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[2015] QSC 4
Supreme Court of Queensland
2015-01-23
Martin J
Original judgment source is linked above.
EQUITY - TRUSTS AND TRUSTEES - APPLICATIONS TO COURT FOR ADVICE AND AUTHORITY - PETITION OR SUMMONS FOR ADVICE - where the first matter is an application for directions with respect to whether or not a proceeding should be brought against the respondents - where the second matter is an application in which the first respondent in the first matter seeks a direction that, if the direction sought in the first matter is given, it should defend that proceeding - where the applicant did not provide a written statement of facts - whether or not the proceedings should be taken in the best interests of the trust estate - whether costs of the main proceeding should be paid out of the trust
Corporations Act 2001 (Cth), s 471B, s 601EB, s 601FC
Trustee Act 1925 (NSW)
Uniform Civil Procedure Rules 1999, r 700(2)
Coore v Coore [2013] QSC 196
In re Dallaway, decd [1982] 1 WLR 756
Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66
Ong v Lottwo Pty Ltd (in liquidation) (2013) 304 ALR 651
Sneath v Sneath [2014] QSC 152
[1] There are two applications before the court. The first matter (8792 of 2013) is an application under s 96 of the Trusts Act 1973 for directions with respect to whether or not a proceeding should be brought against the respondents. The second matter (8884 of 2014) is another application under s 96 of the Trusts Act 1973 in which the first respondent in 8792 of 2013 seeks a direction that, if the direction sought in the first matter is given, it should defend that proceeding.
[2] On 12 April 2013, de Jersey CJ ordered that the applicants in 8792 of 2013 ("Kordamentha") replace the first respondent ("LMIM") as trustee of the Unit Trust called LM Managed Performance Fund ("MPF").
[3] At the relevant time, LMIM was also the responsible entity for the LM Australian Income Fund ("AIF") which was a scheme registered under s 601EB of the Corporations Act 2001 (Cth). Pursuant to s 601FC of the Corporations Act, LMIM held the scheme property of the AIF on trust for the scheme members.
[4] Trust Company (PTAL) Limited ("PTAL") is a professional corporate trustee which was previously known as Permanent Trustee Australia Limited. It was the legal owner of the relevant assets of the LMIM as trustee for AIF and the LMIM as trustee for MPF under a Custody Agreement. That agreement provided that PTAL "agrees to custodially hold [assets] as agent for [LMIM]". PTAL did not take part in the hearing and does not oppose the orders sought by Kordamentha.
Section 96 of the Trusts Act
[5] The application brought in each matter seeks to have the court exercise its jurisdiction under s 96 of the Trusts Act. That section, together with s 97 which is also relevant, provides as follows:
"96 Right of trustee to apply to court for directions
(1) Any trustee may apply upon a written statement of facts to the court for directions concerning any property subject to a trust, or respecting the management or administration of that property, or respecting the exercise of any power or discretion vested in the trustee.
(2) Every application made under this section shall be served upon, and the hearing thereof may be attended by, all persons interested in the application or such of them as the court thinks expedient.
(1) Any trustee acting under any direction of the court shall be deemed, so far as regards the trustee's own responsibility, to have discharged the trustee's duty as trustee in the subject matter of the direction, notwithstanding that the order giving the direction is subsequently invalidated, overruled, set aside or otherwise rendered of no effect, or varied.
(2) This section does not indemnify any trustee in respect of any act done in accordance with any direction of the court if the trustee has been guilty of any fraud or wilful concealment or misrepresentation in obtaining the direction or in acquiescing in the court making the order giving the direction."
[6] There was no dispute among the parties about the relevant principles to be applied in the determination of an application of this type. The principles have been conveniently collected and set out in the reasons of Boddice J in Glassock v The Trust Company (Australia) Pty Ltd.[1] His Honour's summary, which I respectfully adopt, was as follows:
"[14] Where an executor or trustee is in doubt as to the course of action to be adopted, the executor or trustee is entitled to seek the opinion of the Court as to what it should do (Re Atkinson (Deceased) [1971] VicRp 73; [1971] VR 612 at 615). In determining such an application, it is not the function of the Court to investigate the evidence and make a finding whether or not the trustees will be successful in the litigation (Salmi & Anor v Sinivuori & Anor [2008] QSC 321 at [16]). The Court has merely to determine whether or not the proceedings should be taken (Fitzgerald v Smith [1889] VicLawRp 94; (1889) 15 VLR 467). However, the matter should be sufficiently investigated to determine whether or not the proceedings would be fruitless (Re Atkinson (Deceased) at 615; adopted by Atkinson J in Loughnan v McConnel [2006] QSC 359 at [7]).
[15] The sole purpose in giving advice is to determine what should be done in the best interests of the trust estate (Macedonian Orthodox Community Church St Petka Inc v Petar [2008] HCA 42; (2008) 237 CLR 66 at [104]- [107]). The Court's ambit includes obtaining advice about whether it is proper for the trustee to incur the cost and expense of prosecuting or defending litigation. The function of the power is not merely to afford personal protection to the trustees. It is also to protect the interests of the trust (Macedonian Orthodox Community Church St Petka Inc v Petar [2008] HCA 42; (2008) 237 CLR 66 at [71]- [72]).
[16] In Watson v Yore, ([2004] QSC 339 at [15].) Holmes J (as her Honour then was) held, in dealing with an application for directions under s 96 of the Trusts Act:
"Essentially, what must be determined on this application is whether retention of funds to enable an action against the first respondent is in the interests of the beneficiaries of the estate as a whole. There are a number of competing considerations: the prospects of success, the potential for substantial depletion of the estate in costs should the action be unsuccessful, the proportions of what might be gained if it were to succeed, and, peculiar to this case, the fact that there is at present no cause of action ..."
[17] If the Court does advise that the trustees ought to defend or commence proceedings on behalf of the estate, the Court has a discretion as to whether the costs of those proceedings ought be borne out of the estate (Salmi & Anor v Sinivuori & Anor [2008] QSC 321 at [19]). In Application of Macedonian Orthodox Community Church St Petka Inc (No 3), [2006] NSWSC 1247 at [62] Palmer J observed:
'I think that the development of the law in this area has now reached the point where I may state the following proposition. Where a trustee seeks an order that it is justified in defending a claim against the trust estate by recourse to the trust assets for the costs of the litigation, the question will be whether it is more practical, and fairer, to leave the competing claimants to the beneficial interest in the trust estate to fight the litigation out amongst themselves, at their own risk as to costs and leaving the trustee as a necessary but inactive party in the proceedings, or whether it is more practical, and fairer, that the trustee be the active litigant with recourse to the trust fund for the costs of the litigation. What is practical and fair will depend on the particular circumstances of each case and will include:
- whether the beneficiaries of the trust estate have a substantial financial interest in defending the claim;
- what are the financial means of the beneficiaries to fund the defence;
- the merits and strengths of the claim against the trust estate;
- the extent to which recourse to the trust estate for defence costs would deprive the successful claimant of the fruits of the litigation;
- if the trust is a charitable trust rather than a private trust, what, if any, are the considerations of public interest.'"
[7] The cognate provisions in the Trustee Act 1925 (NSW) were considered by the High Court in Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand[2]. The relevant effect of the decision in that case was considered by Atkinson J in Coore v Coore[3] where her Honour summarised the guidance afforded in that decision as to the role of the court under the relevant Queensland provisions. I respectfully agree with what her Honour said:
"[11] To these principles, additional guidance can be gathered from the decision in Macedonian Church v Eminence Petar as to the role of the court under s 96 and s 97 of the Trusts Act:
(1) The court is entitled to act on the facts stated by the trustee even if they are contested and controversial. The trustee loses the protection afforded by s 97(1) if the trustee "has been guilty of any fraud or wilful concealment or misrepresentation" to the court. It is therefore not necessary or appropriate to determine a challenge to those facts as if it were adversarial litigation (At 95-96 [80]-[81]).
(2) The court is not just concerned with whether it is in the interests of the trust estate for proceedings to be commenced, continue or defended but whether it is practical and fair for trust assets to be used for that purpose (At 96-97, [82]-[85]).
(3) As a general rule if the orders are later revoked, the effect would not operate retrospectively (At 97-99; [89]-[96]).
(4) Judicial advice proceedings should not be used to settle disputes between parties to a trust. The distinction is between deciding whether it would be proper for a trustee to sue or defend and deciding the issues tendered in the proceedings that it is proposed to institute or defend (At 104, [111]).
(5) Nothing warrants limiting the powers given to the court by reference to some proceedings as "adversarial" and some as not (At 104-105, [112], [116]). Classification of the proceedings in which a trustee asks advice about the propriety of institute or defending, as "adversarial proceedings" is not useful in deciding whether advice should be given by the court that instituting or defending the proceedings is proper.
(6) To adopt the words of the Privy Council in Marley v Mutual Security Merchant Bank and Trust Co Ltd ([1991] 3 All ER 198 at 201) in a judicial advice application, "the court is essentially engaged solely in determining what ought to be done in the best interests of the trust estate and not in determining the rights of adversarial parties." (Macedonian Church v Eminence Petar at 107, [125]).
(7) If all that is at stake in proceedings is the liability of a trustee personally to make good the consequences of what is alleged to be the trustee's breach of trust, that would be a powerful reason to make no order permitting such a trustee to defend the suit at the expense of the trust fund (At 120, [166]).
[8] An applicant under s 96 is required to "apply upon a written statement of facts ... for directions". Kordamentha did not do that. In the submissions filed on its behalf it relies upon all the affidavit material filed by it together with any other written material read by its counsel on the application. Reliance was placed upon the decision by Henry J in Sneath v Sneath[4] in which his Honour was apparently prepared to proceed on the basis that the affidavits relied upon by the applicant involved sufficient compliance with s 96(1). I regret that I cannot agree with that. Section 96 explicitly provides that the application is to be made "upon a written statement of facts". Had the legislature intended that the application be supported by an affidavit then it could have easily have said so. It is not a function of the court, under s 96, to decide disputed questions of fact. It is unnecessary, then, for affidavits to be produced. Kordamentha did provide a document entitled "Statement of Facts for Application pursuant to section 96 of the Trusts Act 1973" but it was little more than a list of the affidavits filed on its behalf. It is not appropriate, and not consistent with s 96, for an applicant to point a judge towards a number of affidavits and, in effect, say "the facts are in there for you to find".
[9] The written outline of submissions for Kordamentha does contain some of the facts, interspersed with submissions, upon which Kordamentha must be taken to rely. There is also a draft statement of claim which contains allegation which can be read as an assertion of facts. I am prepared to proceed on the basis that the written statement of facts is contained within the outline of submissions and the draft statement of claim because to require the parties to come back would be to delay the matter and increase costs. Prospective applicants should not take for granted that such leniency will always be afforded.
[10] The facts and arguments advanced by Kordamentha in its written submission are as follows:
"5. The business of both LMIM atf MPF and LMIM atf AIF was to use funds obtained from members by entering into property investment and structured loan transactions for the purchase and/or development of Australian real property for the eventual benefit of members.
(a) it was neither in fact for the benefit of the members of the MPF;
(b) nor could it reasonably have been thought to be for the benefit of the members of the MPF,
that LMIM atf AIF would participate in the particular loan transaction in terms which entirely subordinated the lending which had already been made by LMIM atf MPF to the subsequent lending by LMIM atf AIF. There was a breach of the core duty of LMIM as trustee of the MPF to perform the trust honestly and in good faith for the benefit of the members of the MPF.
(a) the duties which it owed to the members of the MPF conflicted with its interest in its capacity as the responsible entity for AIF; and further or alternatively
(b) the duties which it owed to the members of the MPF conflicted with the duties which it owed to the members of the AIF.
(a) In September 2013 a sum of $429,135.04 was received by the applicants in respect of the $3.2m lending which had been made by LMIM atf MPF but on the other hand a sum of $1,925,729.92 was received by PTAL as custodian for LMIM in respect of the $1.7m loan which had been made by LMIM atf AIF.
(i) LMIM is to be regarded as owning that fund itself (because the Custodian Agreement provides that PTAL holds only as agent for LMIM and PTAL must act on LMIM's instructions); or
(ii) PTAL owns the funds and LMIM owns its rights as against PTAL pursuant to the custodian agreement to direct PTAL as to the disposition of the fund.
(c) Because by the time the monies were received the applicants had complained of breaches of trust by LMIM when it was acting as trustee of the MPF, the monies received by PTAL as custodian for LMIM were agreed to be held on trust pending the resolution of the dispute concerning breaches of trust.
(a) A declaration that PTAL holds the proceeds which it received on about 10 September 2013 (i.e. $1,925,729.92) ("the Disputed Fund") together with any accretions on constructive trust for the plaintiffs.
(b) An order that PTAL pay to the plaintiffs the amount of the Fund together with any accretions which accrue thereto.
(i) a declaration that LMIM holds its interest in the Fund together with any accretions, on constructive trust for the plaintiffs;
(ii) an order that LMIM cause PTAL to pay the amount of the Fund together with any accretions which accrue thereto to the plaintiffs."
[11] Section 96(2) requires that the application be served upon "all persons interested in the application". I am satisfied that that requirement has been met.
[12] MPF has over 4500 unit holders. It has been demonstrated:
(a) that it was not expedient to personally serve each of the unit holders, and
(b) that the steps undertaken by Kordamentha, which included the establishment of a website accessible to unit holders on which all the relevant material was posted, were sufficient to bring these proceedings to the attention of the unit holders.
[13] LMIM has appeared on these proceedings and it has the obligation to protect whatever interest the members of the AIF have in relation to the claim. LMIM did not assert that the members of the AIF had to be served separately from it.
[14] Up to the making of this application the costs of the new trustees (Kordamentha) and its lawyers have been approximately $316,000. The estimate of future costs, including that of a three day trial, is put by Kordamentha at about $480,000.
[15] LMIM submits that the costs will be substantially more and that a trial of the action would take longer than the three days proposed by Kordamentha. LMIM submits that a further amount of some $150,000 to $200,000 would be needed for the purposes of analysing the cash flow.
[16] It is, of course, appropriate to consider the estimated outlay on costs against the possible benefit which might be obtained. Kordamentha submits that if it were successful then it would be the recipient of an order in its favour of approximately $1.9 million. LMIM disputes that and says that the amount that might be recovered, if Kordamentha was completely successful, would be in the order of about $500,000. Thus, if Kordamentha were to be successful then, even after recovering costs, the amount to be distributed to unit holders would be much less than $1.9 million. Of course, if LMIM is correct then the unit holders would be worse off because the amount recovered would be less than the costs expended and, in the light of the submissions made, it is reasonable to conclude that LMIM might seek to protect itself against costs by making an appropriate offer. If that were the case, then the unit holders would be substantially worse off, even if they were successful to the extent of $500,000.
[17] The applicant estimates that the current net cash holdings of the MPF are approximately $4.6 million prior to future realisations and other recovery actions. There is, therefore, sufficient to fund the claim if it proceeds and to pay any adverse costs orders.
[18] There are two aspects to this question. First, there is the general question of the proposed cause of action and, secondly, the consideration of the likely return should the applicant be successful.
[19] Both parties provided me with opinions from counsel. It was agreed that each of those opinions was to remain confidential and each party agreed that the use by the other of counsel's opinion did not constitute a waiver of privilege.
[20] The purpose of this application is not for the court to investigate the evidence or to make findings or to decide whether or not an applicant will be successful. It is for the court to determine whether or not the proceedings should be taken in the best interests of the trust estate.
[21] Each party addressed me on the merits and the prospects of success in the absence of the other.
[22] LMIM submits that there was no breach by it of its duties as trustee. It also submits that the true profit or benefit obtained by AIF from having the first mortgage was not the amount of money it lent to Peregian Beach Pty Ltd but simply the interest it received. Kordamentha's response to that argument is the submission that: LMIM would not have been able to recover the whole amount had it not acted in breach of its duty to MPF. LMIM obtained the benefit of being placed in a position where it was able to recover the whole of the amount lent.
[23] This is a complex matter and it certainly cannot be said, on the material before me and the arguments raised, that the claim by Kordamentha is without foundation. Mr Barlow QC, for LMIM, accepted that there was "a real issue as to whether MPF was acting in accordance with its duties and whether it was being benefited". He went on to say that the major issue was that, even if there had been a breach, the applicant was mistaken as to the relief it could obtain.
[24] After consideration of the matters contained within counsels' opinions, I have come to the view that it is appropriate to make the order sought by the applicant.
[25] There is a separate application by LMIM in which it seeks a direction that it be entitled to defend this claim. It is appropriate, in the circumstances, to make such a direction.
Leave to proceed - Corporations Act
[26] Another issue which arises is with respect to the position of LMIM. As it is in liquidation, leave is necessary to proceed against it - see s 471B Corporations Act 2001 (Cth).
[27] A claim of the nature made by Kordamentha is outside the scope of the proof of debt system and so leave should be granted.[5] In the light of the application by LMIM to defend the matter it is appropriate that leave be granted to Kordamentha.
[28] In an application of this type the applicant/trustee's costs are ordinarily ordered to be paid out of the trust estate on the indemnity basis.[6] I will make an order of that type.
[29] The applicant also seeks an order about how its costs of the main litigation should be dealt with.
[30] Kordamentha seeks an order in the following terms:
"Subject to further order, the applicants' costs and expenses incidental to prosecuting the proceedings be paid on the indemnity basis out of the LM Managed Performance Fund to the extent that the costs are not paid by the respondent".
[31] Such a 'pre-emptive' order can be made. The applicant relies upon the apparent approval by the High Court of such an order in Macedonian Orthodox Community Church. In that case the order had been made by the trial judge after consideration of the decision in In re Dallaway, decd.[7] That decision concerned an estate which had been left equally between the 10 brothers and sisters of the deceased apart from a legacy to the wife of one of the brothers. That brother and his wife claimed that the deceased had orally agreed to leave them his entire estate and they sought to enforce that claim against the executor. The nine other brothers and sisters wanted the claim to be resisted and so the executor sought directions as to whether it should continue to defend and to counterclaim for possession of a farm which formed part of the estate. On the question of how the costs of the action should be borne if the court directed the executor to continue the defence and to counterclaim, Sir Robert McGarry V-C held that there should be an order entitling the executor to be indemnified out of the estate for all the costs for which it might be liable. His Lordship referred to R.S.C., Ord. 62, r 6(2) which laid down a special rule for anyone who litigated as, among other things, a trustee or personal representative. The rule provided that, in so far as such a person does not recover his costs from any other person, he is entitled to take his costs out of the fund held by him unless the court otherwise orders. A similar rule applies under the Uniform Civil Procedure Rules 1999. Rule 700(2) provides that a party who sues or is sued as a trustee is, unless the court otherwise orders, entitled to have the costs of the proceeding, that are not paid by someone else, paid out of the fund held by the trustee. The difference in In re Dallaway was that, if the trustee's defence was unsuccessful, then there would be no estate from which it could be paid its costs. In other words, his Lordship made an order which preserved the effect of the rule of court relating to trustee's costs in the event that there was no estate against which the costs could be sought. That is not the case here. Kordamentha has the right under r 700(2) to have its costs paid out of the fund held by it. There is no suggestion that at the conclusion of any action that Kordamentha will not be able to have recourse to the fund for its costs.
[32] It is not appropriate in this case to make such an order.
[33] I will give directions to the applicant in each application with respect to the prosecution and defence of the proceedings in accordance with their applications. I require the parties to provide me with minutes of order reflecting these reasons.
[5] Ong v Lottwo Pty Ltd (in liquidation) (2013) 304 ALR 651.
[6] Coore v Coore [2013] QSC 196.
Kordamentha Pty Ltd & Calibre Capital Ltd
LM Investment Management Ltd
(2008) 237 CLR 66
(2013) 304 ALR 651