Lowe v Pascoe

Introduction

1. These two sets of proceedings arise out of the actions of the late Kut Sze Tu (KST) in misappropriating funds belonging to a partnership of which he and other parties to the proceedings were members. One set of the proceedings (the Partnership Proceedings) is of some antiquity and the questions before me concerned an Inquiry for the taking of accounts ordered by the Court of Appeal. The other set of proceedings (the FC Chow Proceedings) was dependant on findings made in the first set. The Inquiry and the FC Chow Proceedings were heard by me concurrently. On 4 March 2021, I published my reasons (the Principal Reasons) for reaching conclusions in relation to the two proceedings. [1] On 30 September 2021 and 28 October 2021, I published my reasons for further conclusions reached in relation to both proceedings. [2] In these present reasons, I shall use terms as defined in the Principal Reasons. I shall not reiterate the background to the two proceedings, which is set out in the Principal Reasons.
2. A further question has now risen as to the extent to which the Administrator has a right of indemnity from the Net Proceeds Trust and the Profits Trust (together the Partnership Fund) in respect of costs and expenses incurred in relation to his defence of the FC Chow Proceedings and an entitlement to be paid remuneration from the Partnership Fund in relation to the FC Chow Proceedings. That question depends upon whether such costs, expenses and remuneration were reasonably and properly incurred by the Administrator as trustee of the Partnership Fund. For reasons that are explained below, the FC Chow Plaintiffs dispute the Administrator's claims that he is entitled to be indemnified in respect of his costs and expenses and to be paid his remuneration in relation to his defence of the FC Chow Proceedings.
3. The Administrator relies on the Trustee Act 1925 (NSW) (the Trustee Act), section 63(1) of which relevantly provides that a trustee may apply to the Court for an opinion, advice or direction on any question respecting the management or administration of the trust property. Critically for present purposes, s 63(2) relevantly provides that, if the trustee acts in accordance with the opinion, advice or direction given by the Court under s 63(1), the trustee will 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 application. That deeming, however, depends upon the trustee not being guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion, advice or direction. Under s 5 of the Trustee Act, the term "trust" includes implied and constructive trusts, and the duties incident to the office of legal personal representative of deceased persons. The term "trustee" has a meaning corresponding with that of trust, and includes legal representative.
4. As will appear below, the Administrator sought advice from the Court in pursuance of s 63 of the Trustee Act (the Judicial Advice Application) and received advice that he would be justified in defending the FC Chow Proceedings. Before dealing with the detail of the Judicial Advice Application, it is desirable to say something about the pleadings in the FC Chow Proceedings, to the extent that the question of the Administrator's right to indemnification and payment out of the Partnership Fund is addressed in the pleadings.

The Pleadings

1. By their further amended statement of claim filed on 11 March 2019, the FC Chow Plaintiffs sought an order that the Administrator pay to the estate of FC Chow 30% of any benefits obtained by KST through his ownership, possession and/or use of the Partnership Properties since their acquisition as may be found to be held on constructive trust for the Partnership pursuant to the Inquiry to be held in the Partnership Proceedings, as directed by the Court of Appeal. In the alternative, the FC Chow Plaintiffs sought a declaration that they are entitled to an inquiry in similar terms to that ordered in favour of Geoffrey and Mary by the Court of Appeal, and an order that their entitlements be determined in the Inquiry ordered by the Court in the Partnership Proceedings without the need for a separate inquiry.
2. In his defence to the further amended statement of claim (the Defence), the Administrator noted that, from 26 March 2001, he had been the trustee of a constructive trust over the Partnership Fund, and submitted that, as trustee of the Partnership Fund, he is entitled to be indemnified out of the partnership Fund (the Administrator's Indemnity). The Administrator asserted that, pursuant to the Administrator's Indemnity, he had paid amounts approved by the Court for the costs and expenses incurred by him as administrator of the estate of KST (the Administration and Trust Costs) and had done so by utilising the funds held by him in his capacity as administrator of the estate of KST. The Administrator also asserted in the Defence that, pursuant to the Administrator's Indemnity, he is entitled to pay such part of further costs incurred by him in his capacity as administrator of the estate of the late KST, or alternatively as trustee of the Partnership Fund, as are attributable to his remuneration, costs and expenses properly incurred in his capacity as trustee of the Partnership Fund and is entitled to do so out of the Partnership Fund (see paragraphs 59 to 62).
3. In their reply to the Defence (the Reply), the FC Chow Plaintiffs asserted that any entitlement of the Administrator to indemnification from the partnership Fund is limited to the Administrator's role as constructive trustee of the Partnership Fund and costs incurred in fulfilment of his duties in that role. They also asserted that the Administrator was not, and is not, acting in pursuit of those duties when he:

• denied and continues to deny the entitlement of the estate of FC Chow as a member of the Partnership;
• refused and continues to refuse to distribute the late FC Chow's Partnership share absent a Court order compelling him to do so;
• denied that the assets of the Partnership Fund are held for the Partnership and asserted that those assets are held on constructive trust only for Mary and Geoffrey;
• prefers the interests of Mary and Geoffrey as members of the Partnership as opposed to the other members to whom he also owes duties;
• acted and continues to act as an active defendant in the FC Chow Proceedings despite having a conflict of interest between his duties as administrator of the estate of KST and his duties as constructive trustee of the Partnership Fund;
• failed to obtain the consent of the members of the Partnership to his active resistance to the FC Chow Proceedings;
• continued and continues to act as an active defendant in the FC Chow Proceedings despite receiving notice that the estate of the late FC Chow, having the greatest interest in the Partnership, did not consent to that role. The Reply asserted that, in the circumstances, no indemnity applies to any payments, costs or expenses incurred as a result of or related to the Administrator's acts or omissions so described, including, but not limited to, the legal costs associated with the Administrator's defence in the FC Chow Proceedings (see [45] and [46] below).

1. With the Court's leave, and in accordance with the Court's direction, the Administrator filed a rejoinder on 12 April 2019 saying, relevantly, as follows:

• the Administrator is required to act and has always acted reasonably and in accordance with the law and his duties, including by taking reasonable defences;
• the FC Chow Plaintiffs failed to apply in the Partnership Proceedings, at the appropriate time, for the relief now sought in the FC Chow Proceedings;
• the effect of allegations made in the Defence would not be to allow a defaulting fiduciary to retain 80% of the proceeds of his breach of fiduciary duty held on institutional constructive trust for the members of the Partnership;
• the effect of the allegations in the Defence would be to retain funds in the estate of KST to be distributed according to law;
• the Administrator has not preferred the interests of Mary and Geoffrey as members of the Partnership as opposed to the other members to whom he also owed duties;
• there is no conflict between the Administrator's role as administrator of the estate of KST and his role as constructive trustee of the Partnership Fund; and
• the estate of KST is the greatest beneficiary of the estate of FC Chow and the FC Chow Proceedings have been brought without the authority or consent of the estate of KST. The Administrator otherwise denied the allegations in the Reply that are summarised above.

The Costs in question

1. The costs and expenses claimed by the Administrator fall into three categories as follows:

• costs that have been specifically identified as costs of the FC Chow Proceedings;
• costs that have been specifically identified as costs of the Partnership Proceedings;
• costs, including costs of the Judicial Advice Application, that have not been specifically allocated to either the Partnership Proceedings or the FC Chow Proceedings.

1. The total costs incurred by the Administrator for the period from 10 October 2017 to 30 April 2021 amounted to $1,323,082.22. As at June 2021, the amount of legal costs payable but not yet paid was $6,253.50 and the Administrator's estimated future legal costs, if there were no further disputes, amount to $6,105. Those together give a total of $1,335,440.72, which, allocated as above, are as follows:

• Administrator's solicitors' fees specifically identified as costs of the FC Chow Proceedings: $114,723.59;
• Administrator's solicitors' fees specifically identified as costs of the Partnership Proceedings: $68,157.90;
• costs, including costs of the Judicial Advice Application, that have not been specifically allocated: 1. $520,095.40 for remuneration; 2. $499,489.50 for counsels' fees; 3. $120,615.83 for solicitors' fees 4. $12,358.50 for unpaid and future costs. The total of unallocated costs is $1,152,559.23.

1. The FC Chow Plaintiffs assert that the Administrator should reimburse the Partnership Fund for costs that have been specifically identified as costs of the FC Chow Proceedings, being $114,723.59, and a proportion of the legal costs that have not been given specific allocation as between the two proceedings, of $1,152,559.23. They assert that that proportion should be determined by the Court on the basis of an assessment of the time taken to deal with the FC Chow Proceedings, as against the Inquiry, from October 2017, when the FC Chow Proceedings were commenced.

Judicial Advice under s 63 of the Trustee Act.

1. The Administrator commenced the Judicial Advice Application by summons filed on 22 February 2019, in which he sought the opinion, advice and direction of the Court on the questions set out in the accompanying statement of facts of that date (the original statement of facts). The questions stated in the original statement of facts were relevantly as follows: 1. whether the Administrator would be justified in taking a non-active role in relation to the FC Chow Proceedings, save in so far as the Administrator is required to give expert evidence in that proceeding or may assist the Court by responding to a claim that is not put against any other party to the proceeding; and 2. whether the Administrator would be justified in taking a non-active role in relation to the Partnership Proceedings, save in so far as the Administrator is required to give expert evidence in those proceedings or may assist the Court by responding to a claim that is not put against any other party to the proceedings. By letter of 22 February 2019, addressed to the parties to the Partnership Proceedings and the FC Chow Proceedings, the Administrator's solicitors provided a copy of the summons of 22 February 2019 and the original statement of facts together with affidavits of the Administrator and his solicitor.
2. On 26 February 2019, the solicitors for the FC Chow Plaintiffs wrote to the Administrator's solicitors saying that their clients' position was that it was both desirable and appropriate for the Administrator to take a non-active role in relation to the FC Chow Proceedings, since there were already appropriate contradictors in Mary and Geoffrey, who were actively resisting the FC Chow Proceedings and who had filed a defence that raised similar issues to those raised by the Administrator. The FC Chow plaintiffs' solicitors also said that there were at least five reasons why it was inappropriate for the FC Chow Plaintiffs to act as the active contradictor in respect of the Inquiry being conducted in the Partnership Proceedings. The letter invited the Administrator to bring those matters to the attention of the Court at the hearing of the Judicial Advice Application.
3. The Judicial Advice Application came before Robb J on 27 February 2019. On that occasion, the following exchange took place between Robb J and senior counsel for the Administrator: "HIS HONOUR: In any event, presumably there are parties interested in the estate and [sic] the administrator effectively represents, and provided counsel take the view that the estate's position is defensible, then the court ordinarily would give approval. STOLJAR: Yes. HIS HONOUR: That, of course, deals with the partnership proceedings, but I see that these particular parties, who I assume are the beneficiaries - I am just not sure I understand or recall who CS Legal represents, but they say about the FC Chow proceedings that the administrator should not involve himself. STOLJAR: Yes. HIS HONOUR: So that would leave this application live, would it not, for that? I have just got to remind myself what is actually been [sic] sought, STOLJAR: The practical difficulty with having - I suppose there are-- HIS HONOUR: It's a bit hard if the proceedings are being heard together. STOLJAR: Yes. HIS HONOUR: You end up with one foot on the wharf and one on the gunnel. STOLJAR: There's that problem, but the other problem is, as we understand it, what [sic] the plaintiffs in the FC Chow proceedings gives [sic] a 30 per cent share in the proceedings as distinct from FC Chow and Mary Lowe - if they are seeking 1.5 of what Geoffrey and Mary get. If one took the position against Mary, one is ipso facto taking a position against what they seek, that is probably number one. Number two is just being in a contested hearing with all issues, as your Honour said, with one foot in both camps. There is a real practical difficulty with taking no active part in one and an active part in the other. Every decision might be fraught with complication. HIS HONOUR: Yes. I can see that. One has to start from the proposition that the administrator's role must be as simple and transparent as possible. STOLJAR: Yes. HIS HONOUR: and not artificially confined. On the basis that it looks like Geoffrey and Mary Lowe, in establishing their 20 per cent right, only did so on their own account and that will just happen to rely upon the relief they seek at the time. So if is probably nonsense to think of the executor defending the 20 per cent claim and not defending the 30 per cent claim which has threshold hurdles to meet. STOLJAR: Yes. HIS HONOUR: That is not for him to speculate about. STOLJAR: Yes. HIS HONOUR: I can see once the problems overlap and they're at the same time and that explodes in the non-participation in order to reduce costs."
4. On 28 February 2019, the Administrator's solicitors wrote to all of the other parties reporting that the Administrator had applied to Robb J and that the Judicial Advice Application had been adjourned for further hearing on 15 March 2019. The letter said that, on the afternoon prior to the hearing, the FC Chow Plaintiffs had given notice that they did not consider that it was appropriate that they act as contradictors in the Inquiry in the Partnership Proceedings. The letter said that the Court had made it clear that, absent a contradictor in the Inquiry, the Court was unlikely to affirm that the Administrator would be justified in taking a non-active role in the Partnership Proceedings. It also said that the Court indicated that, since the FC Chow Proceedings and the Partnership Proceedings "travel together and ventilate related issues", it was unlikely that the Court would advise that the Administrator would be justified in taking a non-active role in the Partnership Proceedings alone. The letter said that, in those circumstances, the Administrator had been invited by the Court to amend the summons to seek advice as to whether the Administrator was justified in taking an active role to defend the position of the estate of KST in the Partnership Proceedings and in the FC Chow Proceedings.
5. On 13 March 2019, the FC Chow Plaintiffs' solicitors wrote to the Administrator's solicitors in reply. They rejected the proposition alleged to have been put to the Court by senior counsel for the Administrator that there were "inherent difficulties" with the Administrator remaining active in only one proceeding and not in the other. The solicitors for the FC Chow Plaintiffs outlined their reasoning in support of that stance.
6. On 13 March 2019, the Administrator filed an amended summons and an amended statement of facts (the amended statement of facts). In the amended statement of facts, the Administrator said that, on 27 February 2019, being the day prior to the hearing of the application before Robb J, the solicitors for the FC Chow Plaintiffs had given notice that they maintained that it was desirable and appropriate that the Administrator not take steps to defend the FC Chow Proceedings, and that it was inappropriate for the FC Chow Plaintiffs to act as contradictor in the Inquiry in the Partnership Proceedings. The questions stated in the amended statement of facts were as follows: 1. whether the Administrator would be justified in defending the interests of the estate of KST in the FC Chow Proceedings; and 2. whether the Administrator would be justified in defending the interests of the estate of KST in the Partnership Proceedings. On 14 March 2019, the Administrator's solicitors sent to all the other parties in both proceedings a copy of the amended summons, the amended statement of facts and a further affidavit of the Administrator.
7. On 21 May 2019, the Administrator filed a further amended summons together with a further amended statement of facts (the further amended statement of facts). In the further amended summons, the Administrator also sought an order that he was entitled to be reimbursed and exonerated out of the assets held in the estate of KST for his costs, charges and expenses incurred in conducting the Judicial Advice Application. The further amended statement of facts contained, relevantly, the following statements:

• the Court of Appeal declared that 90% of the Net Proceeds Trust is held on constructive trust for the Partnership;
• the Court of Appeal declared that 90% of the Profits Trust was and is held on trust for the benefit of the Partnership;
• the Court of Appeal directed that the Inquiry be held to identify what, if any, monies Geoffrey and Mary are entitled to from the estate of the late KST by way of an account of profits; and
• consequently, the Administrator holds assets in the estate of KST, in an amount presently unknown, that are impressed with a constructive trust and, in that respect, the Administrator is now in the position of both administrator and constructive trustee.

1. The further amended statement of facts proposed the following questions: 1. whether the Administrator would be justified, in his capacities as administrator of the estate of KST and constructive trustee of the Net Proceeds Trust and the Profits Trust, in defending the FC Chow Proceedings; and 2. whether the Administrator would be justified, in his capacities as administrator of the estate of KST and constructive trustee of the Net Proceeds Trust and the Profits Trust, in defending the Partnership Proceedings.
2. The Administrator's further supplementary outline of submissions to Robb J of 21 May 2019 said that, at the resumption of the hearing of the Judicial Advice Application on 7 May 2019, the Court had considered the issues that may arise if Geoffrey and Mary, being beneficiaries of the constructive trusts, were successful, such that the whole of the estate of KST was depleted. The submission said that those issues were addressed in a confidential, privileged further opinion that had been provided to the Court, which was the subject of a confidentiality order. That opinion is not presently in evidence before me. The Administrator's submissions said that, in defending the two sets of proceedings, one of the important tasks to be performed by him was the calculation of the value of the assets held on constructive trust and that the purpose of that work was to assist the Court to implement the orders of the Court of Appeal.
3. The Administrator's submissions then said that Robb J was not being asked to determine the costs orders that are to be made in the FC Chow Proceedings or in the Partnership Proceedings and that all that was sought was judicial advice. However, the submissions said, if judicial advice was provided to the Administrator on the questions posed in the further amended statement of facts and the Administrator acted in accordance with the opinion, advice or direction, he would be deemed, so far as regards his own responsibility, to have discharged his duty as trustee, provided he had not been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion, advice or direction. The submissions said that the provisions of the Trustee Act that provide for notice to be given to affected beneficiaries, and that facilitate the beneficiaries applying for orders or directions in the event of apprehended prejudice, were not engaged in the case at hand because those provisions apply where the question is who the beneficiaries are or what the rights of the beneficiaries among themselves are. Nevertheless, the submissions said, the Administrator intended to give notice of the judicial advice to all of the parties who may be affected by it. The submissions said that, although the application as originally constituted was "scuppered by the late service of notice that there would be no contradictor in the Inquiry" in the absence of the Administrator's participation, the Administrator had worked to amend his application appropriately and without delay in response to that development.
4. On 1 July 2019, for reasons published on that day, [3] Robb J ordered that each question posed in the further amended statement of facts be answered in the affirmative. His Honour also declared that the Administrator was entitled to be reimbursed and exonerated out of the assets held in the estate of KST for his costs, charges and expenses incurred in conducting the Judicial Advice Application.

The Present Questions

1. Against that background, the question now raised for determination is whether the Administrator has a right of indemnification from the Partnership Fund for his costs, expenses and remuneration in respect of the FC Chow Proceedings. That depends upon whether such costs, expenses and remuneration were "reasonably and properly incurred" by the Administrator as trustee of the Partnership Fund. In addressing that question, senior counsel for the FC Chow Plaintiffs formulated four propositions that were said to result in denial of the entitlement of the Administrator to rely on s 63 of the Trustee Act: 1. the costs incurred by the Administrator in defending the FC Chow Proceedings were not reasonably and properly incurred, in circumstances where: 1. there was a dispute between Mary and Geoffrey, on the one hand, and the FC Chow Plaintiffs on behalf of the estate of FC Chow, on the other; 2. Mary and Geoffrey were proper contradictors to the claims made in the FC Chow Proceedings on behalf of the estate of FC Chow by the FC Chow Plaintiffs; and 3. there will be a shortfall in the amount of the Partnership Fund in relation to the claims by all Partners. 1. although any suggestion that the Administrator had been guilty of any fraud or wilful concealment or misrepresentation in obtaining the opinion advice and direction of Robb J is expressly eschewed, the Judicial Advice Application "misfired" because Robb J was not fully apprised of the real issues; and 2. in circumstances where the Administrator is the legal personal representative of KST, who was responsible for misappropriating funds of the Partnership, thereby depriving the members of the Partnership of their entitlements, and because he is, in part, a constructive trustee of the Partnership Fund, he has no right to indemnification or payment from the Partnership Fund and is not entitled to indemnity in respect of the costs of defending the FC Chow Proceedings.
2. Senior counsel for the FC Chow Plaintiffs made clear that no complaint was made as to the Administrator's entitlement to be indemnified in respect of his costs and to be paid remuneration in connection with the conduct of the Inquiry in the Partnership Proceedings. The question arises only in relation to the costs incurred in defending the FC Chow Proceedings and the remuneration of the Administrator in that regard.

Whether Costs Reasonably and Properly Incurred

1. It is important, at the outset, to draw a distinction between the question of party and party costs in the FC Chow Proceedings, on the one hand, and the Administrator's entitlement to indemnification and payment out of the Partnership Fund. The question of party and party costs has been deferred pending resolution of all questions of account, including the question now under consideration. The Administrator's entitlement to indemnification and payment out of the Partnership Fund is not only concerned with his costs and expenses and remuneration in defending the FC Chow Proceedings but also any order for costs that may be made against him as a party to the FC Chow Proceedings. All entitlements of the Administrator in that regard depend upon whether the costs, expenses and remuneration were prudently and reasonably incurred in the discharge by the Administrator of the duties imposed upon him as administrator, such that they can be said to have been incurred for the benefit of the beneficiaries of the Partnership Fund. [4]
2. The FC Chow Plaintiffs characterise the position taken by the Administrator in his defence of the FC Chow Proceedings as involving the following:

• a denial of the entitlement of the late FC Chow, as a member of the Partnership, despite the fact that the estate of the late KST is a beneficiary of the estate of the late FC Chow and despite the estate of FC Chow being entitled to a distribution of the Partnership Funds;
• a denial of the entitlement of the estate of the late KST, as a member of the Partnership, despite being administrator of the estate of the late KST and being duty bound to act in the interests of the beneficiaries of the estate of the late KST;
• a refusal to distribute funds of the Partnership to any members of the Partnership other than Mary and Geoffrey, in the absence of a court order compelling him to do so, which the FC Chow Plaintiffs have now achieved;
• a denial that the assets of the Partnership Fund were held for members of the Partnership, and the assertion that the assets were held by the Administrator on trust only for Mary and Geoffrey;
• preferring the interests of Mary and Geoffrey as members of the Partnership as opposed to the other members of the Partnership to whom he owed duties at all times; and
• acting in a position of conflict by taking the side of Mary and Geoffrey in circumstances where he was a constructive trustee of the Partnership Fund for all members of the Partnership, including the estate of the late KST.

1. In those circumstances, the FC Chow Plaintiffs contend, costs incurred by the Administrator in conducting his defence in the FC Chow Proceedings and denying the entitlement of all members of the Partnership other than Mary and Geoffrey were not properly incurred as trustee of the Partnership Fund. Rather, they say, those costs were incurred in breach of the Administrator's duty as constructive trustee of the Partnership Fund. They say that the extensive legal costs incurred by the Administrator could have been avoided if he had taken a passive role in the FC Chow Proceedings, given that Mary and Geoffrey were active contradictors.
2. In a case where there is a dispute between rival claimants to a beneficial interest in the subject matter of a trust, the duty of the trustee is normally to remain neutral. A trustee who adopts a neutral stance will be entitled to indemnity in respect of the costs necessarily and properly incurred in taking such a stance. On the other hand, if a trustee, in unsuccessfully preferring one class of beneficiaries over another, actively defends claims and fails, the trustee will not normally be entitled to any indemnity for expenditure so incurred. [5]
3. The FC Chow Plaintiffs point to an observation I made in earlier reasons to the effect that it might be thought that the Administrator is in a position of conflict. [6] That observation was based on the fact that, to the extent that the estate of KST is a beneficiary of the estate of FC Chow, the success of the FC Chow Plaintiffs would increase the value of the assets of the estate of FC Chow that were available for distribution to the beneficiaries, including the estate of KST.
4. However, there is no suggestion in the Principal Reasons, or in the subsequent reasons of 30 September 2021 and 28 October 2021, that the Administrator has acted otherwise than properly and reasonably in relation to the FC Chow Proceedings. The Administrator, who gave evidence in proceedings before me, was not cross-examined on behalf of the FC Chow Plaintiffs concerning alleged unreasonableness or lack of propriety in his defence of the FC Chow Proceedings.
5. While I have rejected many of the arguments advanced by the Administrator in opposition to the claims made by the FC Chow Plaintiffs, I would certainly not characterise any of the contentions advanced as being without substance or without merit. I concluded, in response to contentions advanced on behalf of Mary and Geoffrey, that the expenses and remuneration of the Administrator should be quarantined from any assets in respect of which Mary and Geoffrey have an equitable interest and that the expenses and remuneration of the Administrator as allocated by him in his report to the Court should properly be brought into account for the purpose of the Inquiry. [7]
6. The Administrator provided the Court with both the structure and the material necessary to address the claims made by the litigants and the Administrator's report formed the foundation upon which all of the parties ventilated their respective positions. An agenda prepared by the Administrator provided the structure and the points for debate of the issues dealt with in my reasons of 30 September 2021. The Court has regularly directed the Administrator to undertake tasks in order to facilitate the ventilation of the issues that are required for resolution and to inform the Court's deliberations in respect of those issues. All of the parties had the benefit of the Administrator's efforts in that regard.

Whether the Judicial Advice Application "Misfired"

1. The FC Chow Plaintiffs contend that the judicial advice obtained by the Administrator from Robb J provides no protection to the Administrator because he did not make full and accurate disclosure to Robb J of the strengths and weaknesses of his case in the FC Chow Proceedings. They advance several reasons, as follows.
2. First, the FC Chow Plaintiffs complain that the Administrator submitted that it was only if the FC Chow Plaintiffs succeeded in the FC Chow Proceedings that the Administrator would also be a constructive trustee of some of the assets of the estate of KST on behalf of the FC Chow Plaintiffs. Thus, Robb J made the following observation: [8] "The Court of Appeal's order only had the effect that [the Administrator] is constructive trustee for a presently unidentified part of the estate for [Mary and Geoffrey] in the Partnership Proceedings, and not the Plaintiffs in the FC Chow Proceeding." That, the FC Chow Plaintiffs say, is based on the inaccurate characterisation of the Partnership Proceedings provided to Robb J in the further amended statement of facts as follows: "In 2005 Geoffrey and Mary Lowe commenced proceedings to determine their entitlements in respect of defalcations by the late [KST] in relation to his Partnership duties." The FC Chow Plaintiffs complain that that submission is inaccurate and does not provide full disclosure of the true position because the Partnership Proceedings were not commenced on behalf of only Geoffrey and Mary but on behalf of all members of the Partnership. They say that that point has been made repeatedly by way of submissions and by correspondence addressed to the Administrator. They assert that the submission made to Robb J was inconsistent with the case of the FC Chow Plaintiffs and inconsistent with the findings of the Court of Appeal as summarised in the Principal Reasons. [9]
3. The FC Chow Plaintiffs assert that the Court of Appeal determined that an institutional constructive trust existed in relation to the Partnership Fund and that, as such, that trust was for the benefit of all members of the Partnership at the time of the breach of fiduciary duty by KST. [10] Thus, the Court of Appeal observed that the beneficiaries of the constructive trust in relation to the Partnership Fund were the members of the Partnership, since a partnership is not a person and cannot be a beneficiary. In his defence in the FC Chow Proceedings, the Administrator accepted that he held the Partnership Fund as constructive trustee for the members of the Partnership.
4. The FC Chow Plaintiffs assert that Robb J gave judicial advice on the basis that the only persons to whom the Administrator owed duties as constructive trustee were Mary and Geoffrey. Accordingly, they say, Robb J was asked whether the Administrator would be justified, in his capacity as constructive trustee of the trusts declared by the Court of Appeal, in defending the FC Chow Proceedings in circumstances where the only present beneficiaries of those trusts are Mary and Geoffrey. They assert that neither the question posed to nor the answer given by Robb J applies to the present circumstances, since Mary and Geoffrey are not and never were the only beneficiaries of the Partnership Fund.
5. The FC Chow Plaintiffs complain that Robb J assumed, consistently with the submissions made on behalf of the Administrator, that the Administrator owed duties solely to Mary and Geoffrey and to no other members of the Partnership. They say that, had that truly been the case, there would be no issue as to preferring the interests of Mary and Geoffrey in defending the FC Chow Proceedings, since there would have been no competing interests. However, they say, that was wrong because the Administrator always had duties to each member of the Partnership in his capacity as constructive trustee of the Partnership Fund. For that reason, they say, it was inappropriate that the Administrator be an active defendant in the FC Chow Proceedings where Mary and Geoffrey were always present as contradictors. The FC Chow Plaintiffs assert that the judicial advice was based on a mischaracterisation of the constructive trust and mis-definition of the beneficiaries of that constructive trust, and that, as a consequence, the advice mischaracterised the duties of the Administrator as constructive trustee.
6. Second, the FC Chow Plaintiffs complain about the accuracy of the factual allegations made to Robb J to justify the delay in bringing the Judicial Advice Application, which was made some 16 months after the commencement of the FC Chow Proceedings. They point to submissions of the Administrator, recorded in Robb J's reasons, which may be summarised as follows: [11]

• at the time when the Administrator commenced the Judicial Advice Application, he understood that the respective plaintiffs in the proceedings would be prepared actively to contradict the claims made by the plaintiffs in the other proceedings;
• however, on the eve of the hearing of the Judicial Advice Application, the Administrator learned that the FC Chow Plaintiffs would not act as contradictors in the Partnership proceedings;
• the plaintiffs in each of the proceedings had informed the Administrator that they objected to his acting as contradictor in the proceedings they had commenced but that they expected the Administrator to defend the proceedings commenced by the other plaintiffs;
• those developments caused the Administrator to change his position to one where it was necessary, in the interests of the beneficiaries of the estate of KST, that the Partnership Proceedings be defended properly, in circumstances where he was the only person realistically available to take on that role;
• the Administrator consequently formed the opinion that, as the two proceedings were to be heard together, with evidence in one being evidence in the other, and as the subject matters of the proceedings were inextricably linked, if he was to defend the Partnership proceedings, he should also defend the FC Chow Proceedings.

1. Thus, the FC Chow Plaintiffs assert, the Administrator submitted to Robb J that his need to defend the FC Chow Proceedings actively was, in part, caused by a change of position by the FC Chow Plaintiffs, given his previous understanding that the FC Chow Plaintiffs would act as contradictors in the Inquiry in the Partnership Proceedings, and that those allegations were "baseless". They say that at no time prior to the Judicial Advice Application had the Administrator been told that the FC Chow Plaintiffs would be willing to act as active contradictors in the Inquiry, since that role was inconsistent with the passive role taken by the FC Chow Plaintiffs up to that point. Prior to the Judicial Advice Application being made, the FC Chow Plaintiffs had not filed points of claim, written submissions or expert evidence in relation to the Inquiry. Rather, they say, their position as passive participants in the Inquiry was expressly communicated to the Administrator in open court and was acknowledged by the Administrator in correspondence.
2. For example, at the first directions hearing after commencement of the FC Chow Proceedings, senior counsel for the FC Chow Plaintiffs indicated that, while the FC Chow Plaintiffs then supported the position of the Administrator in the quantification exercise involved in the Inquiry, they adopted a passive role. Further, they pointed to a letter on behalf of the Administrator of 13 December 2018, which said, relevantly, as follows: "On the last occasion that this matter was in court for directions, being 26 November 2018, our counsel inquired of your counsel whether your clients intend to take on the role of being an active contradictor in the Inquiry. As we understand it, your counsel was not in a position to respond to that question immediately, but intended to give the issue further thought. We request that you inform us whether [the FC Chow Plaintiffs] will act as contradictor in the Inquiry." They say that that communication acknowledged the Administrator's understanding that the FC Chow Plaintiffs were not acting as contradictors and that the Administrator had not yet received an indication that they would accept that role. Therefore, they say, the Administrator had no legitimate basis for presuming or having an understanding that the they would act as contradictor in the Inquiry in the Partnership Proceedings. Therefore, they say, there was no "change of position".
3. The FC Chow Plaintiffs assert that the two proceedings were, on proper analysis, different. Thus, the Inquiry in the Partnership Proceedings constituted the quantification exercise in which the Administrator was best placed to act as contradictor, given his position as administrator of the estate of the late KST and his knowledge of the assets, and because there was no other active contradictor. The FC Chow Proceedings, on the other hand, represented a dispute between rival claimants to a beneficial interest in the subject matter of the Partnership Fund, for which there was already an active contradictor, namely Mary and Geoffrey, who had filed a defence and filed evidence in the FC Chow Proceedings and were represented by senior counsel.

Administrator as Constructive Trustee

1. The term "constructive trustee" refers to a person who is not an express trustee but is made liable in equity to account for trust assets as if he or she were a trustee. [12] However, the term refers to two different categories, to which very different legal considerations apply. The distinction between the two categories is fundamental and is not just a matter of the chronology of events leading to liability. It is the distinction between an institutional trust and a remedial formula. [13]
2. The first category of "constructive trustee" concerns persons who have lawfully assumed fiduciary obligations in relation to trust property, but without a formal appointment. Such a person may be a trustee de son tort, who, without having been properly appointed, assumes to act in the administration of a trust as if he or she had been appointed. Alternatively, such persons may be trustees under trusts implied from the common intention to be inferred from the conduct of the parties but never formally created as such. Such persons can conveniently be referred to as de facto trustees, since they intend to act as trustees, if only as a matter of objective construction of their acts, and they are true trustees. If the assets are not applied in accordance with the trust, equity will enforce the obligations that such persons have assumed by reason of their status as trustees, exactly as if they had been formally appointed.
3. The second category of "constructive trustee" consists of persons who never assumed and never intended to assume the status of a trustee, whether formally or informally, but have exposed themselves to equitable remedies by virtue of their participation in the unlawful misapplication of trust assets. Either such persons have dishonestly assisted in a misapplication of funds by a trustee or they have received trust assets knowing that the transfer to them was a breach of trust. In such cases, such persons will be required by equity to account as if they were trustees, even though they are not. The intervention of equity in such cases does not reflect any pre-existing obligation but comes about solely because of the misapplication of the assets. Treating such persons as trustees is purely remedial. [14] That is to say, the second category of constructive trustee is, in effect, a formula for granting equitable relief. A court of equity holds the relevant person liable in equity as though that person were a trustee by the imposition of a constructive trust of the Court of Equity. That occurs because it is equitable that the person should be held liable as though he or she were a trustee.
4. Thus, the second category arises when a person is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case the person is traditionally described as a constructive trustee, and is liable to account as a trustee, even though the person never assumes the position of a trustee but receives trust property adversely to the interests of the claimant by reason of an unlawful transaction impugned by the claimant. While the terms "constructive trust" and "constructive trustee" are applied to such categories, there is no trust. Rather, they are simply formulae for equitable relief.
5. KST was a constructive trustee in the second category so described. That is to say, he was never either formally or informally a trustee of property. Rather, he, and subsequently his estate, have been charged with the obligations of a trustee by way of remedial order.
6. A consequence of the distinction is that, whereas a duly appointed trustee, or a constructive trustee in the first category, will be entitled to be indemnified out of the trust property in respect of costs and expenses reasonably incurred in discharging the duties of trustee, the position will be different in relation to a constructive trustee in the second category. That is to say, where a person in the second category derives unauthorised gain as a result of a breach of fiduciary duty, such a person will have a duty to account for any benefit or gain that the person has received. The "constructive trust" in such a case exists in order to deprive the person of the unauthorised gain and pass that gain to the person who has suffered loss as a consequence of the breach of fiduciary duty. In such circumstances, there will normally be no occasion for any ongoing duties to manage the property that is the subject of the "constructive trust". Indeed, a delinquent fiduciary may well be an unsuitable person to exercise such a function.
7. Nevertheless, there may be circumstances where a "constructive trustee" in the second category actually incurs costs and expenses in preserving the "trust property", such that the person may be entitled to be indemnified out of the trust property in respect of those expenses. It is not necessary to examine such circumstances for present purposes.
8. I am not presently concerned with costs or expenses incurred by KST in managing the funds that he misappropriated from the Partnership or the Partnership Properties acquired with funds of the Partnership. I am concerned only with the position of the Administrator, who is not KST. While the Administrator may well be characterised as a "constructive trustee", he is not a constructive trustee in the second category. He is a constructive trustee in the first category, in that he has been appointed by the Court as the administrator of the estate of the late KST. In that capacity, he has received the Partnership Fund and, in that sense, is a "constructive trustee" of the Partnership Fund. However, those circumstances do not constitute a basis for depriving him of one of the incidents of such constructive trusteeship. That is to say, he is entitled to be reimbursed out of the Partnership Fund for all costs and expenses reasonably and properly incurred in the performance of his duties as administrator of the estate of KST, including his dealing with and management of the Partnership Fund.

Conclusion

1. In all the circumstances, I consider that the Administrator has a right of indemnification from the Net Proceeds Trust and the Profits Trust in respect of his costs and expenses incurred in relation to the FC Chow Proceedings, and a right to remuneration, from the Net Proceeds Trust and the Profits Trust, in relation to his conduct of those proceedings. I consider that such costs and expenses were properly incurred by the Administrator as trustee of the Partnership Fund and that such remuneration is properly payable to him as such trustee.
2. I shall direct the Administrator to bring in short minutes for the further conduct and finalisation of both the Partnership Proceedings and the FC Chow Proceedings. That should be done within 14 days.

Endnotes

1. See Lowe v Pascoe (No 9) [2021] NSWSC 163.
2. See Lowe v Pascoe (No 10) [2021] NSWSC 1232 and Lowe v Pascoe (No 11) [2021] NSWSC 1375.
3. Pascoe as Administrator of the Estate of Kut Sze Tu [2019] NSWSC 817.
4. Re Beddoe: Downes v Cotton [1893] 1 Chancery 447 at 558; and Adelaide Brighton Cement Ltd [2020] FCA 928 at [108]-[111].
5. See Allsop Wilkinson v Neary [1995] 1 All ER 431 at 435 - 436.
6. See Lowe v Pascoe (No 8) [2018] NSWSC 764 at [16].
7. See Lowe v Pascoe (No 9) [2021] NSWSC 163 at [90].
8. Pascoe as Administrator of the Estate of Kut Sze Tu [2019] NSWSC 817 at [30].
9. See Principal Reasons at [44], [46] and [49].
10. See Sze Tu v Lowe [2014] 89 NSWLR 317 at [162] and [374].
11. See Pascoe as Administrator of the Estate of Kut Sze Tu [2019] NSWSC 817 at [9]-[13].
12. See Barnes v Addy (1874) LR 9 Ch App 244 at 251.
13. See Williams v Central Bank of Nigeria at [10] and [11].
14. See Williams v Central Bank of Nigeria [2014] AC 1189 at [9]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 December 2021