TRUSTS AND TRUSTEES - Judicial advice - Court's consideration of advice - Charlesworth Nominees Pty Ltd v Charlesworth [2017] 54 VR 155 - [Supreme Court

2 Frank Versace ('Frank') and Maria Versace ('Maria') are siblings and are appointors of the trust. They were both directors of the plaintiff until Frank resigned as a director in 2008. Frank and Maria are corpus beneficiaries of the trust and the discretionary beneficiaries include family, spouses and former spouses of the corpus beneficiaries.

3 By originating motion filed 10 January 2022, pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), the plaintiff seeks the direction and determination of the following questions arising in the administration, management and execution of the trust:

(a) Would the plaintiff be justified in defending Supreme Court proceeding S ECI 2021 03482 ('the related proceeding');

(b) Would the plaintiff be justified in:

(i) retaining independent forensic accountant, Michael Smith of CFA Advisory, or some other appropriately qualified individual, for the purpose of auditing and verifying amendments made to the trust's accounts by the plaintiff's accountant; and

(ii) relying on the amended accounts in the event that Michael Smith of CFA Advisory, or some other appropriately qualified individual, having audited and verified the amendments made to the trust's accounts by the plaintiff's accountant, is satisfied that the amendments were appropriately made and that the amended accounts fairly reflect the financial history of the trust to audit and verify amendments made to the trust's accounts by the plaintiff's accountant, and relying on the same amended documents.

4 The plaintiff relied on an affidavit of Maria affirmed on 22 December 2021 and an affidavit of Michael Anderson, the plaintiff's solicitor, affirmed on 20 May 2022, which exhibits a memorandum of advice from counsel. The advice discloses that counsel and the plaintiff's solicitor advised Maria in her capacity as director of the plaintiff and the advice is provided for the purpose of the plaintiff's application for judicial advice. Although the advice is not marked confidential, the usual practice in applications for judicial advice is to mark the advice as confidential and orders to that affect will be made on this instance.

5 On 4 May 2022, Keith JR made orders for the plaintiff to file an outline of submission and the proceeding to be referred for determination on the papers.

6 The plaintiff, in its capacity as trustee of the trust, is the sole proprietor of the following properties:

(a) a commercial property in Footscray;

(b) a property in Torquay ('the Torquay property'), which is used as a holiday home;

(c) a residential property in Sunbury over which there is a mortgage that has been repaid but not discharged;

(d) a second residential property in Sunbury, which is subject to a mortgage to the Commonwealth Bank; and

(e) a third residential property in Sunbury, which is subject to a mortgage to Westpac Bank.

7 Apart from the Torquay property, the other properties are tenanted. In addition to the properties, the plaintiff holds two bank accounts with Westpac Bank with funds as at December 2021 of approximately $62,500.

8 On 16 July 2021, Frank lodged a caveat over each of the five properties claiming an implied, resulting or constructive trust.

9 On 23 September 2021, Frank commenced the related proceeding, at first by originating motion but he was subsequently directed to continue the proceeding as if commenced by writ. The claims made in the related proceeding are not clearly made out in some instances. The claims against the plaintiff relate to the plaintiff's governance of the trust, wrongful transfers of shares in the plaintiff leading to Maria now holding the shares in the plaintiff, unlawful conduct by the plaintiff, the trust being for the benefit of Frank and Maria equally, misappropriation of trust funds, breach of certain duties and obligations by the plaintiff as trustee, and failure by the plaintiff to explain and provide trust documents to Frank.

10 By the related proceeding Frank seeks to establish that he has a certain fixed entitlement of one half of the income and capital of the trust from 2008 to 2021. Frank seeks various orders and declarations against the plaintiff, including removal as trustee of the trust and that he be entitled to one half of the income and capital of the trust from 2008 to 2021, as follows:

(a) the plaintiff be retrained by way of interim injunction from making any payment from the trust or transferring any assets, other than for the payment of expenses of managing the trust, before the determination of the proceeding;

(b) the plaintiff be removed as trustee of the trust, an independent trustee be appointed, the trust property be vested in the new trustee, and the plaintiff deliver all documents of the trust to the new trustee pursuant to, inter alia, ss 41, 48 and 51 of the Trustee Act 1958 (Vic);

(c) the plaintiff provide Frank with copies of all trust resolutions, minutes of meetings, financial statements and tax returns since 30 June 2008;

(d) that for the year ended 30 June 2011 and thereafter, all resolutions made by the plaintiff were made without genuine consideration of whether a distribution should be made to Frank and were therefore in a breach of trust and invalid;

(e) that for the year ended 30 June 2008 to 30 June 2021, the plaintiff held, and continues to hold, one half of the income and capital of the trust for Frank's benefit;

(f) the appointed trustee resolve to vest the trust and distribute one half of the income and capital to Frank;

(g) that Maria has, in the 2011 or 2015 financial year, misappropriated unpaid present entitlements held in the trust for Frank;

(h) the plaintiff reinstate Frank's present entitlement as at 30 June 2010, alternatively, 30 June 2014, and make a corresponding adjustment to Maria's present entitlements; and

(i) that Maria holds half of the shares in the plaintiff on trust for Frank and transfer half of the shares in the plaintiff to him.

11 On 4 May 2022, orders were made in the related proceeding for an interlocutory timetable for Maria and Frank but excused the plaintiff from filing a defence and making discovery pending the outcome of this proceeding, unless otherwise ordered by the Court.

12 In Charlesworth Nominees Pty Ltd v Charlesworth,[1] Croft J set out a detailed analysis of the principles relevant to an application for judicial advice when a party to a proceeding seeks declarations or orders as to whether they are justified in defending a proceeding. In general terms, in an application for judicial advice where a party seeks such declarations or orders, the Court's task is to determine whether, on the material presently available, it would be proper for an applicant to defend the relevant proceeding.

13 In determining this issue the Court is not bound to investigate the evidence in order to make a finding as to whether the related proceeding would be successful or not or to determine the issues in the relevant proceeding. The Court's role is to determine whether the defence of the proceeding is justifiable. This means the Court should satisfy itself that the defence of the relevant proceeding will not be fruitless. The Court is entitled to make a determination based on legal advice obtained by the applicant that canvasses the prospects of success in the relevant proceeding, as well as whether the likely costs are proportionate to the issues and the significance of the case.[2]

14 Generally the issue is whether the applicant seeking the advice of the Court has a legitimate interest in defending the relevant proceeding. Whether there is a legitimate interest in defending the proceeding depends on the nature of that proceeding and the circumstances of the particular case. The focus is on the impact of the relevant proceeding as a whole.[3]

15 A trustee may be involved in three kinds of disputes, being:

(a) a trust dispute, involving a dispute as to the trusts on which the trustee holds the subject matter of the settlement. This includes the construction of the trust deed, issues concerning administration of the trust, or challenges against the validity of the trust;

(b) a beneficiaries' dispute, involving a dispute with the beneficiaries as to the propriety of any actions of the trustee, which may include allegations of breach of trust or an application for the removal of the trustee; and

(c) a third party dispute, where the disputes are with third parties in respect of rights and liabilities of the trust such as contractual disputes.

16 In a trust dispute the trustee's general duty is to remain neutral and to submit to the Court's directions, leaving it to the rival claimants to conduct the dispute. In a third party dispute that ordinarily has a direct impact on the trust, a trustee has a duty to protect the trust and represent the trust in the third party dispute. Whether a trust should defend a beneficiaries' dispute depends on the circumstances.[4]

17 Given that Frank's claims made in the related proceeding are not clearly made out it is appropriate to characterise the disputes in the related proceeding as a combination of a trust dispute and a beneficiaries' dispute. Counsel's advice provides an analysis of the factual circumstances and the legal arguments likely to be raised as a result of Frank's claims against the plaintiff in the related proceeding. The advice addresses certain difficulties with Frank's pleadings in the related proceeding (which have been conveyed to Frank's solicitors) as well as the trustee's defences to those claims. The advice concludes that the trustee has a legitimate interest in defending those claims.

18 The ultimate issue in the related proceeding is Frank's claims to a certain fixed entitlement of one half of the income and capital of the trust from 2008 to 2021 in circumstances where the trust is a discretionary trust and the beneficiaries include Frank, Maria, and their families. The plaintiff seeks to defend the related proceeding in respect of the whole of the trust's corpus and income for the benefit of all beneficiaries of the trust, whereas if successful the result of Frank's claims would be that the entire trust would be for the benefit of Frank and Maria only. This means that the plaintiff is a necessary party in the related proceeding as the past and future governance of the trust is in issue.

19 The further relief sought by the plaintiff relates to evidentiary matters for the defence of the related proceeding and it is not appropriate for the Court to determine that relief in this application.

20 The Court declares that pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), the plaintiff, in its capacity as trustee of the G&A Versace Family Trust, is justified in defending Supreme Court proceeding S ECI 2021 03482.

(a) Pursuant to r 28A.06 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), the affidavit of Michael Anderson affirmed 20 May 2022 and the exhibits thereto, including the memorandum of Harlis Kirimof of counsel dated 20 May 2022 being exhibit MA-1, be kept on the Court file and marked confidential and remain confidential to the plaintiff and its legal representatives, and no other person may inspect or obtain a copy of the document except by order of a Judge of this Honourable Court.

(b) The plaintiff's costs be paid from the assets of the trust on an indemnity basis.

(c) Otherwise the proceeding be dismissed.

[1] Charlesworth Nominees Pty Ltd v Charlesworth [2017] VSC 445; (2017) 54 VR 155.