RJK Enterprises P/L v Webb & Anor

EQUITY - TRUSTS AND TRUSTEES - POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES - INDEMNITY, LIEN AND REIMBURSEMENT - GENERAL PRINCIPLES - where respondents are directors of a company which acted as trustee for a family trust - where trustee company purchased a business - where judgment made in the District Court against trustee company as a result of a default under agreement to purchase business - where that judgment has not been satisfied - where trustee company has been placed into liquidation by a previous application - whether s 197 of the Corporations Act 2001 (Cth) as it then was applies - whether directors of trustee company are personally liable for a debt incurred when there are insufficient trust assets to indemnify the trustee company

Corporations Act 2001 (Cth), s 197

Trustee Act 1898 (Tas), s 27(2)

Trustee Act 1925 (NSW), s 59(4)

Trustee Act 1936 (SA), s 35(2)

Trustee Act 1958 (Vic), s 36(2)

Trustees Act 1962 (WA), s 71

Trusts Act 1973 (Qld), s 72

Allina Pty Ltd v Federal Commissioner of Taxation (1991) 99 ALR 295, cited

Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, cited

Edwards v Attorney General (NSW) [2004] NSWCA 272; (2004) 208 ALR 605, cited

Hanel v O'Neill [2003] SASC 409; (2003) 48 ACSR 378, distinguished

Intagro Projects Pty Ltd v Australia and New Zealand Banking Group Ltd [2004] NSWSC 618; (2004) 50 ACSR 224, cited

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, cited

Kemtron Industries Pty Ltd v Commissioner of Stamp Duties [1984] 1 Qd R 576, cited

Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in Liq) [2005] NSWSC 1317, cited

Sit Simplex Stulte Pty Ltd (in liq) v Carter [2003] QSC 99, cited

Young v Murphy [1996] 1 VR 279, cited

[1] Douglas J: This is an application for an order that the respondents pay the applicant the sum of $138,540.22 pursuant to s. 197 of the Corporations Act 2001 (Cth) as that section was before 18 November 2005.

[2] The second respondent was a director of a company called LJAW Enterprises Pty Ltd which was the trustee for the Aiga-Webb Family Trust when it incurred a liability to pay the applicant, RJK Enterprises Pty Ltd, the sum of $105,000 provided by RJK as vendor finance for the completion of a purchase of a newsagency by LJAW from RJK.

[3] LJAW did not repay that sum when repayment was due. It was sued by RJK which obtained judgment against it on 17 November 2005 for $138,540.22. That judgment has not been satisfied and on 26 April 2006 LJAW was placed into liquidation on the application of RJK. At the time of the judgment both the first respondent and the second respondent were directors of LJAW.

[4] Section 197 provided at the relevant times:

"197 Directors liable for debts and other obligations incurred by corporation as trustee

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not, and cannot, discharge the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets.

This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection." (emphasis added)

[5] It was a replacement for an earlier section of the Corporations Law, s. 233, which was itself based on s. 229A of the earlier Companies (Qld) Code. Those sections had been construed to apply to give a remedy against directors of a trustee company where an indemnity in their favour was not available against trust assets, but not simply because the trust had no assets or insufficient assets to afford the relevant indemnity. It had to be on some other ground that the indemnity was not available; see Young v Murphy [1996] 1 V.R. 279, 313. The natural reading of s. 197 and its legislative history do not suggest that parliament intended that there should be any change in the policy behind the section when it was compared to its predecessors.

[6] The Full Court of the South Australian Supreme Court decided, however, in Hanel v O'Neill [2003] SASC 409; (2003) 48 ACSR 378, by Mullighan J, that if there were no assets comprised in the trust fund, there was no entitlement to be indemnified,[1] and, in the case of Gray J that, properly construed, s. 197(1) had the result that a director of a corporate trustee was personally liable where a debt was incurred and there were insufficient trust assets to meet the debt.[2] Debelle J dissented on this issue.

[7] The proposition of Mullighan J that "if there are no assets comprising the trust fund, there is no entitlement to be indemnified" is, in my view, plainly wrong. An entitlement normally refers to a legal right but not the value of that right. Mr Charles Wilson for the respondent submitted that the absence of a right of indemnity under s. 197(1)(b) may arise potentially in Queensland only as a result of a liability that was incurred by the trustee in breach of trust or beyond the powers given by the trust instrument. The statutory right of indemnity provided by s. 72 of the Trusts Act 1973 (Qld) cannot be overridden by contrary intention in the trust instrument denying or limiting the right of indemnity; see s. 65 and Kemtron Industries Pty Ltd v Commissioner of Stamp Duties [1984] 1 Qd R 576, 584-585.

[8] The position in Queensland is similar in some other states such as New South Wales and South Australia[3]. Conversely, the implied (statutory) right of indemnity in Victoria, Western Australia and Tasmania[4] may be overridden by contrary intention and, in those states, the absence of a right of indemnity potentially arises as a result of either or both disentitling conduct and a contrary intention in the trust instrument. In no case is the entitlement to an indemnity absent simply because of a lack of trust assets.

[9] The approach adopted by Gray J was developed with reference particularly to the sentence in s. 197(1) that I have emphasised above: "This is so even if the trust does not have enough assets to indemnify the trustee." That sentence appears after subparagraphs 1(a) and (b) of the section. It has been described as an ambiguous sentence but Austin J of the New South Wales Supreme Court, when delivering a lecture in February 2004, gave an explanation which seems, to me, to be correct. He said:

"I suggest that the ambiguous sentence should be taken to mean that the director's liability (if it exists because the right to indemnity has been destroyed) is not diminished by reference to the fact that the trust has insufficient assets to indemnify the trustee. On its proper construction, s 197 should not be taken to render the director liable when the right of indemnity remains in place but there are insufficient assets to meet the indemnity."

[10] That passage from the lecture was quoted by McDougall J in Intagro Projects Pty Ltd v Australia and New Zealand Banking Group Ltd [2004] NSWSC 618; (2004) 50 ACSR 224, 236 [53]. In that decision at 230-237 [24]-[62] his Honour canvassed many of the criticisms of the decision in Hanel. I agree with those criticisms and shall not repeat them here.

[11] It is clear that his Honour thought that the majority view in Hanel was wrong. The reason that may have stopped his Honour from saying that the decision in Hanel was plainly wrong came from the procedural context in which he was considering the question. A defendant bank was seeking leave to amend its cross-claim by adding two directors of a trustee company as cross-defendants arguing that they were liable to discharge a trustee company's liability as a trustee under s. 197. Because of the decision in Hanel, McDougall J did not feel justified in refusing the amendment on the basis that, if the majority view in Hanel was correct, then it was fairly arguable; see at 237-238 [64]-[65]. The situation is different here because final relief is sought to require the respondents to pay the sum claimed.

[12] The issue whether the decision is "plainly wrong" arises because of the decision of the High Court in Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485, 492 according to which State courts and "all the more so a single judge" should not depart from an interpretation placed on Commonwealth legislation by another Australian intermediate appellate court unless convinced that interpretation is plainly wrong.

[13] Young CJ in Eq of the New South Wales Supreme Court in Edwards v Attorney General (NSW) [2004] NSWCA 272; (2004) 208 ALR 605, sitting as a member of the Court of Appeal of that Court, "may well have yielded to the temptation so valiantly resisted by McDougal J in the Intagro case" to say that Hanel was plainly wrong, had that Court needed to deal with s. 197 in that decision; see at 628 [150]-[152].

[14] Windeyer J, in Saffron Sun Pty Ltd v Perma-Fit Finance Pty Ltd (in liq) [2005] NSWSC 1317, was less inhibited in concluding at [31] that the decision in Hanel was wrong and should not be followed. He went on to say that if that required him to come to the conclusion that it was plainly wrong then "I must do so". He relied on what had been said by Young CJ in Eq in reaching that conclusion.

[15] Before these controversies had arisen Helman J of this Court had decided in Sit Simplex Stulte Pty Ltd (in liq) v Carter [2003] QSC 99 at [14] not to allow an amendment to a pleading based on a submission that may have advanced a similar view of s. 197 and its predecessor to that which succeeded in Hanel. So the only relevant authority in this State is against the proposition advanced in Hanel.

[16] The coup de grâce was delivered late in 2005 by the Commonwealth Parliament when it amended s. 197 "so as to correct a perceived anomaly arising due to the interpretation placed upon the section by the Supreme Court of South Australia" and to override the decision in Hanel to ensure "that the liability of directors of trustee corporations will extend only so far as intended when section 197 was introduced in its original form in the corporations legislation"; see the Law and Bills Digest accompanying the Corporations Amendment Bill (No. 1) 2005. The explanatory memorandum for that bill also said of the decision in Hanel that the:

"South Australian Supreme Court departed from the longstanding interpretation of section 197 of the Corporations Act. The practical impact of the new interpretation is that the directors of corporate trustees may be held to be guarantors for any liability entered into by the trustee. As such, directors of corporate trustees are now exposed to greater potential for personal liability than directors of other companies."

[17] There is no other judicial decision that supports the approach adopted in Hanel and, in spite of McDougall J's unwillingness in Intagro to go so far as to say that the decision was "plainly wrong", it seems to me that the judicial and legislative developments since then justify me in reaching that conclusion. The subsequent statutory history in circumstances like this is also an available aid to construction to permit me to reach this conclusion; Allina Pty Ltd v Federal Commissioner of Taxation (1991) 99 ALR 295, 303 and Pearce and Geddes_, Statutory Interpretation in Australia,_ 5th ed. (2001) at [3.30]-[3.31].

[18] The lack of a single reason for the decision also makes it an unreliable basis on which to give the judgment sought here. This application is not one for interlocutory relief of the type before McDougall J. It is however an interlocutory application seeking, in effect, summary judgment. The applicant seeks to rely upon Hanel to enforce a money claim against the first respondents as directors. That provides another reason why I should not follow Hanel in this context.

[19] Nor was the evidence, at this stage at least, satisfactory in respect of the inferences as to the assets available to LJAW. The fact that it has been put into liquidation where there is no evidence from the directors about the company's ability to pay the claimed debt was relied upon by the applicant to argue that I should draw the inference on the current evidence that the trust fund had no assets, thus permitting the use of s. 197. At this stage of the proceeding I would not have converted that conjecture into inference, to use the language of Kitto J in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, 305. Nor was the first respondent a director of LJAW when the liability was incurred, although he was when judgment was entered, another reason for refusing the relief against him at least.

[20] Principally, however, I would refuse the application because it can only succeed if Hanel is right, and I am of the view that the decision is plainly wrong and should not be followed. Accordingly the application is dismissed. I shall hear the parties further as to costs.

[3] Trustee Act 1925 (NSW), s. 59(4) and Trustee Act 1936 (SA), s. 35(2).

[4] Trustee Act 1958 (Vic), s. 36(2), Trustees Act 1962 (WA), s. 71 and Trustee Act 1898 (Tas), s. 27(2).