POPE v POPE AND OTHERS No. SCGRG-96-1003 [2001] SASC 26

2 DUGGAN J. I agree that this matter should be dismissed for the reasons given by Bleby J.

3 BLEBY J: The appellant, Desmond Roy Pope, is a director of the respondent DRP Nominees Pty Ltd, which company was, until 5 November 1998, the trustee of the Pope Family Trust. For convenience I will refer to the company as "the former trustee".

4 The first respondent Desmond Oliver Pope ("the plaintiff") is one of a class of potential beneficiaries of the Pope Family Trust. On 14 May 1996 he commenced an application in this Court for an order for the appointment of an inspector of the trust pursuant to s 84C of the Trustee Act 1936. At that stage the sole defendant in the proceedings was the former trustee.

5 On 11 September 1996 a Master of this Court appointed an inspector. The former trustee appealed to the Full Court of this Court against that order, but on 6 March 1997, on the day when the appeal was listed for hearing, the former trustee abandoned the appeal. The Full Court ordered that the former trustee pay the plaintiff's costs of the abandoned appeal on a solicitor and client basis. A further application that the former trustee be required to pay the costs personally, or alternatively that the present appellant should pay them, was adjourned for further consideration.

6 On 16 July 1997 the Master formally appointed an inspector, and on 8 December 1997 the former trustee issued an application seeking directions designed to confine the inspector's powers. On 13 January 1998 that application was withdrawn.

7 On 22 February 1998 the inspector delivered his interim report to the court. It was highly critical of the administration of the trust in circumstances to which I shall later refer.

8 As a consequence of the report, on 6 March 1998 the plaintiff sought and was granted leave to amend the summons seeking a number of further orders, including an order for removal of the trustee and for the appointment of new trustees. Other orders sought included an order restraining the former trustee from indemnifying itself out of the assets of the trust in respect of any liability for costs of and incidental to the action, and a further order that in the event that the former trustee was unable to meet such liability, that the directors of the former trustee pay such costs.

9 At a subsequent hearing an intimation was given that the former trustee was desirous of retiring from the trust, and that the appellant, who was given the power of appointment under clause 10 of the relevant trust deed, wished to appoint a new personal trustee in its place. The plaintiff objected. The appellant sought leave to intervene and was joined as a defendant in the proceedings on 27 August 1998.

10 After a bitterly contested hearing, a judge of this Court ordered that the former trustee be removed as trustee, and that two independent joint trustees be appointed to replace it.

11 The appellant appealed against that order, contending that the Court had no power to appoint new trustees in the circumstances, as that was a power vested solely in him pursuant to clause 10 of the trust deed. He unsuccessfully sought a stay of the order before the single judge. He renewed the stay application before the Full Court, and failed. He was ordered to pay the costs of those applications.

12 Neither the appellant nor the former trustee appealed against the order removing the former trustee as trustee, nor was there any challenge made to the trial judge's findings of fact which gave rise to the order of removal.

13 On 13 August 1999 a differently constituted Full Court dismissed the appellant's appeal: see Pope v DRP Nominees Pty Ltd [1999] SASC 337; (1999) 74 SASR 78. That Full Court ordered that the appellant pay the plaintiff's costs of the appeal on an indemnity basis.

14 Subsequently the matter came before the single judge again on the question of costs of the proceedings other than in respect of the particular orders made by the previous Full Courts. The plaintiff sought an order for costs on an indemnity basis, and an order that the costs should be paid by the former trustee without indemnity from the trust estate or, in the event that the former trustee was unable to discharge such liability, that they be borne by the appellant. The latter order was sought on the basis that the appellant had actively sponsored the resistance of the former trustee to the proceedings for his own benefit or purposes up to the time that he was joined, and thereafter because he assumed the principal defence role in any event. The plaintiff also relied on s 233 of the Corporations Law.

15 The single judge had heard no oral evidence. The preliminary report of the court-appointed inspector disclosed serious and apparently continuing breaches of trust by the former trustee. Some of the plaintiff's allegations had been denied in affidavits filed on behalf of the former trustee. However, there was no material calling in question the principal findings of the inspector, the essence of which is summarised below. The breaches of trust disclosed were sufficient to justify the trustee's immediate removal. The inspector's report, at the same time, impeached the conduct of the appellant as director, both of the former trustee and of the corporate co-director of the former trustee, in respect of transactions involving trust assets, in which transactions either the appellant or a company or companies controlled by him also had an interest.

16 For reasons then published, the trial judge ordered that the appellant pay the plaintiff his costs of and incidental to the proceedings not otherwise provided for to be taxed on the basis of an indemnity in respect of such costs. He ordered that the appellant pay the costs of the abandoned appeal which came before the Full Court on 6 March 1997 "in discharge and to the exoneration of the primary liability of the [former trustee] in that regard". His Honour further ordered that the costs, fees and expenses of and incidental to the investigation and report of the inspector be the primary liability of the plaintiff, to the exoneration of the trust assets, but upon the footing that such costs, fees and expenses should be allowed to the plaintiff as a proper disbursement on taxation of the costs ordered to be paid by the appellant. There was a further order that the appellant pay to another intervener in the proceedings the costs of that intervener fixed at $2600.

17 The appellant now appeals against those orders for costs.

18 The plaintiff argued that the appeal was incompetent. In my view, the appeal must be dismissed in any event, and it is not necessary to decide that question.

19 A summary of the relevant factual findings made by the trial judge in determining the removal application, and accepted by the Full Court on the appellant's appeal against the appointment of the new trustees, is conveniently set out in Pope v DRP Nominees Pty Ltd (supra) at [21]:

"What we now see is a situation in which, undoubtedly -

* there has been a total failure, at all times, to maintain proper trust records as required by the Act and regulations; trust funds have been consistently intermingled with those of a corporate trading entity controlled by [the appellant]; and there is every reason to believe that the purported trustee's minutes as to allocations are spurious and that the meetings which they purport to evidence did not take place;

* large money loans have been raised on the security of the major trust asset and have been on-lent, on an unsecured basis, to the corporate entity controlled by [the appellant];

* the structure of the trust management arrangements are such that they inherently give rise to conflict of interest situations;

* it is plain, even on his own affidavit, that the trust has been administered not on an independent, objective basis - but to reflect the personal views and wishes of [the appellant] - regardless of whether he has acted in good faith or not;

* a significant number of the persons who are potential beneficiaries have, with good reason, lost faith in the Trustee; ....

* questions will need to be considered as to whether any breaches of trust sounding in damages have occurred and what action may need to be taken in relation to them."

20 In dealing with the question of costs, the trial judge upheld a submission of the plaintiff that the former trustee had never been able to point to any substantial justification in fact or in law for resisting its removal and for the appointment of new trustees. His Honour accepted that the conduct of the former trustee in resisting the application was never intended to be in the best interest of the beneficiaries of the trust. His Honour accepted that the former trustee's resistance to its removal was wholly unreasonable in the light of the inspector's report. That resistance was not advanced bona fide in the interest of the beneficiaries, but as an attempt to justify the former trustee's own position and to avoid the scrutiny of its actions by the court as a consequence of the inspector's report.

21 There were many attempts by the former trustee to avoid the appointment of an inspector and, when appointed, to attempt to confine his powers. Notwithstanding the content of the report, the former trustee continued to resist its removal until about the time of the full hearing by the trial judge, when an intimation was given that it might resign, but only to make way for the appointment of new trustees by the appellant.

22 There were many allegations of the plaintiff in the proceedings giving rise to the possibility of a number of breaches of trust by the former trustee. It was not necessary to resolve all those claims in the proceedings then before the trial judge. The findings of the trial judge, based on the report of the inspector as an officer of the court, were clearly open to him, and revealed serious breaches of trust, sufficient to justify the order for removal. It was not then necessary for the court to consider whether there may have been, in the course of the administration of the trust, other serious breaches, or whether, as a result of the former trustee's actions, there had been any loss to the trust or unlawful gain to the appellant.

23 Mr Ross-Smith, for the appellant, argued that orders for costs could not be made against the trustee or the appellant because there were no relevant findings of fact against the trustee that could be made which revealed any breach of trust by the former trustee. This was tantamount to a submission that the previous orders of the trial judge and of the Full Court were wrongly made. Such a submission cannot now be entertained. In any event, there was every justification for the conclusion that some serious breaches of trust had occurred which justified the appointment of the inspector and the ultimate removal of the former trustee. This was so whether or not those breaches had caused loss to the trust, and whether or not there were other breaches yet to be proved.

24 The breaches of trust having been established, it was open to the court to order that the costs of and incidental to the appointment of the inspector and the order for removal, bitterly opposed by the trustee, should be paid personally by the trustee. This is so, notwithstanding what the appellant argued was the trustee's usual right to indemnity out of the trust estate.

25 Such right may well arise in respect of most cases where the trustee is acting in the administration of the estate, particularly in taking or defending legal proceedings in protection of the trust estate. However, the indemnity only applies where the trustee has not acted unreasonably or improperly: In re Beddoe; Downes v Cottam [1893] 1 Ch 547, especially per Bowen LJ at 562; Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201 at 212, 214; Palairet v Carew [1863] EngR 300; (1863) 32 Beav 564; 55 ER 222.

26 It cannot be said that the former trustee was acting reasonably or properly in resisting its removal for breaches of trust found by the court to have taken place, and of which the trustee must have been aware. It cannot be said to have been acting reasonably or properly when it resisted such an application for the sole apparent purpose of protecting its own position in respect of the trust, and of avoiding exposure of its own breaches of trust.

"9. No Trustee purporting to act in the execution of the trusts and powers hereof shall be liable for any loss not attributable to that Trustee's dishonesty or to the wilful commission or omission by that Trustee of an act known to be a breach of trust...."

28 The appellant relies on Armitage v Nurse [1998] Ch 241 to the effect that such an exclusion clause will be strictly construed in favour of the trustee. In other words, unless there is proved fraud or dishonesty on the part of the trustee, or unless the breach is shown to be wilful or dishonest, the trustee is entitled to indemnity out of the trust fund.

29 The authority of Armitage v Nurse in Australia has been questioned: Honey v McLennan (1997) 18 WAR 384 at 390; G.E. Del Pont, "The Exclusion of Liability for Trustee Fraud" (1998) 6 APLJ 41. Be that as it may, the Court in Armitage v Nurse recognised that, so far as the trustee's entitlement to indemnity for costs is concerned, it depends very much on the conduct of the trustee. Millett LJ, giving judgment on behalf of the Court of Appeal, considered that the submission that trustees are entitled to a lien over the trust fund for their costs, and that this lien extends to the cost of litigation, including the costs of defending themselves against the charge of breach of trust, was overstated. He said (at 262):

"Trustees are entitled to a lien on the trust fund for the costs of successfully defending themselves against an action for breach of trust. That was the position in In re Spurling's Will Trusts as it was in Walters v. Woodbridge (1878) 7 Ch.D. 504, which it followed. But on what principle can one justify their right to recoup themselves out of the trust fund for the costs of unsuccessfully defending themselves against such an action? It offends all sense of justice. The respondents rely on Turner v. Hancock, 20 Ch.D. 303 and submit that that was just such a case; but I do not think that it was. The action was an action for an account. On taking the accounts it was found that a sum was due from the trustee and not to him as he contended. It was therefore a case in which the trustee was unsuccessful; but it was not a case in which he was found to be guilty of misconduct or breach of trust." (Emphasis added)

30 Ungoed-Thomas J pointed out in In re Spurling's Will Trusts [1966] 1 WLR 920 at 935 - 936 that trustees will not be deprived of their right to indemnity for costs out of the trust fund merely because the claim is a claim to recover money from them for the benefit of the trust. He said (at 935):

"[T]he approach and the decisive test is not, in my view, the claim advanced by a beneficiary, however far-fetched, and the allegations he makes, however wild, but whether the trustee has in fact so acted that he should be deprived of his contractual right to costs: and that, to my mind, cannot be a matter of form or proceedings or of claim against him, but a matter of substance; namely, his own conduct."

31 Consistent with that approach it seems to me that this case was not dissimilar from the situation in Miller v Cameron [1936] HCA 13; (1936) 54 CLR 572, where a trustee was removed by order of the court and in the exercise of the court's discretion, the trustee having assigned his estate for the benefit of his creditors. Having held that the court was entitled to exercise its discretion by removing the trustee, Latham CJ addressed the question of the order for costs (at 578 - 579):

"By the judgment of the Supreme Court of Tasmania the defendant is ordered to pay the costs of the action. It is urged on his behalf that in the absence of evidence of misconduct of the trustee such an order cannot be made. Certainly, as a rule, a trustee is allowed his costs out of the trust estate if his conduct has been honest, even though it may have been mistaken. In the ordinary case a trustee brings or contests legal proceedings on behalf of the trust and not on his own behalf. He is often a necessary party to proceedings where he ought to be present even though he may do no more than submit to the judgment of the Court. In such a case the trustee receives his costs. The position is admittedly different in a case of misconduct. In this case there has, however, been no misconduct in the management of the trust estate.

In this case the trustee was asked to resign his office by every person interested in the execution of the trust. In my opinion his refusal to resign in all the circumstances of the case has resulted in legal proceedings which ought to have been avoided. The defendant would have acted wisely and properly in resigning as soon as he was asked. In defending this action and in prosecuting this appeal the defendant has been representing and supporting his own interests and not those of the trust estate. He has failed to show that his interests coincide with the interest of the trust estate. In such a case I consider it quite proper that he should pay the plaintiffs' costs of the action and of the appeal to this Court."

32 The position is a fortiori where, as in this case, misconduct amounting to breaches of trust have been established.

33 In my opinion it was open to the trial judge to hold not only that there had been breaches of trust established on the part of the former trustee, but that the former trustee was not acting reasonably or properly in defending the action for removal, and can only have been acting in its own self-interest in attempting to avoid proper inquiry and accountability, and therefore not acting in the execution of the trust at all. In those circumstances, clause 9 of the trust deed could have no application.

34 If it was within the discretion of the court to order costs against the trustee without recourse to the trust assets, the next step is to consider whether such an order was able to be made against the appellant as director of the former trustee. In this regard, the trial judge was only concerned with the appellant's liability for costs as a non-party and as a defendant other than in respect of his unsuccessful appeal to the Full Court and his unsuccessful attempts to stay the order removing the trustee pending that appeal. Orders for costs against him had already been made by the differently constituted Full Courts in respect of those proceedings.

35 The evidence before the trial judge showed that the former trustee had an issued capital of two dollars and no assets other than a right of indemnity from the trust. It was not a commercial trading entity, and its sole activity appeared to be as trustee of the trust. There is no suggestion that it had any available assets to meet any orders for costs itself.

36 The only directors of the former trustee were the appellant and W B Finnie & Co ("Finnie"). The appellant was the largest single shareholder in Finnie and was a director of it. The trial judge inferred from the material before him, which inference was reasonably open, that the appellant in practical terms controlled Finnie and its decision making processes, and that he also controlled the decision making processes of the former trustee. In an affidavit sworn by him, the appellant deposed that he was originally the sole director of the former trustee, and that since the appointment of the corporate co-director, he had been "chairman of the trustee company and (had) always had the casting vote". He asserted that "a decision of W B Finnie & Co Pty Ltd cannot prevail without my agreement".

37 In the proceedings for removal of the former trustee before the single judge, the appellant swore a 65 page affidavit on behalf of the former trustee deposing to its activities as trustee. It will be recalled that the appellant also controlled the corporate entity with which the trust funds had been intermingled and which had borrowed large sums of money on the security of the major trust asset. The trial judge considered that the whole tenor of the appellant's affidavit was consistent only with the conclusion that, at all material times, the appellant had effectively made all relevant decisions in relation to the trust and the administration of its assets. In my opinion that was a conclusion which was clearly open on the evidence before the trial judge. The trial judge concluded:

"[I]t is clear that, in the instant case, the second defendant has always been the effective litigant standing behind the first defendant, or the "real" party to the litigation, even prior to becoming involved in the matter as a formal party. Moreover, what has effectively been in issue in this matter has been undoubted maladministration of the Trust, obviously orchestrated by the second defendant personally, whilst he, himself, stood in a conflict of interest situation. Whilst it is true that he may not, necessarily, have participated in this action in furtherance of his own direct, personal financial benefit, in the strict sense of that expression, he certainly has done so in furtherance of his own personal agenda, rather than that of the beneficiaries. It is also fair comment to say that his conduct within the litigation appears to have been such as, inter alia, to attempt to avoid, delay or obscure any effective independent scrutiny of what, prima facie, have been clear, apparent breaches of trust, which have plainly occurred at his instance."

38 Section 40 of the Supreme Court Act 1935 is sufficiently wide to confer jurisdiction on the court to award costs against a non-party: Vestris v Cashman (1998) 72 SASR 449.

39 In Knight v FP Special Assets Ltd (1992) 174 CLR 178, when dealing with the equivalent section in the Queensland Supreme Court Act, Mason CJ and Deane J at 192 - 193 recognised a particular class of case where an order against a non-party would be appropriate. They said:

"That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."

40 In the circumstances before the court, there was, in my opinion, ample material justifying the exercise of the trial judge's discretion to make an order for costs against the appellant.

41 The court also has a discretion under s 40 of the Supreme Court Act and Rule 101 of the Supreme Court Rules 1987 to order costs on an indemnity basis if the court is satisfied that the party's conduct is unreasonable, where the successful party has been put to considerable unnecessary expense and where the general circumstances of the case warrants such an order: Walton v McBride (1995) 36 NSWLR 440.

42 It can now be seen that the strident opposition of the former trustee to the appointment of the inspector and to its own removal was not in the best interest of the beneficiaries. It can also be seen that the pursuit of inappropriate defences added greatly to the time and costs of all parties to the litigation. There was, in my opinion, ample justification for the exercise by the trial Judge of the discretion to award costs on an indemnity basis.

43 Finally, an aspect of the submissions by Mr Ross-Smith was that the effect of the order under appeal was to make the appellant liable for costs associated with matters pleaded against the former trustee, which matters have not been tried or resolved. There are a number of such matters. In the end it was not necessary to resolve them. These matters were pleaded by the plaintiff because, after the inspector's report was received, the former trustee, for some time, refused to accept that it should be replaced. It was reasonable for the plaintiff to proceed as it did, and to put forward all of its allegations as against the former trustee. There is every reason why the plaintiff should have his costs of the pleading, and associated issues, having regard to the conduct of the former trustee. That being so, it follows that there can be no valid complaint about the appellant being made liable for these costs.