Reid v Hubbard [2003] VSC 387

2 At the date of the deceased's death, his assets included a debt of $9,163,572 due by Hubbard Holdings Pty Ltd as trustee of the JRH Family Trust, and real property and listed securities in value totalling $1,221,317.72, and in the months which followed the deceased's death there flowed into the estate a superannuation payment of a further $1,536,148.86, and a tax refund of a further $147,619.79.

3 Since then, two real properties included amongst the assets have been realised at values in aggregate exceeding their probate valuations by $275,000, making therefore for a total value of the estate of $12,343,658.37.

4 If the estate's assets had been got in, as they could have been, and divided into the John and Sue funds in accordance with the will, there would have been not less than $6,171,829.18 in each of those funds.

5 Probate of the will was granted on 25 January 1999 but contrary to the terms of the will John Hubbard and Bruce Sundberg did not get in the assets of the estate and they did not establish either the "John fund" or "Susan fund". The Hubbard Holdings Pty Ltd debt was left outstanding and John Hubbard, who was a director of that company, caused or procured Hubbard Holdings Pty Ltd to advance the amount of that debt and other funds of the JRH Family Trust to entities with which John Hubbard was associated.

6 Although the details are to some extent still uncertain, so far as can be told: between about the time of the deceased's death and 20 March 2002, Hubbard Holdings made unsecured interest-free advances totalling up to $8.7 million to Billingsby Estate Pty Ltd (a company apparently controlled by John Hubbard's wife, Anne Hubbard) to assist in the construction and development of a vineyard, winery and related restaurant facilities on land at Harris's Hill, Nagambie in Victoria (which was owned by Currawong Investments Pty Ltd as trustee of John Hubbard's superannuation fund).

7 In the same period, Hubbard Holdings Pty Ltd subscribed $500,000 for just over one half of the issued share capital in Resin Coated Sands Pty Ltd, a company engaged in the moulding industry and by which John Hubbard is engaged as a financial consultant and paid regular remuneration.

8 In the same period, Hubbard Holdings Pty Ltd advanced a further $1.3 million by way of loan to Resin Coated Sands Pty Ltd at interest and secured by second ranking mortgage debenture over the assets and undertaking of the company, and first registered third party real property mortgages.

9 In the same period, Hubbard Holdings Pty Ltd subscribed a further $680,000 for just over half the shares in Caddy Sand Queensland Pty Ltd which is said to be related to Resin Coated Sands Pty Ltd, making for a total investment in the Resin Coated Sands group of $2.44 million.

10 Also in the same period, John Hubbard caused a further $1.423 million of estate funds to be advanced directly to Billingsby Estate Pty Ltd by way of further unsecured interest-free loan, as I gather, further to assist in the establishment and development of the Harris's Hill Winery and related facilities.

11 For some time neither Susan Reid nor her son knew anything of what was going on. They did not know how much or what the estate had comprised, and they did not know how estate funds were being dealt with. Susan Reid had a general understanding that her father's will provided for the estate to be divided into two, but for a long time whenever she made enquiries of John Hubbard about what was going on, she was put off with one or other excuse or explanation that in truth revealed very little. Indeed, it was not until after she had engaged solicitors in or about January 2002, and they uncovered some of the details of what had been going on, that she learned how much had once been in the estate and how it had been disbursed.

12 At first, John Hubbard seems to have been apologetic about what had occurred. There is evidence that he expressed regret about the way in which the estate and trust moneys had been applied, and he retained Ernst & Young to devise a strategy whereby any loss resulting to Susan Reid might be made good out of funds which he stands to inherit under the will of his late mother and by sale of real property which he owns in Brighton. But in the months which followed, attitudes seemed to have hardened and, as matters stand, there are no admissions of wrongdoing or offers of reparation. Despite the remorse and contrition which John Hubbard appears to have shown when the facts were first uncovered, his attitude now is that he has done no wrong and that he is in no way liable.

13 By order of the court made on 16 May 2002, John Hubbard and Bruce Sundberg were removed as executors and trustees of the estate, and Charles Bernard Gore Brett, solicitor, was appointed administrator in their place, and in that capacity he has been joined as a defendant to this proceeding.

14 By order of the court made on 21 July 2003, Hubbard Holdings Pty Ltd was removed as the trustee of the JRH Family Trust and Colin Boltman, solicitor, was appointed in his place.

15 On 27 August 2003, it was ordered that Billingsby Estate Pty Ltd be wound up in insolvency and that Mr Tuckwell be appointed as liquidator.

16 It has since been ascertained that Billingsby Estate Pty Ltd does not have any right of tenure or other interest in the vineyard or improvements upon which the trust and estate funds were expended. In the result, there is very little prospect of Hubbard Holdings Pty Ltd, or at least the trust, recovering back from Billingsby Estate Pty Ltd any of the moneys which were advanced unsecured and interest-free, or of the estate recovering back any of the $1.423 million which it advanced unsecured and interest-free.

17 Resin Coated Sands Pty Ltd is also in somewhat difficult financial circumstances, and although the $1.3 million advanced by Hubbard Holdings Pty Ltd is secured, the quality and value of the security is such that the trust's chances of significant recovery are problematic at best. The debt is not due for repayment for approximately another 12 months, and upon the evidence the second ranking mortgage debenture is unlikely to realise anything more than $100,000, and even that is doubtful, and whilst the third party mortgages are over properties said to total some $1.2 million in value, the properties are family homes and the path to enforcement would likely be plagued with problems.

18 Accordingly, as matters stand, out of an estate which less than five years ago was worth at least $12.3 million, there is now only some $1,515,490.59 left in hand, plus a slight chance that over time the estate may recover up to another $1.4 million by enforcement against the trust of the debt which is due.

19 As at today, the loss to the estate stands at $10,817,509.80, and the loss to the Susan fund stands at half that amount, which is to say at least $5,408,754.90.

20 By this proceeding, Susan and Michael Reid, as plaintiffs, seek orders that John Hubbard compensate the "Susan fund" for the loss which it has sustained. They allege that John Hubbard's failure to get in the assets of the estate when they could have been got in, and his employment of estate funds in the development of the vineyard, were in clear breach of his duties as executor and trustee and that he is liable, accordingly, to make good the loss.

21 John Hubbard, who has chosen to appear unrepresented, does not dispute that he did not get in the assets of the estate, or that he procured the use of the estate and Hubbard Holdings Pty Ltd funds in the development of the vineyard in the way in which has been described, but he contends that the terms of the will gave him power to defer the getting in of assets, and he says that he exercised that power and took the other actions which he did in what he conceived to be his late father's wishes that the estate's and trust's moneys should be invested in new, long-term ventures.

22 Alternatively, he says, if he did act in breach of duty, he did what he did on the faith of advice given to him by Bruce Sundberg, or at least because of the failure of Bruce Sundberg to point out to John Hubbard that he should have acted otherwise, and thus he contends that he acted honestly and reasonably and ought fairly to be excused pursuant to s.67 of the Trustee Act 1958.

23 The will does confer power on the trustees to defer getting in the assets. Clause 6.2(a) of the will provides that "my trustees shall have ... (power) without being liable for any loss caused by so doing to postpone the selling, calling in and conversion of any or all assets in my estate for as long as my trustees shall think fit." But plainly that of itself is not sufficient authority for what was done. A provision such as clause 6.2(a) may be sufficient to protect a trustee acting bona fide and in what he or she considers to be the best interests of beneficiaries.[1] But it will not protect a trustee acting in his or her own interests or otherwise in disregard of the interests of the beneficiaries.[2]

24 The duty of a trustee to perform the trusts honestly and in good faith for the benefit of the beneficiaries, and the same applies to executors, is the minimum necessary to give substance to the trusts and thus no exemption clause can absolve a trustee or executor from liability for knowingly participating in a fraudulent breach of trust.

25 In this case I do not accept for a moment that John Hubbard did what he did bona fide and in what he conceived to be the best interests of Susan and Michael Reid. Self-evidently he deferred the getting in of the estate's assets to advance his own selfish interests despite the prejudice to Susan and Michael Reid.

26 Furthermore, upon the evidence I find that he took steps deliberately to conceal his perfidy by leaving out of the inventory of assets of the estate the debt of $9,163,572 owed by Hubbard Holdings Pty Ltd to the estate, and by failing to identify as such in the balance sheet of Hubbard Holdings Pty Ltd the loans made to Billingsby Estate Pty Ltd.

27 He said at one point in his evidence that his failure to record the Hubbard Holdings Pty Ltd debt in the estate's inventory of assets was "unintentional", and he said at another point in the course of his final address that it might have been left out in order to deter Susan Reid's former husband from demanding a share of it upon his divorce from Susan Reid. But I do not accept that John Hubbard could have acted inadvertently in leaving out of the inventory of assets a debt comprising over three-quarters of the total value of the assets of the estate. Such an omission, or at least failure to correct such an omission, has to have been deliberate, and I note that when I questioned Mr Hubbard about the utility of the omission to fend off Susan Reid's erstwhile husband, the suggestion was immediately abandoned.

28 John Hubbard also gave evidence that he acted in what he conceived to be his father's wishes based, he said, upon the fact that his father was always interested in long-term investments, and because his father had wished him well with the vineyard when it was first begun, and because, he said, Hubbard Holdings Pty Ltd had advanced some moneys to Billingsby Estate Pty Ltd even before his father's death, and his father was so astute up until his death that it had to be concluded that his father would have known that that was so. But if the matter were not so serious, I would regard such suggestions as risible.

29 Instructions left in writing by the deceased shortly before his death, of which John Hubbard admitted in evidence he was aware, reveal a careful and conservative man who would have had nothing whatever to do with speculative ventures no matter what the promised rewards, and who was at pains to inform his professional advisers, and anyone else that mattered, of his abiding wish to provide for the future financial security of his daughter and her children in the sort of fashion for which he was able handsomely to provide.

30 For similar reasons, John Hubbard's alternative contention that he should be adjudged to have acted honestly and reasonably because he acted on the advice of Bruce Sundberg also fails. To begin with, John Hubbard bears the burden of proof of bringing himself within the exemption.

31 In the second place, I am not at all persuaded that John Hubbard did take any advice from Mr Sundberg or, if he did, that any of the advice which was given was to the effect alleged. Mr Sundberg was not called as a witness, nor was he joined as a third party, despite that John Hubbard was legally represented at all points of the proceeding, up until the eve of the trial. There may or may not be other criticisms which could be made of Mr Sundberg's conduct in the administration of the estate, depending upon what he knew of John Hubbard's actions, and upon what Mr Hubbard may have told him of what was occurring. But Mr Sundberg's role as an executor and trustee is not the subject of inquiry in this proceeding, and accordingly I pass no judgment upon it.

32 In the third place, and even if Mr Sundberg had advised that it was in order to do what was done, it would not have constituted an excuse.[3] If the facts were otherwise, such advice if given might have gone some way to establishing that John Hubbard had acted honestly. But even then it would not have been enough to establish that he had acted reasonably.

33 A trustee must not only act honestly but also reasonably[4], and a trustee who acts on the statements of a co-trustee, even a co-trustee who is a solicitor, without assessing the accuracy of the statements, does not act reasonably and will not be excused.[5]

34 On any realistic analysis, the actions of this executor and trustee in disbursing virtually all of the trust funds for which he was responsible, by way of direct and indirect advances through the trust, and investments to and for his own benefit, and in the large part interest-free without any security, and with minimal probability of repayment, constituted so gross a breach of trust as to the epithets "honest" and "reasonable" to be anathema.

35 A breach of trust is a breach of an equitable obligation, and the breach yields a civil liability to make good the loss of property caused by the wrongful act or omission, an obligation to put the trust estate in the same position as if the breach of trust had not been committed.[6]

36 Thus beneficiaries are entitled to hold their trustees civilly liable to restore trust funds and to make good any loss caused by the breach of trust. The same applies to executors.

37 On the basis of the facts to which I have now referred I am satisfied that the failure of John Hubbard to get in the assets of the estate has resulted in a loss to the estate of at least $10,817,509.80, and consequently a loss to the "Susan fund" of at least $5,408,754.90.

38 As I have mentioned there is some prospect of recovery in future by the trustee of the JRH Family Trust of up to another $1.4 million, and thus some prospect of the estate recovering that amount, but I regard the chances of recovery as so speculative as to treat the present value of that prospect at nil.

39 In light of the evidence given by John Hubbard about the financial position of the Resin Coated Sands group of companies, and the nature of the security which is held for advances made to that group, I cannot conceive that a willing but not anxious arm's length purchaser would be prepared to pay anything for the right to pursue a recovery.

40 In the result, I consider that John Hubbard is liable to pay an amount of $5,408,754.90 to the administrator of the estate to the use of the "Susan fund". I also consider that John Hubbard should pay interest on that amount.

41 The plaintiffs have succeeded in establishing that John Hubbard is guilty of a gross breach of duty as executor and trustee. In the circumstances it is appropriate that compound interest be paid at a rate at or about the long term government bond rate, which for the sake of convenience I fix at 8 per cent, and that it be computed from the date of grant of probate until payment or discharge. It will, however, be necessary to subtract from that sum of interest any amount received by Susan Reid by way of income from the estate, which upon the evidence stands at $100,000.

42 That then leaves the question of costs. Plainly John Hubbard should pay the plaintiffs' cost of the proceeding.[7]

43 The only question is whether they are to be taxed on a party and party basis, or as between solicitor and own client. The general rule is that the court should not usually make an order for the payment of costs on some basis more generous than the party and party basis.[8] But circumstances may warrant a departure and a more generous scale may be allowed by way of a punitive order, as for example where an unsuccessful party has defended in a vexatious matter[9] or has had an ulterior motive for denying liability[10] or has failed to heed a clear and credible warning that the defence would fail.[11]

44 In my opinion, in way one or another each of those considerations arises in this case. It follows in my view that costs should be paid upon an indemnity basis.

[1] Armitage v Nurse [1998] Ch 241 p.253; Pope v DRP Nominees (No.2) [2000] SASC 65 at para.[101]; and Walker v Stones [2001] QB 902 at pp.934-5

[2] Partridge v Equity Trustees Executors & Agency Co Ltd [1947] HCA 42; (1947) 75 CLR 149 pp.162-164

[3] Re Turner [1897] 1 Ch. 536

[4] Pailman v Heyen (1993) 33 NSWLR 188 at p.200

[5] Re Second-East Dullich et cetera Building Society (1899) 68 LJ Ch. 196; Dalrymple v Melville (1932) 32 SR (NSW) 596

[6] In Re Luckings Will Trusts [1968] 1 WLR 866; Jacobs', Law of Trusts in Australia 6th ed. para. 2201

[7] Re Thompson, Thomas and Allan [1930] 1 Ch. 203; Jacobs' op. cit at para. 2211

[8] Colgate-Palmolive Company v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225

[9] Australian Guarantee Corporation Ltd v De Jager [1984] VicRp 40; [1984] VR 483

[10] Rouse v Shepherd (No.2) (1994) 35 NSWLR 277

[11] Pascoe v Lucas [1999] NSWSC 923