Nolan v Collie & Merlaw Nominees Pty Ltd

[ 2003] VSCA 39

TRUSTS - Trading trust - Constructive trust as between vendor and purchaser of land sold by trustee of trading trust - Same corporation trustee of both trusts - Consequences of breach of constructive trust, as found in Collie v. Merlaw Nominees [1998] VSC 203 - Whether trustee vendor had right of indemnification out of assets of trading trust, in contrast to possible right against assets of constructive trust - Whether relevant act of trustee "improper" - Whether successful plaintiff in first action subrogated to rights of trustee against assets of trading trust - Effect of liquidation of trust corporation.

2. This appeal by Damien John Nolan raises a number of difficult issues arising out of a judgment given in favour of Geoffrey Malcolm Collie ("Mr G.M. Collie") by Warren, J. in the action Collie v. Nolan and Merlaw Nominees Pty. Ltd. (In Liquidation)[1], whereby she declared that the second respondent, Merlaw Nominees Pty. Ltd. ("Merlaw") was entitled to be indemnified out of the estate of what was called the Prudent Trust, of which Merlaw had been the trustee and the Nolan family were the beneficiaries, in respect of a judgment given by Byrne, J.[2] That earlier judgment was given against Merlaw also in favour of the respondent Mr G.M. Collie for compensation for breach of a constructive trust, which his Honour called the "purchase trust", arising out of a contract of sale dated 31 December 1984 in which Merlaw was the vendor and Terramont Pty. Ltd. ("Terramont") was the purchaser. Warren, J. further held in the later proceeding that Mr G.M. Collie was entitled to a declaration that he was entitled by subrogation to indemnity and exoneration from the Prudent Trust estate in respect of the amount of the judgment. Mr G.M. Collie had been held entitled to sue in each proceeding as he had been appointed the new trustee of the Terracol Trust (a family trust of the Collie family), a joint venturer with the Terranol Trust (a family trust of the Nolan family) through Terramont Pty. Ltd., which had been deregistered in October 1988. At the same time Warren, J. held that the appellant Mr Nolan was by then acting as trustee[3] of the Prudent Trust (another Nolan family trust) in place of Merlaw which had been deregistered in 1988 and had later gone into liquidation[4], so that Mr Nolan then held the assets of the Prudent Trust subject to Merlaw's and Mr G.M. Collie's rights and was restrained from dealing with them until further order. Consequential declarations and orders were also made.

5. To understand what has been decided in this second action brought by Mr G.M. Collie, which I shall call the "indemnity action", which is the subject of the present appeal, it is important to understand what had occurred earlier before Byrne, J., for all of Mr G.M. Collie's rights flowed from his success in that first action. That action, which I shall call the "compensation action", is the subject itself of an appeal heard at the same time as the present appeal, although it is an appeal by Mr G.M. Collie seeking only an increase in the quantum of compensation, being $198,620.35, including interest, awarded for breach of the constructive trust arising out of the contract of sale, but, importantly, there has been no cross-appeal therein on behalf of the defendant Merlaw (or any privy of it).

8. It is desirable, if only as a matter of procedural conformity, that judgments be separately delivered in the two appeals, but the factual bases for both judgments will be set out in the judgment in the present appeal, as it was agreed that all relevant evidentiary materials should be available for consideration in both appeals and in any event the whole of the transcript, the exhibits and other materials in the action before Byrne, J. were treated as part of the evidence before Warren, J. in the second proceeding. Only a limited amount of additional evidence was called before her Honour relating to the "enforcement" of the rights declared in the first proceeding. In the circumstances, of course, there can be no question of the appellant Nolan in this appeal from the orders of Warren, J. seeking to set aside or question any of the orders of Byrne, J., partly because there was an estoppel between a number of the relevant parties and secondly, and more importantly, because there was no attempt to do so either at the trial or in the notice of appeal. Consequently, there is no dispute for present purposes as to the nature of the liability found by Byrne, J., although certain aspects of it affecting the quantum of compensation are raised in the other appeal.

11. It will, however, be necessary to analyse with some care the nature of the interests found to exist by Byrne, J. and the nature of the breach which he found leading to a right to claim compensation for breach of trust. In the present appeal, moreover, each of the findings by Warren, J. as to the effective enforcement of that claim for compensation has been challenged, with the result that it is asserted that the respondent Merlaw had no right to indemnity, exoneration or reimbursement in respect of its obligation to pay the purchaser compensation, because the relevant breach was held to be that of its obligations under the "purchase trust". Primarily it is argued that in consequence there was no right in Merlaw to claim indemnity or the like in respect of the assets of the Prudent Trust. Not only is it said that the only relevant trust was the constructive trust created by the contract of sale, the "purchase trust", but it is also said that neither Mr G.M. Collie, nor any of the direct or indirect beneficiaries of the Terramont trust, had any right to be subrogated to Merlaw's rights of indemnity and the like. More will be said later as to the matters raised on this appeal.

Facts and circumstances surrounding both proceedings

15. In 1979 Mr Nolan and his family set up a discretionary trust known as the Prudent Trust of which the beneficiaries included Nolan's family. The terms of it are largely irrelevant but there was an amendment in July 1993 by which the trustee was entitled to be indemnified in respect of certain liabilities. The original trustee of the Prudent Trust was Merlaw, although it was originally known as Seventy-Seventh Alby Trading Pty. Ltd., which changed its name to Merlaw Pty. Ltd. in 1981. After the events which gave rise to the right to compensation in the first proceeding Mr Nolan replaced Merlaw as trustee of the Prudent Trust. At all relevant times between 1984 and 1988, before it was deregistered, the directors of Merlaw were Mr Nolan and his wife. Some 10 years after its restoration to the register Merlaw was placed into voluntary liquidation in February 2000 and is believed to be insolvent.

18. The precise activities of Merlaw are not known but by late 1984 its assets included a two-storey property of 32 Jolimont Terrace ("Jolimont") and another at 16 Walmer Street, Kew. Jolimont had been purchased by Merlaw in 1981. Shortly before it was sold to Terramont Merlaw borrowed $250,000 from Ogge Partners Nominees Pty. Ltd. ("Ogge"), giving Ogge a mortgage over the property by way of security. At that time Mr Nolan was a chartered accountant and carried on certain businesses from Jolimont, one-half of which, the upper floor, he occupied for that purpose. The other half, the ground floor, was occupied by Mr G.M. Collie's son, Ian Stafford Collie ("Mr Ian Collie"), who carried on a solicitor's practice from the other half of the building and paid rent to Merlaw accordingly.

21. After some negotiations in late 1984 Merlaw entered into a contract on 31 December 1984 or thereabouts to sell Jolimont to Terramont, then known as Halls Gate Pty. Ltd. The latter company was the trustee for two discretionary trusts, the Terranol Trust and the Terracol Trust, the beneficiaries of which were Mr Nolan's wife and children and Mr Ian Collie's wife and children respectively. The directors of Terramont were Mrs Nolan and Mrs Collie, who were each the appointors of the other family's trust. The purchase price payable by Terramont was $350,000, of which $90,000 was to be paid on 15 February 1985, $250,000 was to be paid by Terramont assuming the obligations of Merlaw under the mortgage to Ogge as from 1 January 1985 and $10,000 was to be paid on 15 February 1990. The sums required by Terramont to comply with these obligations were to be provided by Mr Nolan and Mr Ian Collie, or their families, in equal shares. Settlement of the contract in fact took place on 21 February 1985, when title was accepted and $45,000 was paid by each of the Terranol and Terracol trusts to Merlaw and Terramont assumed Merlaw's obligations under the Ogge mortgage. In consequence Mr Ian Collie's tenancy arrangements with Merlaw ceased and, with his interests and the Nolan interests each occupying one-half of the building through companies connected with each of them, they agreed to advance moneys to Terramont from which it paid Merlaw's interest obligations under the Ogge mortgage and any other necessary outgoings.

24. It followed that after the entry into the contract of sale Merlaw still continued to hold the legal title as registered proprietor of Jolimont and the Ogge mortgage remained in its name. From early 1985 until some time in 1987 each of the two "joint venture" trusts paid their share of interest and outgoings, although it is by no means clear whether and to what extent Terranol and Terracol entered into specific other contractual arrangements to deal with their interest in Jolimont. The broadly equal payment of necessary funds was, however, interrupted in and after April 1987 when Mr Ian Collie was convicted of tax fraud and was imprisoned until November of that year, during which time he and his interests made no contribution to Terramont for the various required outgoings. As a result Terramont was by that time overdrawn to the extent of some $48,000.

27. The Ogge mortgage over Jolimont fell due for discharge on 17 December 1987, at which stage the amount required to discharge the mortgage was $258,956.50. At about that time Mr Nolan and Mr Ian Collie agreed between themselves that they and their interests would refinance Jolimont by obtaining a bill facility, secured by mortgage, from the Australia & New Zealand Banking Group Ltd. ("the ANZ bank") for $265,000.

30. On 24 December 1987 the ANZ bank agreed to provide the bill facility but did so by allowing Merlaw to draw down on it to its full extent in order to discharge the Ogge mortgage. As part of that arrangement Merlaw as registered proprietor in turn provided the ANZ bank with a mortgage over Jolimont which was executed in the name of Merlaw by Mr Nolan. Mr Ian Collie, on behalf of the Terracol trust, was agreeable in broad terms to this arrangement, which the parties implicitly agreed was to be carried out on behalf of Terramont as purchaser and joint venture vehicle, but accepting that the mortgage had to be in the name of Merlaw as the registered proprietor. Mr Ian Collie drove Mr Nolan to the ANZ bank at 454 Collins Street, Melbourne for the purpose late on Christmas Eve 1987 but remained outside in the car while the necessary documents were signed. Unfortunately it seems that neither the bank nor Mr Nolan noticed that the new mortgage in the name of Merlaw was an "all moneys" mortgage, which had the consequence of making it security not merely for the bill facility but also for all other moneys then or thereafter owed by Merlaw to the bank whether on behalf of the Prudent Trust or otherwise, including a $450,000 bill facility taken out in April 1986 and an overdrawn current account amounting to $31, 446. In the first trial Byrne, J. held that, although Merlaw must be taken to have been aware of this[5], it had not been at that trial suggested that Mr Nolan intended to defraud Terramont or the Collie interests, so that his Honour held that he had inadvertently overlooked this aspect of the matter in the rush of getting the matter concluded by Christmas.[6]

33. It was this act by Merlaw (in the person of Mr Nolan) which Byrne, J. held to be a breach of what he called the "purchase trust", being the constructive trust arising out of the sale by Merlaw to Terramont of the property Jolimont, although he also described it as a breach by Merlaw "of the duty which it owed to Terramont as a purchaser with an equitable interest in the Jolimont property".[7]

36. In July 1988 the ANZ bank agreed to increase its bill facility to Merlaw to $300,000. Mr Ian Collie agreed to this so that an extra $35,000 might be credited to the Merlaw account and it was, as Byrne, J. found, "treated by Mr Collie as an adjustment in favour of Mr Nolan to the disparity which then existed between the two men as to their contributions ...".[8]

39. However, from the end of 1988 or the beginning of 1989 the imbalance in the contributions of the two family trusts to the Terramont account was causing some friction. At about the same time in October 1988 Terramont was deregistered because of its failure to lodge annual company returns for the preceding four years, which was apparently Mr Nolan's responsibility. Then in July 1989 the ANZ bank declined to roll over the $300,000 bill facility relating to Jolimont, although the other Merlaw bills were rolled over to August of that year. It seems, therefore, that the bank was dissatisfied with Merlaw's failure to reduce its liability, in that its resulting debt as at August 1989 stood at $896,072.94, in relation to which the bank was placing pressure on Mr Nolan. Throughout the year there had been disagreements as to how the Collie interests should equalise their contributions and a number of proposals were put forward. Mr Ian Collie, as a result of not pursuing his professional activities, undertook other business interests and made little use of his half of the Jolimont premises. On 14 April 1989 Mr Nolan changed the locks on the premises, effectively shutting out the Collie interests. In the course of the negotiations between the parties Mr Ian Collie obtained a valuation of Jolimont as at 21 April 1989, the week of his exclusion, fixing a value upon it of some $900,000, which Byrne, J. accepted.

42. On 6 October 1989 Mr Nolan wrote to the ANZ Bank denying that there was any contract relating to Jolimont and, thus, that the Collie interests had any interest in the land. At about this time Mrs Collie lodged a caveat over the Jolimont premises asserting that she had a beneficial interest in the property arising from the contract of sale. In an action brought by the Collie interests in support of her caveat, Merlaw filed a defence denying the existence of any contract of sale and denying Terracol's rights. The proceeding was eventually struck out in October 1991.

45. Notwithstanding Mr Nolan's denial that Terramont had any interest in Jolimont, Messrs Marshall & Dent, accepted on these appeals as acting for the Collie interests, tendered the sum of $10,000 on 15 February 1990, being the date for final payment fixed under the contract of sale. Merlaw rejected the tender.

48. No moneys having been contributed by Terramont or any persons on its behalf to satisfy Merlaw's obligations in relation to the mortgage of Jolimont, the ANZ bank continued to press for payment of all sums outstanding by Merlaw. Thus it exercised its rights over Jolimont as mortgagee and on 18 July 1990 it sold the premises at auction for $750,000. Presumably that was payable in cash, for the following day the net proceeds of $729,638.10 were used by the bank to reduce the overdraft from $1,051,638.36 to $322,270.26. The bank did not purport to allocate that reduction of the overdraft between the various entities and trusts which Merlaw represented. Suffice it to say that the sum received at auction was more than enough to satisfy the bill facility liability of $300,000 (together with related obligations[9]) with respect to Jolimont, but the purchase moneys were, of course, used to pay other liabilities, including those incurred by Merlaw as trustee for the Prudent Trust. Terramont was (and thereby the Collie interests to the extent of their share were) thus deprived of its interest in the surplus of the purchase moneys for which otherwise the mortgagee was accountable after its sale.

51. There were various difficulties facing the enforcement of the rights of the Terracol trust, which need not here be examined in detail, but in February 1991 this Court made an order appointing Mr G.M. Collie to be the new trustee of the Terracol trust. It was in that role that he commenced the first of the relevant actions, namely that brought by him against Merlaw, the ANZ bank and Mrs Nolan.[10] It was that proceeding which led to the various judgments of Byrne, J. awarding and fixing compensation in favour of Mr G.M. Collie for breach of what the judge there described as the "purchase trust". The breach was held to consist in the making available of the property Jolimont as security for Merlaw's debts other than those arising out of the facility relating to that property.[11] It should be noted that at the same time he dismissed a claim for breach of the contract of sale based on an implied term of the contract which was held not to have been established, as well as a claim for a breach of another constructive trust, apparently founded on the joint venture arrangement between the Collie and Nolan interests.

54. As already noted, the claim for equitable compensation not only involved a dispute as to liability, which was resolved in favour of the Collie interests and is not the subject of appeal, but also many incidental disputes as to the proper quantification of that compensation. This led, after Byrne, J. gave his primary judgment on 22 December 1998, to several further hearings, including a reference to a master, which resulted in two further judgments on that issue, the first given on 26 March 1999 and the second on 24 November 1999. The judgment, finally authenticated on 1 December 1999, fixed the compensation at $92,784.74, together with interest thereon of $105,835.61. The relatively small principal sum allowed in favour of the Collie interests was arrived at after making a number of adjustments in favour of both parties, but it should be remembered that the Collie interests were seeking, and only entitled to seek, the Terracol share, primarily a half share (but subject to adjustments), of Terramont's rights against Merlaw.

57. The precise nature of the disputes as to the quantification of the compensation, as discussed by Byrne, J. and as argued in this Court on the appeal in proceeding 6265 of 1991, appear in the judgment of Batt, J.A. to be given in that appeal.

60. The judgment gained by the Collie interests was of little immediate value to them, because, within a couple of months Merlaw had been placed in liquidation, so that recovery of the compensation by execution or the like seemed likely to be largely fruitless. Thus the second action (No. 5565 of 2000) was brought in May 2000 by Mr G.M. Collie on behalf of the same interests to establish both Merlaw's right to indemnification from the Prudent Trust estate in respect of its liability for breach of the purchase trust (and its claimed consequential equitable charge or lien over those assets) and the Collie interests' (through Terramont) right to be subrogated to Merlaw's rights against the Prudent Trust estate. Both Merlaw and Mr Nolan were sued as defendants, Mr Nolan, as noted above, because he was by then the trustee of the Prudent Trust. A considerable number of issues were raised at the trial before Warren, J., relying on not only the whole of the evidence taken in the first proceeding but also on certain additional evidence relating particularly to the indemnity action. In due course her Honour gave judgment in the second proceeding on 28 February 2001 in favour of the Collie interests, both as to the right of indemnity of Merlaw and as to the Collie interests' right to be subrogated to the trustee's rights against the Prudent Trust, together with a number of ancillary orders. In broad terms her Honour held that Merlaw was the trustee of the Prudent Trust until Mr Nolan replaced it in October 1993, that at all relevant times, though subject to the interests of Terramont, the Jolimont property was an asset of the Prudent Trust and thirdly that Merlaw had mortgaged Jolimont to the ANZ Bank in its capacity as trustee of the Prudent Trust. She further held that, as a trustee is entitled to be reimbursed in respect of all expenses properly incurred in the execution of its trust, Merlaw had a right of indemnity for its liability to Mr G.M. Collie out of the assets of the Prudent Trust which was a first charge or lien on those assets, which existed up to the present time notwithstanding that Mr Nolan had become trustee. It is by no means clear that the argument principally raised before this Court, namely that the right of indemnity only existed against the assets of the purchase trust, was raised or developed before the judge, for her Honour certainly did not deal explicitly with that matter in her judgment.

63. As to the issue of subrogation her Honour held that as a matter of general principle the Collie interests as creditors of the trustee Merlaw were entitled to be subrogated to Merlaw's right of indemnity out of the Prudent Trust assets. Her Honour conceded that the matter was here complicated by the fact that Merlaw was in liquidation but held that in accordance with Octavo Investments Pty. Ltd. v. Knight[12], although a trustee's proprietary interest in the assets passes to a trustee in bankruptcy, it does not do so in the case of liquidation because the liquidator acquires no title to company property.[13] The case of Re Enhill Pty. Ltd.[14] was relied upon by both parties, but the judge said that, notwithstanding the liquidator's powers with respect to the company's property, there was no competition for the assets of Merlaw in the present case, whether from other creditors or from the liquidator himself, so that the Collie interests were entitled to orders subrogating them to Merlaw's right of indemnification.

Whether circumstances gave rise to rights of indemnification and subrogation

67. One may assume, as Byrne, J. found in what I have called the "compensation action", that the first respondent Mr G.M. Collie, as the appointed trustee of the Terracol Trust[15], could sue not only on behalf of that trust but also, to the extent of Terracol's interest, on behalf of Terramont, the "joint venture" trust vehicle employed by both Terracol and Terranol. He therefore could assert any rights which Terramont might have against Merlaw arising out of the contract of sale of Jolimont entered into between Merlaw and Terramont for its beneficiaries Terracol and Terranol.

70. Moreover in the present appeal, brought in what I have called the "indemnity action", it would have been difficult for the Nolan interests to challenge what Byrne, J. had held in the earlier compensation action inasmuch as, (1) their erstwhile family company, Merlaw, and Mrs Nolan were both bound and estopped by what then had occurred and had been held, (2) they had failed to appeal against that decision, and, (3) Mr Nolan, though not directly a party to that earlier proceeding, had not sought to challenge his Honour's findings at the hearing before Warren, J.

73. As I have said, Byrne, J. had earlier held[16], relevantly, that Mr G.M. Collie (on behalf of the Terracol Trust) was entitled to an order against Merlaw for compensation in equity for breach of the "purchase trust", being the trust held to arise upon the making of the contract of sale and acceptance of the vendor's title (i.e. settlement). The breach of trust was constituted by the act of Merlaw (in the person of Mr Nolan), in order to discharge the existing mortgage granted to Ogge and taken over by Terramont, in taking out the new "all moneys" mortgage with the ANZ bank, which by Mr Nolan's inadvertence, but not by design (as Byrne, J. held)[17], provided security, not only for the Terramont loan and Terramont's incidental borrowings and the like, but for all borrowings and accounts of Merlaw arising out of its many dealings on behalf of the Nolan family and in particular on behalf of the Prudent Trust, which had the effect of adding immediately about $481,000 to the secured debt of $265,000 borrowed from the ANZ bank to pay out the Ogge loan.

76. This second appeal, in the indemnity action, is against the judgment of Warren, J.[18], in which she declared Mr G.M. Collie to be subrogated to Merlaw's rights as trustee of the Prudent Trust and thereby to its right of indemnity arising in respect of the compensation ordered by Byrne, J. The primary and most significant point raised by counsel on behalf of the appellant Nolan in this appeal is whether any right of indemnity[19] existed in Merlaw as trustee of the Prudent Trust against the assets of that trust. In short, it is said that the breach of trust held by Byrne, J. to have been established was of the "purchase trust" of which Merlaw was undoubtedly trustee, but not in its capacity as trustee of the Prudent Trust. No breach of the Prudent Trust had been found by Byrne, J., so it was correctly said, so that it was further contended that there was no possible basis for Merlaw to make a claim for indemnity in that respect.

79. The assumption made in counsel's otherwise clear and compelling argument was that indemnity could only be sought in relation to the trust which was held to be the subject of the claim for breach of trust. In many cases that would be so, but the relationship between the two trusts was here relevantly different, in that there was no necessary inconsistency in finding a right of indemnity existing in a trustee of a trust different from the one held to have been breached. There was, of course, no misidentification of the subject trust by Warren, J. Here, however, the trust breached by Merlaw was a limited and special kind of trust which, significantly, arose directly out of the authorised acts of Merlaw in its capacity as trustee of the Prudent Trust, namely the entry into and performance by Merlaw of the contract of sale of the subject premises, one of that trust's assets.

82. Contrary to counsel's contentions, the creation of the "purchase trust" did not mean that the activities of Merlaw as trustee of the Prudent Trust ceased or were taken over by it in a different role as trustee of the "purchase trust". Merlaw certainly held the legal title of Jolimont on behalf of Terramont (at least to the extent of its interest), i.e. as trustee on behalf of the purchaser, but that was only part of the story.

85. Terramont was the beneficiary of the "purchase trust", in the sense that it was the purchaser, but, until it had paid (or arguably, tendered) the balance of the purchase money, Merlaw, and through it the beneficiaries of the Prudent Trust, retained a real and beneficial interest in the premises, such that, on default and subject to consequential equities, it might regain the full beneficial interest in it. Moreover, to say that Merlaw was trustee under the "purchase trust" hides a number of complex obligations to which it was subject. Certainly it had to transfer title when the balance of purchase moneys was paid, but, whether or not that was in the role of vendor or trustee, or both, it also must be treated as having been under an implied obligation to deal appropriately with the mortgage "taken over" by Terramont under the contract of sale, as, being the registered proprietor, it had to remain the mortgagor. As that original mortgage to Ogge fell due for payment in 1987, Terramont had to decide whether to pay out the debt or seek further accommodation. Terramont could not do that in its own name, in the sense that it could not directly provide security in its own name over the subject premises, as it was not then the registered proprietor and it was under no immediate obligation to get in the title and become registered proprietor. If that be so, then Merlaw, both as unpaid vendor and as trustee sub modo [20]

, was under an implicit obligation to assist in obtaining another mortgage in the sense of making the registered title, the legal interest, available for that purpose, subject to it being held harmless for so acting in mortgaging the title. Necessarily the trustee Merlaw was to be held harmless, not in its role as trustee of the "purchase trust", but in its role as trustee of the Prudent Trust as vendor, for that was the role in which it entered into the contract of sale. Moreover it should not be forgotten that Merlaw, in entering into the new mortgage, was not merely acting to satisfy the request of the purchaser as beneficiary, but could also properly be seen as protecting its own interests under the contract of sale, for failure to so act, while the contract was on foot and well before the final payment was due, might be seen as causing the contract to go off, whatever benefits or disadvantages might then have flowed to the parties in those circumstances.

90. Counsel for the appellant asserted that no right of indemnity existed in Merlaw as trustee of the Prudent Trust because it held the land and title as trustee for the "purchase trust", which was the trust it was held to have breached. But there was no examination of the consequences of that finding, save to assert that the Prudent Trust could not be "attacked" or made responsible for Merlaw's acts in these circumstances. But if Merlaw was trustee (for this purpose) only of the "purchase trust", what were its rights and liabilities? From what assets or fund could Merlaw as that trustee seek indemnity in the normal way? We are here considering the rights as asserted by way of subrogation, but those rights can ordinarily be no better than the trustee's rights arising out of its activities as trustee on a day to day basis. Nor can one be confined in this general analysis to an indemnity sought in consequence of breach of trust, for that is the same kind of indemnity as a trustee can seek for mundane items such as accounting fees and conveyancing expenses. Looked at in that way the subject fund cannot be simply the interest in the land sold under the contract of sale, for the "trustee", the vendor, would thereby obtain a right in support of its indemnity enforceable by way of sale and the like over that which it was holding on trust for the purchaser Terramont. To seek indemnity from that source would be entirely antipathetic to the imposed constructive trust, which in truth is only erected to protect the beneficiary from misuse of the asset by the trustee pending completion of the contract of sale.[21] Nor could one seriously say that the right of indemnity is to be enforced against the "balance" of the purchase moneys as and when received or any other incidental rights of the vendor. For one thing I do not believe that Merlaw as the constructive trustee (or trustee sub modo) held that balance (etc.) on trust for itself: at the least it would have held those rights on trust for itself as trustee of the Prudent Trust as the vendor.

93. In truth Merlaw's role as constructive trustee of the purchase trust was only a subsidiary one, to protect the position of the purchaser.[22] It otherwise continued to act for the Prudent Trust in its role as vendor. If it acted on behalf of that trust by entering into a mortgage of the kind here granted, it did so in order to satisfy the obligations, actual or perceived, of the vendor under the circumstances. If Mr Nolan had incurred fees, whether legal fees, bank fees or whatever, on behalf of Merlaw, Merlaw (and Mr Nolan) did not have to look, nor could it have looked, to the subject matter of the "purchase trust" for reimbursement; it must have looked to the Prudent Trust on whose behalf Merlaw had taken all steps in entering into and carrying out the contract of sale, including incurring the subsidiary obligations of a trustee vis-à-vis Terramont, by way of the so-called "purchase trust".

96. If that be so, and it would seem hard to deny, then the further liability of the trustee for breach of the "purchase trust" could not be the subject of a claim for indemnity in the same way. If the compensation had in fact been paid to the plaintiff while Merlaw was solvent, it would seem extraordinary that Merlaw would have to look to the subject matter of the "purchase trust", namely the land itself or to the minute amount ($10,000 in effect) remaining unpaid to the vendor or to some evanescent tracing claim (as was suggested), even assuming that, when the contract of sale went off, there were any remaining assets in the "purchase trust" whatsoever. Assuming, on the other hand, that the contract had been completed, there would have been no remaining subject of the trust, other than (arguably) the purchase moneys which necessarily by then would have been held by Merlaw on behalf of the Prudent Trust.

99. To say, as I have been suggesting, that Merlaw had no right of indemnity against the "purchase trust" assets, whether enforceable by Terramont or Mr G.M. Collie by way of subrogation or otherwise, may seem inconsistent with certain authorities relating to indemnification of trustees of constructive trusts. The assumption made in argument was that a trustee under a constructive trust would have the conventional rights in equity (and under statute) of all trustees under express trusts. A moment's thought, however, will show that such a conclusion in relation to constructive trusts will not infrequently pose difficulties of application. Conceptually, a right of indemnity, whether by way of exoneration or recoupment, can be somewhat more easily envisaged and rationalised under the Anglo-Australian approach to the law of constructive trusts in that such trusts are deemed to have arisen from the moment the relevant relationship commences, whereas there may theoretically be greater difficulties in the United States where the constructive trust is seen as primarily remedial, coming into existence on breach[23] and providing a means of restitution for unjust enrichment.[24] Even in the United States there seems to be some acceptance of a right of reimbursement in relation to expenditure by a constructive trustee, though described by Scott on Trusts as "a more difficult question"[25], but Scott also gives this pertinent example[26]:

"Where the constructive trustee placed a mortgage on the property and the proceeds were not applied in any way for the benefit of the property, the beneficiary is entitled to have the property surrendered to him by the constructive trustee free from the mortgage."

103. Under the Anglo-Australian system there is very little authority or discussion on the subject, except in relation to fiduciaries. There seems to be a recognition that, at the stage a fiduciary is obliged to account to the beneficiary, allowance may fairly be made for recoupment of expenditure and compensation for the value of improvements: see, e.g., Mansard Developments Pty. Ltd. v. Tilley Consultants Pty. Ltd.[27] and Warman International Ltd. v. Dwyer[28]. See also Ford and Lee on Trusts[29] and Jacob's Law of Trusts in Australia[30]. Where, however, the constructive trust is that imported from the relationship of vendor and purchaser, the opposite would seem more likely, although there is no authority to my knowledge on the subject. Cope in his work on Constructive Trusts (1990) is firmly of the view[31] that: "The vendor is not entitled to be reimbursed for any expenses incurred in the fulfilment of the duties [of a constructive trustee]". This is said to flow from the fact that the trustee's duties are carried out as much in the vendor's interests as in those of the purchaser, at least until there is final settlement, and, in addition, because under the conventional contract of sale all rents and profits went to the vendor[32] until completion, so that it was not unreasonable that the vendor should bear the expenses involved in holding the land.

106. The difficulties here arising may derive from the traditional view in Anglo-Australian jurisprudence under which the vendor-purchaser relationship has been analysed in such a way as to lead the courts to construe a trust imposed on the vendor in favour of the purchaser, at least from the time of settlement. In a number of works this kind of constructive trust is said to be one of the oldest trusts devised by courts of chancery and derived from implied uses held to apply in similar circumstances as early as the sixteenth century. The history of the vendor-purchaser constructive trust is carefully but critically examined in Waters: The Constructive Trust (1964)[33]. That history, referring to Irebey v. Gibone[34] and Lady Foliamb's Case, described only in Daire v. Beversham[35], appears to have been largely accepted by later writers, such as Cope[36] and in Oakley on Constructive Trusts[37], though its working out has posed conceptual difficulties for many years. The cases earlier cited[38]

merely point to certain practical difficulties which were largely passed over in this litigation. Although one must accept for the purpose of the present appeal that a constructive trust was treated as having arisen by reason of the entry into the contract of sale by the parties Merlaw and Terramont, it does not follow that every incident of a conventional trust flowed, nor that Merlaw had all the rights and liabilities of conventional trustees, except to the extent that Byrne, J. in the first trial found it necessary to hold that there was a breach of trust.

111. For these reasons I would hold that there was no right in Merlaw to an indemnity against the "assets" of the "purchase trust". There remains, however, the question whether there was a right of indemnity in relation to those assets held by Merlaw on behalf of the Prudent Trust.

114. The argument put on behalf of the appellant, that the right of indemnity, whether or not enforced by means of subrogation, could not affect the assets held on behalf of the Prudent Trust, seemed to flow from two propositions. The first was what appeared to be a simple argument that, if the alleged trustee, here Merlaw, had acted on behalf of two trusts, then it was a simple matter of characterisation to determine whether the acts performed giving rise to the indemnity were carried out on behalf of one trust or the other trust. So it was said that, if the acts were properly to be described as carried out by Merlaw on behalf of the "purchase trust", then those same acts could not be relied upon to found an indemnity in favour of Merlaw in relation to assets it otherwise held as a trustee, such as those held in the Prudent Trust. The second argument was not entirely dissimilar, but it asked whether the breach arose out of the trustee's acts on behalf of a particular trust, so that, if the acts were, as here has been held, a breach of the "purchase trust", it necessarily followed that the right of indemnity was confined to the trust assets the terms of which had been broken.

117. Neither argument appears to me to be persuasive. Taking the second argument first, there seems to be no reason, at least in present circumstances, why the right to indemnity should be entirely dependent upon the breach and upon identifying the trust in respect of which the breach occurred. The trustee is liable but, in the absence of any explicit or implicit agreement with the judgment creditor that the trustee should be liable only in respect of the assets of a particular trust, the trustee is liable directly to pay the sum ordered by way of compensation. It can relevantly obtain exoneration or recoupment from the assets of a trust in respect of which the trustee was purporting to act. Ordinarily if a breach of trust is alleged, that will identify the trust and the estate in respect of which the trustee was acting, but in the present case there were undoubtedly two trusts at the relevant time, the Prudent Trust, whose asset Jolimont was being sold to Terramont, and the "purchase trust" which came into existence by virtue of the contract of sale in order to give the purchaser a protectible beneficial interest in Jolimont, as the subject of that sale.

120. That brings me back to the first question, namely, whether a choice has to be made between the two trusts as to which should provide indemnity to Merlaw in consequence of its wrongful mortgaging of Jolimont. Logic might perhaps suggest that there could only be one relevant trust, but that fails to take account of the nature of the second trust, the constructive trust erected by equity to protect the purchaser. Doubtless it was that trust which had been held to have been broken by the acts of Merlaw when it mortgaged Jolimont on an "all moneys" mortgage late in 1987. But the creation of the "purchase trust" had not resulted in Merlaw's interest in Jolimont being transferred, either in fact or notionally, from one trust to another. The beneficial interest obtained by the purchaser did not remove Jolimont from the assets of the Prudent Trust; the contract of sale gave the purchaser merely a qualified interest in the land, sufficient for it to be recognised as significantly cutting down the interest previously held by Merlaw on behalf of the Prudent Trust, but not denying that trust a continuing interest in that land until in fact there had been full completion of the contract. Every step carried out and to be carried out by Merlaw in relation to the contract of sale was, and would have been, taken in effectuating the sale to Terramont but carried out on behalf of the Prudent Trust. Merlaw was obliged to act in a way consistent with the qualified interest of Terramont as purchaser and could not, as has been held, act in a way to deprive the latter of its interest gained pursuant to the contract of sale. That did not, however, mean that otherwise Merlaw was not fully entitled to act on behalf of the Prudent Trust to ensure that its rights as vendor were also fully protected and that it might gain the benefit of the contract of sale by its being carried into effect.[39]

One may ask, hypothetically, from whom Merlaw might have sought indemnity (or exoneration) at each stage that it sought to carry out the contract of sale. Who, to give but a very simple but common example, was to pay Merlaw's conveyancing expenses? The answer must clearly have been, and must still be, that its rights of recoupment or exoneration in respect of expenses of this kind had to be directed to the assets of the Prudent Trust on whose behalf Merlaw was at all times acting. It could not have asked that such expenses come out of the assets of the "purchase trust", for there were no rents or profits coming to the vendor and it would be inconceivable that the "trustee" under the "purchase trust" should have had some right by way of charge, lien or the like permitting it to sell the subject-matter of the sale, which it was obliged to transfer free of all such burdens in return for the purchase moneys at the time of final completion.

125. The fact that the transaction giving rise to the liability to pay compensation was the creation of a further mortgage should not deflect the Court from the conclusion that Merlaw was still acting on behalf of the Prudent Trust. Undoubtedly the transfer of the Ogge mortgage to Terramont as part of the consideration had relieved Merlaw effectively of any burdens under that mortgage. But it was still the registered proprietor in law and it was for the time being under an obligation to make the title available for any related transactions, short of an actual transfer of the whole interest to the purchaser. When the Ogge mortgage came due for payment, Merlaw was still a necessary party to the substituted mortgage with the ANZ bank, albeit that its role primarily was to provide the mortgage and to ensure that its position as registered proprietor and vendor was protected. If it had failed to take any steps in late 1987, it would have taken the risk that the sale might have gone off, for it was not entitled to call for the balance of the purchase moneys until February 1990. If the mortgage moneys had been called up in late 1987 and no substitute mortgage arranged, then the property might have to have been sold and Merlaw would have lost the sale, albeit that it would have received the title back with a corresponding obligation to return any purchase moneys received by it to Terramont, subject to its rights under the contract. That may not, in those heady times, have been an enormous disadvantage to it, but one cannot be sure and, at least on the face of it, Merlaw desired to proceed with the sale and obtain the benefit of what must have been seen to be a properly negotiated price.

128. All this has been intended to show that, when Merlaw mortgaged the land to the ANZ in 1987 and made the title available for that purpose, it was acting just as much in its own interests as in the interests of the "trustee" under the "purchase trust". The benefit of obtaining the new mortgage ought therefore to be seen, at least in part, as a benefit gained by Merlaw in its role as trustee of the Prudent Trust, acting as it thought appropriate so as to ensure that the contract of sale was carried out in accordance with its terms by the purchaser Terramont. Moreover, it would follow that any expenses incurred, subject to any agreement on the part of Terramont, would have been incurred on behalf of the Prudent Trust, with the natural burdens and benefits that its role as vendor brought, including the right of indemnity from the assets of the Prudent Trust in respect of any relevant expenditures incurred by it.

131. In my opinion, therefore, although Merlaw acted in breach of the "purchase trust" when granting the "all moneys" mortgage, as found by Byrne, J., it nevertheless was still acting generally as vendor on behalf of the Prudent Trust, whose asset was the subject of the sale and whose interests in that property it was bound to protect. If it acted in breach of the purchaser's equitable interest, it was liable, as his Honour had found. If it had had assets of its own, it could have paid the award of compensation from those assets but it would have been perfectly entitled to claim indemnity from the assets of the Prudent Trust and in ordinary circumstances it might have claimed exoneration before even the compensation had been paid. The present unhappy sequence of events, so far as Merlaw was concerned, did not deny that right of indemnity, nor, as will be examined in due course, the rights of any person who was entitled to be subrogated to the right of indemnity.

134. First, however, it is necessary to deal with an argument mentioned briefly in counsel's outline and examined in greater detail in oral argument, to the effect that there was no right of indemnity in Merlaw because the obligation in question had not been "properly incurred" in the administration of the relevant trust. The simple assertion for which counsel contended in the first place was based, as I would understand it, on the premise that the relevant trust was the "purchase trust". If that be so, so it was argued, a liability arising out of a breach of trust could not, ex hypothesi, be characterised as one which had been properly incurred in the administration of that trust. Clearly the breach caused compensable loss to the principal "beneficiary" of the purchase trust, namely Terramont as purchaser, and there could be no basis for an indemnity in that respect. One may accept, whatever be the correct criterion for determining indemnifiable expenses and liabilities of a trustee, that that proposition, so far as it went, was correct.

137. For reasons which I have already attempted to explain, the real issue in the present case as to the nature of expenditure and liabilities entitling a trustee to indemnity from the trust assets is its application to the assets of the Prudent Trust and Merlaw's entitlement to make a claim against those assets. This issue was raised to a degree in oral argument, consistent with the appellant's pleadings, to the effect that any liability to pay compensation, if it were in fact incurred in the course of acting as trustee for the Prudent Trust, was incurred while Merlaw was acting improperly in the role of that trustee. In addition it was argued that the acts giving rise to Merlaw's liability to the plaintiff in the first action were not performed for the benefit of the Prudent Trust's beneficiaries.

140. The assumed legal premise for these contentions, especially the primary contention, was that the trustee's right of indemnification against the trust estate is confined to liabilities and expenses which have been properly incurred in the carrying out of the trust. That test, at least at one time, seemed to be expressed in terms uniformly accepted: see, e.g., Re Beddoe[40]; Vacuum Oil Co. Pty. Ltd. v. Wiltshire[41] and R.W.G. Management Ltd. v. Commissioner for Corporate Affairs[42]. Such an approach seemed, until a few years ago, also largely accepted by the two principal texts in this country on the law of trusts, as well as the standard English texts: see Ford and Lee Principles of the Law of Trusts[43] and Jacobs' Law of Trusts in Australia[44]. In very recent times, however, doubt has been cast on that simple proposition, in particular by the New South Wales Court of Appeal in Gatsios Holdings Pty. Ltd. v. Mick Kritharas Holdings Pty. Ltd. (in liquidation)[45]. In the course of his judgment Spigelman, C.J. said[46]:

"The use of such terminology as conduct being `proper' or `reasonable', cannot be regarded as a test of when a trustee is entitled to receive indemnity for outgoings incurred [in] the course of execution of the trust. Such terminology generally records a conclusion which has been reached on other grounds."

Meagher, J.A., in considering "the limits to be placed on this right to indemnification", said[47]:

"[O]ne must in principle incline to the view that if the activity in question had been fraudulent the law would withhold the right to indemnification ... I find it difficult to formulate any other limitations. United States authorities ... might be read as establishing either or both these propositions: (a) that the activity in respect of which indemnity is claimed must be `reasonable', and (b) that the activity must be `proper'. In my view, neither such limitation exists in Australian law. As to the former, it is in the circumstances, meaningless ... As to the latter, it is almost as meaningless to endeavour to apply some hypothetical standard of propriety in ordinary commercial life, absent fraud and crime."

As to what is the appropriate test, Mason, P. said[48] that in substance he agreed with Meagher, J.A., but that he preferred to express no view on the issue whether a trustee's right depended on whether the conduct had been reasonable or proper, commenting only that "the terms are notoriously open-ended", but cautioning that he "would need to be persuaded that they are meaningless in the present situation". Conceding that they embodied "judgments to be made in context", he observed that "some outer limit needs to be drawn in order to recognise that certain types of grossly improper frolics by trustees will put them outside the presently uncertain boundary of the right now in question."

147. With the greatest of respect, it is by no means clear why a majority of their Honours in Gatsios Holdings seemed to sanction so significant a departure from accepted principle as to leave the trustee's right largely unconstrained.[49] It is possible that their views were prompted by the fact that the claim there in question resulted from a judgment obtained in an action in tort, which has always posed problems in relation to questions of indemnification. The form of their Honours' discussion tends to make it unlikely that their intention was so limited[50], nor does it seem that the case depended, as it might have, on the terms of the trust deed, which appear to have been expressed benevolently towards the trustees.[51] Again with respect, the majority's views would appear to leave this important area of trust law rudderless and in a state where mischievous trustees might seize upon an almost unfettered right to indemnity as justifying improper depredations of trust funds, contrary to their obligation not to abuse their position by making it "a means of profit or benefit" to themselves.[52]

150. To my way of thinking the conventionally stated test as to expenses "properly incurred" is merely a convenient shorthand to describe those restraints applicable to trustees who would seek to look to trust funds for the payment of their expenses and other trust liabilities. It also has the advantage of succinctly expressing the notion of propriety as underpinning a trustee's relationship with the trust estate and the beneficiaries. One must not forget, moreover, that in Re Beddoe, seen as one of the leading authorities, Lindley, L.J. explained that in cases of doubt the trust estate should bear the trustee's costs[53], and that: "The words `properly incurred' in the ordinary form of order[54] are equivalent to `not improperly incurred'". The proposition was converted[55] by another respected judge, Bowen, L.J., who was perhaps more familiar with courts of common law, into "a proposition in which the word `properly' means reasonably as well as honestly incurred". His Lordship added[56] that, while trustees ought not to bear expenses and liabilities personally "on account of mere errors in judgment which fall short of negligence or unreasonableness", nevertheless "mere bona fides is not the test". A.L. Smith, L.J. concurred[57] with the other members of the Court.

153. Re Beddoe or the principles stated therein have been cited and applied in Australia on numerous occasions. In the High Court it was used in National Trustees Executors & Agency Co. of Australasia Ltd. v. Barnes[58] as the basis for Rich, A.C.J. and Williams, J. to support the proposition 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 the trust". Starke, J., who approached the matter slightly differently, nevertheless espoused a proposition that a trustee had a right to be recouped as of right all that he had "expended properly" in that role.[59] Subsequently, in a judgment in which Dixon, J. formed part of the majority, his Honour said in Vacuum Oil Co.[60] that, where an executor has acted under appropriate authority, the executor had a "right to be indemnified out of the assets in respect of liabilities he has incurred in the proper performance of his duties or exercise of his powers".

156. In two later cases in the High Court principles as to the indemnification of trustees were stated without specific reference to the "proper" incurring of costs or expenses but in terms which would not deny the applicability of the rule, especially having regard to the reliance on the authorities referred to above in support of the propositions discussed in those later cases. In Octavo Investments Pty. Ltd. v. Knight[61] the majority (Stephen, Mason, Aickin and Wilson, JJ.) referred on four occasions to Vacuum Oil Co. with approval and without in any way suggesting that the test as to proper incurrence no longer applied. Likewise in Commissioner of Stamp Duties (N.S.W.) v. Buckle[62] the High Court again referred with approval to the passage cited above from Vacuum Oil Co. and also to Re Beddoe itself, without there being any suggestion that the tests laid down in those cases were no longer apposite.

159. The decision in Gatsios Holdings seems to have provoked a substantial rewriting of the relevant part of Ford and Lee's Chapter 14, especially para.14040, reflecting a scepticism as to the applicability of a test of indemnification for expenses and liabilities upon the basis of those which are "properly incurred". In particular they seem unsure as to the appropriate test for liabilities in tort and they perceive that a different test may be applicable to indemnities sought by trust companies with no genuine assets other than those held on trust.[63] They now formulate, in slightly revised terms, the necessary conditions for satisfying a court that liabilities have been properly incurred by requiring that the trustee must have acted (a) within power; (b) with the degree of care and diligence that a person of ordinary prudence would exercise in the conduct of her or his affairs; and (c) in good faith. The first test may merely reflect an obvious requirement and the second and third are adaptations of the test of Bowen, L.J. in Re Beddoe, except that the term "reasonably" is adapted in reliance on the terms used in the judgment of Brooking, J. in R.W.G. Management[64], although his Honour had used the terms "reasonable diligence and care". With great respect, I am by no means confident that, in using the term "reasonably", Bowen, L.J. was intending to pose so stringent a test as has now been suggested, for he also observed "that trustees ought not to be visited with personal loss on account of mere errors of judgment ...".[65] Likewise, and also with great respect, the test stated by Brooking, J. should be seen as intended as no more than a shorthand for the conventional statement of a trustee's duty.

162. Perhaps the rule will not pose difficulties where the issue relates merely to costs and expenses, although even in that area it has frequently been said that trustees should not be deprived of their right of reimbursement unless they have clearly been shown to have acted improperly, with the onus resting on those who seek to deny the right. But the rule relating to indemnification also applies to the incurring of liabilities and, by necessity, a considerable proportion of those must be incurred where in some way a trustee has been found to have acted in error. Doubtless liability in tort poses its own particular problems, as the cases, especially Gatsios Holdings, demonstrate. With respect, I would prefer therefore, at least for the time being, to confine what was said in that case to liabilities in tort incurred by trustees and the circumstances in which they should be so indemnified.

165. The answer to what now seems to be a degree of confusion as to the nature of costs, expenses and liabilities for which a trustee can seek indemnification may well lie in the simple proposition of Lindley, L.J. in Re Beddoe to the effect that the words "properly incurred" are equivalent to the words "not improperly incurred", a proposition so abundantly obvious that it tends to obscure some of the complications which have been overlooked from time to time. In my opinion the use of the negative is intended to show that what is "proper" and "improper" must be answered by reference to the circumstances and in particular by reference to the duty with which a trustee was obliged to comply or the power which a trustee is intending to exercise. The content of trustees' duties vary considerably, as do the obligations taken on when a power is exercised. A significant number of trustees' duties requires strict compliance so that failure to comply with that duty will necessarily lead to the conclusion that a particular cost, expense or liability has not been properly incurred. On the other hand, the more day-to-day functions of a trustee in the management of a trust require only that the trustee "exercise the same care as an ordinary, prudent person of business will exercise in the conduct of that business were it his or her own": per Gummow, J. in Breen v. Williams[66]. The proposition is derived from a number of well-known authorities such as Speight v. Gaunt[67]; Austin v. Austin[68] and Fouche v. Superannuation Fund Board[69]. That test has been accepted for many years as providing an objective but not over-strict standard and it has been stated on many occasions that it does not require a subjective standard of diligence and care which an individual trustee might exercise in the management of his or her own affairs, but only the objective standard of the "ordinary prudent" business person taking on the role of a trustee: see Jacobs[70]. In my opinion it was that latter obligation to which Bowen, L.J. was referring in Re Beddoe, so that to rely on what his Lordship said there may be misleading, even allowing for the fact that it has frequently been taken as expressing Lindley, L.J.'s test in different terms. But that case was concerned solely with the costs of litigation and Bowen, L.J.'s comments were confined explicitly to "costs, charges and expenses". "Reasonably" must therefore be understood in the context of the particular duty which is in issue.

168. On the other hand, expenses and liabilities may be incurred where a trustee is engaged in activities which extend beyond mere management. The trustee may then be held to account far more strictly, in all senses. Conventionally a contrast is drawn with the performance of what have been called proscriptive and prescriptive duties such as the duty to keep and render accounts, the duty not to allow a conflict between duty and interest and the duty not to obtain an unauthorised benefit from the trust.[72] Again it seems to have been accepted that a higher standard is demanded, subject to any statutory provisions, when making investments on behalf of the trust: see, e.g., Re Whiteley[73]. For present purposes one may mention only one further strict duty recently described in the High Court as the duty "to adhere to the terms of his trust in all things great and small, important, and seemingly unimportant": see Youyang Pty. Ltd. v. Minter Ellison Morris Fletcher[74]. The fact that such breaches can now be excused under s.67 of the Trustee Act 1958 was there noted by the High Court as indicating merely the strictness of the obligation and the need for legislation to relieve trustees who breached it. It would follow that expenses or liabilities incurred as a result of a breach of that duty must ordinarily be characterised as improperly incurred, without regard to the reasonableness of the trustee's acts. It is obvious that there would be other breaches of these stricter duties which would lead to expenses and liabilities which were incapable of indemnification because each could be said to have been improperly incurred.

171. A test, therefore, based on whether a cost, expense or liability has been "properly incurred" takes on some meaning, even if the answer depends on an analysis of the act which gives rise to the particular cost, expense or liability and the duty whose performance or breach may have led to that consequence. Naturally the vast majority of costs and expenses will not arise out of any breach of trust but will be merely incurred in the ordinary day-to-day management of it, but some will arise out of breaches of trust many of which will lead to a denial of indemnification because the relevant breach of duty will be characterised as having been improperly incurred. There will remain, nevertheless, some breaches of duty giving rise to expenses and liabilities about which that cannot be said automatically, so that one must examine those particular breaches individually in the context of the stated duty or power. I would therefore hesitate to agree with the restated tests in Ford & Lee[75] which require that every properly incurred liability has to satisfy the triple test stated above.[76]

The negative test is the relevant test, that is to allow indemnification for what has not been shown to have been improperly incurred. Thus it may be shown that a particular act is either outside the relevant power, done in bad faith, or exercised with an absence of the care and diligence that a person of ordinary prudence should exercise. I believe that, if carefully read, the judgment of Brooking, J.A. in R.W.G. Management merely expresses the possibility that impropriety may be established in a variety of different ways according to the nature of the duty or power exercised by a trustee. It would follow that the test of "reasonableness" is primarily concerned with the standard of ordinary diligence and care required in the management of trust affairs which might be expected of a trustee as objectively but not over zealously enforced. That is why Bowen, L.J. insisted that in matters of management and the like "mere errors of judgment" should not deny the right to indemnification but, with the greatest of respect, his insistence on a test of unreasonableness goes beyond what equity would demand. So far as costs and expenses are concerned, at least those which are the subject of taxation as "indemnity costs", no question of reasonableness applies in the first instance as to the nature of the costs and expenses which the trustee may claim (at least in ordinary cases), but the test of reasonableness is imposed on the quantum of the amount claimed by a trustee which the Taxing Master should properly allow. Otherwise I reiterate what I have said above in paragraph [51].

176. The present case, like many others, involves a liability arising out of what might otherwise seem to be a relatively mundane performance of a trustee's duties, namely, the providing of a security, effectively to preserve a sale. The trustee's error was, as was clearly found in the earlier case by Byrne, J., a mere slip which came about because of the speed whereby the parties sought to effectuate their intentions and which led to an explicit holding that there was no fraud involved on the part of the trustee. Of course it could be said that the trustee acted negligently in the sense that it did not ensure that the mortgagee's rights were not confined to the debt arising out of the transaction relating to the Jolimont property, so that, by mistake, it made the security available to satisfy all of Merlaw's liabilities to the ANZ bank. It is arguable that the transaction was not carried out with the degree of care and diligence that a person of ordinary prudence would exercise in the conduct of his or her affairs, but I think, nevertheless, that such an analysis cannot here determine whether a trustee can fairly seek indemnification from the assets of a trust in circumstances where something has happened to go wrong.

179. No direct authority was cited which would govern the case in issue, but in my opinion this was not the type of case where the degree of want of prudence was such as to deprive the trustee Merlaw of the right to look to the trust estate to satisfy a liability of the kind here incurred. In other words it has not been shown that the trustee acted improperly. There was no question raised that the transaction was unauthorised or was not entered into in good faith, for, as I have explained before, the object of the trustee, at least in part, was to ensure that the contract might proceed to completion, which would certainly not come about if the purchaser was forced into defaulting on its obligations. The only error seems to have been a "mere error of judgment", in allowing the mortgage, intended to cover the debt arising from the purchase by Terramont of Jolimont, to be security for liabilities to the ANZ bank beyond those incurred with respect to that property. Incautiously, but not deliberately, as Byrne, J. held, the mortgage signed by Mr Nolan on behalf of Merlaw urgently just before Christmas permitted the ANZ bank to apply the proceeds of any sale of the mortgaged asset in discharge of all or any of Merlaw's liabilities to the bank, including, because of its generality, liabilities incurred by Merlaw in relation to the Prudent Trust other than those arising out of the contract relating to the subject land. Signing a mortgage in that form was clearly inappropriate and prejudicial to the parties interested in Jolimont, in particular Terramont and the interests standing behind it, but in substance it caused no prejudice directly to the Prudent Trust, save that it exposed Merlaw to the action which was successfully brought by the Collie interests and heard by Byrne, J., which has led to the liability to make compensation to that purchaser. Indeed, apart from exposing Merlaw to that liability, the transaction was beneficial to that company in that, by chance and not by design, it provided additional security for all Merlaw's trust obligations owed to the ANZ bank. In broad terms close on $400,000 of its liabilities to the bank were satisfied by the reduction of its overdraft to that extent.

182. It may be regretted that her Honour did not examine why the liabilities here in question were not improperly incurred within the meaning of the authorities, but, so far as I can ascertain, little if anything was raised in argument before her on this issue. It was, however, entirely proper for Merlaw as trustee to seek to carry out its obligations under the sale that it had made of the Jolimont property to Terramont and to allow the title to be mortgaged a second time, this time to the ANZ bank, to ensure completion by the purchaser. Its careless expansion of the liabilities secured by the mortgage did not directly harm the Prudent Trust; on the contrary, in the way just described, it provided additional security to support that trust's many liabilities, albeit that it prejudiced the purchaser. Having regard to my conclusion already stated that it was appropriate that a mortgage over the Jolimont land should be entered into in support of the contract of sale and what would otherwise be properly intended to ensure the purchaser's position under that contract, it is hard to characterise the oversight relating to the extent of liabilities secured as being more than a mere error of judgment which had no immediate harmful effect on the Prudent Trust. I did not understand the appellant to be arguing that he effectuated a breach of the Prudent Trust on behalf of Merlaw when he executed the mortgage on its behalf, but one may accept counsel's submissions to the effect that the trustee's acts were "improper" as tending to the same conclusion, in that they were intended to support the contention that Merlaw had not acted properly in the performance of the trust.

185. In my opinion, notwithstanding that error which led to the successful action against Merlaw for breach of the purchase trust, I consider that this act on the part of Merlaw was not sufficiently heinous to deny it the right to indemnification from the Prudent Trust, inasmuch as it has not been shown to have been improperly incurred within the (largely) accepted meaning of that expression. If one were to accept the "ordinary, prudent business person" test, the entry into the mortgage satisfied that test, as properly understood, and the extension of the security was, in the circumstances, a mere oversight and error of judgment.[77] It is not necessary to examine further the decision in Gatsios Holdings, which may fairly be confined to liabilities arising out of torts[78], nor the constant problems, commented upon so frequently in judgments[79] and especially in the textbooks, which arise because impersonal corporations, other than those under the strict control of the Trustee Companies Act 1984, are permitted to act as trustees of, in particular, trading trusts.

188. A second basis for a right of indemnity is the fact that the impugned act benefited the Prudent Trust estate. According to the authorities such benefit entitles a trustee to claim indemnification even if it cannot establish that a liability was properly incurred. As Brooking, J. expressed it in R.W.G. Management[80]: "A trustee is, however, entitled to be indemnified in respect of the liability improperly incurred to the extent to which, acting in good faith, he has benefited the trust estate". For this proposition he relied on Vyse v. Foster[81] and Jesse v. Lloyd[82], as well as Scott on Trusts, 3rd ed. (Vol. III paras.244-248 and 268).[83] See also Ford and Lee[84].

191. The appellant denied that the Prudent Trust obtained any benefit from the mortgage transaction. He primarily contended that there was no legal or logical connection between the incorrectly drafted mortgage and the Prudent Trust, in that Merlaw was seeking only to advance the interests of the parties to the Purchase Trust and in particular those who stood behind Terramont. For reasons already stated at length one cannot isolate the transactions in that way. Merlaw was the vendor and it was selling an asset of the Prudent Trust. The fact that the vendor's beneficial interest in the land was by then relatively small in value (seemingly only $10,000 of the purchase moneys remained payable) was of no consequence, for the parties had not completed the sale and Merlaw had functions yet to carry out under the terms of that contract so as to vest full ownership in Terramont and to receive the balance of the purchase moneys.

194. Nor is it easy for the appellant to make out a case that the Prudent Trust and its beneficiaries received no benefit. After all it was Merlaw's gains by reason of the proceeds of sale of Jolimont being applied to satisfy all of Merlaw's other liabilities to the ANZ bank which in effect formed the basis for the Collie interests' recovery of compensation in the action heard by Byrne, J. There must have been a corresponding, if not identical, benefit to the beneficiaries of the Prudent Trust. That benefit was the use of the proceeds of the mortgagee's sale to reduce Merlaw's liabilities generally to the bank and not merely to reduce the much lesser liability relating only to the Jolimont land which the mortgage was intended to secure. The precise figure of the benefit (as such) was not identified, to my recollection, but it must have been the extent to which the Prudent Trust's liabilities were reduced in excess of the debt relating solely to Jolimont, which should have been the only amount secured by the mortgage. The primary amount of compensation for that element recovered in the first action (and which is the subject of the other appeal to this Court) should broadly represent one-half of the benefit obtained by the Prudent Trust and its beneficiaries, the other half being referable to Terranol and the Nolan interests. It may be somewhat less than the liability presently in issue, but it is unnecessary to pursue the question in detail, as I have already concluded that the liability was not improperly incurred by the respondent trustee, Merlaw.

197. I should also add at this point that, although the appellant also raised arguments that a tracing action should have been brought before Byrne, J. and that certain claims against (and by) the ANZ bank in the first action were compromised, I cannot see that they have a bearing on the outcome of this appeal. There is no logical basis for the suggestion that each involved some election on the part of Merlaw which in some, unspecified, way could limit Merlaw's consequent right to seek to enforce it by way of indemnity or the like. If it be said that in some way the judgment creditor in the first action was barred from tracing the sum obtained by way of compensation, then I do not agree that the present action involved a claim to trace moneys at all. Although it has been accepted that the claim for indemnification may lead to a form of beneficial interest in the trust estate, that is merely an incident of such a claim, for the claim for indemnification is in the first place a personal claim, howsoever it may be enforced, and the claim to be subrogated is likewise personal for it involves only the right to stand in the shoes of a trustee who has a right to indemnification. To the extent that it has been suggested and accepted that there is a beneficial right in the trustee or anyone who stands in its shoes, that is merely a right to a general interest in the estate and not a right to claim any specific asset. None of the matters so asserted could properly bar the first respondent's claim.

200. It remains to deal with the arguments which challenge the first respondent's right to be subrogated to the trustee Merlaw's rights of indemnification out of the Prudent Trust estate. One may immediately observe that, were it not for certain technical arguments raised by the appellant, there would otherwise appear to be little reason why the respondent Mr G.M. Collie should not have the right directly to enforce that indemnity in relation to that estate. The learned judge, at paras.[57]-[77], gave clear and compelling reasons for allowing the Collie interests to stand in the shoes of Merlaw to enforce its rights to be indemnified, to the extent that that is now possible having regard to the liquidation of the second respondent Merlaw. I should also add that, significantly, counsel for the second respondent attended the court on the first day of the hearing of the appeal to inform the Court that, on instructions from the liquidator of Merlaw, it did not wish to put any arguments on its or any other person's behalf relating to the substance of the appeal, save that it said that it might wish to make submissions in due course relating to the costs of this litigation. Counsel was then given leave to absent himself from the rest of the argument in this Court.

203. The principal objection made to the learned judge's orders that the judgment creditor Mr G.M. Collie was "entitled by subrogation to an indemnity out of and to exoneration from the trust estate of the Prudent Trust in respect of the judgment" was that the judge had no power to make such a declaration because Merlaw was now in liquidation and consequently, in accordance with the judgment of the Full Court in Re Enhill Pty. Ltd.[85], the trustee's indemnity became property available to the liquidator for division among the trustee's creditors generally and her Honour's orders had the effect, so it was said, of granting the benefit of the right of indemnity to Mr Collie "to the exclusion of Merlaw's other creditors. " The passage relied upon in particular by the appellant came from the judgment of Young, C.J., as follows[86]:

"In a case like the present [i.e. where the trustee is bankrupt or in liquidation] therefore the proceeds of the trustee's lien are available for division among the bankrupt's creditors generally, not only among creditors of the trust business, and in the case of a company in liquidation are subject to the control of the liquidator under s.292[87]. ... Creditors of the trust business may be subrogated to the trustee's right of indemnity but they cannot, by subrogation, obtain any greater right than that possessed by the trustee, and when the trustee's estate is separated from the trust estate by bankruptcy they rank with the general creditors of the bankrupt. They can have no better right than the bankrupt trustee ...".[88]

Counsel for the appellant asserted that by making the order that she did, her Honour conferred the benefit of Merlaw's right of indemnity on the judgment creditor in the first action, Mr G.M. Collie, to the exclusion of Merlaw's other creditors.

208. I confess that I cannot see how it is that the judge's order excluded the interests of any other creditors of Merlaw for the purposes of the winding up. The relevant paragraph of the judge's order read merely that the Court declared that: "The plaintiff is entitled by subrogation to an indemnity out of and to exoneration from the trust estate of the Prudent Trust in respect of the judgment (including costs and interest) and subsequent statutory interest." That order appears to me merely to declare the successful plaintiff's right to be subrogated and says nothing as to how the liquidator, who one may accept is in practical control of all Merlaw's property, should deal with the right particularly vis-a-vis the other creditors of Merlaw. As I would understand it Merlaw's activities were confined to acting on behalf of the Prudent Trust; certainly it was not suggested that it had any other assets or any other interests. For present purposes the only potential claimant was the liquidator himself but we were likewise led to understand that he was making no claim on the estate at least for the present. The assumption made by the appellant's argument, nevertheless, was that there were competing claims which should be recognised or at least their potentiality should have been recognised by refusing to make the declaration.

211. To refuse to make an appropriate declaration would seem a curious decision if indeed there would ordinarily be a right in a judgment creditor to stand in the shoes of a trustee who has a right of indemnification out of a trust estate. The right cannot be discretionary, except to the extent that courts of equity reserve to themselves a right to refuse to make equitable orders if the party seeking them has acted unconscientiously or is otherwise disqualified by reason of any other rule of equity. Nor, surely, could it matter that the trustee is in liquidation, except to the extent that the liquidator may have to deal differently with the claim for recoupment made by the subrogated party in order to give effect to the liquidator's obligations to deal with the assets under his control. That latter matter would seem to be a question to be resolved on a liquidator's summons, if indeed there is some conflict between the party claiming the right by way of subrogation and other creditors. The order made by Warren, J. did not impinge on the liquidator's powers, at least as I would understand the order that she made.

214. There must therefore be some other reason lying at the back of the appellant's contention. It seems that what in particular is relied upon is the assertion made in the authorities that upon subrogation the party subrogated acquires some equitable interest in the relevant assets. That may be so, indeed there is no doubt that the right of indemnification continues to affect the trust property even though there is a new trustee, but the interest recognised is intended merely to preserve the right of the trustee, not to create a priority of the kind frequently given where other charges are imposed except a right to claim priority over the beneficiaries.[89]

217. The present case involves only the issue whether the trustee was entitled to indemnification in respect of the relevant liability and whether the judgment creditor was and is entitled to stand in the shoes of the trustee for the purpose of enforcing it. The problems raised in Re Enhill and other cases are not raised in this litigation. The appellant argues that Enhill was correctly decided and the respondent does not deny that it was correctly decided, only that its application is different. It is therefore not necessary to examine, even if a court of three judges could do so, the continued applicability of that decision insofar as it has been considered to reach a controversial conclusion.[90] In the present case no issue is raised by the liquidator or by any third party as to competition with the right of the first respondent to claim over against the Prudent Trust estate. No issue has been raised as to how the liquidator proposes to administer that trust estate, nor at present does there seem to be any ordinary creditor of Merlaw making a claim against the liquidator in respect of the trust assets. In other circumstances the Collie interests might, if Enhill be correct, have had to compete with other ordinary creditors of Merlaw, so that they would have to share rateably the amount the Trustee could get in from the Prudent Trust assets by way of indemnity. In theory some such order could here be devised to protect those notional creditors, but there would seem no point in doing so here. Traditionally equity eschews circuity of action, so that the direct orders here made were entirely appropriate.

220. 68 There is therefore no reason why the orders made by Warren, J. should not be maintained declaring the right of Mr. G.M. Collie to enforce the trustee's right by seeking payment out of the Prudent Trust assets against the second respondent liquidator, of the amount of the judgment obtained by him. In consequence I would dismiss the appeal.

225. I agree with Ormiston, J.A., whose reasons I have had the benefit of reading.

230. I agree that this appeal should be dismissed for the reasons given by Ormiston, J.A.

[1] (Proceeding 5565 of 2000). Reasons for judgment were delivered on 28 February 2001: [2001] VSC 39; and declarations and orders made on 9 March 2001.

[2] In Collie v. Merlaw Nominees Pty. Ltd. & Ors (Proceeding 6265 of 1991). The relevant judgment for this appeal was given on 22 December 1998: [1998] VSC 203.

[3] He had been appointed on 11 October 1993.

[4] After Merlaw had been deregistered, it was restored to the register in 1990. It was placed in liquidation on 16 February 2000.

[9] The precise amount of these was the subject of much dispute in the compensation action and was the subject of further dispute in the appeal in that action.

[10] Proceeding No. 6265 of 1991. The claim against the ANZ bank, along with claims brought by the bank, was settled some time before trial by compromise. Byrne, J. dismissed the claims against Mrs Nolan.

[11] See paras.[74]-[79] of Byrne, J.'s judgment.

[12] [1979] HCA 61; (1979) 144 C.L.R. 360.

[14] [1983] VicRp 52; [1983] 1 V.R. 561.

[15] Appointed by vesting order on 8 February 1991.

[16] [1998] VSC 203 at paras.[74]-[79].

[18] [2001] VSC 39.

[19] I use the word "indemnity" generally as a short-hand comprehending rights of exoneration and recoupment.

[20] There seems little doubt that "it has long been established that a vendor of real estate under a valid contract of sale is a trustee of the property sold for the purchaser": per Mason, J. in Chang v. Registrar of Titles [1976] HCA 1; (1975) 137 C.L.R. 177 at 184. Whether the vendor is a constructive trustee before becoming a bare trustee upon payment in full of the purchase price or whether the vendor is only a trustee sub modo, which, as I would understand it, recognises the varying continuing interests of the vendor before completion, is presently of little consequence. See also the use of the expression by members of the High Court in KLDE Pty. Ltd. v. Commissioner of Stamp Duties (Qld.) [1984] HCA 63; (1984) 155 C.L.R. 288 at 296, 301. Compare the disapproving observations of Deane, J. (diss.) in Kern Corporation Ltd. v. Walter Reid Trading Pty. Ltd. [1987] HCA 20; (1986) 163 C.L.R.. 164 at 192. See further below at paras.[[]-[].

21] Cf. Stern v. McArthur [1988] HCA 51; (1988) 165 C.L.R. 489 at 522, per Deane and Dawson, JJ.

[22] It may be that there was in fact a breach of the contract of sale in a way not articulated before Byrne, J., but he held that there was no breach as pleaded: paras.[68]-[73]; and that was not here challenged.

[23] See Bogert on Trusts and Trustees (2nd ed. revd. 1978) para.472.

[24] See also the general approach of Professor Scott both as author of his own work on Trusts (see now the 4th ed.) and as a reporter for the American Law Institute in its Restatement on Restitution.

[25] 4th ed. (by W.F. Fratcher) (1989) Vol. V para.479. 1.

[27] [1982] W.A.R. 161.

[28] [1995] HCA 18; (1995) 182 C.L.R. 544.

[29] (3rd ed., loose-leaf, to December 2000) para.22640.

[32] Which, however, is not customary under terms contracts of sale in Victoria.

[34] (1579) Carey 82-83.

[36] At 898-904, again in a very lengthy chapter (chapter 25 pp.898-971).

39] See also above, at paras.[[]-[].

40] [1893] 1 Ch. 547 at 558.

[41] [1945] HCA 37; (1945) 72 C.L.R. 319 at 335.

[42] [1985] VicRp 42; [1985] V.R. 385 at 394, 396 per Brooking, J.

[43] 3rd ed. (loose parts). Chapter 14 para.14040 (before the cumulative supplement No. 7 of September 2002).

[44] 6th ed., edited by Meagher, J.A. and Gummow, J., at p.628 [2102] and at pp.631-632 [2105].

[45] [2002] N.S.W.C.A. 29; [2002] ATPR s.41-864.

[49] The decision of the Court was in favour of indemnification. One of their Honours, indeed, has been in part responsible for the passages cited from Jacobs' Law of Trusts from the second edition in 1967 to the 6th edition in 1997.

[50] Meagher, J.A.'s reference to "this right" in para.[47] refers back to the same expression in para.[46] of his judgment, but the question there posed was whether "this right" "extends to reimbursement ... for damages ... for torts".

[54] See e.g. Form 1 at p.1126 of Seton's Forms of Judgments and Orders (7th ed.) vol. II and see also at pp.1131-1132.

[58] [1941] HCA 3; (1941) 64 C.L.R. 268 esp. at 277 per Williams, J., which was concurred in by Rich, A.C.J.

[60] At 335. It should be noted that Dixon, J., although not expressly citing Re Beddoe, explicitly referred to "liabilities" as such, although the word seems to have been used in its widest sense.

[61] [1979] HCA 61; (1979) 144 C.L.R. 360.

[62] [1998] HCA 4; (1998) 192 C.L.R. 226.

[63] See pp.92-93 of the 7th Supplement of September 2002.

[67] (1883) 9 App.Cas. 1 at 19 per Lord Blackburn.

[68] [1906] HCA 5; (1906) 3 C.L.R. 516 at 525 per Griffith, C.J.

[69] [1952] HCA 1; (1952) 88 C.L.R. 609 at 641 per Dixon, McTiernan and Fullagar, JJ.

[73] (1886) 33 Ch.D. 347 at 355 per Lindley, L.J.; and see Ford & Lee at para.[9020] and Jacobs at para.[1802].

[74] [2003] H.C.A. 15 at para.[33], quoting Augustine Birrell, Q.C. in The Duties and Liabilities of Trustees (1896) at p.22.

77] It is conceivable that, but for its registration, the mortgage might have been rectified for mistake.

[78] It should be noted that less than a year later, in Kirnan v. Cresvale Far East Ltd. (In Liquidation) [2002] N.S.W.C.A. 395, (2002) 44 A.C.S.R. 21, the N.S.W. Court of Appeal again adopted Re Beddoe, though referring to the "reasonable and honest" test of Bowen, L.J., as well as the test laid down in Barnes: see at [259] per Beazley, J.A. with whom Meagher, J.A. concurred.

[79] See, e.g., ASC v. A.S. Nominees Ltd. [1995] FCA 1663; (1995) 62 F.C.R. 504 at 516-518 per Finn, J.

[81] (1872) L.R. 8 Ch. App. 309; (1874) L.R. 7 H.L. 318.

[82] (1883) 48 L.T. 656.

[83] See now 4th ed. Vol. IIIA paras.245.1 and 269-269.3.

[85] [1983] VicRp 52; [1983] 1 V.R. 561.

[86] At 564-565. The judgment was concurred in by Gray, J. (at 572) and a judgment along similar but not identical lines was delivered by Lush, J.

[87] Of the Companies Act 1961. What was contained in a single section at that time is now spread, with innumerable subsequent modifications, over ss.555-563AAA of the Corporations Act 2001, the principal priority section being s.556.

[88] See also per Brooking, J. in R.W.G. Management at 393.

[89] The qualified nature of the trustee's interest has now been explained by the High Court in Commissioner of Stamp Duties (N.S.W.) v. Buckle [1998] HCA 4; (1998) 192 C.L.R. 226, esp. at 244-247.

[90] See, e.g., Re Suco Gold Pty. Ltd. (1983) 33 S.A.S.R. 99; Jacobs para.[2114] and Merralls: Unsecured Borrowings by Trustees of Commercial Trusts (1993) 10 Aust. Bar Rev. 248.