2445/08 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd
JUDGMENT (ex tempore)
1 HIS HONOUR: The defendant and first respondent Reliance Financial Services Pty Ltd ("Reliance"), of which in earlier days Mr Sam Cassaniti was the principal, was wound up by order of the Court made in these proceedings on 26 June 2008. Reliance's liquidator, Mr Maxwell Donnelly, is the second respondent to the present application. Reliance is party to seven other proceedings in this Court - some of them in this Division and some of them in the Common Law Division - in which it seeks to recover from third parties loans which it made to them, and which they resist essentially on (NSW) Contracts Review Act 1980 and related grounds. Those third parties are the other (third to eighth) respondents to the present application.
2 Pursuant to a Deed of Settlement dated 1 July 1994, Reliance - then known as Reliance Investment Services Pty Ltd - was appointed the trustee of a discretionary trust called the Reliance Discretionary Trust. The appointor was Mr Sam Cassaniti.
3 Clause 13 of the Deed provided:
The appointor may at any time and from time to time by deed or by notice in writing delivered to the trustee remove any trustee hereof in its absolute and unfettered discretion and the right to remove any trustee hereof and to appoint new or additional trustees hereof by deed or notice in writing is hereby vested in the appointor ...
4 Clause 26.2 of the Deed provided:
The office of the trustee should be ipso facto determined and vacated if the trustee shall enter into liquidation or bankruptcy whether compulsory or voluntary (not being merely a voluntary liquidation for the purposes of amalgamation or reconstruction) or if a receiver or official manager shall be appointed of the undertaking of the Trustee or any part thereof.
5 It follows, from clause 26.2, that upon the winding up of Reliance on 26 June 2008, its office as trustee of the Reliance Discretionary Trust was determined and vacated. By a Deed of Appointment, also made on 26 June 2008, Mr Cassaniti appointed Reliance Financial Services NSW Pty Ltd ("RFSNSW") as new trustee in place of Reliance. The consequence is that RFSNSW is now the trustee of the Reliance Discretionary Trust in place of Reliance.
6 Clause 27.1 of the Deed provided as follows:
A trustee shall on retirement or removal take such action as is necessary to vest the Trust Fund or cause it to be vested in any new trustee and shall deliver to such new trustee all books, documents, records and other property relating to the Trust Fund. Until transfer to the new trustee of any property belonging to the Trust Fund the old trustee will hold the Trust Fund as bare trustee for the new trustee.
7 The application presently before the Court is brought by RFSNSW by interlocutory process filed on 25 July 2008, in which it seeks a declaration that it has been appointed as trustee of the Reliance Discretionary Trust; a further declaration that the loans the subject of the various third party proceedings are assets of the trust and have vested in RFSNSW; alternatively, a vesting order; and, upon an undertaking not to settle the third party proceedings, and to pay any moneys recovered from them into a controlled moneys account, an order pursuant to (NSW) Uniform Civil Procedure Rules, r 7.8, giving RFSNSW the conduct of all the third party proceedings.
8 There are two main issues to be decided. The first is whether the causes of action in the third party proceedings, and the loans and securities the subject of those proceedings, are assets of the Reliance Discretionary Trust. The second is, if so, whether the former trustee Reliance is entitled to retain those assets in its possession, notwithstanding its removal and replacement by RFSNSW as trustee, as security for its right of indemnity against the trust assets.
Are the loans, securities and causes of action arising from them assets of the Reliance Discretionary Trust?
9 As to the first issue - whether the loans, securities and causes of action arising from them are assets of the Reliance Discretionary Trust - Mr Cassaniti has given evidence that each of those loans was a transaction made by Reliance in its capacity as trustee of the Reliance Discretionary Trust, using assets of the Reliance Discretionary Trust. Minutes of the Annual General Meetings of the trustee over the years since 1995 record that the trust "continued to trade as an investment vehicle lending moneys to various borrowers". There is evidence indicating that, in about 1995, Mr Cassaniti determined that he would carry on business through the structure of a trust. Notices lodged with the Australian Taxation Office in connection with ABNs indicate that Reliance ceased to trade in its own right in 2000, and thereafter traded only as a trustee.
10 There is no evidence to the contrary. There is no evidence that Reliance entered into the relevant transactions in its own right rather than as trustee. It is true that at no time did Reliance disclose that it was acting as trustee and, in particular, in earlier proceedings in the Court concerning the present fourth respondent Mrs Mizzi, it was not disclosed that Reliance was acting as trustee. But that would have been an irrelevant matter to disclose, and in any event there is no obligation on a trustee to disclose that it is acting in that capacity. Insofar as any land instruments are involved, the (NSW) Real Property Act 1900 would not permit disclosure on the face of the register of the circumstance that the registered proprietor was acting as trustee. I do not think that any inference can be drawn, from the circumstance that there was no such disclosure, that Reliance was not acting as trustee.
11 In the absence of contrary evidence, it seems to me that on balance the evidence plainly establishes that the loans, and the causes of action arising from them, are trust assets. Accordingly, the first issue is resolved by concluding that the subject loans, securities and causes of action were held by Reliance in its capacity as trustee of the Reliance Discretionary Trust.
Is the former trustee entitled to retain the trust assets as security for its right of indemnity?
12 I turn then to the second, and much more difficult, issue, which is whether a former trustee, as Reliance now is, is entitled to retain the trust assets as security for its right of indemnity, notwithstanding its removal and replacement by a new trustee.
13 The relevant principles concerning a trustee's right of indemnity against trust assets include the following, for which I am indebted in large part to the analysis by Austin J in Trim Perfect Australia v Albrook Constructions [2006] NSWSC 153, [20].
14 First, as against a third party, a trustee is personally liable for debts and liabilities incurred in its capacity as trustee [Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367].
15 Secondly, however, the trustee has a right of indemnity out of the trust assets for expenses or liabilities incurred by the trustee, by recoupment of expenditure and exoneration from liability [Octavo Investments, 367; Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226, 245].
16 Thirdly, this right of indemnity, recoupment and exoneration is secured by an equitable lien over the trust assets, which arises by operation of law and confers a proprietary interest, in the nature of a security interest, in the trust assets, and takes priority over the claims of beneficiaries [Octavo Investments v Knight, 367, 370; Chief Commissioner of Stamp Duties v Buckle, 246].
17 Fourthly, this equitable lien extends to all of the trust assets, save only those that are specifically excluded by the trust instrument [Dowse v Gorton [1891] AC 190; Octavo Investments v Knight, 367].
18 Fifthly, being an equitable lien, the security is enforceable by the trustee only by judicial sale or appointment of a receiver, and not by foreclosure nor by sale out of Court [Tennant v Trenchard (1869) LR 4 Ch App 537; ANZ Banking Group Ltd v Intagro Projects Pty Ltd [2004] NSWSC 1054, [14]; Melbourne Tramways Trust v Melbourne Tramway & Omnibus Company Ltd (1887) 13 VLR 487, 490; Re Pumfrey (1882) 22 Ch D 255, 265; Re Stucley [1906] 1 Ch 67; Davies v Littlejohn (1923) 34 CLR 174, 184; Hewett v Court (1983) 149 CLR 639, 663; Sykes & Walker, The Law of Securities, 5th ed, (1993) Lawbook Co, 198].
19 Sixthly, the right of indemnity accrues at the time the obligation is incurred [Xebec Pty Ltd (in liq) v Enthe Pty Ltd (1987) 18 ATR 893; Southern Wine Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162, [30]], and is not subsequently lost by cessation of office, whether by retirement or removal [Xebec v Enthe, 898; Coates v McInerney (1992) 7 WAR 537; Southern Wine Corp v Frankland River Olive Co, [30]; Dimos v Dikeakos Nominees Pty Ltd (1996) 68 FCR 39, 43].
20 Seventhly, upon bankruptcy or liquidation of a trustee, its right of indemnity vests in its trustee in bankruptcy or liquidator [Official Assignee of O'Neill v O'Neill (1898) 16 NZLR 628; Jennings v Mather [1901] 1 QB 108, 117; Savage & Whitelaw v Union Bank of Australasia Ltd (1906) 3 CLR 1170, 1188, 1196; Octavo Investments v Knight; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99, 109; (1983) 7 ACLR 873, 882].
21 Eighthly, if the trust property is transferred to a new trustee, the lien survives and the new trustee takes subject to the lien of the old trustee - except perhaps in the exceptional case of a bona fide purchaser for value without notice [Belar Pty Ltd (in liq) v Mahaffey [1999] QCA 2; [2000] 1 Qd R 477, [20]; Octavo Investments v Knight, 370; Chief Commissioner of Stamp Duties v Buckle, 246; Re Exhall Coal Co Ltd (1866) 55 ER 970].
22 Ninthly, a trustee is entitled to retain possession of trust property against a beneficiary until its indemnity is exercised [Octavo Investments v Knight, 369-370; Chief Commissioner of Stamp Duties v Buckle, 246; Re Exhall Coal Co Ltd, 972; Re Enhill Pty Ltd [1983] 1 VR 561].
23 At issue in the present case is whether the ninth proposition extends to allow a former trustee to retain assets pending exercise its right of indemnity, not as against a beneficiary, but as against a new trustee. On this issue, the authorities are far from clear.
24 Analysis begins with the judgment of Knight Bruce VC in Wilson v Parker (1846) 10 Jur 979, where it was held that a claim by a former trustee for remuneration was no objection to the entitlement of the new trustee to a transfer of the trust assets - though the possibility that a claim for indemnity in respect of expenses incurred might be in a different position was left open.
25 An important case is Jennings v Mather [1901] 1 KB 108, a decision of the King's Bench Divisional Court on appeal from the County Court. The Divisional Court upheld the claim of a trustee's trustee-in-bankruptcy over that of the trustee's execution creditor to possession of trust property, on the basis that the trustee's right of indemnity passed to its trustee-in-bankruptcy. Kennedy J said (at 113-4):
It seems to me clear that, on the undisputed facts in the present case, the goods in question come within these decisions, and, so far as common law is concerned, they became as they came in assets of the assignor - that is to say, assets of the trust estate ... if that is so, something follows in equity which, it seems to me, the county court judge has overlooked. While there can be no right of a creditor created in the course of the trading to treat as goods of the trustee goods which form part of the trust estate, still it is equally clear that the trustee has a right and interest in those goods, because he has a right to an indemnity in the nature of a lien over those goods. It necessarily follows, as it seems to me, that the trustee has a right to prevent any person from carrying away those goods, and to say to everybody, including the cestuis que trust, 'I am entitled to an indemnity out of those goods, and have therefore, a pecuniary interest in them.' Of course, when the accounts come to be made up, if it should appear that nothing is due to the trustee on the trading, there is nothing in respect of which he needs to be indemnified, and his lien over the goods is gone; but until the accounts are made up he is entitled to a lien over all the assets of the estate. A lien (putting aside the question of bankruptcy, with which I will deal directly) has always been held to be sufficient title as against the world to hold the goods until that lien is satisfied or is proved not to exist. We are bound, as it seems to me, to enforce the equitable rights of a trustee who, properly and in accordance with his trust, is carrying on a business for the benefit of the trust estate.
26 A number of observations may be made about that judgment. The first is, as Mr Ashhurst SC for the applicant points out, allowing the execution creditor to take the property in question would have destroyed the right of indemnity in respect of it. Secondly, the case deals with competing claims to trust assets, between the trustee's execution creditor and the trustee's trustee-in-bankruptcy; it is silent on the position of a replacement trustee. Thirdly, the observation of Kennedy J, to the effect that a lien is sufficient title as against the world to withhold goods until the lien is satisfied or proved not to exist, is true of a common law possessory lien, but it is far from clear that it is an accurate statement of a characteristic of an equitable lien.
27 The case went on appeal to the Court of Appeal [Jennings v Mather [1902] 1 KB 1]. Stirling LJ said (at 6):
A trustee has for his protection a right to have costs and expenses properly incurred by him in the administration of the trust paid out of the trust property, and the amount of such costs and expenses constitutes a first charge upon that property. A Court of Equity will never take trust property out of the hands of a trustee without seeing that such costs and expenses are reimbursed to him, and that he is relieved from personal liability in respect of them; and, when the legal title to trust property is vested in the trustee, he has a right to resort to that property, without the assistance of the Court, for the purpose of indemnity against liabilities properly incurred by him in the administration of the trust. It is most important that this right should be maintained.
28 Matthews LJ said (at 8-9):
The position originally taken up by the execution creditor left out of sight altogether the right of Mather as a trustee to indemnity out of the trust property, and to hold the goods seized as part of such property until his rights in respect of them are ascertained. That right appears to me clearly to exist, and to form a part of Mather 's estate which passed to the claimant as his trustee in bankruptcy. It is impossible at this stage to take an account as between Mather and the trust estate. I think the claimant is entitled to say that such an account cannot be gone into now, but must be taken hereafter in due course, and that, in the meantime, it is sufficient, in order to entitle him to succeed on the interpleader issue as against the execution creditor, who has no title whatever to the goods, that there is primâ facie this equitable lien on the goods in favour of Mather 's estate which has passed to him as Mather 's trustee in bankruptcy.
29 Again, the observations may be made, first, that the context was competing claims by a trustee's execution creditor and trustee-in-bankruptcy, and not by a replacement trustee; and secondly, while reference was made to the circumstance that the lien was an equitable one, there does not appear to have been consideration of the characteristics of an equitable lien (and, in particular, that it is not possessory).
30 The next significant case appears to be Re Pauling's Settlement Trusts (No 2) [1963] Ch 576; [1963] 1 All ER 857. In that case Wilberforce J (as he then was) held that an order for the appointment of new trustees should not be made, inter alia on the ground that the old trustees were entitled to have security for their indemnity, and that to vest the trust fund in new trustees would deprive the old trustees of that security. His Lordship considered the possibility of appointing new trustees and leaving the question of vesting of the assets to be dealt with at a later at a stage, but concluded ([1963] 1 All ER 857, 863): "To appoint new trustees, and at the same time to leave another person not in the position of a trustee in the possession of the trust fund, would be to create a most undesirable situation".
31 With great respect, the suggestion that appointing new trustees and vesting the trust assets in them would deprive the old trustees of security for their indemnity is incorrect. The cases already referred to establish that the security survives and can be enforced against the trust assets in the hands of the new trustees at the suit of the old trustee: see the eighth proposition above (at [21]). Thus, while Re Pauling's Settlement Trusts (No 2) suggests that an outgoing trustee is entitled to insist on retaining the trust fund as against the new trustee as security for its indemnity, it appears to overlook the cases that hold that the security survives and is enforceable against the assets in the hands of the new trustee. However, as to the undesirability of a person not in the position of the trustee being in possession of the trust fund, in this case the appointment of a new trustee has already taken place out of Court, so that that position will pertain if the trust fund is not now vested in the new trustee.