney-General's submission: see [2006] NSWSC 336 at [40], in the following terms: "… your Honour is faced with … a very difficult decision on the balance of convenience by reason in large part, on the one hand, with what should be the Court's desire to protect what is reasonably arguably charitable church property and, on the other hand, to permit the party that holds it to run a case about whether or not that is so." 85 In that balancing exercise there must be weighed that the warning in the letter of 4 April 2003 that the use of the Schedule A property other than for the purposes of the Macedonian Orthodox Church would be a breach of trust plainly called attention to the use of the non-Schedule A property in breach of trust. On Metropolitan Petar's case, the non-Schedule A property was also trust property. The Association was on notice, albeit less directly, that it should not rely on use of the non-Schedule A property to fund its defence. There is a prima facie case that the non-Schedule A property is trust property and the Court should be attentive to protection of trust property. For reasons earlier explained, if the non-Schedule A property is used up in payment of costs and it is in due course held that it is (or at the time of the holding was) trust property, there is no real prospect of the loss being made good. 86 Overall, the balance falls in favour of restraining use of the non-Schedule A property to pay the past costs. At the present time the result of the judicial advice proceedings is not known. However, even if that advice was to the effect that the Association would be justified in using Schedule A property to defend the principal proceedings, the same conclusion would follow.

[64]

Form of orders 87 At the outset of the hearing of the appeal, Metropolitan Petar sought leave to file an amended Notice of Appeal to add a ground appealing against the costs Order made by Hamilton J on 2 June 2006. There was no objection to the proposed amendment as it was consequential upon the outcome of the appeal. Metropolitan Petar failed to file the Amended Notice of Appeal within the time directed by the Court. It appears that the Association objected to it being filed out of time. The Court subsequently directed that the draft Amended document be forwarded to the Court with submissions as to why it should not be accepted. This occurred. However, the Orders sought in the draft Amended Notice of Appeal were more extensive than was originally indicated would be the case at the hearing of the appeal. This has clearly been a matter of concern to the Association. 88 Subsequently, the parties advanced different forms of the proposed orders that the Court should make should the appeal be successful. It is apparent from the proposed Orders forwarded by each that there has been a significant withdrawal by Metropolitan Petar from the extent of the Orders sought in the draft Amended Notice of Appeal. The Association has informed the Court that it opposes the making of the Orders sought by Metropolitan Petar. In making this objection the Court has been informed that the difference between the formulations in the two sets of draft Orders reflects "a disagreement as to the scope and nature of the orders that can properly be sought in these proceedings". 89 We assume that the point of this objection is that the Court should not make Orders in these proceedings which affects costs incurred in other proceedings. The objection can have no other basis. The initiating summons in the matter sought Orders that on their terms extended to costs incurred in the proceedings before Young CJ in Eq on the 'privilege' question in the judicial advice proceedings: proceedings no. SC 2451/04. There was argument before Hamilton J on 3 May 2006 as to the form of the Orders that should be made by him. Hamilton J stated in a short Judgment given that day that "[t]he use of the Schedule A property should be restrained in relation to all sets of proceedings". It appears from his Honour's judgment that Mr Blake, senior counsel for the Association, had acceded to this. There is no cross-appeal from his Honour's Orders. 90 The competing forms of the draft Orders that have now been forwarded by the parties contain a difference of form and one of substance. The Court is not concerned with the difference of form. The difference of substance relates to the costs of the appeal in proceedings no. CA 40298 of 2006. Those proceedings were the appeal brought by the Association from the Order made by Young CJ in Eq on the privilege question. There was no objection to the injunction reaching to the costs incurred in the proceedings before Young CJ in Eq, nor, as a matter of principle, could there be. A Court has power to restrain the use of trust funds. It is that power that is being exercised. It does not matter that the call for the exercise of that power arises in respect of the incurring of costs in other legal proceedings just as it would not matter that the call for the exercise of the power related to the incurring of costs for social functions. It is the appropriateness of the Trustee using trust funds that is the point in question. 91 The Association was successful on that appeal and the Court ordered Metropolitan Petar to pay the Association's costs, both at first instance and on the appeal. The draft Orders proposed by Metropolitan Petar seek to have the injunction extend to the payment of legal costs of those appeal proceedings (CA 40298 of 2006) other than as may be payable under Rule 42.25 of the Uniform Civil Procedure Rules 2005. That Rule provides, relevantly: "(1) … a person who is or has been a party to any proceedings in the capacity of trustee … is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee …" 92 The point of the injunction we propose is to protect the assets of the Association until the matters in contention between the parties have been determined. To achieve that end, we consider it appropriate and necessary that the Order we make should also restrain the payment of costs by the Association to its solicitors other than those ordered and those to which the Association is entitled under Rule 42.25. In other words, to the extent that the Association is entitled to be paid costs on a party/party basis as ordered by the Court in proceedings CA 40298 of 2006, the Association is entitled to on-pay those costs to its solicitors. Likewise, to the extent that the Association is entitled to costs under Rule 42.25, it is entitled to have those costs out of "funds held by" it and, it follows, to on-pay those costs to its solicitors. Except in those respects, the injunction we proposed to make will extend to the costs incurred by the Association of and in relation to those proceedings. 93 Accordingly, the Orders we make substantially reflect those sought by Metropolitan Petar.

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