Metropolitan Petar v Mitreski

28 The following is a summary of principles of law that I have taken into account in determining this application. Paragraphs [29] to [32] substantially follow written submissions on behalf of the defendants, which in my view correctly state the law in this regard.

29 A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in and about the execution of the trustee's trusts or powers: Trustee Act 1925 s 59(4). This provision is statutory recognition of the rule that a trustee is entitled to be indemnified out of the trust estate against all his proper costs, charges and expenses incident to the execution of a trust: National Trustees Executors and Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at 274 per Starke J, at 277 per Williams J (with whom Rich ACJ agreed at 273).

30 Part 52A r 42 of the Supreme Court Rules 1970 provided: "42 Trustee or mortgagee

(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."

The word "fund" extended to any property held on trust for any purpose: Part 52A r 3(a). Although Part 52A r 42 has now been repealed, it has been replaced by Uniform Civil Procedure Rules 2005 r 42.25, which is to the same effect. The entitlement to indemnity is not subject to an order being made by the Court to the effect that the trustee may exercise it or have the costs out of the estate.

31 In Drummond v Drummond [1999] NSWSC 923 Austin J at [43] - [47] gave a most useful summary of the principles as to the trustee's right to recover legal costs out of the trust fund: "[43] In Miller v Cameron (1936) 54 CLR 572, 578, Latham CJ explained that 'as a rule, a trustee is allowed his costs out of the trust estate if his conduct has been honest, even though it may have been mistaken'. In Re Weall; Andrews v Weall (1889) 42 ChD 674, 677, Kekewich J spoke of the 'tenderness which the Court is anxious to exhibit towards trustees honestly exercising discretion in discharge of their duties, often difficult and still more often thankless'. In Re Jones; Christmas v Jones [1897] 2 Ch 190, 197 the same judge said that 'a man who fulfils the difficult duties of an administrator, executor or trustee is, in common sense and common justice, entitled to be recouped to the very last penny everything that he has expended properly - that is to say, without impropriety - in his character of administrator, executor or trustee ...'. Thus it is normally the case that an executor who commences or defends an action in the capacity of executor is entitled to be indemnified out of the estate for the costs incurred in doing so, even if the litigation is unsuccessful, the executor's conduct is found to have been mistaken, and the other party in the litigation is held to be entitled to an order for costs.

[44] This exception to the normal rule that costs follow the event, which permits an executor to recover costs from the estate, is itself subject to some exceptions, as is plain from Latham CJ's reference to honest conduct and Kekewich J's reference to impropriety. There are two 'sub-exceptions' which are arguably relevant to the present case.

[45] The first is the sub-exception for 'impropriety'. As Kekewich J made clear in Re Jones , cases of impropriety include an executor taking or defending proceedings in breach of trust, or conducting the proceedings in such a way that the Court, on a general view of the case, regards the executor's conduct as 'not honestly brought forward' ([1897] 2 Ch 190, 198). Additionally, recourse to the estate may be denied to an executor 'where the claim is of monstrous character, that is, one which no reasonable man could say ought to have been put forward' (at 198). In Re Weall the trustees allowed a solicitor to deduct fees which were not properly chargeable to the life tenant from the rental income of the estate. Kekewich J observed that while mistakes or errors in judgment would not disentitle the trustees to an indemnity, the beneficiaries were entitled to expect 'reasonable prudence' of the trustees (42 ChD at 678 - 9).

[47] Secondly, the rule which gives an executor the prima facie entitlement to be indemnified out of the estate for costs relates only the costs incurred in the administration and distribution of the estate. Such costs are to be distinguished from costs incurred by an executor in furtherance of a personal interest: Miller v Cameron (1936) 54 CLR at 578 - 9; Re Jones [1897] 2 Ch at 197 - 8; Plimsoll v Drake (No 2) (Supreme Court of Tasmania, Zeeman J, unreported, 8 June 1995). Executors who pursue personal interests in litigation are 'not fighting for the estate any more than if they were not executors at all': Skrimshire v Melbourne Benevolent Asylum (1894) 20 VLR 13, 18 per Madden CJ. An executor who prosecutes or defends proceedings in the capacity of, say, creditor or beneficiary of the estate rather than in the capacity as executor cannot expect to recoup the costs of litigation from the estate simply on the basis that he or she is also an executor. In Miller v Cameron Latham CJ took the view that a trustee who defended an action for his removal was thereby representing his own interests and not those of the trust estate. In Plimsoll v Drake Zeeman J reached a similar conclusion where a trustee unsuccessfully asserted the right to demand a release before distributing the trust estate to the beneficiaries."

In National Trustees Executors and Agency Co of Australasia Ltd v Barnes supra Williams J said at 278 - 279: "The main contention has been whether these costs are recoverable under the indemnity. The learned Chief Justice of the Supreme Court of Victoria decided that they were not because they were incurred by the trustees in defending themselves against a personal liability and therefore on their own behalf and not for the benefit of the trust. He considered the principle to be that the costs of trustees of defending such a suit are chargeable against the estate in all cases in which the defence is for the benefit of the estate. … If it is necessary to show such a benefit, then the fact the trustees establish that they have administered properly would be sufficient, but I am satisfied that it is not necessary to do so. Such expressions as acting 'for the benefit of' 'with reference to' or 'on behalf of' the trust estate or in the discharge of his duty as a trustee are used indiscriminately in the judgments, but they all mean the same thing, namely, that the question is whether the costs, charges and expenses are properly incurred by the trustee as an incident of his administration of the estate. If a trustee is sued by beneficiaries who complain of some act or omission by the trustee, he is entitled to defend his conduct as an incident of such administration ( In re Llewellin; Llewellin v Williams (3)). Even if he fails in the suit, he may be allowed his costs out of the estate, but, if he succeeds, as in this case, he is clearly entitled thereto."

This passage was cited with approval by Kellam J in Hayman v Equity Trustees Ltd (2003) 8 VR 548 at [63].

32 The fact that, in defending a suit for the benefit of a trust estate, a trustee also defends his own character and actions as trustee does not disentitle him to indemnity for his costs: Walters v Woodbridge (1878) 7 Ch D 504 per Jessel MR at 509 - 510 and James LJ at 510, with each of whom Thesiger LJ agreed at 510; Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 per Giles JA at [259], with whom Meagher JA agreed at [3]; and per Young CJ in Eq at [430].

33 In my view, this is not a case in the category of Re Beddoe; Downes v Cotton [1893] 1 Ch 547, where a trustee's right to indemnity out of the trust fund is finally determined after litigation is concluded. Nor is it a case where what is sought is a pre emptive order, ie, a finally binding order in relation to a trustee's costs before the determination of the issues in the proceedings: cf Re Biddencare Ltd [1994] 2 BCLC 160; Alsop Wilkinson (A Firm) v Neary [1996] 1 WLR 1220. This is an application to restrain the use of funds on an interlocutory basis. In this case, as has been plain at all times, if the trustee utilises funds in a way that is ultimately determined not to be justified, it will be liable to repay them.

34 The above principles apply where the fund to be resorted to for costs is undisputedly or has been found to be subject to the trust. In this case, it is contested that some of the property involved is subject to the trust. In relation to this property, the matter is more akin to the area of Mareva orders, where the principle is applied that, even where the fund under restraint may be used up, the restraint will not be permitted to prevent the defence of the proceedings. Thus, in Chandler v Church Chancery Division 21 December 1987 unreported, Harman J said: "The litigant is entitled to be heard and have his day in court. The question for me is at whose expense should he have that day? I have to balance the fact that this is likely to be a long, heavy and complicated case involving vital matters for Mr Church, against the fact that if I grant this application and Mr Church is found to be a defaulting trustee he will have spent the whole trust fund in defending himself."

And in PCW (Underwriting Agencies) Ltd v Dixon [1983] 2 All ER 158 at 164 Lloyd J (in the Commercial Court of the Queen's Bench Division) said: "The distinction between the ordinary Mareva plaintiff (to use Ackner LJ's phrase) and the case where the plaintiff is laying claim to a trust fund on the so-called wider ground, is thus clear. In the latter case the whole object is to secure the trust fund itself so that it should be available if the plaintiff should prove his claim. In the former case by contrast the plaintiff is not entitled to any security. The purpose of the jurisdiction, as is now clearly established, is not to provide the plaintiffs with any form of pre-trial attachment. It is simply to prevent the injustice of a defendant removing or dissipating his assets so as to cheat the plaintiff of the fruits of his claim.

Can the plaintiffs then bring the present case within the wider jurisdiction? I have grave doubts. Both in A v C [[1981] QB 596] and Chief Constable of Kent v V [[1983] QB 34] the claim related to specific identifiable bank accounts. It is difficult to regard the whole of a man's assets as a fund in that sense, even though his assets may in part contain or be derived from money improperly come by. But even if I could regard the whole of the defendant's assets as a trust fund, I would be quite unwilling to uphold the ex parte order in the present case on that basis. All injunctions are, of course, in the end discretionary. I would regard it as unjust in the present case if the defendant were compelled to reduce his standard of living, to give up his flat or to take his children away from school, in order to secure what is as yet only a claim by the plaintiffs. I would regard it as even more unjust that he should be prevented from defending himself properly (for that is what it would amount to), merely because the plaintiffs say that in doing so he is using somebody else's money.

In my view justice and convenience require in the present case that the first defendant should be allowed the means of defending himself, even if it could be said that the plaintiffs had laid claim to the whole of his assets as a trust fund. Similarly justice and convenience require that he should be able to pay his ordinary bills and continue to live as he has been accustomed to live heretofore. So whether the case is put on the basis of the Mareva jurisdiction or the so-called wider jurisdiction to trace in equity I reach the same conclusion."

See also the useful summary of these and other authorities by Michael Burton QC sitting as a deputy High Court Judge in United Mizrahi Bank Ltd v Doherty [1998] 1 WLR 435. And see generally Biscoe on Mareva and Anton Piller Orders (2005) [6.21].

35 In my view, the matter falls for consideration under three heads, to which different considerations apply: first, in relation to all property up to the time it became clear that the plaintiffs were claiming that any use of the sixth defendant's property was a breach of trust; secondly, thereafter in relation to the use of the Schedule A property; and, thirdly, thereafter in relation to property not conceded to be subject to the declared trust.

36 As to the first, that is costs incurred before the allegation of breach of trust became plain, the plaintiffs have a stronger prima facie case, at least in relation to the Schedule A property, since there is no doubt that that property is subject to the declared trust. There is still contest as to whether or not the various conduct complained of was in breach of trust. In this case, there are much the same matters to be considered in the balancing exercise as are weighed in [39] and [40] below in relation to the third head. However, on this head there are discretionary considerations, which in my view will, upon any balancing of the relevant considerations, lead to the conclusion that injunctive relief ought be refused. These arise from delay by the plaintiffs and hardship to others. The plaintiffs, the applicants for relief, stood by for months on end before taking any objection to the use of trust property to fund the defence of the proceedings. The Attorney General, who is charged with supervision of the public interest in charitable trust funds and who is a party to the proceedings, has not joined in the plaintiffs' application, indicating in submissions made to the Court that he supports neither the plaintiffs nor the defendants. During the lengthy period which it took the plaintiffs to reach the stance they have now taken, the defendants continued to incur costs and their lawyers continued to do large amounts of work on the basis that the objection to this course had not been formulated. By reason of the course of action which the defendants and their lawyers have pursued since April 2004, there is no reason to doubt that, had their conduct been challenged earlier, they would have applied to the Court earlier for judicial advice in respect of the Schedule A property. The work having been done, it would inflict grave hardship on both the defendants and their lawyers to grant relief in respect of costs incurred on that basis. See Meagher, Gummow & Lehane's Equity Doctrines and Remedies (4th ed, 2002) [21-375], [21-380].

37 It may be suggested that this situation should be regarded as having come to an end when it became plain to the sixth defendant that any expenditure by it on costs was objected to, ie, about the time the summons for judicial advice was taken out in April 2004. Until about that time, the warnings given were in relation either to a course of conduct that was not then being pursued or to a course of conduct that was not within the pleadings as they then stood. However, the Court has held that judicial advice should be given only prospectively. In effect, this means prospectively from 7 May 2004, when the first Palmer judgment was delivered, authorising conduct from that date. There was no delay by the sixth defendant after the filing of that summons. The due prosecution of those proceedings resulted in preliminary judicial advice being given only about a month after the commencement of those proceedings. As I see it, advice will not be given in those proceedings concerning expenditure incurred before then. In my view, injunctive relief should be refused in relation to costs incurred by the defendants in these proceedings up to and including 7 May 2004.

38 So far as the second head is concerned, the defendants have in effect conceded by their application for judicial advice that the Schedule A property should not be used for costs, except in accordance with judicial advice, at least as to costs incurred since the time when they first obtained judicial advice. They took that course of action and have continued and continue to prosecute that application for judicial advice. The application is only in relation to the Schedule A property, and the Court has made it plain that that is the correct approach, since it will not give advice in relation to property not conceded to be subject to the trust. Furthermore, the Court will give advice only prospectively, ie, in relation to costs yet to be incurred. I do not propose to allow the defendants to pursue one course in the proceedings for judicial advice and another course in these proceedings, as to the appropriate use for costs of the Schedule A property. In general terms, I propose to continue, in relation to the use of the Schedule A property to pay costs, the injunction now current. It will apply in relation to costs incurred after 7 May 2004. That may be inconvenient, because the defendants' authorisation to use such funds was current only to 19 July 2005. But that is by reason of complications in the proceedings caused by the actions of the parties, over which I have no control.

39 Thirdly, the situation in relation to the property not conceded to be subject to the declared trust in respect of costs incurred after 7 May 2004 is more difficult. This is because the plaintiffs' prima facie case is weaker, in that it is not conceded, but hotly contested, that this property is subject to the trust. Further, the property involved is not established to be subject to the declared trust. On their application in respect of this property, the plaintiffs have established that there is a serious question to be tried, resolution of which in their favour would establish that the property is subject to the declared trust. They say that, in some regards at least, they have a strong case. The defendants contend, and I accept, that they have established a countervailing case that this property is not subject to the declared trust. I have already said that this is not one of those cases in which the relative strengths of the cases should be determined on the interlocutory application: see [3] above. It is, indeed, a case where that would be impracticable, bearing in mind the convoluted state of this litigation. I do not propose to attempt to untangle the tangled skein relating to the various types and items of property into categories and determine the strength of the case in respect of each. In addition, of course, there is in this case also strong contest as to whether any of the conduct complained of was in breach of trust.

40 In face of the competing prima facie cases, the balancing exercise which the Court must conduct was adverted to thus in submissions put to the Court by Mr Lancaster, of counsel on behalf of the Attorney General: "In the Attorney's position your Honour is faced with, with respect, a very difficult decision on the balance of convenience by reason in large part, on the one hand, with what should be the Court's desire to protect what is reasonably arguably charitable church property and, on the other hand, to permit the party that holds it to run a case about whether or not that is so."

The relevant considerations include the following. Since the Court is not making a pre emptive costs order (indeed, any costs order), the sixth defendant will be liable to repay any moneys expended, if it is ultimately found they should not have been expended in that way. On the other hand, there may be doubts as to their recoverability. But the defendants are likely to be precluded from defending the proceedings, if the sixth defendant's property may not be used for that purpose. To the extent that an injunction is granted, the plaintiffs' undertaking as to damages is of dubious worth, bearing in mind the six figure sum outstanding under a judgment debt in favour of their former solicitors in respect of their own costs of these proceedings.

41 The conclusion that I have come to by reference to all the relevant considerations is that there should be no injunctive relief in relation to the sixth defendant's property, other than the Schedule A property. In relation to that subject matter, I do not consider that any of the defendants' submissions put as precluding any injunctive relief at all at the plaintiffs' suit should preclude relief. Most of those submissions are based on questions of fact which cannot or should not be determined on this application. In relation to the second and third heads, those submissions do not arise for decision, in view of my conclusion that relief should be refused.

42 As I have already indicated, because of the defendants' course in seeking judicial advice in relation to the Schedule A property, there should be a restraint upon the use of that property except in accordance with judicial advice given by the Court or as otherwise permitted by the Court. I have already excepted from the temporary injunction still current the costs of conducting this motion and any appeal therefrom and I propose to continue that exception; bearing in mind the complicated and difficult nature of the application and its importance to the continued representation of the defendants in the proceedings generally, it has been and continues to be vital that the defendants be represented thereon.

43 Short minutes should be brought in to give effect to this decision.

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.