RMBL Investments Pty Ltd v Salvus Quen Nominees Pty Ltd [1999] VSC 44

5. The plaintiff applies now for approval by the court of payment of costs from trust funds. Approval is sought of the payment at first instance and, further, payment of costs on an indemnity basis with respect to costs incurred by the plaintiff arising from the interim distribution that I approved in my orders made on 4 February 1999. The plaintiff applies for an interim order of payment from trust funds of $76,117.08 consisting of $61,644.50 for professional services and $14,472.58 for disbursements. In support of its application for costs the plaintiff relies specifically upon the affidavits sworn by Lionel Jerrold Appleboom and Ariel Weingart on 1 February 1999.

8. The issues before the court raised on the originating motion concern the identification of those persons who are entitled to receive a distribution of the funds now held in trust by the plaintiff. There have been directions hearings and applications heard in this proceeding on 17 and 26 November 1998, and 2, 4 and 25 February 1999. On each of those occasions the defendants, in particular the third defendant Mr Hubbard, have strongly opposed proposals put forward by the plaintiff including this application. Affidavits have been filed by all parties, with the exception of the first defendant, to which substantial documentary material is exhibited. Furthermore, orders will be sought with respect to discovery and inspection of documents and which the parties inform me will be extensive. The third defendant has made an application, also, seeking to join Kevin Joseph Power, the receiver appointed to the contributory mortgage practice of Young Hubbard & Co and, also Messrs McPherson & Kelly, the solicitors for the plaintiff and the original purchaser of the mortgage practice of Young Hubbard & Co. Mr Hubbard foreshadowed extensive and serious allegations of breach of trust, fraud, negligence, conspiracy, contempt of court and other allegations. His application to join Mr Power and McPherson Kelly as parties to this proceeding was dismissed by me on 25 February 1999. Generally, the attitude of some of the defendants in this proceeding, has been one of opposition to the plaintiff and any distribution by it including the interim distribution ordered on 4 February 1999.

11. An affidavit in support of the originating motion sworn by Colin Henry Madden on 20 October 1998 and the exhibits thereto demonstrate, in part, the extent of the efforts that the plaintiff has been required to make in the course of ascertaining all the relevant facts of which the court ought be informed, including identifying all relevant parties to whom notice ought be given of this proceeding.

14. As is apparent from the facts of the proceeding that I described in my ruling delivered 4 February 1999 this matter is complex. Furthermore, the material that will eventually be considered by the court at trial will be voluminous.

17. The plaintiff submits that as trustee it is in the same position as any ordinary trustee, namely, required to make an application to the court for the determination of critical questions, in particular, the identity of persons entitled to distributions from the trust. The procedure for doing so is provided in Order 51 of Chapter 1 of the Rules. Mr R. Kendall who appeared on behalf of the plaintiff on this application and, indeed, at all directions hearings drew attention to the observations with respect to a trustee in the position that the plaintiff finds itself as set out in Principles of the Law of Trust, Ford and Lee (3rd ed) at para.14040:

"Where a trustee after taking advice is in doubt as to what the trust instrument provides or as to a question of administration the proper course is to apply to the court by originating summons in which the court is asked the relevant questions. Usually in such proceeding the costs of all parties would be ordered to be paid out of the trust property; compare Holding and Management Limited v. Property Holdings and Investment Trust plc (1990) 1 All ER 938. The trustee's costs will be on an indemnity basis while the costs of the other parties will be on the basis of solicitor-client".

21. In Holding and Management the English Court of Appeal disallowed the trustee's claim to recover its costs against the relevant trust fund on the basis of the facts before the court. The Court of Appeal was satisfied that the trustees had not brought the proceeding to protect the maintenance funds for the benefit of the beneficiaries but had acted in their own interests. Mr Kendall submits that the facts in Holding and Management were special and unusual and are distinguishable from the facts in the present matter. Mr Kendall has urged the course that the present matter is one in which the plaintiff is not acting in its own interests. Against this submission the third, fourth, fifth and sixth defendants assert that as the plaintiff is the nominee trustee company appointed by the firm of solicitors McPherson & Kelly to act as its agent with respect to the relevant trust the plaintiff is acting in the interests of McPherson & Kelly. Criticism has been made by those defendants that the plaintiff because of its role on behalf of McPherson & Kelly places McPherson & Kelly in a position of advantage where it is able to accrue a benefit, namely, charging the costs in acting in this proceeding on behalf of the plaintiff. Notwithstanding these allegations none of the defendants substantiated such allegations by matters placed on affidavit alleging impropriety in the charging of costs, the performance of work by McPherson & Kelly as solicitors for the plaintiff or matters to support the assertion that the costs sought are excessive. Mr Forbes who appeared as counsel for the fourth, fifth and sixth defendants went so far as to assert that it was improper in all the circumstances for McPherson & Kelly to charge out at its normal hourly rate. He submitted that the proper course in all the circumstances was for McPherson & Kelly to charge out at the actual cost rate as distinct from the profit cost rate of the firm of solicitors. Mr Forbes was unable to direct me to any authority in support of his proposition and which did appear to be unusual if not unprecedented. In the absence of evidence on affidavit supporting the assertions and allegations by the third, fourth, fifth and sixth defendants concerning to the conduct and charging practices of McPherson & Kelly with respect to the plaintiff I cannot accept that part of the submissions made by those defendants.

24. Mr Kendall referred me to the judgment in Alsop Wilkinson (a firm) v. Neary (1995) 1 All ER 431 in which the court considered whether trustees were entitled to an early or pre-emptive costs order. Lightman, J (at 434) identified three kinds of dispute in which trustees may be involved. The first dispute was referred to as "a trust dispute" that is a dispute as to the trusts on which the trustees hold the subject matter of assessment and can involve the true construction of the trust instrument or some other question arising in the course of the administration of the trust. It was observed that such litigation can involve hostility particularly where there is a challenge to the validity of a settlement on the grounds of undue influence. Mr Kendall submitted that the present matter was distinguishable from the observations in Alsop Wilkinson because the plaintiff had brought before the court a dispute concerning the entitlement of various claimants to participate in the distribution of a trust fund but that the plaintiff proposed to adopt a neutral position in the dispute and, accordingly, abide by any court orders.

27. In Alsop Wilkinson the second category of dispute referred to by Lightman, J involved a "beneficiaries' dispute" being a dispute between one or more beneficiaries as to the propriety of any action which the trustees have taken or omitted to take and can involve allegations of breach of trust and an application to remove the trustees and/or damages for breach of trust. The third category was a "third party dispute" being a dispute with persons who are not beneficiaries and who assert rights such as in contract or tort in the course of administration of the relevant trust. The present matter clearly falls within the first category, if at all, of the three categories described by Lightman, J. However, given the position that the plaintiff has found itself in, namely, uncertainty as to the identity of the parties who should benefit from a distribution from the trust the plaintiff has had no alternative but to come before the court and seek the declarations set out in the originating motion. With respect to the attitude of the plaintiff, quite properly it proposes to adopt a neutral position and, indeed, has done so to date (see Alsop Wilkinson (a firm) v. Neary, supra, at 435).

30. Mr Kendall drew attention, also, to the judgment of the English Court of Appeal in McDonald & Ors v. Horn & Ors (1995) 1 All ER 961. Mr P. Barton who appeared for the first defendant relied upon McDonald in support of the submission that the plaintiff was not entitled to any costs at this point in time.

33. In McDonald & Ors v. Horn & Ors the English Court of Appeal considered an order for pre-emptive costs in favour of potential beneficiaries of a pension fund who instituted proceedings alleging misuse of trust powers and breach of trust by the trustee. The order for costs was made upon an indemnity basis at first instance and was challenged as being beyond the power of the judge and, in any event, as being inappropriate. The claim by the plaintiffs included a challenge to the relevant trust deeds and allegations of breach of trust in the investment of trust funds and the abuse of fiduciary powers by the trustee. Hoffman, L.J. in considering the issues on appeal re-stated the traditional warning against the making of an interim order for costs that might fetter a later discretion of the court's discretion in respect of costs (see at 969; also, Wallersteiner v. Moir (No. 2) (1975) 1 All ER 849, 868, (1975) 1 QB 373, 403). His Lordship considered the observations of Browne-Wilkinson V.C. in Re Westdock Realisations Limited (1988) BCLC 354, 359, that in the context of trusts it is not "right" to make a pre-emptive costs order unless the judge is satisfied that the trial judge would be likely to make an order that the costs of all parties are to come out of the relevant trust fund. Hoffman, L.J. in McDonald (at 971-2) expressed a stronger view to the effect that before a pre-emptive order for costs is made " ... the judge must be satisfied that the judge at the trial could properly exercise his discretion only by ordering the applicant's costs to be paid out of the fund".

36. Mr Kendall submitted that the facts in McDonald & Ors v. Horn & Ors were clearly distinguishable from those in the present matter. Furthermore, Mr Kendall submitted that the present matter can be distinguished from the circumstances in both McDonald and Alsop Wilkinson in that here the subject of the originating motion is not a matter of dispute. Rather, it is a matter in which the plaintiff as trustee comes to the court seeking clarification and identification of persons to whom the trust should be distributed. Whilst matters of dispute have been aired in the present matter in the context of directions hearings and, indeed, on affidavit, the matters raised are not matters properly within the ambit of the originating motion. At best the matters alleged giving rise to dispute potentially between the plaintiff and other parties are matters that ought properly, if at all, proceed in separate proceedings and be the subject of quite different relief to that sought by the plaintiff in the present proceeding.

39. Mr Barton for the first defendant submitted that this proceeding is "hostile litigation of the interpleader kind" being a dispute over the beneficial ownership of part of the trust property. As matters stand that proposition cannot be made out. Insofar as allegations or complaints are made against the plaintiff concerning the conduct and management of the trust and the actions of McPherson & Kelly, those matters are not the subject of the originating motion.

42. Mr Forbes submitted to me that at very best the payment sought by the plaintiff was premature. He relied upon the observations of King, C.J. in Re Suco Gold Pty Ltd (in liq) (1983) 7 ACLR where the Full Court of the Supreme Court of South Australia considered the right of a trustee to indemnity in the context of a liquidation. King, C.J. observed (at 879):

"I am bound to say that, with the greatest respect to those who have found this argument persuasive, it seems to me to be in conflict with fundamental principles of the law of trust. I appreciate that there is some conflict of judicial opinion as to the legal position as to the enforceability of an indemnity before payment of the debt where the indemnity arises under contract, re Richardson (1911) 2 KB 705 per Cozens Hardy M.R. at 709, per Fletcher Moulton L.J. at 712; Re Law Guarantee Trust and Accident Society Limited; Liverpool Mortgage Insurance Company's case (1914) 2 Ch 617 per Scrutton, J. at 651 and cases there cited; Official Assignee v. Jarvis (1923) NSLR 1009 per Salmond, J. at 1021. A trustee, however, has no legal right to use or apply the trust property other than for the authorised purposes of the trust. In particular he has no legal right to apply the trust property for his own benefit or for the benefit of third parties, Keech v. Sandford [1726] EWHC J76; (1726) 2 Eq Cas Abr 741".

46. However, at 882, King, C.J. observed that the trustee's lien is an equitable lien which confers a charge over the trust property, whether in possession of the trustee or not, for the purpose of protecting and enforcing the right of indemnity. It also confers on the trustee a right to possession of the trust property for the purpose of protecting and enforcing the right of indemnity. Further, at 878 King, C.J. observed:

"The right of indemnity which a trustee possesses is, therefore, in essence a right to resort to the trust property for the protection and preservation of his personal estate against liabilities which he has incurred in the proper performance of the trust".

50. In this respect, the observations of Ford and Lee in Principles of the Law of Trust, op cit (para.14020) are of assistance:

"A trustee is not bound in the first instance to pay trust creditors out of the trustee's own pocket, and then recoup out of the trust property. The trustee is entitled to be indemnified, not only in respect of payments of debts already made, ... but also against liability to make payments".

54. Applying the approach in McDonald to the present matter, I can be satisfied that the trial judge would exercise his or her discretion only by ordering the plaintiff's costs be paid out of the trust with respect to the interim distribution from the trust ordered on 4 February 1999. This position follows from the fact of the making of the order, the further fact that none of the defendants seriously opposed such interim distribution and, finally, on the basis of the application of the legal principles already discussed concerning the entitlement of a trustee to indemnity from the trust fund. I am satisfied that by making an order for costs with respect to the interim distribution from the trust the discretion of the trial judge will not be fettered. Indeed, on a proper construction, such an order is not pre-emptive but follows the event. Turning to the costs which are sought on a strictly pre-emptive basis, that is costs beyond the interim distribution order, the question is raised, what substantive orders the trial judge will need to contemplate making? The trial judge will make a declaration as to the identity of the parties entitled to a distribution from the trust. The trial judge will not make any findings and consequential orders against any party with respect to negligence or breach of trust and the like. Those matters are not before the court on the originating motion. On the basis of the affidavits filed on behalf of the defendants to date there is clearly a dispute between the defendants as to who is entitled to the trust funds and in which proportions. It is not clear at this point as to the findings that the trial judge will make particularly given that the first defendant has not filed any affidavit as to its position at this point in time.

57. Allegations have been made in the course of submissions on the present application by the third, fourth, fifth and sixth defendants that McPherson & Kelly, the trust entity behind the plaintiff, has acted improperly by breaching the solicitor mortgage practice rules and, further, acting on behalf of the plaintiff rather than instructing outside solicitors, that is, failing to act at arm's length. All these allegations are unsubstantiated. Furthermore, repeatedly the third defendant has made allegations of impropriety against McPherson & Kelly with respect to the purchase of the solicitor's contributory mortgage practice of Young Hubbard & Co and the disposition of property within the estate. Notwithstanding these allegations no proceedings been issued against McPherson & Kelly. These matters were considered at length in my reasons with respect to the application brought on by the third defendant for the joinder of Kevin Joseph Power, the receiver and McPherson & Kelly as parties to the present proceeding.

60. Section 36(2) of the Trustee Act 1958 provides that a trustee is entitled to re-imbursement out of the trust for expenses incurred "in or about the execution of the trusts or powers". Section 28(1) of the Trustee Act provides that trustees may instead of acting personally employee and pay an agent, such as, a barrister and solicitor "to do any act required to be transacted or done in the execution of the trust, and shall be entitled to be allowed and paid all charges and expenses incurred ... ".

63. It was submitted on behalf of the first defendant that there was no suggestion in the supporting material of the plaintiff that without an order for costs the ability of the plaintiff to present its case would be affected. It was also emphasised on behalf of the first defendant that there was no evidence that the plaintiff would be out of pocket by having to pay its solicitors before the end of the proceeding. These submissions do not address the primary test of which I must be satisfied before making the pre-emptive cost orders sought by the plaintiff. In weighing up whether the judge at trial could properly exercise a discretion only by ordering the plaintiff's costs to be paid out of the trust I am mindful that there is much dispute between the defendants as to who is to be paid and in what proportions. As matters stand on the affidavits filed by the parties to date I cannot be totally satisfied that the judge at trial will exercise the discretion only by ordering the plaintiff's costs to be paid out of the trust. In my view, as matters stand it is undesirable to fetter the discretion of the judge at trial.

66. Mr Kendall informed me that he had instructions to give an undertaking to the court by the plaintiff that in the event that the interim sum of costs which is the subject of the application is found by the court to be inappropriate at the conclusion of the case at trial that the plaintiff will, within 30 days of being directed to do so by the court, re-pay that sum to the trust fund. The proposed undertaking was not challenged or criticised by any of the defendants. However, I am informed that the plaintiff is a nominal trustee company and hence its capacity to satisfy the undertaking if ultimately called upon to do so is questionable. In all the circumstances, therefore, I do not consider it appropriate to make a pre-emptive costs order with respect to costs incurred by the plaintiff beyond those costs incurred with respect to the interim distribution order made on 4 February 1999.

69. There was no challenge to the right of a trustee of indemnity from a trust fund. In addition, in the absence of any evidence to the contrary by the defendants I am satisfied that the interim bill of costs prepared is fair and reasonable in the circumstances and that the plaintiff is entitled to have recourse to the trust fund in order that it be paid with respect to the interim distribution.

72. Accordingly, I propose to make orders authorising payment to the plaintiff from trust funds of the costs of and incidental to the interim distribution order made on 4 February 1999. Further, I propose to order that the plaintiff is entitled to its costs on an indemnity basis. I will hear the parties as to the form of orders to be made.