Metropolitan Local Aboriginal Land Council v Metropolitan Aboriginal Assoc

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1877/02 METROPOLITAN LOCAL ABORIGINAL LAND COUNCIL V METROPOLITAN ABORIGINAL ASSOCIATION INCORPORATED JUDGMENT 1 HIS HONOUR: By notice of motion filed on 18 February 2003, the defendant ("MAAI") seeks judicial advice under s 63 of the Trustee Act 1925 (NSW) and the Court's inherent jurisdiction on the following question: "Whether MAAI which: (a) holds property (the "Settled Property") on charitable trusts; (b) has, in its capacity as trustee, borrowed moneys for the purpose of the trusts (the "Loan Moneys"); (c) has received a demand from the lender ("MLALC") to the effect that: i. the Loan Moneys are payable; and ii. MLALC, at the time the loan was made, retained a beneficial interest in the Loan Moneys so as to support the existence of a trust being, or being in the nature of, a "Quistclose" trust; (d) disputes: i. that the Loan Moneys are repayable; and ii. that MLALC, by reason of the facts alleged by it in support of its claim to a trust, has any beneficial interest in the Loan Moneys or any property (including the Settled Property); (e) is engaged in legal proceedings with MLALC for a determination of competing allegations about these questions in dispute; would be justified in applying property which is: (f) part of the Settled Property subject to such (if any) entitlements MLALC has or might be held by the Court to have arising from its allegations; (g) and might, if MLALC's allegations are upheld, be part of property the subject of a trust in favour of MLALC, in the payment of reasonable costs (including fees and disbursements charged by legal practitioners) in the conduct of the contested proceedings." 2 The plaintiff, MLALC, is the Local Aboriginal Land Council for the area of central and northern Sydney, constituted under the Aboriginal Land Rights Act 1983 (NSW) (the "ALR Act"). Members of MLALC must be adult aborigines. 3 In 1996 MLALC became interested in purchasing a property at 150-152 Elisabeth Street, Sydney (the "Land"), and approached the Indigenous Land Corporation ("ILC") for assistance. ILC has the power under s 191D of the Aboriginal and Torres Strait Islander Commission Act 1989 (Cth) to acquire interests in land for the purpose of making a grant to an aboriginal corporation. ILC purchased the Land in September 1998. MLALC contends that it was always ILC's intention to transfer its interest in the Land to an aboriginal corporation. 4 MAAI was formed by MLALC in 1998, as an incorporated association under the Associations Incorporation Act 1984 (NSW). Under its rules, the membership comprises adult aborigines who reside within a defined metropolitan land area, or who have a cultural connection with the land within the area, who in each case have applied for membership and have been accepted by MAAI's committee. MLALC's evidence is that it formed MAAI to act as its "commercial arm" and to hold the Land on trust. 5 On 9 December 1998 MAAI became the trustee of the Eora Trust. The trust deed of that date is in evidence. Pursuant to that deed, ILC as settlor settled trust property upon MAAI for charitable purposes relating to the aboriginal community who reside in metropolitan Sydney, or who have a cultural connection with the Land. 6 ILC and MAAI entered into a Deed of Grant of the same date, by which the ILC granted its interest in the Land to MAAI, on certain conditions. The conditions included the requirement that aboriginal persons would continue to have a controlling interest in MAAI, and that MAAI would comply with the terms of the Eora Trust Deed. The Deed of Grant stipulated that MAAI was to ensure that the Land was used in accordance with the provisions of the Eora Trust Deed and not for the profit of any member or employee of MAAI. The deed provided that MAAI was not to mortgage, charge or otherwise deal with its interest in the land without the consent of ILC. 7 MLALC and MAAI entered into a loan agreement on 1 December 2000. The agreement recited that MLALC wished to provide funds to MAAI as trustee of the Eora Trust to assist it in carrying out conservation works and refurbishment to the building on the Land. It provided (in clause 2.1) for MLALC to lend $8 million (and further amounts as may be agreed) to MAAI as trustee of the Eora Trust, "to be used by [MAAI] only for carrying out of conservation works and refurbishment works to the building on the Land and in accordance with the Eora Trust so far as applicable in respect of the Land." Clause 3.1 stated that MLALC would apply the funds advanced only for the purposes set out in the agreement, and not for the profit or gain of the any member or employee of MAAI. Clause 4.1 provided that MAAI would repay the funds advanced pursuant to the agreement only in the event of disposal of its interest in the Land and only out of the proceeds of any such disposal. Interest was payable by MAAI under clause 4.2. By clause 4.3 MAAI charged its interest in the Land with repayment of the funds advanced pursuant to the agreement. MAAI agreed by clause 5 to lease part of the first floor of the building on the Land to MLALC. 8 According to MAAI's Statement of Facts filed for the purposes of the present application, MLALC commenced lending it money early in 2000, and by the time of the making of the loan agreement on 1 December 2000, a substantial part but not all of the loan had been advanced. In its Outline of Principal Contentions of Fact and Law MLALC asserts that it advanced MAAI a total amount of $9,104,784 during the period between January and November 2000. 9 On 13 March 2002 MLALC instituted proceedings against MAAI. Eventually an amended statement of claim was filed on 2 December 2002, claiming that it had advanced $9,104,784 pursuant to the loan agreement, of which only $1 million had been repaid. It alleged that MAAI had applied some of the funds advanced to it for purposes other than carrying out conservation works and refurbishment works to the building on the Land. It appears that the disputed payments relate to consulting services in connection with the work of heritage architects, payment in respect of an aboriginal festival called the Budyari Festival, payment in respect of a joint venture concerning the building and operation of aged care facility in Belrose, and payment for the purchase of furnishings. MLALC claimed that $2,919,483 had been misapplied, and sought to recover that sum as money had and received by MAAI for the use of MLALC. It alleged in the alternative that the money advanced by MLALC to MAAI had been entrusted to MAAI on the condition that it be used only for the purposes set out in the loan agreement. It alleged that this condition had failed and that MLALC was entitled to payment of the sum of $2,919,483 pursuant to a secondary trust for repayment or in the alternative, pursuant to a constructive trust for the benefit of MLALC. It also alleged that it had terminated the loan agreement on 19 November 2002 and that consequently MAAI was obliged to repay the whole of the advanced funds (less the $1 million already repaid) in the sum of $8,795,888.49. The amended statement of claim pleaded that the obligation to repay was based upon unjust enrichment or a trust or equitable obligation to account. 10 The allegations that the moneys advanced by MLALC were subject to trust obligations appear to be based, at least partly, on the principle emerging from Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, as applied in later cases including the recent decision of the House of Lords in Twinsectra Ltd v Yardley [2002] 2 AC 164. They were not pleaded in the statement of claim in the form originally filed. According to MAAI's Statement of Facts, the first time MAAI became aware of the trust obligations was on 25 November 2002, when its solicitors saw a draft of the amended statement of claim. 11 By its defence dated 13 December 2002, MAAI admitted that it had received $8,679,221 from MLALC, and contended, amongst other things, that · on the true construction of clause 4.2 of the loan agreement, interest on the loan was due and payable only in the event of disposal of the Land; · any obligation of MAAI as to the permissible use of the funds applied (if at all) only from and after the date of the loan agreement, namely 1 December 2000, and only in respect of funds advanced after that date; · the relief claimed by MLALC was claimed for improper purposes, as part of a continuing attempt by Robert Welsh and certain other office holders of MLALC to prevent MAAI from continuing to hold the Land and from securing income by leasing part of the Land, in circumstances where MAAI did not agree to a proposal to open a licensed club with poker machines in the building or to pay Ray Welsh (Robert Welsh's brother) money that had been demanded. 12 By a cross-claim dated 13 December 2002, MAAI alleged against MLALC that: · it was agreed between them that rent due by MLALC to MAAI in respect of the lease of part of the first floor of the building on the Land would be set off against any payment of interest otherwise required under the loan; · it was their mutual intention that MAAI would enter into commercial leases of lettable parts of the building so as to provide ongoing funds for the benefit of the Eora Trust and the ongoing maintenance and conservation of the building; · MLALC was aware of MAAI's participation in the Bawaga Joint Venture, under which it was essential that MAAI be the registered proprietor of certain land in Belrose to be used for the purposes of an aged care facility, and in various ways MLALC breached its obligations with respect to the Bawaga Project; · MLALC failed to consent to a lease of ground floor shop premises (the "Hermida Lease") within a reasonable time; · MLALC failed to consent promptly to a proposed lease of the top floor of the building on the Land to Smith Partners Corporation Pty Ltd, and this was a material cause of the decision of Smith Partners Corporation not to proceed with the lease; · MLALC failed to consent to registration of the positive covenants and the negative covenants in a draft deed between the Council of the City of Sydney, MAAI and the Cyprus-Helene Club dealing with the award of heritage floor space; · MLALC repudiated the lease of the first floor of the building on the Land; · MAAI paid $1 million to MLALC under mistaken beliefs and was entitled to recover that amount; · MAAI made payments with respect to the Budyari Festival totalling approximately $360,442. and the mutual intention of MAAI and MLALC was that MLALC would reimburse those amounts to MAAI. 13 The MLALC's Outline of Principal Contentions of Act and Law provides further information about the cross-claim and MLALC's responses. It is unnecessary to give further detail here. The proceedings have been listed for final hearing before Hamilton J on 10 March 2003, with an estimated duration of five days. 14 On 4 February 2002, prior to the commencement of the proceedings, MAAI gave an undertaking for the duration of three months that it would not disburse or commit any funds of MAAI other than for the purpose of meeting MAAI's debts in the ordinary and proper course of business. It appears from a letter written by MAAI's solicitors on 14 March 2002, that MAAI regarded the payment of legal fees in respect of the proceedings as falling within that undertaking. MAAI's Statement of Facts says that its solicitor holds about $28,000 on account of costs, but no drawings have been made by the solicitor since 1 December 2002 because of the trust allegations. The solicitor has unbilled costs of about $20,000, and memoranda of fees from counsel for nearly $13,000, none of which have been paid. Further costs will have been incurred on the hearing of the application and in preparation for the final hearing. 15 On 19 December 2002, MAAI's solicitors wrote to MLALC's solicitors seeking confirmation that MLALC would not object to MAAI using money originally sourced from MLALC to pay its reasonable legal costs and expenses, and that in the event that MLALC succeeded in its cross-claim, it would not pursue MAAI or its committee members or legal representatives for repayment of funds used to pay reasonable legal costs and expenses. The letter foreshadowed an application to the Court for directions if the confirmation was not provided. By letter dated 8 January 2003 MLALC's solicitors replied, saying that their client would not provide the confirmation sought by MAAI. 16 The letter of 8 January 2003 presented a dilemma for MAAI and its advisers. They were concerned that the effect of MLALC's amended statement of claim was to put them on notice that any money applied by MAAI towards meeting the costs of the contested proceedings might be held to be the subject of a trust in favour of MLALC, with the consequence that any application of the money otherwise than by payment to MLALC could be a breach of trust for which they might be personally held to account. That raised the prospect that in the absence of the protection that might be afforded by judicial advice, MAAI might be unable to conduct the proceedings because of its exposure (and the exposure of its officers and legal representatives) to claims in equity. 17 Consequently MAAI approached the NSW Bar Association and under its Legal Assistance Scheme, and the Bar Association referred the matter to Mr G Lindsay SC for an opinion for the purpose of an application for judicial advice. Mr Lindsay's opinion, dated 20 February 2003, is in evidence. 18 Mr Lindsay noted that the question for advice must be addressed in the context of the particular facts underlying it, but where a trustee seeks advice as to whether proceedings should be taken or defended, the Court is not bound at that stage to investigate evidence so as to make a finding determinative of any questions in dispute in the proceedings (citing Ford and Lee, Principles of the Law of Trusts (3rd ed, looseleaf) paragraph [17 030]). Although he expressed the opinion that the alleged trust obligations were inconsistent with the terms of the loan agreement, he noted that on the hearing of MAAI's application for judicial advice the Court's focus would be limited to the determination of whether it would be proper for MAAI to continue to participate in the proceedings, and the Court would not be called upon to make any finding determinative of the principal proceedings. 19 Noting that the respective rights of the parties could not be determined without MAAI having a reasonable and fair opportunity to participate in the final hearing, Mr Lindsay expressed the opinions that: · it was "incumbent upon MAAI to continue to participate in the principal proceedings in order to protect property of the Eroa Trust, which it undoubtedly holds on trust"; · "it would be open to the Court to make an order (under s 63 of the Trustee Act 1925 or the inherent jurisdiction of the Court) to the effect that the association would be justified in applying towards the payment of reasonable costs (including fees and disbursements charged by legal practitioners) in the conduct of the proceedings property which might be the subject of a final determination that [MLALC] is entitled to the property in equity."; · by securing to MAAI such protection as is afforded by s 63, the Court would facilitate the proper administration of justice by aiding MAAI to participate in the final hearing of the proceedings without any undue further exposure to liability; · by making its application for judicial advice with notice to MLALC, MAAI would strengthen any application for relief it might be called upon to make under s 85 of the Trustee Act. 20 MAAI has relied on Mr Lindsay's opinion in proceeding with the present application. It appears to be common ground that the conservation and refurbishment works referred to in the loan agreement have been completed. There is a balance of loan monies remaining. 21 MLALC contends that the money that it lent MAAI for conservation and refurbishment works was retained by MAAI in a separate account known as the "Eora Trust Account". However, MAAI's evidence suggests that the loan money has been mixed with other trust money. It appears that, as at 18 February 2003, MAAI held approximately $1.7 million in its bank account, mainly comprising the unexpended part of the loan from MLALC, although a small part of the figure reflects rents and interest. As at that date, the combined gross monthly rental from the building was $17,670.83. There are two tenants. Hermida is the tenant of the ground floor and has been paying rent from 1 December 2001. Up to January 2003 it paid approximately $140,910 in gross rent. The tenant on the second floor of the building is a Walt Disney Corporation subsidiary, which has been paying rent from 1 November 2002. The total gross rent paid by the Disney company up to and including January 2003 was approximately $22,112. By March 2003 the total amount of gross rent paid by the two tenants will be $198,354.15. 22 This application for judicial advice is directed to a specific question. It is not an application of the kind referred to in the English cases as a "Beddoe application" (Re Beddoe [1893] 1 Ch 547). A Beddoe application seeks the advice of the Court as to whether proceedings should be taken or defended by the Trustee: see Ford and Lee, Principles of the Law of Trusts (3rd ed, looseleaf), paragraph [17030]. When such an application is made, the Court determines whether the proceedings are justifiable so that the trustee's bringing or defending them would not be fruitless. An application for such an order is usually supported by an opinion by counsel as to the trustee's prospects of success in the proposed proceedings. In the present case, the question upon which advice is sought is not whether MAAI would be justified in maintaining its defences and cross-claim. It is whether MAAI would be justified in using trust money that might be held to belong in equity to MLALC, to pay for its costs of the proceedings. Mr Lindsay's opinion deals with MAAI's prospects of success in resisting the Quistclose trust claim, but he does not deal directly with MAAI's overall prospects of success in the defence and cross-claim. There is no evidentiary foundation for the Court to determine, at large, whether MAAI would be justifiable in defending the proceedings and pursuing the cross-claim, and the notice of motion does not invite the Court to do so. 23 Aided by Mr Lindsay's opinion, I have reached the view that there is a sufficient prospect of success in resisting the trust claims that, absent other considerations, it would be appropriate to give a direction in the terms sought in the notice of motion. I agree with Mr Lindsay that MAAI as trustee of the Eora Trust should be placed in a position where it is able to exercise its discretion and judgment to protect the trust property in litigation, without exposing itself or its officers or advisers to the risk of an automatic liability in equity should its defence be unsuccessful. A direction under s 63 will facilitate the administration of justice in this case by providing a limited degree of protection to the trustee within the scope of the specific terms of the advice given. 24 If MLALC were to succeed in its claims based upon trust, the consequence would be that almost all of the assets held by MAAI as trustee of the Eora Trust would belong in equity to MLALC. If, in that event, MAAI were allowed to deduct its costs and disbursements in the proceedings from trust funds, the practical effect would be as if MLALC were the required to pay MAAI's costs, notwithstanding that it had succeeded in the litigation. 25 This kind of problem was considered by Megarry V-C in Re Dallaway, Dec'd [1982] 1 WLR 756. In that case the deceased by his will left the bulk of his estate to be divided equally amongst his ten brothers and sisters. Subsequently one of the brothers and his wife alleged against the executor that the deceased had orally agreed to leave them his entire estate. The other brothers and sisters wanted that claim to be resisted. The executor issued summons for directions. 26 Megarry VC said (at 759-760): "I take it to be axiomatic that, acting with proper prudence, executors should take proper steps to protect their testator's estate against adverse claims. However, when there is an adverse claim not merely to a small part of the estate, but to the whole of it, the executors are in a difficult position; for if the claim succeeds, the decision establishes that nothing is theirs, and so they hold nothing out of which they can indemnify themselves for the costs in defending what they believed to be their estate. Executors who have an estate which is held to consist of nothing can have nothing out of which they can take their costs. However, in the parallel case of trustees of courts have tempered this icy logic. It has been held that where a settlement is set aside and so there is no property out of which the trustees can take their costs as of right, the Court nevertheless has a discretion to allow the trustees to take their costs out of the fund before handing it over to the successful litigants." 27 His Lordship went on to remark that the Court has a general jurisdiction in relation to costs, and he referred to the equivalent of our Supreme Court Rules, Part 52A rule 42. That rule provides as follows: "42 (1) Where a person is or has been a party to any proceedings in the capacity of trustee or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of the proceedings out of the fund held by the trustee or out of the mortgaged property, as the case may be, in so far as the costs are not paid by any other person. (2) The Court may otherwise order pursuant to subrule (1) only where - (a) the trustee or mortgagee has acted unreasonably; or (b) in the case of a trustee, he has in substance acted for his own benefit rather than for the benefit of the fund." 28 Megarry V-C observed that this rule did not apply directly to the problem before him because, since the adverse claim was practically to the entire trust estate, there was doubt whether there was any fund held by the trustee. But he regarded the rule as a significant indicator of the proper manner of exercising the Court's general discretion in relation to costs. 29 Exercising the Court's discretion as to costs, Megarry V-C gave a direction authorising the executor to continue to defend and to raise a counterclaim, adding a provision that, subject to any order made by the trial judge, the executor would be entitled to be indemnified out of the estate for all costs for which it was liable, even if the defence or counterclaim, or both, were unsuccessful. 30 It appears to me that his Lordship's reasoning is applicable to the present case, and I respectfully follow it. Consequently the fact that substantially all of the Eora Trust would belong in equity to MLALC if it succeeds in the proceedings should not prevent the Court from making an appropriate order with respect to MAAI's recoupment of its costs out of the trust fund, to the extent that it has shown that it would be justified in incurring those costs. 31 Counsel for MLALC made several specific submissions, which were designed to dissuade me from giving advice at all, or from giving affirmative advice. Each of those submissions has been unsuccessful, in my view, for reasons I shall now set out. 32 First, counsel for MLALC asserted that there was an additional factor in the present case not present in Re Dallaway. The additional factor is said to be that the application of any of the loan funds now held in the Eora Trust to the payment of costs and disbursements incurred by MAAI with respect of the proceedings would be in breach of clause 2.1 of the loan agreement. Counsel submitted that the Court should not provide judicial advice or make any other order or direction having the effect of condoning a breach of contract. 33 In my opinion is not appropriate for the Court to determine, at this stage, whether the application of loan money to the payment of costs and disbursements would be a breach of clause 2.1. That is a disputed matter. For one thing, MAAI's defence relies upon the fact that the bulk of the loan was made before the loan agreement was entered into. It may also be arguable that expenditure on costs and disbursements in proceedings arising out of a loan for the purpose of conservation and refurbishment works is arguably a use of funds incidental to the carrying out of those works and therefore "for" the carrying out of the works. There being what appears to be a genuine dispute between the parties about the scope of clause 2.1, it is inappropriate for the Court to seek to resolve the dispute in an application at this stage. The more important consideration, from the Court's point of view, is the consideration that persuaded Megarry V-C to make orders in Re Dallaway, namely that without the orders the trustee may be left without funds to conduct litigation for the purpose of protecting the trust fund. 34 Secondly, it has often been observed in cases that the Court will not give advice under s 63 of the Trustee Act where the advice would resolve a contest between the parties to the trust: Harrison v Mills [1976] 1 NSWLR 42, at 44-5; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 440. However, I do not accept the submission on behalf of counsel for MLALC that this principle would be infringed if judicial advice were to be given in the present case. This is not a case where the advice would resolve a matter that would be in contest between the parties at the final hearing. The application for judicial advice is contested, but the matter the subject of the advice is merely whether the trustee would be justified in applying trust property in payment of reasonable costs in the conduct of the proceedings, notwithstanding MLALC's trust claims. 35 In these circumstances, my opinion is that the case fits within the principles of Re Addstone Pty Ltd (1997) 25 ACSR 357 and MTM Funds Management Ltd v Cavalane Holdings Pty Ltd (2000) 35 ACSR 440, at 445. Here the issue the subject of the application for judicial advice is a particular issue of principle as to the use of the trust fund for payment of costs when the other party in the proceedings alleges that substantially the whole the trust fund belongs to it. The mere fact that there is contention over this point does not make s 63 an inappropriate procedure. After all, the Court's ultimate duty is to make sure that there is a fair trial, and in the absence of access to funds for the purposes of paying in costs and disbursements, it is hard to see how MAAI could secure a fair trial of the issues: compare, in another context, Miskell v Green (Supreme Court of New South Wales, Young J, unreported, 14 August 1998). 36 Thirdly, counsel for MLALC submitted that the question posed by MAAI for judicial advice was framed at too general a level. I do not accept this submission. It is true that none of the assumptions set out in the question go squarely to MLALC's points concerning the operation and effect of clauses 2.1, 2.4 and 3.1 of the loan agreement. It seems to me, however, that to make the question for advice more specific in that way would be to invite the Court to become involved in the resolution of the ultimate issues to be decided at the hearing. There is no need for the Court to be involved in such matters now, and the question as presently framed sets the assumptions at the right level. 37 Fourthly, counsel for MLALC submitted that MAAI is not impecunious, and therefore (in effect) the present case is outside the principle identified by Megarry V-C in Re Dallaway. It is true that the Eora Trust includes assets (principally rental receipts) which are not part of loan money over which MLALC asserts beneficial ownership. But the evidence indicates that the loan money is the overwhelming bulk of the trust fund, and it appears also that the loan money has been mixed with other receipts. In those circumstances, it seems to me that Megarry V-C's reasoning is applicable. 38 Finally, counsel for MLALC submitted that the application should be, if properly brought, an application for costs in the proceedings. I disagree. The question raised by the application is whether MAAI as trustee would be justified in using certain trust funds for the payment of the costs it will be incurring in respect of the hearing of the preceding. The application raises a particular point of principle, appropriately dealt with by the giving of judicial advice. Conclusion 39 MLALC's challenges to the application for judicial advice have failed. I have decided that the Court should give judicial advice by answering, in the affirmative, the precise question set out in the Statement of Facts that accompanies the Notice of Motion. In doing so, I recognise the limited scope that question. 40 I shall hear the parties on the question of costs of the application.

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