Nolan v Collie & Merlaw Nominees Pty Ltd

Nolan v Collie & Merlaw Nominees Pty Ltd - [2003] VSCA 39 - VSCA 2003 case summary — Zoe

[23]

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.

[34]

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.

[63]

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".[71] "Reasonably" must therefore be understood in the context of the particular duty which is in issue.

[68]

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.

At a glance

Court

Decision date

Before

Source

Judgment (142 paragraphs)

Parties