Re S & D International Pty Ltd (No 5) [2011] VSC 30 (14 February 2011)

Re S & D International Pty Ltd (No 5) [2011] VSC 30 (14 February 2011) - VSC 2011 case summary — Zoe

[25]

The unregistered real property mortgages granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of the Australian and New Zealand Banking Group Ltd on 29 July 2002 ("the ANZ Mortgages") are valid and effective.
The charges granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of Velos & Davis on 8 October 2004 ("the Velos & Davis Charges") are valid and effective.
The fifth defendant's equitable proprietary interest in the Footscray Property and the Hillside Property under the ANZ Mortgages is subject and subordinated to the prior equitable proprietary interest of the fourth defendant in those properties under the Velos & Davis Charges.
The fifth defendant's equitable proprietary interest in the Footscray Property and the Hillside Property under the ANZ Mortgages is subject and subordinated to the prior equitable proprietary interest of the third defendant in those properties as declared by Balmford J in proceeding no. 6869 of 2002 ("the Malhotra v Tiwari proceeding).
The fourth defendant's equitable proprietary interest in the Footscray Property and the Hillside Property under the Velos & Davis Charges is subject and subordinated to the prior equitable proprietary interest of the third defendant in those properties as declared by Balmford J in proceeding no. 6869 of 2002.
The funds in Court are charged first with payment of the first plaintiff's reasonable remuneration, costs and expenses directed exclusively towards recovering them out of the hands of the first and second defendants and procuring their payment into Court.
By giving the Velos & Davis Charges and incurring liability for Velos & Davis's fees and expenses in connection with Sheela Tiwari's and the second plaintiff's defence of the action in the Malhotra v Tiwari proceeding, the second plaintiff breached its duties as trustee of the S&D International Unit Trust.
The fifth defendant knowingly assisted the second plaintiff's said breach of its duties as trustee of the S&D International Unit Trust.
The fifth defendant is liable as constructive trustee to compensate and indemnify the second plaintiff for any loss and damage suffered by it as a result of the said breaches of its duties as trustee of the S&D International Unit Trust.
By authorising and facilitating the second plaintiff's giving of the Velos & Davis Charges and its incurring of liability for Velos & Davis's fees and expenses in connection with the Malhotra v Tiwari proceeding, the fifth defendant contravened his duties as a director of the second plaintiff under sections 180, 181 and 182 of the Corporations Act 2001 ("Act").
The fifth defendant is liable pursuant to section 1317H of the Act to compensate the second plaintiff for any loss and damage it has suffered as a result of the said breaches of the fifth defendant's duties as a director of the second plaintiff.

[118]

MR GALVIN: I have some instructions Your Honour. Your Honour I'm instructed the trustee company, the plaintiff and the liquidator will take up the claims again against Mr Velos and against Mr Tiwari. I should say to Your Honour though, without explaining to Your Honour as Your Honour doesn't need to hear of course, why these matters were not pursued in the way they might have been.

Your Honour will recall that Mr Handberg was appointed in replacement of Mr Horne and Mr Vince some time ago, by the court. Since his appointment he has had access to very limited funds. Indeed the reason we're all here partly is because funds had to be extracted from - we say, against the party holding them and deposited into court.

Even still Mr Handberg does not have resources with which to conduct the sort of due diligence, if you like or investigation, that one would ordinarily expect from a liquidator before he or she embarked upon the sort of litigation that Your Honour has made rulings about. I mean beyond priorities.

I only say that Your Honour because he is a court officer. I'm instructed to advance an explanation as to why he might not have pursued these matters in the way they might ordinarily have been pursued. We will however, pursue them. There is an anxiety about the potential for adverse costs orders. I don't expect Your Honour to make any ruling or comment on that now.

For example, if the case against Mr Velos were to fail, Mr Velos was to seek costs against the company or Mr Handberg personally, those are issues which might arise, which we're anxious about.

We have a degree of knowledge about the Velos charges, but not a full detail - there are 18 boxes, I'm instructed, of documents relating to that litigation, or 16 whatever it is. But, we consider that there is a basis for bringing the claim and on that basis we will prosecute it Your Honour.

What I proposed Your Honour is that I know there have been several rounds of pleadings and statements of facts and contention. We will have a further attempt at, with Your Honour's leave, a single document which will bind together all of the claims we make against all of the parties, including these claims.

With Your Honour's leave we'd filed that document within perhaps three weeks I would seek Your Honour. The intention would be to give Mr Donald and my learned friend Mr Hamlyn-Harris all of the particulars they would need to understand and meet the claim, the claims against their clients.

HIS HONOUR: Well, I think I should make a comment. First of all my ruling should not be taken to contain any criticism of the conduct of the litigator.

MR GALVIN: I've not take that way Your Honour.

HIS HONOUR: I really mention it because as all parties had been urging on me, other than Mr Malhotra, they'd been urging on me that his interest is really as a beneficiary of a trust. When one stands back and thinks about it then as I said in my ruling, without referring to any cases, it's pretty fundamental that the primary duty to look after the trust as is falls on the trustee, in effect, the court may not permit a beneficiary to interfere.

But, on occasion where the trustee can't act because it's got no funds or refuses to act, then a beneficiary might be given leave to bring the proceedings. Mr Malhotra hasn't defined all this and the proceedings would be brought on behalf of the trust. That's different as arise here because the litigant personally doesn't understand those subtleties.

MR GALVIN: I know.

HIS HONOUR: That's why in an ideal world that any claims would be made by the trustee, but as you say the trustees got limited resources.

MR GALVIN: Your Honour, notwithstanding the absence of resources or their current state in two places primarily the courts coffers and a vacant piece of land at Hillside. The liquidator will, in a sense relieve Your Honour of the obligation of having to deal with it through Mr Malhotra as a beneficiary. Your Honour will not then have the need to concern yourself with the litigant in person.

HIS HONOUR: The problem was, as you can see, that when you raised it, the issue, one can draw the inference there was reasonable grounds for the allegation. Whether you succeed I don't know.

MR GALVIN: Yes.

HIS HONOUR: Then you have a litigant in person there whose saying the money shouldn't go to these people and the trustee had already articulated the grounds.

MR GALVIN: Yes.

HIS HONOUR: I was left with that dilemma of how to deal with it.

MR GALVIN: I understand the dilemma Your Honour and hopefully if we proceed this way, Your Honour will find it more convenient.

HIS HONOUR: That would be a far more sensible way of dealing with it and I would probably encourage you to talk to Mr Malhotra on the basis that what you're doing is in his interests.

MR GALVIN: In his interest.

HIS HONOUR: As the trustee. Of course he would want to know what you're up to and he may well then come back and say to me I adopt the arguments of the trustee.

MR GALVIN: He may have arguments of his own as well.

HIS HONOUR: He may have some others, but he may come back and say I'm satisfied.

MR GALVIN: That's right, yes, Your Honour.

HIS HONOUR: Thank you. Now, Mr Malhotra, in my ruling I assumed you were adopting the arguments that the trustee had initially put forward attacking the securities.

MR MALHOTRA: Yes, Your Honour.

HIS HONOUR: Yes, now you've heard Mr Galvin say that the trustee is now prepared to reinstate those allegations and continue with them, which in part attacked the efficacy of both the Velos charges and the ANZ securities and also - yes, and to do that, Mr Galvin agrees that the case should be adjourned so that those claims can be particularised. Mr Donald wants, so far as the ANZ - so far as Tiwari is concerned, wants them particularised.

MR MALHOTRA: Yes, Your Honour.

HIS HONOUR: Mr Donald has said they've got a good defence. They say that there was moneys owing to Sheela Tiwari and that the money was borrowed to repay the loan, and he wants time to put documents in to establish that defence.

So the application by Mr Donald for an adjournment is supported by Mr Galvin. Do you have anything to say about it?

MR MALHOTRA: No, Your Honour, I'm in your hands.

[271]

This is but one application of the wider principle which was described by Danckwerts J in Re Grimthorpe thus: "It is common place that persons, who take the onerous and sometimes dangerous duty of being trustees, are not expected to do any of the work on their own expense; they are entitled to be indemnified against the costs and expenses which they incur in the course of their office; of course, that necessarily means that such costs and expenses are properly incurred and not improperly incurred. The general rule is quite plain; they are entitled to be paid back all that they have had to pay out." Accordingly, an order that the trustee, in taking his costs out of the assets, have his costs taxed "as between solicitor and client" was not sufficient to afford him the indemnity to which he was entitled: Daniell, (quoted in Giles); contrast Re Bradshaw. This inadequacy prompted the court to formulate a more appropriate order, that the plaintiff trustee have his taxed costs and expenses of and incident to the litigation, without the addition of the words "as between solicitor and client": Practice Direction, 27 October 1953; Practice Note, 23 March 1954. The Practice Direction in England was explained by Vaisey J. in a Practice Note, 3 November 1953. Of the order newly formulated, his Lordship said: "It is, I think, plain that those words 'the costs and expenses of and incident to any application' are intended to cover the whole of the costs that the trustees were entitled to, and mean almost the same as costs on an indemnity basis, or costs as between solicitor and own client." The word "almost" is significant; it recognises that a trustee is not in the same position as an individual litigant, who may pay whatever he likes. A trustee "must use his judgment to try and save the estate money which should not be unnecessarily paid out" (Grimthorpe) but subject thereto, the trustee was to have his costs, charges and expenses in full out of the assets. In a very real sense, the new order for a plaintiff trustee's costs substituted for the old standard of what was reasonably necessary as found in r27(29) a new standard of what was proper. (citations omitted)

[275]

A number of observations must be made about these submissions. First, we do not accept that the circumstances under which a trustee may be deprived of his or her costs indemnity are as limited as counsel suggest. It is necessary to refer to the pertinent principles. A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt's estate. The trustee is bound to administer that estate in accordance with the Bankruptcy Act and Bankruptcy Rules. The trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; second, to exercise, as a public duty and for the public welfare, certain powers given, and duties imposed, under the Act (Re Campbell; ex parte Official Trustee . The conduct of the trustee is subject to the supervision of the Court (e.g. Division 4 of Part VIII of the Act) and a trustee in bankruptcy has historically been regarded as an officer of the relevant court (Ex parte James, Re Condon; Scranton's Trustee v Pearse; Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liq.); Re Henderson. A trustee in bankruptcy who acts for remuneration is under a duty of care greater than that of a gratuitous trustee (In Re Silver Valley Mines CA. The trustee is required to bring reasonable skill to the performance of his or her duties (Silver Valley Mines; Re Alafaci; Registrar in Bankruptcy v Hardwick).

A trustee under the general law must exercise judgment so as to save the estate unnecessary expenditure of money (In Re Grimthorpe, Deceased; In Re Whitley ). A trustee in bankruptcy is in no different position. The discharge of a public duty imposed by the Act is to be performed conformably with the requirements of that duty, but also conformably with the trustee's obligation to administer the estate in such a manner as to maximise the return from estate assets, and thereby to maximise satisfaction of the creditors' claims and any possible surplus for the bankrupt. We adopt, as a correct statement of the duty of a trustee and the proper manner of its performance, the words of Smithers J in Mannigel v Aitken:

[280]

A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act or Rules (Re Ladyman). The Act confers no right on a trustee to be reimbursed in respect of the costs, charges or expenses incurred in the administration of the estate. The trustee's right to an indemnity is provided under the general law.

Under that law a trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee (Turner v Hancock; In Re Love; Hill v Spurgeon; In Re Beddoe; Downes v Cottam).

A trustee's right to remuneration for his or her own efforts, as distinct from reimbursement of outgoings, is not conferred by the general law. A trustee, generally speaking, has no right to remuneration. Neither does the right to remuneration arise out of the indemnity in respect of "costs, charges or expenses". That collocation of words does not include the value of services provided by the trustee in administering the estate. The concepts of remuneration and outgoings are distinct. It is true that in some statutory provisions - for example, s 109 of the Bankruptcy Act - the trustee's remuneration is specifically included amongst the "costs, charges and expenses of the administration of the bankruptcy". But such special provisions, giving an extended meaning to "costs, charges and expenses", do not remove the conceptual dichotomy between remuneration and outgoings. Rather, they group the two concepts for the limited purposes of the relevant sections.

Where a trustee in bankruptcy is appointed in the expectation that he or she will be remunerated, and there is no prior agreement to act gratuitously, the Act assumes the existence of a right to be remunerated. Section 162 provides a mechanism for fixing the quantum of the remuneration (Mayne v Jaques) The right to remuneration for work done is enforceable by the trustee by calling a meeting of creditors to fix the remuneration by resolution or, if the creditors so resolve, to have the remuneration fixed by the committee of inspection, if any (s 162 (1)). Where remuneration is not fixed by the creditors or the committee of inspection, the Registrar may fix the remuneration (s 162(4)). The remuneration to which the trustee is entitled is to be just and proper (Mayne v Jaques), or reasonable remuneration in all the circumstances (Re Palmer; Ex parte Taylor), for the work carried out by the trustee. The right to payment is only lost for a specific reason, as, for examples, if no work was done or needed to be done or misconduct by the trustee (Mayne v Jaques) As to the loss of the right under the general law see Turner v Hancock and In Re Love ).

The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate (Pitts v La Fontaine ; Re Driller). Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation. In the general area of the administration of trusts, the position was stated by Lindley L.J. in Re Beddoe :

[286]

The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Re Beddoe, which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not "properly incurred". The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment.

In principle, there is no difference in the approach to be taken when the questions of the trustee's right to indemnity and right to remuneration fall for consideration. That is, the trustee's right to remuneration is limited to work properly undertaken. In this context, "properly" means work reasonably and bona fide undertaken for the purpose of administering the estate or performing any public duty imposed by the Act, conformably with the trustee's duty to perform the work with reasonable care and skill and in an efficient and economical way. (citations omitted)

[323]

The Court cannot overreach or postpone a security in exercising its statutory power "in the event of the assets being insufficient to satisfy the liabilities" to "make an order as to the payment out of the estate of the company being wound up of the costs, charges, and expenses incurred in winding up in such order or priority as the Court thinks just" (sec. 118).

A security even over uncalled capital has prevailed over the claim of a petitioning creditor under an order for his costs (In re Anglo-Austrian Printing and Publishing Union; Brabourne v. Same). If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets (In re Marine Mansions Co).

The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (In re Oriental Hotels Co.; Perry v. Oriental Hotels Co.) The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf. In re Regent's Canal Ironworks Co.; Ex parte Grissell and see Batten v. Wedgwood Coal and Iron Co.)

In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property. In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds.

The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it. (citations omitted)

[343]

The essence of the solicitor's "particular" or "non-possessory" costs lien is that the solicitor has been instrumental in recovering the judgment sum (whether by way of compromise or otherwise) or, put another way, that the monies have been recovered as a result of his exertions. Thus the fund in respect of which the lien arises is the fund represented by the fruits of the labours exercised by the solicitor in recovering it. The charge on the fund represented by the "particular" lien arises immediately upon the recovery of the monies through the exertions of the solicitor and should be distinguished from rights which might arise through a solicitor's exertions in respect of other matters. However, for the right to arise, it must be shown that there is a sufficient causal link between the solicitor's exertions and the recovery of the fund. In each case, that is a question of fact. The costs which are protected by the lien will not only include the costs incurred in recovering the judgment, but also those "immediately incidental thereto". The solicitor's lien will extend to costs incurred on appeal, either in defending the fund or in promoting it, because such costs arise from exertions in "recovering the fund". As Weinberg, J noted in the Colour Point case (supra, at 18), the equitable non-possessory lien of a solicitor has, in some jurisdictions, been supplemented by a statutory lien by providing that the lien will attach to any property, real or personal, "recovered or preserved" through the instrumentality of the solicitor. His Honour further noted the protection conferred by such statutes is greater than that provided by the equitable lien but, in jurisdictions in which it applies, does not purport to abrogate the equitable lien which arises independently. Such a statutory lien used to exist in this State (by virtue of s.104 of the Legal Profession Practice Act 1958) but has not existed since the passage of the Legal Practice Act 1996. (citations omitted)

[354]

It was argued, following the reasoning in Re Enhill Pty Ltd, supra, that the proposition affirmed by the High Court in Octavo's case that the trustee's right of indemnity is a beneficial interest in the trust property which passes to the trustee in bankruptcy or liquidator, leads to the conclusion that the trust assets, to the extent of the trust liabilities, pass to the trustee in bankruptcy or liquidator for the benefit of the general body of creditors. I do not think that Octavo's case leads to that conclusion. The right of indemnity, it is true, exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator. The proceeds of that right of indemnity are therefore part of the estate divisible among the creditors.

It seems to me, however, that the right of indemnity can only produce proceeds for division among the creditors generally if the trustee has discharged the liabilities incurred in the performance of the trust and is therefore entitled to recoup himself out of the trust property. If he has not discharged the liabilities, the right of indemnity entitles him to resort to the trust property only for the purpose of discharging those liabilities. He may apply the trust moneys directly to the payment of the trust creditors or he may take it into his own possession for that purpose. If he takes trust property into his possession to satisfy his right to be indemnified in respect of unpaid trust liabilities, it seems to me that that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust. The exercise of the right of indemnity is for the benefit of the trustee in that it relieves him of liability for the trust debts. If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. In the latter circumstances there cannot be proceeds of the right of indemnity which are available for distribution among the general body of creditors.[137]

[360]

It is now necessary to consider the position of the liquidator's costs, expenses and remuneration in the light of the above principles. Although I have not found myself able to agree with certain of the reasoning in Re Enhill Pty Ltd, it is, as a decision of the Full Supreme Court of Victoria, a highly persuasive authority for the proposition that the liquidator's costs, expenses and remuneration may be paid out of the trust property. There are clearly strong practical considerations in favour of such a course. Unless that course can be followed, the liquidation of a trustee company without assets of its own cannot proceed. It seems to me that that course can be justified by reference to the obligations of the trustee company arising out of the carrying on of the business authorized by the trusts. It is part of the duty of the trustee company to incur debts for the purposes of the trust businesses and, of course, to pay those debts. Upon winding up, those debts can only be paid in accordance with the provisions of the Companies Act. This requires necessarily that there be a liquidator and that he incur costs and expenses and be paid remuneration. Section 292 provides that there be paid the costs and expenses of winding up, the taxed costs of the petitioner and the remuneration of the Liquidator "in priority to other unsecured debts" (emphasis mine). The expression "other unsecured debts" appears to imply that the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration are regarded by the statute as debts of the company. As the company's obligation as trustee to pay the debts incurred in carrying out the trust cannot be performed unless the liquidation proceeds, it seems to me to be reasonable to regard the expenses mentioned above as debts of the company incurred in discharging the duties imposed by the trust and as covered by the trustee's right of indemnity. If that reasoning is wrong, I would, like Lush J in Re Enhill Pty Ltd, be prepared to rely on the principle enunciated by Dixon J in Re Universal Distributing Co Ltd [1933] HCA 2; (1933) 48 CLR 171 at 174-5.

On these principles which I have discussed, the liquidator is entitled to have recourse to the property of each trust for the purpose of meeting the costs and expenses of winding up, the petitioner's costs and the liquidator's remuneration, so far as they are incurred in relation to each trust. As there are no non-trust assets or liabilities, all the expenses are attributable to one or other of the trusts and must be appointed between them. The liquidator will be able to make an estimate of the work and expense involved in the liquidation so far as it relates to each trust. Where no apportionment is possible, the maxim that equality is equity should provide the solution to the problem of apportionment.

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