Ludwig v Jeffrey

Court of Appeal (NSW)|2021-09-20|Before: Meagher JA, Brereton JA, Slattery J

Introduction The principal question in these proceedings is the extent to which the respondent, Mr Lynton Jeffrey (the Trustee), is entitled to be indemnified, from property held by him on trust for the appellants, Mrs Joanne Ludwig and Mr Robert Ludwig (together the Beneficiaries), in respect of legal costs incurred by him. The Beneficiaries and the Trustee were together the registered proprietors as joint tenants of a house situated in Barbers Road, Chester Hill (the Property). The trustee held his interest on a bare trust for the beneficiaries (the Trust) and the Beneficiaries demanded that he transfer his legal interest in the Property to them. The Trustee refused on the basis that the Beneficiaries were not entitled to a transfer of his interest because no provision had been made for the satisfaction of a possible liability for capital gains tax (CGT) that he may incur as trustee of the Trust.

The Beneficiaries commenced proceedings in the Equity Division seeking, relevantly, an order that the Trustee transfer his legal interest in the Property to them or, alternatively, an order appointing trustees for sale of the Property. By notice of motion (the Stay Motion), the Trustee applied for a stay of the proceedings until the question of his liability for CGT was determined. A judge of the Equity Division (the primary judge) refused a stay. The primary judge declined to order the Trustee to pay the Beneficiaries' costs of the Stay Motion.
It was subsequently established that the Trustee would have no liability for CGT and the Property was sold, realising sale proceeds of $612,157. The Beneficiaries accepted that the Trustee was entitled to indemnity from the proceeds of sale for legal costs in the sum of $29,558.78 incurred by him up to the commencement of the proceedings. However, a question remained as to the Trustee's entitlement to indemnity from the proceeds of sale for the costs that he incurred in conducting the proceedings. By notice of motion (the Payment Motion), the Beneficiaries applied for payment to them of two thirds of the proceeds of sale.

Background to the Proceedings

Until November 1994, Mrs Katherine Fullagar, who is Joanne Ludwig's mother, was the registered proprietor of the Property. From July 1985, the Beneficiaries and Mrs Fullagar resided permanently at the Property. In 1994, the Beneficiaries wished to purchase the Property from Mrs Fullagar and to occupy it as their principal place of residence. However, they were unable to obtain finance to enable them to do so. The Trustee, who is a cousin of the Beneficiaries, agreed to join with the Beneficiaries in applying for finance to enable the Beneficiaries to purchase the Property in the joint names of the beneficiaries and the Trustee.
In November 1994, the Beneficiaries and the Trustee entered into a contract to purchase the Property from Mrs Fullagar for the price of $130,000. The Beneficiaries paid stamp duty of $4,090 on the contract for sale and the purchase price was provided by a loan from Advance Bank Australia Limited, which was secured by a mortgage over the Property granted by the Beneficiaries and Trustee at the time of settlement of the purchase of the property from Mrs Fullagar. The Beneficiaries and the Trustee subsequently became registered proprietors of the fee simple in the Property as joint tenants.
The Trustee said in his affidavit of 15 July 2019 that he believed that he held his interest in the Property for Mrs Fullagar and that, in 2013, he first became aware of the claim by the Beneficiaries to be beneficially entitled to his interest in the Property. He asserted, however, that he remained ready, willing and able at all times to help Mrs Fullagar and the Beneficiaries in relation to any dealing with his interest in the Property.
The Trustee has lived permanently in the United States since January 2001 and is therefore subject to both Australian and United States tax regimes. When he was asked to transfer his interest in the Property to the Beneficiaries in 2013, he became concerned at the possibility that he might incur a liability for CGT if he were to do so. Thereafter, numerous communications occurred between the Trustee and his advisers, on the one hand, and the Beneficiaries and their advisers, on the other. Ultimately, no accord was reached between them.

The Proceedings in the Equity Division

On 9 May 2018, the Beneficiaries commenced proceedings in the Equity Division seeking a declaration that, since 10 November 1994, when settlement of the purchase of the Property occurred, the Trustee had held on trust for the benefit of each Beneficiary a one-half share of his interest in the Property. They also sought an order that the Trustee execute and deliver to them written transfers of their respective shares in the Property. Alternatively, they sought an order appointing trustees and vesting the Property in such trustees to be held upon the statutory trust for sale under Div 6 of Pt 4 of the Conveyancing Act 1919 (NSW). The Beneficiaries filed an amended statement of claim on 28 July 2018. The amendments are not presently relevant.
In his defences to the statement of claim and the amended statement of claim, the Trustee did not dispute the entitlement of the Beneficiaries to a declaration that, since 10 November 1994, he had held his legal interest in the Property on trust for their benefit. However, he denied that they were entitled to demand a conveyance of his interest in the Property on the basis that:

he had claimed for reimbursement and exoneration in respect of debts and liabilities incurred in the proper execution of his duties and powers under the Trust;
he had not been indemnified for those debts and liabilities;
he was required to retain the Property to meet contingent liabilities of the Trust, including taxation liabilities; and
there may be extant unpaid taxation liabilities of the Trust and no provision had been made for the satisfaction of those liabilities.

On 18 July 2018, the Trustee filed a cross-claim by which he sought declarations that he held his interest in the Property on trust for the benefit of the Beneficiaries and that he was entitled to be indemnified by the Beneficiaries for all debts and liabilities incurred in the proper execution of his duties and powers under the Trust. As to the latter, he sought an order that the Beneficiaries pay him the sum of $29,558.78 for reimbursement of legal expenses incurred in the proper execution of his duties and powers under the Trust.
In addition, the Trustee sought an order that the Beneficiaries pay his costs of preparing and lodging an application to the Australian Taxation Office (the ATO) for a private binding ruling in respect of CGT liability that he may incur as trustee upon registration of a transfer of his legal interest in the Property to the Beneficiaries. In particular, he sought an order that the Beneficiaries pay the sum of $5,500 into his solicitors' trust account to be held on trust for payment of his costs of preparing and lodging an application for a private binding ruling.
In the cross-claim, the Trustee asserted that it was unclear whether, upon registration of a transfer of the Property, he would, in his capacity as trustee of the Trust, incur a CGT liability and what the quantum of any such liability would be. In paragraphs 13 and 14, he asserted that, in circumstances where no monies had been set aside for any CGT liability that may become payable by him upon registration of a transfer of the Property, he was entitled to retain his interest in the Property, as trust property, pending determination of contingent liabilities of the Trust for which he may become personally liable. He also asserted that the Beneficiaries had not agreed to meet the costs of making an application for a private binding ruling.
In their defence to the cross claim, the Beneficiaries did not admit paragraphs 13 and 14, but accepted that the Trustee was "entitled to security for any contingent liabilities". They also asserted that, on 8 July 2018, they offered to set aside monies for any CGT liability and that they had never denied that the Trustee was entitled to security for any contingent CGT liability. While the Beneficiaries admitted that they had not agreed to meet the costs of an application for a private binding ruling, they asserted that they had never rejected the proposal to do so and that, on 27 July 2018, after due consideration of legal advice, they had agreed to the proposal.
On 13 August 2018, the Trustee filed the Stay Motion. The reason for the stay was said to be to enable the parties to obtain certainty, from a binding private ruling, as to the appropriate amount to be set aside as security for any liability for CGT that the Trustee may incur as trustee of the Trust. I shall return to the Stay Motion below.
Under cover of a letter of 13 August 2019, the solicitor for the Trustee lodged an application to the ATO for a private binding ruling. The letter sought answers to the following questions:

Upon registration of a transfer of the interest of the Trustee to the Beneficiaries will any of the Trustee or the Beneficiaries be liable to pay CGT in respect of the Property?
If so in respect of each person or persons who would be liable to pay CGT: (a) what will be the relevant CGT event? (b) what will be the time of the relevant CGT event? (c) how will the capital gain or capital loss be calculated? (d) does any exception or exemption apply? (e) when would the CGT be payable?

On 6 September 2019, the Trustee's solicitor received an email from the ATO posing some 14 questions concerning the Property and its acquisition by the Beneficiaries and the Trustee. The solicitor responded by email on 14 September 2019 requesting an extension of time within which to respond to the email from the ATO. The ATO replied saying that it would be best "to close the case" and suggested that, when the Trustee was ready "to start again", the ATO "will reopen the case".
On 8 November 2019, for reasons published on that day, the primary judge refused the Trustee's application for a stay of the proceedings [1] , but reserved the costs of the Stay Motion. In the course of his reasons of 8 November 2019, his Honour observed that the parties had agreed on the existence of the Trust, the identity of the property of the Trust and the obligation of the Beneficiaries to indemnify the Trustee out of that property. However, his Honour said, the parties could not agree on the quantum of the indemnity or the manner in which the right of indemnity should be secured or satisfied and whether that should be upon or after the transfer of the Property.
On 11 November 2019, with the consent of the parties, in the expectation that it would assist the parties in seeking a private binding ruling from the ATO concerning liability for CGT, the primary judge made the following declarations: "1. The Court declares that since 10 November 1994, the Defendant has held … his interest in the [Property] on trust for the sole benefit of the [Beneficiaries] …; and 2. The Court declares that the [Trustee], in his capacity as trustee, has a right of indemnity out of [the Property] for any taxation liabilities incurred by the trust, legal costs ultimately ordered in these proceedings (if any) and any other expenses or liabilities properly and reasonably incurred by the [Trustee] in his capacity as trustee."
On 19 December 2019, the primary judge made further orders by consent, the substance of which was as follows: 1. Order the parties to take all reasonable steps to ensure that the Property is sold by private treaty or by auction on or before 30 March 2020; 2. Order the parties to do all such acts or things and sign all such documents as may be necessary for the sale of the Property on or before 30 March 2020 and, in particular, the parties shall, by February 2020, instruct an independent solicitor upon whom the parties mutually agree (the Independent Solicitor) to prepare a contract for sale of the Property. 3. Order that until further order any net proceeds of the Property will be retained by the Independent Solicitor; 4. Note that the Court has not yet made final directions about the disposition of the proceeds of the Property upon settlement of any contract for sale; 5. Order that the Trustee be noted as a vendor in his capacity as a trustee on any contract of sale for the Property; 6. Note that now the Property is being sold, the remaining issues in these proceedings (the Remaining Issues) are:

the quantum of the Trustee's expenses and costs and whether those costs have been reasonably and properly incurred;
the liability of the Trustee for CGT and the need for a private ruling by the ATO; and
the order of the application of the proceeds of sale of the Property, including to enable the Trustee to be indemnified in respect of his liabilities as trustee. 1. Order the Beneficiaries to provide to the solicitor for the Trustee no later than 10 January 2019 their responses to the ATO's questions of 6 September 2019. His Honour gave directions for the filing and serving of evidence and submissions in relation to the Remaining Issues and listed the matter for short argument in March 2020.

Also on 19 December 2019, the Beneficiaries' solicitor wrote to the ATO by email responding to the questions of 6 September 2019. The email referred to the proceedings before the primary judge and the declarations made on 11 November 2019. The email also attached affidavits by the Beneficiaries providing details concerning the acquisition of the Property by the Beneficiaries and the Trustee.
On the same day, 19 December 2019, the Trustee's solicitor also wrote to the ATO "by way of update" of the Trustee's application for a private binding ruling. The letter said that the Beneficiaries had advised that they were no longer seeking that the Trustee execute transfers of the Property and were now seeking that the Property be sold on market. Accordingly, the letter said, the Trustee requested that the issues and questions for the ruling be amended as follows:

If the Property is sold on-market, and if the contract the sale records the names of the vendors as being, as joint tenants [the Beneficiaries and the Trustee, in his capacity as trustee for the Beneficiaries] will any of [the Beneficiaries or the Trustee] be liable to pay CGT in respect of the Property in relation to any part of the period from 10 November 1994 until registration of the transfer?
If so, in respect of each person or persons who would be liable to pay CGT: 1. what will be the relevant CGT event? 2. what will be the time of the relevant CGT event? 3. how will the capital gain or capital loss be calculated? 4. does any exception or exemption apply? 5. when would the CGT be payable? The letter of 19 December 2019 from the Trustee's solicitor also provided the Trustee's answers to the questions set out in the ATO's email of 6 September 2019. On 22 December 2019, the Trustee's solicitor formally requested that the ATO "reopen" the application for a private binding ruling.

On 15 January 2020, the ATO sent an email to the Trustee's solicitor indicating that the question upon which a proposed ruling would be given was whether the Trustee would be entitled to disregard a capital gain arising from the sale of the Property held on trust for the benefit of the Beneficiaries in accordance with s 106-50 of the Income Tax Assessment Act 1997 (Cth). The ATO's email said that the ruling was ready to be issued once the Trustee confirmed that he agreed with the question. The email said as follows: "As the ruling is unfavourable the reasons for decision will in depth explain, why it cannot be established the beneficiaries of the trust, have absolute entitlement over the trust property."
On 21 January 2020, the Trustee's solicitor wrote the ATO again setting out seven further questions. On 23 January 2020, the ATO requested further documents in relation to the proceedings, requested confirmation that one of the questions was to be removed and sought an explanation as to why other questions were asked. On 7 February 2020, the Trustee's Solicitor responded furnishing further information and answering various questions.
On 4 March 2020, the ATO provided to the Trustee a decision on the application for a private ruling, noting that all but one question had been withdrawn. The decision provided the answer "no" to the following question: "Will you be liable to pay [CGT] upon the sale of [the Property] held on trust for the benefit of [the Beneficiaries] in accordance with Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (Cth)?" The decision and the reasons for decision included the following: "On 10 November 1994, you agreed to have your name on the title of the [Property] as joint tenants in equal shares. This was to assist [the Beneficiaries] to obtain finance for the [Property]. … The [Property] has always been used for main residence purposes by [the Beneficiaries] and has never been used for investment purposes. You at no stage have contributed any funds towards the Property. The entirety of the purchase price of the Property, the stamp duty payable, all fees, interest and principal repayments in respect of any loans secured by any mortgage over the property have been paid at all times by [the Beneficiaries]. They have paid all outgoings, utility expenses, repairs, maintenance expenses, land taxes and council rates. … The Commissioner considers that you have no beneficial ownership of the property and thus you will not be liable to pay tax on the capital gains upon the sale of the property. … An individual can be a legal owner but have no beneficial ownership in an asset. It is the beneficial owner that will have a CGT event upon sale of a CGT asset. In some cases, an entity may hold a legal ownership interest in property for another individual in trust. A beneficial owner is the person or entity who is beneficially entitled to the income and proceeds from the asset. We consider in extremely limited circumstances where the beneficial ownership and the legal ownership are not the same, there must be evidence that the legal owner holds the property on a trust for the beneficial owner. There must be a valid trust over the property and that the equitable owner is entitled to benefit from the property. In your case, the information provided by you states that you have not held any beneficial interest in the property and have only held legal interest in the property on trust. The [B]eneficiaries who have paid all outgoings are the beneficial owners. You will make a capital gain in your capacity as trustee which may be eligible for the main residence exemption as long as the beneficial owners of the property live there."

Reasons of the Primary Judge

The primary judge began his reasons of 30 November 2020 by observing that "something is seriously wrong" with the administration of a trust when trust property of $204,000 is almost wholly consumed by legal fees but that, regrettably, that had occurred in the present case. His Honour said that, with different trust management and legal guidance to take advantage of s 63 of the Trustee Act 1925 (NSW) (the Trustee Act) to obtain judicial advice, the Beneficiaries could have preserved much more of their trust property than they have.
After setting out a detailed account of the dealings between the parties up to mid 2017, his Honour observed that, by that time, all parties saw the Trustee as a trustee and that, at that time, serious consideration should have been given to seeking judicial advice under s 63 of the Trustee Act. His Honour considered that that course was particularly apt where there was a disagreement between a trustee and a beneficiary about the best way to administer the trust property. However, his Honour said, the imperative to seek judicial advice was not as strong at that time as it was later when the Beneficiaries commenced the proceedings. Nevertheless, his Honour said, it should have been considered by September 2017.
The primary judge then considered how a judicial advice application would have proceeded. Thus, of a number of alternatives that could have been put to the Court for judicial advice, one possible option was proceeding to seek a ruling from the ATO. Another was proceeding with the sale of the Property and asking the Court whether the Trustee would be justified in stipulating that a particular sum be reserved out of the proceeds of sale to secure his unascertained tax liabilities. The Court giving judicial advice could have advised the Trustee whether or not he was justified in insisting on the quantum that he requested. His Honour observed that the Trustee would have been fully indemnified for taking that position if the judicial advice supported him and he would not have needed to negotiate any further. He would thereby have preserved the trust estate from a significant part of the burden of continuing legal fees.
The primary judge observed that the lawyers on both sides saw a private ruling as an attractive solution but overlooked the easiest solution of judicial advice. His Honour said that the principal responsibility for that lay with the Trustee since, although he could not have been expected to know about the Trustee Act himself, his legal advisers should have considered it seriously from as early as September 2017.
The primary judge then referred to communications between the lawyers for the parties in April 2018. Thus, on 9 April 2018, the Beneficiaries' solicitor wrote to the Trustee's solicitor enclosing a draft deed of settlement and draft statement of claim. The letter said that the Trustee had until 23 April 2018 to accept the terms of the deed of settlement and that if the Trustee either rejected the terms or failed to respond, the Beneficiaries would commence proceedings without further notice. His Honour observed that, at that point, it would have been better for the Beneficiaries' solicitors to have suggested that the Trustee seek judicial advice rather than to threaten hostile action.
The Trustee's solicitors responded on 23 April 2018, saying that at all times the Trustee had affirmed that there was a trust and had provided written assurances to the Beneficiaries that he was ready, willing and able to co-operate with the Beneficiaries. The letter expressed surprise that the letter of 9 April 2017 enclosed a draft statement of claim seeking a declaration of trust and an order for transfer of the Trustee's interest in the Property to the Beneficiaries. The letter said the Trustee did not reject the draft deed but that a number of terms of the draft gave rise to some uncertainties as to their timing and operation. The letter said that the Trustee would be willing to consent to a declaration of trust on terms that provided adequate protection to the Trustee, including the date when the Trust was created.
On 30 April 2018, the beneficiaries' solicitors replied, saying that there was "ample equity in the Property to satisfy the Trustee's indemnity". The letter said that the draft deed of settlement was "manifestly reasonable" and ought to be accepted by the Trustee. The letter also said that the Beneficiaries had undertaken to indemnify the Trustee against any cost or expense that he may incur upon transfer of his legal interest in the Property, that the parties had already reached an in principle agreement and that all that was left was for the parties to agree on the precise terms in which to record that agreement.
The primary judge observed that that was another moment when the Trustee should have sought judicial advice. His Honour said that, if the Trustee had been supported by judicial advice, he could have stood his ground on the deed of settlement and opposition from the Beneficiaries would have collapsed.
The primary judge then dealt with the principles of the indemnification of trustees and Trustee's defence in the proceedings. His Honour referred to s 59(4) of the Trustee Act, which relevantly provides that a trustee may reimburse himself or herself for, or pay or discharge out of a trust property, all expenses incurred in or about the execution of the trustee's trust or powers. His Honour then observed that a negative test has long been said to be the applicable test to determine whether or not a Trustee should be indemnified out of trust assets, saying that that test is said to allow indemnification for expenses that have not been shown to have been "improperly incurred" [2] . His Honour recorded that the Beneficiaries argued that whether liabilities are "reasonable" and are "properly incurred" are the touchstones of indemnity. [3] His Honour then referred to statements by this Court that the use of the word "improperly" in the traditional formulation of the test was "ultimately unhelpful". [4] His Honour then observed that the High Court had referred to the test in its traditional formulation without entering into the debate raised by the comments of this Court. [5]
The primary judge then observed that the Trustee contended that the relevant inquiry was whether or not expenses incurred do in fact answer the description of having been so incurred in or about the execution of the trustee's trust or powers. However, his Honour said, although the Trustee disputed that the relevant legal test was whether expenses were "reasonable" and "properly incurred", he contended that the costs and expenses he had incurred were "reasonable" and were "properly incurred". His Honour noted that the Trustee submitted that at all times he had acted within his powers and responsibilities as trustee and that he should therefore be indemnified out of the estate for all of his expenses and costs in so acting.
The primary judge referred to a submission on behalf of the Trustee that, where beneficiaries sue a trustee, the trustee is ordinarily entitled to defend his, her or its conduct as an incident of administration of the trust and to be indemnified in respect of the costs of the defence. [6] While his Honour accepted that those propositions were unexceptionable, as far as they go, as general statements of principle, his Honour considered that they ignored the question of whether or not the Trustee should have sought judicial advice before defending the proceedings.
The primary judge referred to r 42.25(1) of the Uniform Civil Procedure Rules (2005) (UCPR), which relevantly provides that 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. However, his Honour observed that, by the operation of UCPR 42.25(2), a trustee can be deprived of an indemnity out of the trust assets in respect of costs and expenses of litigation, if the trustee insists on adopting unreasonable positions that are contrary to the requests of the beneficiaries and result in litigation. Under UCPR 42.25(2), the Court may order that a trustee's costs not be paid out of the fund held by the trustee if the trustee has acted unreasonably or the trustee has in substance acted for his or her own benefit rather than for the benefit of the trust fund.
The primary judge then observed that a feature of the case before him was that the Trustee did not take judicial advice about whether or not he should defend the proceedings. His Honour said that it was regrettable that he had not done so and that the need has often been emphasised for a trustee to take judicial advice at an early stage in litigation brought by beneficiaries against the trustee, whether or not for alleged breach of trust. Thus, a trustee's application for judicial advice about whether to sue or defend proceedings should not be understood as being directed only to the personal protection of the trustee. Proceedings for judicial advice also have the other, and no less important, purpose of protecting the interests of the trust. [7]
The primary judge then dealt with contentions advanced concerning the question of judicial advice and observed that the Trustee had defended the proceedings since their inception without taking judicial advice about any aspect of the dispute. His Honour observed that the "proper and efficient course" for the Trustee in a case such as this was, once joined as a defendant to the proceedings, to approach the Court to seek judicial advice as to whether he was justified in insisting on his own proposed course or some other course, to secure an indemnity for his costs and expenses and to ascertain his liability for GST. His Honour said that it would have been open to the Trustee "to take that advice" and then put on a submitting appearance, thereby reducing the costs of a contested hearing and that the fact that judicial advice was not taken is one reason why the costs on both sides of the ensuing litigious contest had become so disproportionate to the value of the trust property. However, his Honour did not identify what "that advice", which he said would have been open for the Trustee to take, would have been.
The primary judge then observed that the litigation had been a regrettable waste of the resources of the parties. His Honour said that judicial advice is an important protection not just for the trustee but for the preservation of the trust estate, since judicial advice will often reduce the risk of contested proceedings that might consume the trust estate. His Honour described judicial advice as a simple, accessible summary procedure and said that the fact that the Trustee did not take that simple course was a reason why the litigation was commenced and had become expensive.
The primary judge cited the following observations by the High Court: "A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the principal proceeding. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the principal proceedings." [8] His Honour observed that that statement set a standard for what a trustee should do when sued in litigation by a beneficiary. However, his Honour said, the Trustee failed to act according to that standard and thereby exercised his duties as a trustee with the absence of care and diligence that a person of ordinary prudence would exercise. His Honour considered that the Trustee, together with his legal advisors, should have taken the course of seeking judicial advice, saying that it is probable that, if they had done so, the costs in the proceedings would have been reduced. His Honour therefore considered that some discount ought to apply to the Trustee's claim for indemnity for the costs of the proceedings.
The primary judge then dealt with the three remaining issues in dispute, as follows:

the Trustee's expenses and costs, being costs incurred prior to the commencement of the proceedings, the costs of the proceedings up to and including 20 February 2020 and the costs of the proceedings after 20 February 2020;
the Trustee's liability to pay CGT; and
the application of the proceeds of sale of the Property.

The Trustee claimed approximately $120,000 in costs for defending the proceedings from 9 May 2018 to 20 February 2020. The Beneficiaries contended that the Trustee should not be indemnified for those costs as they were "manifestly excessive" and were incurred unreasonably.
In dealing with those costs, the primary judge said that the Trustee should have sought judicial advice immediately after he was sued by the Beneficiaries but that it was very difficult to estimate how much legal costs would have been saved had he done so. His Honour said that the costs of pursuing judicial advice must be factored into the estimate of the expense to the estate by reason of the Trustee's failure to take the course of obtaining judicial advice. His Honour observed that the estimate was to be based upon a counterfactual and that, doing the best that he could, the Trustee would probably have been able to save approximately $30,000 by seeking judicial advice. His Honour therefore concluded that the Trustee's total claim for costs of the proceedings up to 20 February 2020 should be reduced to a maximum of $90,000.
The Trustee's solicitors estimated that the Trustee has incurred costs in the proceedings after 20 February 2020 amounting to an additional $25,000. His Honour observed that those costs were incurred after the Court's warning in December 2019 "to contain costs" and that the extent of the material put on by the Trustee after that warning was excessive. His Honour therefore considered that the Trustee's claim for indemnity after 20 February 2020 should be reduced to a maximum of $20,000.
The primary judge observed that it is probable that the Trustee will have no liability for CGT. His Honour said that, if the Trustee does incur CGT liability or any other tax liability, the Beneficiaries will remain personally liable to indemnify him once his security rights over the trust property have been exhausted.
The primary judge accepted that the Trustee's right to exoneration or recoupment out of the proceeds of the sale of the Property takes priority over the rights of beneficiaries. His Honour said that the entitlement of the Beneficiaries to the trust property was confined to so much of the assets as were available after the Trustee's indemnity had been discharged or provision had been made for such liabilities [9] . Thus, his Honour said, the Trustee would have a right in equity to recoupment or exoneration and that that right constituted a caveatable interest in the Property so long as the liability remained unpaid. His Honour observed that the final issue should therefore fall away since the Trustee has recourse to the remaining funds in Court to indemnify himself in respect of his execution of the Trust. Once those funds are exhausted, his Honour said, the Trustee could look to the Beneficiaries on their personal obligation to indemnify him.
The primary judge then dealt with the question of the Beneficiaries' costs. His Honour considered that, since both parties were clearly in agreement that a private binding ruling should be sought from the ATO, neither party could claim success in the proceedings because the private binding ruling "ultimately lived up to expectations, indicating that no CGT was payable". His Honour observed that, in prayers 3 and 9 of the cross-claim, the Trustee had sought a declaration that he had a right of indemnity out of the trust property for taxation liabilities and other expenses or liabilities "properly and reasonably incurred" by him in his capacity as trustee. His Honour said that that success was qualified by the fact that the principle was never contested by the Beneficiaries. Rather, the argument was about what it meant when it applied to the facts of the case.

The Appeal

By summons filed on 25 February 2021, the Beneficiaries seek leave to appeal from declarations (3)(b), (3)(c) and (3)(d). The Trustee contends that, having regard to the terms of orders (7) and (8), the proceedings in this Court are premature since his Honour has not yet determined the costs to which the Trustee is entitled. Orders (3)(b) and (3)(c) simply impose maximum limits. Orders (7) and (8) contemplate a further determination of a lump sum in respect of the costs of the proceedings.
In their draft notice of appeal, the Beneficiaries assert that the primary judge erred: 1. In finding that the Trustee's prosecution of his defence was reasonable in circumstances where he could have sought judicial advice; 2. In not finding that the Trustee had breached his duty to act reasonably and prudently in the administration of the Trust; 3. In not properly considering the disproportionate nature of the Trustee's legal costs in comparison to the size of the Trust; 4. In denying the Beneficiaries procedural fairness by not notifying the Beneficiaries that the Court was considering a finding that it was open to them to suggest that the Trustee should have obtained judicial advice; 5. In finding that with different trust management and legal guidance to take advantage of s 63 of the Trustee Act 1925 (NSW), the Beneficiaries could have preserved much more of the trust property than they have; 6. In denying the Beneficiaries procedural fairness by denying them the opportunity to make further submissions after the Court vacated a hearing scheduled to occur on 9 April 2020; 7. In denying the Beneficiaries procedural fairness by failing to determine the matter in accordance with the Evidence Act 1995 (NSW); 8. As a matter of principle in awarding the Trustee costs for the notice of motion of 13 August 2019; 9. As a matter of principle in awarding the Trustee indemnity costs for the notice of motion filed on 2 June 2020; and 10. In not considering whether, had the Trustee sought judicial advice upon proceedings being commenced against him, the Court would not have authorised him to incur costs that were disproportionate to the remaining assets of the Trust.
The Beneficiaries seek orders that declarations (3)(b), (3)(c) and (3)(d) and notation (5) be set aside and that declaration (4)(a) be amended to refer only to declaration (3)(a). They also seek an order that the Independent Solicitor release the whole of the funds held by him to the Beneficiaries and orders that the Trustee pay their costs of the appeal and of the proceedings at first instance. They also seek an order that they are entitled to offset the amounts payable by declaration (3)(a) against those orders for costs. In the alternative, the Beneficiaries seek an order that the proceedings be remitted to the Equity Division to be heard by a judge other than the primary judge.
In substance, there are three issues raised by the proposed grounds of appeal as follows: 1. failure to obtain judicial advice: Grounds 1, 2, 3, 5 and 10; 2. denial of procedural fairness: Grounds 4, 6 and 7; 3. costs of the Stay Motion and the Payment Motion: Grounds 8 and 9.

Failure to Obtain Judicial Advice

The primary question raised by grounds 1, 2, 3, 5 and 10 is whether the Trustee, in his capacity as trustee, was entitled to be indemnified in respect of the legal costs incurred by him in conducting the proceedings in circumstances where he failed to obtain judicial advice that he would be justified in defending the proceedings and prosecuting the cross-claim. The primary judge made findings criticising the Trustee's conduct in incurring costs that nearly depleted the entirety of the trust property and engaging in that conduct without first seeking judicial advice. The Beneficiaries complain that, despite making those findings, his Honour nevertheless permitted the Trustee to be indemnified in respect of a significant proportion of the costs incurred by him in defending the proceedings and prosecuting the cross-claim.
The Beneficiaries characterised the failure of the Trustee to seek judicial advice as to the future conduct of the proceedings as "a critical feature". They point out that the Trustee failed to seek judicial advice in circumstances where:

the value of the trust property was $204,052;
the costs claimed by the Trustee of $174,558.78 constituted 85% of the trust property;
at least $145,000 of costs, constituting 71% of the trust property, were incurred after the Trustee was served with the original statement of claim;
the Trustee's costs were disproportionate; and
the Trustee did not at any time seek judicial advice to ascertain whether significantly depleting the trust property in defending the proceedings would be reasonable and proper, such that he should be indemnified in respect of those costs. The Beneficiaries contended that the primary judge erred in allowing the Trustee to be indemnified from the trust property for approximately $145,000 of costs incurred after the commencement of the proceedings.

The Beneficiaries contended that the Trustee had a duty to seek judicial advice before defending the proceedings or filing a cross-claim and thereby incurring costs that may ultimately reduce the trust property. They assert that the Trustee departed from the relevant standard in circumstances where the primary judge expressly found that judicial advice should have been considered as early as September 2017. Instead, the Trustee conducted a defence, resisting the transfer of the trust property. They assert that he did so in circumstances where the ruling obtained from the ATO indicated that there would be no liability for CGT. They say that the Trustee was under a duty to seek judicial advice and that the failure to do so amounted to a violation of duty or culpable neglect on his part in circumstances where the quantum of costs incurred was disproportionate to the value of the trust property, and the costs were incurred protecting the Trustee from a liability in respect of which he would have been indemnified by the Beneficiaries by the operation of law.
The Beneficiaries assert that, in circumstances where the primary judge was of the view that the Trustee had departed from the standard of diligence required of him in failing to obtain judicial advice and file a submitting appearance, his conduct amounted to unreasonableness in the incurring of legal costs in the performance of his duties as trustee. They assert that, had the Trustee sought judicial advice and acted in accordance with that advice, the only legal costs that would have been incurred would be the costs of the application for judicial advice and costs necessary to give effect to the final orders that would be made on the statement of claim. They contend that the primary judge should have found that the Trustee had not acted reasonably and prudently in the administration of the Trust and should therefore have been denied indemnity in respect of the costs incurred by him after the commencement of the proceedings in actively defending the proceedings and prosecuting the cross-claim.
The Beneficiaries assert that the orders made by the primary judge did not reflect the disproportionality between the costs incurred by the Trustee and the value of the trust property. They assert that the Court would not have given judicial advice authorising the Trustee to incur legal costs in the amount that was incurred, having regard to the value of the trust property. They point to the observations made by his Honour in all three decisions that disapproved of the quantum of the legal costs incurred by the Trustee. Thus, the Beneficiaries assert that his Honour was aware that costs were "amassing", which were in no way proportionate to the value of the trust property. Nevertheless, they complain, his Honour awarded the Trustee most of the indemnity claimed notwithstanding what the Beneficiaries characterised as "the obvious and significant departure from the diligence and prudence expected of a trustee".
The Beneficiaries complain that, in so far as the primary judge considered that neither party was taking a reasonable approach to the litigation or to appropriate cost saving measures, his Honour failed to take proper account of the disproportionality of the quantum of costs to the value of the trust property. They complain that, rather than examining the conduct of the Trustee in the context of his duties and his departure from those duties, his Honour drew a comparison between the conduct of the Trustee, on the one hand, and the conduct of the Beneficiaries, on the other. In so doing, the Beneficiaries complain, his Honour failed to take into account that, had the Trustee filed a submitting appearance or taken judicial advice, the costs incurred would have been significantly reduced. In addition, by taking that approach, the Beneficiaries say his Honour overlooked the fact that the Beneficiaries and the Trustee were in entirely different positions.
The Beneficiaries say that they were simply seeking to realise their beneficial interest in the Property, whereas the Trustee resisted that claim at every opportunity, protecting himself from a liability, which the ATO had determined to be nil prior to the primary judge's reasons being published on 30 November 2020. The Beneficiaries complain that his Honour did not properly consider the disproportionality between the quantum of costs and the value of the trust property. They assert that, had the Trustee obtained judicial advice and disclosed to that Court an estimate as to the costs that he would be likely to incur in defending the proceedings, he would have received advice that he should file a submitting appearance.
The Beneficiaries complain that the approach adopted by the primary judge was not in accordance with principle [10] and that his Honour's reasoning would give rise to a precedent whereby a trustee can ignore any duty to seek judicial advice and wait until the end of the proceedings with the consequence of suffering only a general discount that does not truly give effect to the proper counterfactual. They assert that giving a general discount in relation to the indemnity did not properly preserve the assets of the Trust, since preservation could be achieved only by the Trustee having sought judicial advice before incurring the costs or the Court denying indemnity retrospectively, if the Court considers that, had judicial advice been sought at the appropriate time, the Court would likely have sanctioned the filing of a submitting appearance.
The whole thrust of the contentions advanced by the Beneficiaries in relation to grounds 1, 2, 3, 5 and 10 is that, had the Trustee sought judicial advice upon service of the statement of claim, he would have been advised that he would be justified in filing a submitting appearance. However, the only basis upon which a judge, in giving judicial advice in accordance with principle, would advise that the Trustee file a submitting appearance in proceedings seeking either a transfer of his legal interest to the Beneficiaries or the appointment of trustees for sale of the Property, is that the Trustee would be in no worse position had the orders so sought been made. It is patently obvious that that is not so.
As things stood at the time when the proceedings were commenced, the Trustee was the legal owner of the trust property, namely, an interest as one of three joint tenants of the Property, which he acknowledged he held on trust for the Beneficiaries. However, the question of his liability for CGT if he transferred his legal interest in the Property to the Beneficiaries or the Property were vested in trustees for sale and the property sold, had not been determined. It was not suggested by the Beneficiaries that there was no rational possibility that a liability for CGT may have been incurred in those circumstances.
As things stood, as a legal joint tenant of the Property, the Trustee was entitled to be indemnified or exonerated out of the property of the Trust for any liability that he incurred in his capacity as trustee. Once he parted with his legal interest, either by transfer to the Beneficiaries or upon sale by a trustee for sale, he would lose his lien over the property of the Trust. It is clear enough that, had the Trustee sought judicial advice, he would have been advised that he would be justified in defending the claims made by the Beneficiaries in the proceedings to transfer his interest in the Property to them or to agree to a sale on market of the Property, unless the Beneficiaries were to provide security over the interest in the Property transferred to them or in the proceeds of sale adequate to meet the Trustee's entitlement to an indemnity in respect of his costs and expenses and any liability for CGT. That is to say, he would have been advised that he would be justified in resisting the relief claimed by the Beneficiaries in the statement of claim, unless he were to be provided with adequate security following the transfer or sale by way of a charge over the Property or the proceeds of sale to secure any liability that he incurred for CGT as a trustee, or legal costs that he had incurred in discharging his duties as Trustee up to that time.
It is relevant, as the Beneficiaries contend and the primary judge observed, that, in seeking advice as to whether he would be justified in defending the proceedings in the absence of provision of adequate security, the Trustee was looking to his own interests rather than protecting the trust property. However, there was no conflict in that position. The purpose of judicial advice would have been to determine whether the Trustee was justified in defending the proceedings.
In the light of the claims made in the statement of claim, it is clear that, in the absence of the provision of adequate security for any liability that he incurred for CGT as a trustee or legal costs that he had incurred in discharging his duties as Trustee up to that time, the Trustee was justified in defending the proceedings. Equally, it is highly probable that the Trustee would have received judicial advice that he was justified in filing and prosecuting the cross-claim that he filed on 18 July 2018. Indeed, in essence, the Trustee was substantially successful in obtaining the relief claimed in the cross-claim.
Thus, first, he sought a declaration that, since 10 November 1994, he has held his interest in the Property on trust for the benefit of the Beneficiaries. That is the first prayer for relief in the statement of claim. Secondly, the cross-claim sought a declaration that the Trustee is entitled to be indemnified by the Beneficiaries for all debts and liabilities incurred in the proper execution of his duties and powers under the Trust. He was vindicated in that claim.
The cross-claim sought an order that the Beneficiaries pay the sum of $29,558.78 for reimbursement of expenses incurred by the Trustee in the execution of his duties and powers under the Trust. The primary judge made that order and there is no appeal from that order.
The cross-claim also sought an order that the Beneficiaries pay the Trustee's costs of preparing and lodging an application for a private binding ruling in respect of any CGT liability that would become payable by the Trustee upon transferring his interest in the Property to the Beneficiaries. In particular, prayer 5 was for an order that the Beneficiaries pay to the Trustee's solicitors the sum of $5,500 on account of the costs of preparing and lodging an application for a private binding ruling. The Trustee was successful in both respects.
By prayer 6, the cross-claim sought an order that the proceedings be stayed until receipt of a response to the application for a private binding ruling. While no stay was ordered by the primary judge, the management of the proceedings by his Honour was, in effect, no different from a stay. That is to say, his Honour accepted that it was appropriate, although a stay was not to be ordered, to give directions for the future conduct of the proceedings. The proceedings did not progress until after the private binding ruling had been obtained from the ATO.
By prayer 7, the cross-claim sought an order that the Beneficiaries pay into a joint account controlled by the parties' respective solicitors the amount of money necessary to meet any CGT liability payable by the Trustee upon the transfer of his interest in the Property to the Beneficiaries. Prayer 8 consisted of orders for payment out of the money to discharge the liability, if any, of the Trustee. In the events that occurred, those orders were unnecessary, because the private binding ruling indicated that there was no liability.
In the circumstances, it is clear that, had the Trustee sought judicial advice in relation to the cross-claim, he would have been advised that he would be justified in filing and prosecuting the cross-claim. In that regard, an essential aspect of the cross-claim concerned the possible liability for CGT. Thus, the cross-claim relevantly made the following allegations:
Pursuant to s 104-75 of the Income Tax Assessment Act 1997 (Cth), CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset, which includes real property, of a trust as against a trustee and, where such an event happens, a trustee makes a capital gain if the market value of the CGT asset at the time of the CGT event is more than its cost base.
The published view of the ATO on absolute entitlement to real property in circumstances of multiple beneficiaries of a trust, which appears to conclude that multiple beneficiaries cannot have such an absolute entitlement, has not been finalised.
In the light of paragraph 12, it is unclear whether, upon registration of a transfer by the Trustee to the Beneficiaries, the Trustee would incur a CGT liability and what the quantum of such liability would be.
The Trustee is entitled to retain trust property against the Beneficiaries pending determination of contingent liabilities of the Trust for which the Trustee will become liable, including taxation liabilities, where a fund has not otherwise been set aside in respect of the contingent liability.
To date, no monies have been set aside for any CGT liability that will become payable by the Trustee upon transfer of his interest in the Property.
Before the Court would require the Trustee to execute a transfer of his interest to the Beneficiaries, the Court should require the Beneficiaries to set aside, in a fund jointly controlled by the solicitors for the parties, sufficient monies to satisfy the contingent CGT liability.
In order to ascertain the quantum of any CGT liability payable upon registration of such a transfer, the Trustee has proposed to the Beneficiaries that a private binding ruling application be made to the ATO at the cost of the Beneficiaries.
The Beneficiaries have not agreed to meet the costs of such an application.
Given that upon transfer of his interest in the Property to the Beneficiaries, the Trustee may incur a CGT liability, the costs of preparing such an application would be debts and liabilities incurred in the proper execution of the Trustee's duties and powers under the Trust.
In the light of the matters referred to above, the Court should order the Beneficiaries to pay the costs of the preparation of an application for a private binding ruling so that the CGT liability of the Trustee on transferring his interest in the Property can be ascertained and then set aside in a jointly controlled fund.
The Court should order the Beneficiaries to pay an estimate of the costs of the preparation of a private binding ruling application by the Trustee into a bank account of the Trustee's solicitor to be held on trust to meet those costs.
Had the Beneficiaries filed a submitting appearance to the cross-claim, substantial costs would not have been incurred. However, the defence filed by the Beneficiaries on 15 August 2018 did not admit paragraphs 12, 13, 14 or 16. It admitted paragraphs 17, 18, 19, 20 and 21. In response to paragraphs 14 and 15, the defence asserted that the Trustee was entitled to security for any contingent liabilities and asserted that the Beneficiaries had offered to set aside monies for any CGT liability and had never denied that the Trustee was entitled to security for any contingent CGT liability.
The obvious difficulty with the stance of the Beneficiaries is that the quantum of any possible liability had not been determined. In those circumstances, had the Trustee sought judicial advice, following the filing of the defence to the cross-claim, it is highly likely that he would have been advised that he would be justified in prosecuting the cross-claim until such time as the quantum of liability for CGT, if any, had been established or until security over the whole of the interest of the Trustee in the Property or in the proceeds of sale of the Property, by way of charge over those assets, had been given to secure whatever liability for CGT and costs the Trustee might incur.
There is no absolute principle that requires a trustee to obtain judicial advice before commencing or defending legal proceedings. If a Trustee who commences proceedings is successful in the proceedings, the Trustee will normally be entitled to be indemnified for the costs of prosecuting those proceedings. If a trustee is successful in defending proceedings brought against the Trustee in the capacity as trustee, the Trustee will normally be entitled to be indemnified in respect of the costs incurred in successfully defending the proceedings.
Ordinarily, the question of judicial advice is relevant only where a trustee commences proceedings which are unsuccessful or unsuccessfully defends proceedings brought against the trustee. However, the mere fact of being unsuccessful is, of itself, not sufficient to deprive a trustee of entitlement to indemnity in respect of the costs. It would be necessary, at the end of the day, for an inquiry to be conducted as to whether the Trustee acted reasonably in commencing proceedings or in defending proceedings in respect of which a trustee is unsuccessful. The part that s 69 of the Trustee Act plays is that that inquiry will be unnecessary if the trustee has sought advice and has been advised that commencing and prosecuting the proceedings on the one hand, or defending proceedings, on the other, would be justified.
To the extent that the High Court has said, in the passage cited by the primary judge, that a trustee "should" obtain judicial advice before commencing or defending proceedings, the High Court should be understood as saying no more than that it would be prudent for a trustee to seek judicial advice before commencing or defending proceedings. However, there is no legal obligation to do so. [11] The rationale for doing so is to avoid an argument at the end of the day as to whether it was reasonable to commence and prosecute the proceedings or to defend the proceedings.
In the present case, the question does not arise because the Trustee was successful in defending the proceedings brought by the Beneficiaries and was successful in prosecuting the cross-claim that he himself filed. Whether or not the costs that were incurred were unreasonable is not a question for this Court at this stage. In the circumstances outlined above, there is every reason to conclude that, had the Trustee sought judicial advice at any of the times indicated above, the advice would have been as indicated above. That is to say, the Trustee would have been advised that he would be justified in defending the proceedings brought by the Beneficiaries unless appropriate security was provided for his liabilities as trustee and he would be justified in commencing the cross-claim and in prosecuting the cross-claim after the defence had been filed on behalf of the Beneficiaries.
Ultimately, that appears to be the conclusion reached by the primary judge. Thus, his Honour recognised the lack of prudence on the part of the Trustee in failing to seek judicial advice and, in essence, penalised him for doing so by imposing maximum amounts on the costs that the Trustee is entitled to recover from the trust property. Nevertheless, there was no error on the part of his Honour in allowing indemnity to the trustee notwithstanding that he did not at any time seek judicial advice before defending the proceedings and commencing and prosecuting the cross-claim.

Denial of Procedural Fairness

The Beneficiaries contend that a series of procedural rulings made by the primary judge deprived them of their right to a fair hearing. Initially they asserted that, if the Court was not minded to grant the primary relief sought in the draft notice of appeal, there should be an order, under s 75A(10) of the Supreme Court Act 1970 (NSW), that the proceedings be remitted to the Equity Division to be heard by a judge in that division other than the primary judge. In the course of the hearing of the appeal, the Beneficiaries resiled from the position of seeking a new hearing in the Equity Division.
In support of the grounds relating to denial of procedural fairness, the Beneficiaries relied on an affidavit sworn by Mr David Shad on 23 March 2021. Mr Shad is the solicitor for the Beneficiaries. Mr Shad said that, on 9 March 2020, the primary judge's associate sent an email to the parties advising that the proceedings were listed for one hour of final submissions at 9:30am on 9 April 2020. On 13 March 2020, the Beneficiaries emailed to his Honour's associate a written outline of submissions, which were said to be "for oral argument on 9 April 2020". On 20 March 2020, the primary judge's associate sent an email to the parties advising that, because of the COVID-19 pandemic, the Court intended to have only counsel present in Court and the parties and solicitors could appear by audio visual link. On 25 March 2020, however, his Honour's associate sent an email advising that the matter would be heard on the papers and that any party opposing such a course should explain why a live hearing was still sought.
On 25 March 2020, Mr Shad sent an email to the primary judge's associate indicating that the Beneficiaries had no objection to the matter being determined on the papers, provided that there was a four-page limit for further written submissions. On 31 March 2020, Mr Shad sent a further email to his Honour's associate with proposed directions to facilitate further submissions for the proceedings to be determined on the papers. His Honour's associate responded on 1 April 2020, indicating that his Honour expected the parties to rely on their current submissions. The Beneficiaries complain, that in those circumstances, they were denied the opportunity to make further submissions after the vacation of the proposed live hearing scheduled for 9 April 2020.
On 2 April 2020, the solicitors for the Trustee sent an email to the primary judge's associate proposing directions that the parties provide a schedule identifying the affidavits on which they intended to rely, the evidence that they intended to tender and the submissions that they intended to rely on, being the submissions already filed and served. The letter said that it was the Trustee's position that the parties not engage in taking formal objections to evidence but instead leave it to the Court to give each part of the evidence appropriate weight, since formal objections would increase the cost of the proceedings. Mr Shad sent an email to the primary judge's associate saying that the Beneficiaries opposed an effective waiver of the rules of evidence and that, as a matter of procedural fairness, objections needed to be determined.
Later on 2 April 2020, the primary judge's associate sent an email to the parties directing them to serve and provide to his Honour a schedule of objections and a schedule in response to objections. The email noted that a party may decide not to reply formally to the objections advanced by the other side and would be excused from doing so. His Honour said that, if a party took that course, the Court would consider the objection and take it into account as a matter of how it weighs the evidence objected to. The parties provided a schedule of objections and responses in accordance with that direction.
On 1 December 2020, Mr Shad sent an email to the primary judge's associate inquiring as to the rulings on evidence. In response, his Honour's associate sent an email advising the parties that his Honour had dealt with objections in accordance with the above note.
The Beneficiaries complain that they would never have consented to the course adopted by the primary judge in circumstances where, in his affidavit of 6 March 2020, Mr Shad said that he would not be responding to inadmissible evidence given by the Trustee's solicitor in an affidavit of 20 February 2020.
The Beneficiaries complain that the primary judge made findings criticising them for not urging the Trustee to seek judicial advice, but it is unclear to what extent those findings had any impact on his Honour's conclusions and orders. Nevertheless, they say, the criticism of them and their solicitor's failure to urge the Trustee to seek judicial advice was not immaterial. They complain that they were not given notice by his Honour that findings of that nature were being contemplated.
The Beneficiaries contend that the primary judge should have allowed them the opportunity of filing further written submissions once a decision had been made for the hearing to be conducted on the papers. They assert that the failure to do so was a denial of procedural fairness in so far as the submissions that had been filed on 1 April 2020 were described as an "outline", which was to be supplemented by oral submissions. They assert that the ruling was inconsistent with the email from the primary judge's associate of 25 March 2020.
Finally, the Beneficiaries complain that considering objections and responses as a matter of weight was to apply only if neither party formally replied to an objection. However, both parties advanced objections and responses to the objections. Therefore, the Beneficiaries assert, they were entitled to assume that there would be formal rulings and they did not consent to the course adopted by his Honour. They say that, in the circumstances, they were denied a fair hearing and lost the opportunity to object and seek exclusion of material that was inadmissible and may have had a material effect on the outcome of the issues still in dispute.
In his reasons of 30 November 2020, the primary judge observed that the Beneficiaries did not suggest to the Trustee that he seek judicial advice. His Honour's observation is not entirely clear when he said: "With different trust management and legal guidance to take advantage of Trustee Act 1925, s 63 judicial advice, the beneficiaries could have preserved much more of their trust property than they have." [12] It is by no means clear whether his Honour was suggesting that the Beneficiaries should have urged the Trustee to seek judicial advice. It is difficult to comprehend what "different trust management and legal advice" could have been adopted by the Beneficiaries. Other observations by his Honour suggest that different trust management and legal advice on the part of the Trustee and his solicitors may have preserved much more of the trust property. In any event, any failure by the Beneficiaries to urge the Trustee to seek judicial advice does not appear to have been determinative of any matter on the part of the primary judge.
The Beneficiaries have not indicated what further submissions would have been advanced by them, had they been afforded the opportunity of providing further submissions. There is nothing before this Court to indicate that any further submissions that may have been made by them would have been material to the decision of the primary judge. Further, an assumption should be made that this Court has now received all submissions that would have been made to the primary judge.
Finally, this Court has not been taken to any evidence to which objection was taken by the Beneficiaries. Thus, nothing has been advanced to this Court to indicate that the primary judge relied on inadmissible evidence in reaching any of the conclusions that he reached.
There was no denial of procedural fairness. Grounds 4, 6 and 7 have no merit.

Costs of the Motions

Having reserved the costs of the Stay Motion on 8 November 2019, in his reasons of 30 November 2020, the primary judge refused the Beneficiaries' application that their costs of the Stay Motion be paid by the Trustee. The Beneficiaries contend that the primary judge erred in failing to order the Trustee to pay their costs. However, in essence, the Stay Motion was by no means entirely unsuccessful.
Thus, on 8 November 2019, while his Honour ordered that the Stay Motion be dismissed, his Honour noted that the Court had used the Stay Motion as a basis for making the further orders and directions that followed. Thus, his Honour:

directed the parties to indicate whether they wanted the Court to grant any part of the final relief identified in the reasons of 8 November 2019 as immediately available on the existing evidence and pleadings;
directed the parties to indicate whether they want the Court to decide the question of an appropriate mechanism for securing or satisfying the Trustee's indemnity over trust assets in respect of the crude and contingent liabilities and, if so, to provide draft directions for that question to be determined; and
referring the proceedings to the Court's next mediation under the Civil Procedure Act 2005 (NSW).

The Beneficiaries complain that there was no compelling reason why costs should not have followed the event and reject the reasons proffered by his Honour. Thus, they say, the outcome of the Stay Motion could have been achieved by a directions hearing but they had to expend costs to oppose the relief being sought by the Trustee and were successful in doing so. They say that his Honour did not explain why the Trustee should have brought the Stay Motion. The Beneficiaries could rely on their complaint about the failure to obtain judicial advice as a basis upon which his Honour ought to have ordered the Trustee to pay the costs of the Stay Motion.
The Beneficiaries assert that the Trustee put the parties to the expense of a hearing seeking a stay of the entire proceedings but was ultimately unsuccessful in obtaining that relief. There was no departure from proper principle by his Honour in declining to make an order that the Trustee pay the costs of the Stay Motion.
In relation to the Payment Motion, the Beneficiaries point out that the monies released to them were not trust property and that the Trustee had no proper basis for refusing to consent to the release of those funds to them. They complain that they were put to the expense of prosecuting the Payment Motion before the Trustee eventually consented to the relief sought. They say that, in the circumstances, the Trustee should be treated as having capitulated and, accordingly, should have been ordered to pay the costs, far from being given indemnity costs.
However, in ordinary circumstances, a trustee is entitled to be indemnified in respect of legal costs incurred in the performance of his duties as trustee. It was not unreasonable for the Trustee, in the circumstances, to require formality. The proceeds of sale of the Property were paid to the Independent Solicitor pursuant to the orders made by the primary judge. It was necessary for the Court to make an order for part of the funds to be released to the Beneficiaries. There was no error in the exercise of the discretion as to costs in relation to the Payment Motion.

Conclusion

Having regard to the matters of principle raised by grounds 1, 2, 3, 5 and 10, I would grant leave to appeal in relation to those grounds. However, the appeal on grounds 1, 2, 3, 5 and 10 should be dismissed. I would refuse leave to appeal in relation to the other grounds. The Beneficiaries should pay the Trustee's costs of the appeal. The Trustee is entitled to be indemnified in respect of his costs of the appeal from the funds remaining with the Independent Solicitor.

Endnotes

[2019] NSWSC 1550.
See In Re Beddoe [1893] 1 Ch 547.
Citing Northey v Juul [2014] NSWSC 464 at [96].
See Gatsios Holdings Pty Ltd v Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29; ATPR 41-864.
See Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 at [93] ("Macedonian Orthodox").
See Segal v Osborne (No 2) [2016] NSWSC 1328 at [17].
See Macedonian Orthodox at [72].
See Macedonian Orthodox at [74].
See Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226; [1998] HCA 4 at [48].
See Macedonian Orthodox at [74].
See Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v Bishop Irinej Dobrijevic (No 3) [2017] NSWCA 109 at [42] (Payne JA; Ward JA and Gleeson JA agreeing), citing Bovaird v Frost [2009] NSWSC 917 at [32] (Brereton J); Wales v Wales [2014] VSCA 101 at [85]-[87] (Ashley JA; Almond AJA agreeing); see also Grizonic v Suttor [2011] NSWSC 471 at [60] (Brereton J).
See Ludwig v Jeffrey (No 2) [2020] NSWSC 1677 at [1]. 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: 26 October 2021

HEADNOTE [This headnote is not to be read as part of the judgment] The appellants (the Beneficiaries) and the respondent (the Trustee) were the registered proprietors of a house in Chester Hill (the Property). The Beneficiaries requested that the Trustee transfer his legal interest in the Property to them, which he refused to do until a question on Capital Gains Tax (CGT) had been determined. Proceedings were brought in the NSW Equity Division to complete the transfer. It was subsequently established that the Trustee would have no liability for CGT, and the Property was sold. Despite the primary judge considering that the Trustee, together with his legal advisors, should have sought judicial advice, the primary judge determined that the Trustee was entitled to be indemnified for legal costs incurred defending the proceedings. By way of penalisation, the primary judge imposed maximum amounts on the costs the Trustee was entitled to recover from the trust property. The Beneficiaries appealed from the decision below on a number of grounds. The principal issues before this Court were: 1. whether the Trustee should have sought, but failed to obtain judicial advice; 2. whether the following resulted in a denial of procedural fairness to the Beneficiaries: 1. not being provided an opportunity to make further submissions following a hearing vacated by the Court; 2. the Court's failure to determine the matter in accordance with the Evidence Act 1995 (NSW); and 3. the Court's failure to notify the Beneficiaries of its consideration that the Trustee should have obtained judicial advice. 1. whether the Trustee should be indemnified for in respect of notices of motion brought in the proceedings. Held by Emmett AJA (Meagher JA and Brereton JA agreeing) dismissing the appeal: Issue (1) - obtaining judicial advice (1) The Trustee was entitled to be indemnified or exonerated out of the property of the Trust for any liability that he incurred in his capacity as trustee. Judicial advice, had it been obtained would have suggested that resisting the relief claimed by the Beneficiaries was justified in circumstances where the Trustee was not provided with adequate security upon the transfer or sale of the trust property, for any liability he may have incurred for CGT as a trustee or for legal costs incurred in discharging his duties. Ordinarily, the question of judicial advice is relevant only where a trustee commenced proceedings which are unsuccessful or unsuccessfully defends proceedings brought against the trustee. There is no principle that requires a trustee to obtain judicial advice before commencing or defending legal proceedings: [82] - [84]. Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42; Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v Bishop Irinej Dobrijevic (No 3) [2017] NSWCA 109; Bovaird v Frost [2009] NSWSC 917; Wales v Wales [2014] VSCA 101; Grizonic v Suttor [2011] NSWSC 471. (2) The only basis upon which a judge would have been entitled to advise the Trustee to file a submitting appearance in proceedings seeking either a transfer of his legal interest to the Beneficiaries or the appointment of trustees for sale of the Property, is where the Trustee would be in no worse position had the orders so sought been made. The Court found that this was not so in this case: [69]. Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42. Issue (2) - denial of procedural fairness (3) There had been no denial of procedural fairness. The Beneficiaries had not indicated what further submissions would have been advanced if allowed; there was nothing advanced to the Court to indicate inadmissible evidence was relied on in the initial proceedings; and it was not clear that the primary judge was suggesting the Beneficiaries should seek judicial advice: [97] - [100]. Issue (3) - costs of prior notices of motion (4) The Trustee's motion to stay the entire proceedings was not entirely unsuccessful and there was no error of the primary judge in declining to order the Trustee pay the costs of that motion. Despite the Trustee ultimately consenting to orders sought, the Court found that the trustee was entitled to be indemnified in respect of legal costs incurred: [101]; [104] - [106].

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