These proceedings were commenced by Summons filed on 4 August 2017. The plaintiff, Mr James O'Dea, sought orders for the appointment of trustees for sale pursuant to s 66G of the Conveyancing Act 1919 (NSW) in respect of a block of units in Bondi he co-owned with his brother, the defendant, Mr Michael O'Dea. They were tenants in common in equal shares.
On 31 August 2017 the Court made orders appointing trustees for sale in respect of the property. Unfortunately, for various reasons, completion of the sale did not take place until June 2019. In the intervening period Mr James O'Dea died and the executors of his estate have been substituted as the plaintiffs in his place.
The contract for sale that settled in June 2019 had been entered into by the trustees on 27 February 2019 for a price of $5.8 million. By late July 2019 the trustees were holding sale proceeds, after the payment of various costs and expenses, in an amount of about $5.373 million.
I interpose here that the trustees had earlier entered into a contract for sale of the property to the defendant. That contract had been entered into on 7 March 2018 for a price of $6.345 million. That is $545,000 more than the price agreed to be paid by the later purchaser. The contract between the trustees and the defendant was terminated by the trustees on 13 July 2018 following the failure of the defendant to complete the purchase by 11 July 2018, as called for by a Notice to Complete that had been served on 25 June 2018. It should be noted that the defendant disputes the validity of the termination.
On 26 July 2019, the solicitors acting for the plaintiffs sent a letter to the firms of solicitors acting respectively for the trustees and for the defendant. The letter contained calculations in support of a suggested distribution to the beneficiaries of the funds held by the trustees. In short, it was suggested that the plaintiffs should receive more than $3.6 million out of the funds which, as I have said, were then about $5.373 million. The disparity is the product of various adjustments which the plaintiffs contend should be made in their favour. The largest adjustment, being an amount of almost $705,000 (this figure has since been revised), is based upon a calculation of losses said to have been incurred as a result of the failure of the defendant to complete his purchase of the property. Other adjustments are suggested on the basis that certain costs (including agent's commission and some of the trustees' fees and legal expenses, and some of the plaintiffs' costs of these proceedings) should be wholly borne by the defendant's share of the fund.
On 30 July 2019, the solicitors for the trustees sent a letter to the solicitors for the plaintiffs and the solicitors for the defendant in relation to the proposed distribution. The trustees' solicitors requested that the defendant indicate his attitude to the proposal and, if not in agreement, propose an alternative distribution. No response was received from the defendant or his solicitors.
On 20 August 2019, the solicitors for the trustees sent another letter. The stated purpose of the letter was to advise that unless the parties could agree on a distribution, the trustees would have to apply to the Court for directions. It was stated that part of any such application would involve the seeking of orders to enable the trustees to set aside a sum "on account of the further litigation previously foreshadowed by Mr O'Dea [the defendant]". That is a reference to certain claims made by the defendant in connection with his contract to purchase the property and the termination of that contract. The trustees' solicitors also stated in the letter that the trustees were nonetheless minded to make an interim distribution of $1 million to both the plaintiffs and the defendant.
On 3 September 2019, the trustees filed a Notice of Motion seeking (1) judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) as to whether they would be justified in making a distribution in accordance with the plaintiffs' 26 July 2019 proposal; and (2) a variation of the existing orders to permit them to retain a sum as security for their right of indemnity.
The motion was listed for hearing on 11 October 2019. On that occasion the trustees filed in Court an Amended Notice of Motion which included a prayer for judicial advice as to whether they would be justified in making interim distributions in amounts of $1 million. The trustees, it seems, had earlier indicated to the plaintiffs that they would not be pressing for judicial advice in respect of the 26 July 2019 proposal. In these circumstances, the plaintiffs filed in Court their own Notice of Motion seeking an order that the trustees be directed to make a distribution in accordance with the 26 July 2019 proposal.
Ultimately, the only matter pressed upon the Court on 11 October 2019 was an application by the trustees for judicial advice about an interim distribution of funds. An order was made to the effect that the trustees would be justified in making interim distributions of $1 million to the plaintiffs and $1 million to the defendant. The motions were otherwise adjourned until 29 October 2019.
In the meantime, and notwithstanding the terms of the advice given by the Court, the trustees made interim distributions of $1.5 million to the plaintiffs and to the defendant. Accordingly, the fund now held by the trustees is an amount of about $2.373 million.
On 29 October 2019, the Court acceded to an application by the trustees to close the Court to receive confidential submissions about the issues concerning the distribution of funds, including the extent of an appropriate amount to be retained as security for the right of indemnity having regard to the strength of the potential claims that might be brought by the defendant. The application was made in circumstances where the trustees informed the Court that judicial advice was to be sought as to the amount they would be justified in retaining as security for their right of indemnity. After the Court was re-opened, the plaintiffs and the defendant were given the opportunity to make submissions in relation to that matter. They were informed that the Court was contemplating making an order that the trustees would be justified in retaining an amount approaching $400,000 with possibly an additional amount to take into account the potential for costs orders adverse to the trustees. The matter, that is to say the trustees' application for judicial advice and the plaintiffs' Notice of Motion, was adjourned to today.
Senior Counsel for the trustees informed the Court that the trustees now sought judicial advice to the effect that they would be justified in retaining, at least for a period, the entirety of the remaining proceeds or, if the Court was not prepared to so advise, that they would be justified in retaining a sum in the order of somewhere between $400,000 and $600,000.
The position of the defendant is that he opposes (or at least does not consent to) any further distribution of funds by the trustees, including the distribution sought by the plaintiffs. The defendant is thus not opposed to the trustees retaining even all of the remaining funds.
It is convenient to deal first with the plaintiffs' Notice of Motion, before dealing with the question of judicial advice. The plaintiffs seek an order that the trustees be directed to distribute the moneys held by them in accordance with the plaintiffs' proposal of 26 July 2019, as subsequently amended in various respects. Before turning to consider the proposed distribution, reference should be made to the orders of the Court in respect of the trust the subject of these proceedings.
As mentioned earlier, the trustees were appointed on 31 August 2017. The property the subject of the proceedings was vested in them as trustees upon the statutory trust for sale under Division 6 of Part 4 of the Conveyancing Act subject to various orders and directions (see orders 1 and 2). Order 3(c) provided that upon the sale of the property the proceeds of sale were to be distributed in a certain order of priority. Order 3(c)(v) essentially provided that after payment of certain amounts (including the trustees' reasonable costs and expenses and the costs of the s 66G application itself), the proceeds were to be distributed to the plaintiff and the defendant in equal shares. However, on 30 November 2018 (after the termination of the defendant's contract for purchase) various orders were made by Kunc J including an order that order 3(c)(v) be deleted and replaced with the following:
To the plaintiffs and the defendant in equal shares, subject to any adjustments that should be made in favour of either side, including, if applicable, any unpaid costs of the proceedings that one party is ordered to pay to the other; the costs of resale of the property occasioned by the defendant's failure to complete the contract of sale of 7 March 2018; and any deficiency on resale.
In essence, the plaintiffs submit that the distribution they seek to have the trustees make accords with, and indeed is required by, the terms of order 3(c)(v) as made on 30 November 2018.
I do not accept that the trustees are bound to distribute the proceeds of sale in the manner advanced by the plaintiffs. Order 3(c)(v) speaks of adjustments that "should be made in favour of either side", including, "if applicable", adjustments of the types later referred to in the order. In my opinion, the order ought not be read as if it provided that if there was a resale of the property, an adjustment must be made in favour of the plaintiffs for the costs of the resale and, if the resale was at a lower price, the deficiency in price. It is always a question of whether particular adjustments "should" be made. The order ought not be regarded as effectively operating as a summary determination, adverse to the defendant, of the issues in relation to the contract between the trustees and the defendant. That seems to me an unlikely intention, even allowing that the parties had liberty to apply to discharge the order. To the extent that it is relevant, I note that it was not suggested to Kunc J that the order would operate in that fashion. Indeed, it was put to his Honour that the order was intended to "preserve the position" in relation to further accounting between the parties "if any amount is found to be due" (see transcript at 2.30 and 6.10). In addition, the statutory context in which the order was made tends against the construction propounded by the plaintiffs (see Bar-Mordecai v State of New South Wales (2012) 83 NSWLR 125; [2012] NSWCA 207 at [36]). More is said about that later.
In my view, it remains a matter for the trustees to decide whether any particular adjustments "should" be made in favour of either the plaintiffs or the defendant pursuant to order 3(c)(v). The trustees do not appear to have yet made any decisions about the adjustments pressed by the plaintiffs and, at least at this stage, the plaintiffs do not assert that the trustees have breached any duties in relation to the distribution of funds. In that regard it should be noted that the trustees face a most difficult situation, particularly in so far as the main adjustment sought by the plaintiffs is concerned. On the one hand, the defendant asserts various claims against the trustees arising from the contract for sale, including a claim that the trustees' termination of the contract was invalid. On the other hand, the plaintiffs seek an adjustment in their favour calculated on the basis of losses said to have been incurred as a result of the failure of the defendant to complete the contract. It is implicit in the plaintiffs' position that the defendant is liable for those losses on the basis that the trustees validly terminated the contract due to the defendant's default. However, these matters have not been the subject of any determination by a court. It is difficult to see why the trustees in this situation would be bound to decide that the adjustments sought by the plaintiffs are ones that should be made in their favour pursuant to order 3(c)(v).
There are other reasons that reinforce that conclusion. These reasons stem from the very nature of the adjustments sought by the plaintiffs. The trustees were appointed as such upon the statutory trust for sale. That trust is defined in s 66F(2)(a) of the Conveyancing Act. The definition refers in its closing words to the trust being subject to such powers and provisions as may be requisite "for giving effect to the rights of the co-owners". It is well established that the phrase "for giving effect to the rights of the co-owners" means giving effect to the rights of the co-owners as co-owners (see Re Fettell (1952) 52 SR (NSW) 221 at 225 and 228 (McLelland J); Whitehead v Whitehead [2002] NSWSC 486 at [26]-[28] (Austin J); and Arrow Custodians Pty Ltd v Pine Forests of Australia Pty Ltd (2008) 14 BPR 98,326; [2008] NSWSC 839 at [34] (Bryson AJ).
Re Fettell (supra) and Arrow Custodians Pty Ltd v Pine Forests of Australia Pty Ltd (supra) were in this regard cited with approval by Macfarlan JA (with whom Campbell JA and Sackville AJA agreed) in Ross v Ross (2010) 15 BPR 28,945; [2010] NSWCA 301 at [32]-[33], and again by his Honour in Boyd v Thorn (2017) 96 NSWLR 390; [2017] NSWCA 210 at [46]-[47].
Macfarlan JA continued in that case at [48] as follows:
The effect of these statements is that, when making an order under s 66G to give effect to the statutory trust for sale identified in s 66F(2)(a), the court's authority is limited to making adjustments to reflect the rights of the co-owners in their capacity as such. Thus, as I pointed out in Ross v Ross at [34], the court could, for example, provide for the payment of an occupation fee by one co-owner to another or make an allowance for the value of improvements made by one co-owner…
In the light of these principles, it seems to me that in so far as order 3(c)(v) allows "adjustments that should be made in favour of either side", it ought be read as far as possible as being confined to adjustments to reflect the rights of the co-owners in their capacity as such, unless perhaps the adjustments are not contentious. I note in passing that none of these authorities or principles were brought to the attention of Kunc J when he made the orders on 30 November 2018.
I have not overlooked that in Arrow Custodians Pty Ltd v Pine Forests of Australia Pty Ltd (supra) Bryson AJ stated at [35]:
It often happens that the Court decides on entitlements between co-owners in proceedings in which property has been or is to be sold under s 66G and the Court is in control of funds in which the co-owners have interests. Where there are two or three co-owners it is usual and appropriate for the Court to decide on any equitable or legal claims between them without paying close regard to whether the Court has gone past enforcement of the statutory trust for sale under ss 66F and 66G and is using its control over funds to enforce rights of other kinds; abridging processes of accounting and execution by directing how funds under its control are to be distributed. If there are enough funds it matters little whether in requiring discharge of a liability out of what would otherwise be distributable entitlement under s 66G the Court is giving effect to an interest in land, or to a personal claim; or to a constructive trust.
However, an adjustment arising from the defendant's failure to complete his contract with the trustees can scarcely be described as an amount based on the determination of any equitable or legal claim between the co-owners as such. Of course, any cause of action for loss arising from the failure to complete belongs to the trustees, not to the plaintiffs. I would add that until it is agreed or determined that the trustees validly terminated the contract for sale and were thereby entitled to recover the costs of resale and the deficiency on resale, those adjustments are arguably not "applicable" for the purposes of order 3(c)(v).
Even an adjustment arising from a costs order made in favour of the plaintiffs against the defendant is not an amount based on the determination of any legal claim between the co-owners as such. As stated by Macfarlan JA in Boyd v Thorn (supra) at [48], such a liability for costs arises independently of the parties' position as co-owners by reason of a court order. In the same case, Leeming JA stated (at [181]) that the making of an order that costs be paid out of a co-owner's share of the proceeds of sale did not fall within the ambit of the statement made by Bryson AJ in Arrow Custodians Pty Ltd v Pine Forests of Australia Pty Ltd (supra) at [35]. (His Honour further pointed out that an order of that kind would have the effect of elevating an unsecured creditor above other unsecured creditors.) Part of the adjustment sought by the plaintiff consists of costs the subject of orders in their favour against the defendant.
It is my opinion that, in the circumstances that presently exist, the trustees are not bound to decide that the adjustments sought by the plaintiffs should be made pursuant to order 3(c)(v).
For the above reasons, the Court will not make an order directing the trustees to distribute the moneys held by them in the manner sought by the plaintiffs. Accordingly, the plaintiffs' Notice of Motion will be dismissed.
I turn then to the question of judicial advice. As mentioned earlier, the trustees sought advice to the effect that they would be justified in retaining, at least for a period, the entirety of the remaining proceeds or, if the Court was not prepared to so advise, that they would be justified in retaining a sum in the order of somewhere between $400,000 to $600,000. The question of retention arises in the context of the assertion by the defendant of various claims arising from the contract for sale which he entered into with the trustees.
The potential claims, in so far as they have been formulated at this stage, appear to be based upon a contention that the trustees' termination of the contract was invalid or wrongful. As I have said, the termination of the contract followed the defendant's failure to comply with a Notice to Complete. There does not seem to have been any challenge, either at the time or since, to the validity of the Notice to Complete. However, various suggestions have been made by the defendant, apparently in order to support the contention that the termination was invalid or wrongful. A suggestion has been made that the trustees represented that they would allow a postponement of the settlement in certain circumstances, and the defendant relied upon that representation. Complaints have been made about a late provision of settlement figures by the trustees, and a late change in the settlement venue. Assertions have been made that the purchase price had been artificially increased by the actions of the plaintiffs in bidding at the auction, such that the defendant himself had a right to rescind the contract.
As I have mentioned, these claims have not yet been clearly formulated. It is difficult to assess their strengths. I have attempted to do so, however, in light of the evidence that has been placed before the Court. Whilst the arguments do not appear to be strong, and indeed some of them seem very weak, it is difficult to dismiss them as fanciful or regard the challenge to the validity of the termination as doomed to fail. Neither can the prospect that the defendant will seek to bring such claims be easily dismissed.
It is clear that the trustees would, prima facie, be entitled to be indemnified out of the trust assets in respect of such claims. Moreover, the trustees are prima facie entitled to retain trust assets to the extent that is reasonably necessary to protect that right of indemnity. The question that is posed for the purposes of giving advice to the trustees is, in essence, what amount would be reasonably necessary to retain in the circumstances.
Even if it is assumed in the defendant's favour that the termination was invalid or wrongful, there does not appear to be any realistic basis for a claim for loss of bargain damages. The evidence all points to the conclusion that the price of $6.345 million agreed to be paid by the defendant exceeded the current market value. The defendant says so himself although, of course, his subjective belief is not itself relevant to the question of value. The price is well in excess of an independent valuation undertaken at the time of the contract, and the price is more than $500,000 higher than the price obtained almost 12 months later. In addition, having regard to the evidence adduced, any claim for loss of bargain damages would face what appears to be the formidable hurdle of having to establish the existence of readiness, willingness and ability to complete the contract.
It seems to me that the quantum of the potential claim should realistically be regarded as limited to the value of the deposit paid plus interest. The deposit paid in March 2018 was $158,625. Unlike the position in relation to a claim for loss of bargain damages, I do not think that it can be said at this stage that there is no realistic basis for any claim in respect of the deposit.
Evidence has been adduced as to the likely costs of any proceedings brought by the defendant in respect of the claims he has foreshadowed. I refer in that regard to the affidavits of Christopher Hadley, solicitor, in respect of legal costs, and the affidavit of Liam Bailey, trustee, in respect of the trustees' costs. I have considered that evidence. I have done so having regard to the important circumstance that the situation is attended with considerable uncertainty. There is force in the submission of Senior Counsel for the trustees to the effect that, in these circumstances, a somewhat conservative approach is appropriate.
Taking Mr Hadley's evidence, and adjusting it to cater for the possibility that a hearing might go into a third day, the legal costs would be almost $100,000. Taking Mr Bailey's evidence, and making a similar small adjustment to cater for a slightly longer hearing, the trustees' costs would be almost $25,000. Senior Counsel for the trustees submitted that a greater amount ought be retained in respect of legal costs, principally having regard to the possibility or likelihood that some expert evidence may be required, and also to the possibility of numerous interlocutory disputes, such being considered a substantial risk having regard to the course of the present litigation at least during this year. I think that in the circumstances some increase beyond that referred to in Messrs Hadley's and Bailey's affidavits is called for. I consider that a figure of about $150,000 for costs and fees would be appropriate.
In relation to the possibility of an adverse costs order against which, again, the trustees would ordinarily be entitled to an indemnity, I consider that an amount of $100,000 would be appropriate, using Mr Hadley's evidence as a reasonable yardstick. In that regard, of course, I am proceeding on the assumption that any adverse costs order would be assessed on the ordinary basis not an indemnity basis.
As for the claim itself, an allowance for the amount of the deposit plus some interest (say for almost three years from March 2018) would yield an amount of about $180,000.
Then there is the question of potential costs, including adverse costs orders, in respect of an appeal. In that regard I consider, having taken into account the submissions of Senior Counsel for the trustees, that an amount of $50,000 would be appropriate.
Finally, it does seem to me likely that the trustees may at one time or another need to seek further judicial advice from the Court. That is particularly so in circumstances where there is litigation in the offing. Any litigation will likely not be confined to claims by the defendant; it would likely include claims by the trustees against the defendant. An amount of $20,000 to cater for potential applications for judicial advice seems to me to be warranted.
According to my calculations, those amounts add up to $500,000. The plaintiffs, by their counsel, have indicated that they would not object to an amount of up to that figure being retained by the trustees. As I have said, the defendant, who opposes any further distribution, is not opposed to any retention of funds by the trustees.
In all the circumstances, it seems to me that an amount of $500,000 to be retained by the trustees would be an amount which may be considered reasonably necessary to protect the trustees' right of indemnity. Accordingly, the Court would be prepared to make an order under s 63 of the Trustee Act to the effect that the trustees would be justified in retaining that sum until further order of the Court.
For completeness, I should add that, having considered the evidence, I do not agree that retention of all of the remaining funds would be reasonably necessary to protect the trustees' right of indemnity. Whilst I accept that there is a degree of uncertainty, about not only the precise nature but also the quantum of the potential claims of the defendant, I do not think that retention of all of the remaining funds is reasonably necessary in the circumstances.
The assessment of the amount considered reasonably necessary must, in my opinion, not only take into account the potential liabilities facing the trustees, but should also take into account the interests of all the beneficiaries, including the plaintiffs who wish to obtain their share of the proceeds of sale and who have not foreshadowed the bringing of any claims against the trustees. The Court will make an order under s 63 of the Trustee Act to the effect of that which I have indicated.
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Decision last updated: 08 November 2019