REASONS FOR JUDGMENT
1 This proceeding is a representative proceeding commenced under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act). It arises out of the respondent's role as the trustee for noteholders in respect of senior unsecured notes issued by the company now called Octaviar Investment Notes Limited (in liquidation) (OIN). A company now called Octaviar Limited (receivers and managers appointed) (in liquidation) (OL) was a guarantor of OIN's obligations under the notes. The applicant alleges that, following a sharp drop in OL's share price in January 2008, and OL's sale of a business (the Stella Group) which was completed on 29 February 2008, the respondent acted too slowly to protect the interests of noteholders, in particular by failing to apply to wind-up OIN and OL, and to take other steps, by 29 February 2008, with the consequence that the respondent breached his statutory, contractual and general law duties to noteholders.
2 The group members are persons who held notes as at 25 February 2008 (whether or not they still retain those notes) and who suffered loss or damage by or resulting from the acts and omissions pleaded against the respondent. The evidence before the Court is that group members represent 90% by number and 19.44% by value of the present noteholders. Conversely, non-group members represent 10% by number and 80.56% by value of the present noteholders.
3 There are two interlocutory applications before the Court concerning the form of notice to be given to group members pursuant to s 33X of the Federal Court Act. In one interlocutory application (the applicant's interlocutory application), the applicant seeks, amongst other things, an order that the Court approve the form and content of its proposed notice to group members, which does not include an opt out notice. In the other interlocutory application (the respondent's interlocutory application), the respondent seeks, amongst other things, an order approving the form and content of his proposed notice to group members, which does include an opt out notice which specifies an opt out date of 2 November 2015.
4 The parties are in dispute as to the appropriate form and content of the notice that should be given, including whether provision should be made for the giving of an opt out notice. Underlying this dispute is whether, before an opt out notice is given, a separate question should be determined by the Court concerning whether the respondent, when exercising his right as trustee to be indemnified out of the trust estate for his unsatisfied legal costs of the proceeding, is entitled to look first to that share of the trust estate payable to noteholders who are group members before looking to that share of the trust estate payable to noteholders who are non-group members. It is not in dispute that, as a general principle, but subject to certain exceptions, the respondent will have a right of indemnity out of the trust estate for his legal costs. The question is whether, in the context of a proceeding under Part IVA of the Federal Court Act, the respondent would be entitled to exercise his right of indemnity in the way indicated (referred to by the parties as a "selective" exercise of the right) as opposed to exercising his right rateably against all noteholders.
5 The respondent's position is that his right of indemnity must be exercised in the interests of the trust as a whole, and fairly and equitably between different groups of noteholder beneficiaries. Here there are different groups of noteholders - those who are group members; those who are non-group members; and, potentially, those who were group members who have opted out of the proceeding. The respondent submits that, in general, it will be appropriate for a trustee to recoup his proper costs first from the share of the trust estate held for those beneficiaries who caused the costs to be incurred or who stood to gain from the litigation against the trustee, and thereafter from the share of the trust estate owned by the balance of the beneficiaries: National Trustees Executors and Agency Company of Australasia Limited v Barnes (1941) 64 CLR 268; Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336; Grizonic v Suttor [2011] NSWSC 471; Close Trustees (Switzerland) SA v Vildosola [2008] EWHC 1267 (Ch); Tucker L, Le Poidevin N and Brightwell J, Lewin on Trusts (19th ed, Sweet & Maxwell, 2014) at [27-183].
6 With respect to the present proceeding, the respondent submits that the fact that noteholders who are group members have an economic interest in the prosecution of the proceeding, and noteholders who are not group members do not, would make it unfair and inequitable for the respondent's unrecovered proper costs to be charged rateably and, so, indiscriminately, and for non-group member noteholders to share equally in the costs of litigation that could only ever benefit group members. The respondent submits that this is particularly so where the interests of group members represent only about 20% of the value of the notes.
7 Although s 43(1A) of the Federal Court Act provides, subject to certain exceptions, that, in a representative proceeding commenced under Part IVA, costs cannot be awarded against a person on whose behalf the proceeding has been commenced, the respondent submits that this does not derogate from the right of a trustee to seek indemnity out of the trust estate for costs, and cannot control the manner in which that right is to be exercised. The respondent puts the matter in this way:
[Section 43(1A) of the Federal Court Act] cannot prohibit or prevent the [respondent] from exercising the contractual, statutory or equitable rights of indemnity [discussed in the respondent's submissions], if those rights otherwise exist. Nor can the provision be construed as somehow controlling the way in which a trustee can properly exercise his discretion to cause any rights of indemnity (or contribution) that may exist, to fall unequally on those otherwise obliged to indemnify (or contribute). It would be highly surprising if [s 43(1A) of the Federal Court Act] were to be construed as controlling the way that a trustee discharged his duty to consider the manner in which his indemnity should be applied, and the exercise of his discretion to cause the burden to fall on the trust in a manner that the trustee considers fair and equitable. The selective application of a trustee's indemnity in relation to unrecovered legal [costs] in accordance with the principles discussed [in the respondent's submissions] is, in no sense, an "award of costs" within the meaning of [s 43(1A) of the Federal Court Act].
8 By way of further background, on 17 November 2014, pursuant to s 134 of the Public Trustee Act 1978 (Qld), the Supreme Court of Queensland directed the respondent to send an information memorandum to noteholders, which included the following:
To the extent that costs are incurred by the Public Trustee as a consequence of the options discussed above and in the event that he is successful in defending the proceedings, the Public Trustee may seek to recover those costs pursuant to his rights of indemnity from the trust assets which will include any recoveries as a consequence of the recovery actions. To the extent such a recovery from trust assets is sought, the Public Trustee may seek to first recover, as a priority, from the noteholders who are plaintiffs in the proceedings such that any distribution to those noteholders (which may otherwise be made) would be reduced by that recovery. The amount of such costs is not reasonably able to be accurately calculated at this stage, however it is expected such costs will be significant. The categories of costs that may be sought to be recovered include:
(a) the difference between costs awarded to be paid by the plaintiffs to the proceedings (either on a standard or indemnity basis) and the actual costs incurred by the Public Trustee in defending the proceedings; and/or
(b) the difference between the actual costs incurred by the Public Trustee in defending the proceedings and the costs actually recovered from the plaintiffs; and
(c) any other costs and expenses incidental to the conduct of the defence of the proceedings by the Public Trustee which are recoverable as part of the indemnity granted to the Public Trustee under the Trust Deed.
The Public Trustee seeks written feedback from the noteholders regarding the above options. A range of contact options are provided at the conclusion of this memorandum. The Public Trustee proposes to allow one calendar month for noteholders to provide feedback prior to seeking the advice of the Supreme Court of Queensland as to how to proceed.
9 On 3 June 2015, the respondent sent a further memorandum to noteholders, which included the following:
Should the Public Trustee successfully defend the representative proceeding he will first seek to recover his costs from the applicant. To the extent that the Public Trustee cannot recover all of his costs from the applicant, the Public Trustee may then seek to recover any shortfall from the trust assets by exercising his right to be indemnified for proper trust expenses from the assets of the trust. The Public Trustee proposes to exercise his right to indemnity in the following manner: first, to exercise the right against the trust entitlements of noteholders who are the applicant and group members in the representative proceedings, by reducing any distribution that may otherwise be paid to them; and, second, to the extent of any continuing shortfall, as against the trust fund generally. The Public Trustee's view is that this course is appropriate and justified by the decision of the High Court of Australia in National Trustees Executors & Agency Co Ltd v Barnes (1941) 64 CLR 268. Before adopting the course set out in this paragraph, the Public Trustee may seek appropriate judicial advice. The amount of the Public Trustee's cost liability that may be sought to be recovered by The Public Trustee will not have certainty until the finalisation of the representative proceeding as to whether:
(a) he will successfully defend the representative proceeding;
(b) if successful, the amount of the costs he will be able to recover from the applicant;
(c) the amount of any shortfall between the costs recovered from the applicant and his total costs liability; and
(d) the quantum of any indemnity that he may seek from trust assets.
10 For its part, the applicant submits that, in the context of a representative proceeding under Part IVA, the selective exercise of the right of indemnity against group members who are not parties to the proceeding could never be lawful because it would amount to a circumvention of the policy behind Part IVA that group members are not, except when they are parties, to be liable for costs.
11 Each party filed detailed written submissions on this question, whilst recognising that the question did not fall for determination on the hearing of either interlocutory application. I do not intend to rehearse all those submissions in these reasons. The summary I have given above sufficiently identifies the lines of battle.
12 In its interlocutory application, the applicant also sought leave to amend its originating application to add the following prayer for relief:
A declaration that in the event that the Respondent is successful in defending this proceeding and the Respondent seeks to recover adverse costs pursuant to its rights of indemnity from the trust assets, the Respondent is not entitled to seek to recover, as a priority, from those noteholders who are group members such that any distribution to those group member noteholders (which might otherwise be made) would be reduced by that recovery.
13 The applicant also sought an order that the question of whether it is entitled to declaratory relief in those terms should be heard separately and determined before any other issue in the proceeding. Further, in light of the fact that an opt out date has not yet been fixed, the applicant sought leave pursuant to s 33J(4) of the Federal Court Act, which provides:
(4) Except with the leave of the Court, the hearing of a representative proceeding must not commence earlier than the date before which a group member may opt out of the proceeding.
14 Although in its written submissions, the respondent opposed the granting of leave to amend, it seems to me that leave should be granted without reflecting on the prospects of such relief ultimately being granted. The real issue is whether the question raised by the declaration that is sought should be dealt with as a separate question in the way proposed by the applicant. Once that issue is determined, it opens the path to considering the form and content of the notice that should now be approved and given to group members.
15 In its proposed notice to group members, the applicant has provided for alternatives. The first alternative proceeds on the basis that the separate question would be determined prior to any notice being given to group members under s 33X. In this alternative, the answer to the question (assumed to have been given adversely to the respondent's position) would be set out in the notice. The second alternative proceeds on the basis that a notice to group members should be given now, in which group members are informed that the Court will hear and determine the separate question before an opt out notice is issued. It is fair to say that the applicant considered the second alternative to be preferable, on the basis that notice, in some appropriate form, should be given to group members without further delay.
16 The respondent advanced a number of submissions as to why it would be inappropriate to order the applicant's claim for declaratory relief to be determined as a prior and separate question. Once again, I do not propose to rehearse those submissions in these reasons. It is sufficient for me to state my conclusion on that issue and to provide my reasons for coming to that conclusion.