Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella

[2008] NSWSC 685

Reported Decision: 6 ABC (NS) 164

New South Wales

Supreme Court

CITATION:	Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella [2008] NSWSC 685 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	28.02.08, 29.02.08, 07.03.08, 01.05.08, 04.06.08
JUDGMENT DATE :	8 July 2008
JUDGMENT OF:	Nicholas J
DECISION:	Par 66
CATCHWORDS:	EQUITY – trusts and trustees – administration of trust upon bankruptcy of original trustees – sale of trust property – right of trustee in bankruptcy to retain proceeds of sale – whether proceeds of sale a trust asset – whether valid resignation by original trustee – whether trust fund vested in new trustee prior to bankruptcies – right of trustee in bankruptcy to indemnity from trust funds in respect of trust debts – whether indemnity extends to contingent liabilities – trustee in bankruptcy’s equitable lien over trust property
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth)
CATEGORY:	Principal judgment
CASES CITED:	Chief Commissioner of Stamp Duties (NSW) v Buckle (1995) 38 NSWLR 574; on appeal [1998] HCA 4; (1998) 192 CLR 226 Hayman v Equity Trustees Ltd [2003] VSC 353 Hewett v Court [1983] HCA 7; (1983) 149 CLR 639 Jennings v Mather [1901] 1 KB 108 Jennings v Mather [1902] 1 KB 1 Kennett v Charlton [2007] NSWSC 190 Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360 Re Application of Sutherland [2004] NSWSC 798 Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; (1983) 7 ACLR 873 Re Matheson; Ex parte Worrell v Matheson [1994] FCA 1021; (1994) 49 FCR 454 In re Pauling’s Settlement Trusts (No2) [1963] Ch 576 Ronori Pty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246 Savage & Whitelaw v Union Bank of Australia Ltd [1906] HCA 37; (1906) 3 CLR 1170 Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319 Wood v W & G Dean Pty Ltd [1929] HCA 44; (1929) 43 CLR 77 X v A [2000] 1 All ER 490
PARTIES:	Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust - plaintiffs/first cross defendants The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella - defendant/cross claimant Nida Ferella - second cross defendant Ferell Staff Superannuation Fund - third cross defendant
FILE NUMBER(S):	SC 4820/06
COUNSEL:	D Ash - plaintiffs/cross defendants S Golledge - defendant/cross claimant
SOLICITORS:	Colin Biggers & Paisley - plaintiffs/cross defendants Sally Nash & Co - defendant/cross claimant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Nicholas J

8 July 2008

4820/06 Agusta Pty Ltd & Ors as trustees for the Cavallino Unit Trust v The Official Trustee in Bankruptcy as trustee of the bankrupt estates of Gustavo Ferella and Angelo Ferella

JUDGMENT

1 His Honour: These proceedings concern issues arising out of the administration of the Cavallino Unit Trust (the trust) upon the bankruptcy of the original trustees, Mr Gustavo Ferella and Mr Angelo Ferella (the Ferellas) and the sale of the trust property which consisted of real estate at Point Piper (the property). The Official Trustee in Bankruptcy (the defendant) is the trustee of their bankrupt estates, and presently holds the money which was the proceeds of sale of the property (the fund).

2 The defendant did not admit that the fund was an asset of the trust, but did not oppose the plaintiffs’ case that it was. In my opinion the terms of the contract for the purchase of the property made 7 October 2000 and of the arrangement for finance for the transaction support the finding, which I make, that the property was bought for the trust. In addition there was uncontradicted evidence from Angelo Ferella and Tiziana Ferella to the same effect. Accordingly, the fund must properly be regarded as an asset of the trust.

3 By their further amended statement of claim, the plaintiffs seek declarations as to identity of the trustee, that the money held by the defendant is an asset of the trust, and an order that the defendant pay over to the trustee the balance of the fund to which it is not entitled.

4 By its cross-claim the defendant seeks orders confirming its entitlement to retain from the fund a sufficient amount for security for a right of indemnity in respect of certain claims made by creditors of the Ferellas. It also seeks directions for dealing with the fund or any relevant surplus.

5 The essential questions for determination are, firstly, the identity of the trustee and, secondly, whether the fund is subject to an equitable charge or lien in favour of the defendant as security for an indemnity for the payment of certain claims and expenses.

Background

6 Gustavo Ferella and Nida Ferella are the parents of Angelo Ferella. The Cavallino Unit Trust has 10A class units which are held by these persons, and 10B class units which are held by the Ferell Staff Superannuation Fund. Gustavo Ferella and Nida Ferella were the original trustees of this fund and, later, Angelo Ferella became a co-trustee.

7 By deed of 10 January 1995 the Ferellas were appointed trustees of the trust, which was then named “The Ferella Unit Trust”.

8 On 6 October 2000 the name of the trust was changed to “Modena Unit Trust”, and on 7 October 2000 the trustees entered into a contract for the purchase of the property for the price of $3,850,000. Finance for the purchase was obtained from the Commonwealth Bank of Australia. Upon transfer, the property was registered in the names of Gustavo Ferella and Angelo Ferella.

9 On 8 October 2000 the name of the trust was changed back to “Ferella Unit Trust”, and on 1 October 2001 it was changed to “Cavallino Unit Trust”, its present name.

10 By deed of 19 April 2005 the Ferellas resigned, and Riva (NSW) Pty Ltd (Riva) was appointed as trustee. The validity of this transaction was an issue in the proceedings.

11 By deed of 30 June 2005 Gustavo, Angelo and Nida Ferella resigned, and Riva was appointed, as trustee of the Ferell Superannuation Fund.

12 On about 14 October 2005 each of the Ferellas was made bankrupt, and the defendant was appointed trustee of his bankrupt estate.

13 By deed of 9 February 2006 Riva resigned and Agusta Pty Ltd (Agusta) was appointed as trustee. The validity of this transaction was an issue in the proceedings.

14 By deed of 5 April 2006 executed by the Ferellas, Nida Ferella, Riva, and Agusta the earlier changes of name, and changes of trustees, were confirmed and acknowledged.

15 On 11 April 2006 the property was sold pursuant to a sale by the then mortgagee, Kay Nominees Pty Ltd, for the sum of $7,950,000 following which the net proceeds in the sum of $1,742,030.39 were paid to the defendant.

Identity of the trustee

16 A principal issue in the proceedings was the identity of the trustee of the trust at the time of the Ferellas’ bankruptcy. The defendant accepted that it would not be entitled to the lien which it claimed if, by the time of their bankruptcy, the Ferellas had been replaced by either Riva or Agusta.

17 The defendant’s case was that the Ferellas have never ceased to be trustees, and neither Riva nor Agusta had been validly appointed in their place. It contended that the attempts to change the trustee by the deed of 19 April 2005 by which Riva was appointed, and by the deed of 9 February 2006 by which Agusta was appointed, were invalid in that they were executed after the Ferellas became bankrupt on 14 October 2005. In particular, it contended that the deed of 19 April 2005 was not executed on the date it bears, and was falsely backdated. It followed, so it was put, that the requirements of cl 15(a) and/or cl 15(b) of the trust deed had not been fulfilled, and no change of trustee effected.

18 Alternatively, the defendant contended that if Riva had become the new trustee there was no evidence that the Ferellas had caused the trust fund to be vested in it pursuant to cl 15(d) of the trust deed and, if so, such fund remained vested in them.

19 Relevantly, the trust deed of 10 January 1995 included the following:

“15(a) a Trustee may with the approval of all the Registered Holders given by resolution at a duly convened meeting be appointed or removed and the Trustee may from time to time with the approval as aforesaid appoint an additional trustee or additional trustees of this settlement;
(b) the Trustee may retire upon giving six months’ notice (or such shorter period as all of the Registered Holders may agree) to each of the Registered Holders of its desire so to do and by Deed appointing in its stead a person or corporation nominated by it and approved by the Registered Holders to act as the new Trustee;
…
(d) the Trustee shall on retirement or removal vest the Trust Fund or cause it to be vested in the new trustee and shall deliver to such new trustee all books records documents [sic] and other property whatsoever relating to the Trust Fund.”

20 The deed of change of 19 April 2005 provided:

”This DEED [sic] is made on the date specified by the person named in Item 1 (the ‘Old Trustee’) [Angelo Ferella and Gustavo Ferella] and the person named in Item 2 (the ‘New Trustee’) [Riva] whereby it is recorded that the old Trustee hereby resigns as Trustee of the Unit Trust in accordance with the terms set out in the Original Deed and appoints Riva (NSW) Pty Limited as Trustee.”

The deed was executed by each of the Ferellas, and by Nida Ferella as director of Riva. Nida Ferella witnessed the signatures of the Ferellas, and Angelo Ferella witnessed her signature.

21 The deed of change of 9 February 2006 provided:

“This DEED [sic] is made on the date specified by the person named in Item 1 (the ‘Old Trustee’) [Riva] and the person named in Item 2 (the ‘New Trustee’) [Agusta] whereby it is recorded that the old Trustee hereby resigns as Trustee of the Unit Trust in accordance with the terms set out in the Original Deed and appoints Agusta Pty Limited as Trustee.”

The deed was executed by Nida Ferella as director of each of Riva and Agusta, and witnessed by Angelo Ferella.

22 The parties to the remedial deed of 5 April 2006 were the Ferellas, Nida Ferella, Riva, Agusta, and Gustavo Ferella and Nida Ferella as trustees for the Ferell Staff Superannuation Fund. Recital J recorded that:

“J At all times the unit holders of the trust have been and are Angelo, Gustavo, Nida and the Superannuation Fund.”


Recital K stated that the trustees were attempting to refinance the mortgage and “… for this purpose the parties to this deed wish to regularise the past dealings associated with the trust property”.

The parties confirmed and acknowledged, inter alia, the changes of trustees purportedly effected by the earlier deeds. Clause 8 stated that the trust property had been continually owned by the trust since its purchase.

23 Initially, the plaintiffs contended that the Ferellas had been replaced as trustees by Agusta, alternatively, by Riva. However, during the course of submissions the case for Agusta was not pressed and the preference for Riva was stated (T pp 175, 181 and 186). I was left with the impression that the plaintiffs accepted the indubitably correct situation that upon the bankruptcy of the Ferellas s 5 and s 58(1) of the Bankruptcy Act 1966 (Cth) operated to vest the rights and powers attached to their units in the defendant so that they became unable to vote for, or to otherwise approve, a change to Agusta under either cl 15(a) or cl 15(b) of the trust deed. (See Wood v W & G Dean Pty Ltd [1929] HCA 44; (1929) 43 CLR 77, per Isaacs J.) Accordingly, I have proceeded on the basis that it was Riva which the plaintiffs finally claimed to be the trustee at the relevant time. In support, they relied upon the deed of 19 April 2005 and the remedial deed of 5 April 2006.

24 The issues raised by the defendant’s challenge to the validity of the appointment of Riva requires consideration of the following evidence.

25 In her affidavit of 23 April 2007, Tiziana Ferella, the secretary of Agusta, said that by reason of their bankruptcy on 14 October 2005 the Ferellas could no longer act as trustees for the trust which at the time owned the property. In cross-examination she said that the decision to retire was made in a family discussion about the bankruptcy. Nevertheless, she said the deed was signed on 19 April 2005 and rejected the suggestion that it was brought into existence after October 2005. My assessment of her evidence was that her recollection of dates and events was poor, and that the extent of her involvement in, and direct knowledge of, the circumstances of execution of the deed was doubtful.

26 In his statement of affairs of 1 December 2005, Angelo Ferella named his father and himself as trustees of the trust in answer to a question about involvement in a trust. A similar statement was made in Gustavo Ferella’s statement of affairs of the same date.

27 Angelo Ferella gave evidence of an application made by him to Champion Finance for finance for the trust. A letter from Champion Finance of 28 October 2005 in response to the application was addressed to the Ferellas and the trust. It referred to the trust as the borrower, and to the Ferellas as guarantors, which was consistent with his oral evidence. When cross-examined on the deed, Angelo Ferella said the date “19 April 2005” was written by him, and that the deed was executed on that date. He rejected the suggestions that it was executed later, and that the removal of him and his father as trustees was brought about by their bankruptcy, and happened after December 2005.

28 In the heading of the minutes of the meeting of the Ferellas on 27 March 2006 they were described as trustees for the trust. The minutes recorded that it was the intention of the meeting of 19 April 2005 that the Ferellas resign as trustees, and that Riva had been the new trustee since then.

29 The company search for Riva disclosed that it came into existence on 19 April 2005, at which time Nida Ferella was its director and secretary. It also showed that Tiziana Ferella was appointed director to replace her mother on 7 February 2006.

30 The affidavit of Angelo Ferella of 1 November 2000 in the bankruptcy proceedings was also before the Court. It made no reference to Riva as trustee.

31 The defendant submitted that this evidence, taken as a whole, supported the finding that the deed of 19 April 2005 had not been executed before the bankruptcy. It was put that the date was false, and that Angelo Ferella’s evidence to the contrary should be rejected. It was put that the documentary evidence, which contained no reference to Riva, was inconsistent with a change of trustee if such, in fact, had happened. Furthermore, the defendant argued that the statements in the statements of affairs should be taken as admissions that no change had taken place prior to 1 December 2005, and provided powerful support for the proposition that the change took place some time between that date and March 2006 when the deed was registered. The defendant also submitted that an inference adverse to the plaintiffs should be drawn from the failure of both Nida Ferella and Gustavo Ferella to give evidence in response to the challenge to authenticity.

32 As for the issue of vesting, there was no evidence before the Court which demonstrated that the Ferellas had taken any action to cause the property to be vested in Riva in compliance with cl 15(d) trust deed. In my assessment, the weight of the evidence was very much to the contrary. Significantly, the Ferellas remained the registered proprietors of the property until the time of its sale. Nothing in the evidence indicated that before their bankruptcy the Ferellas ever turned their minds to performance of the obligation to comply with cl 15(d). It follows, in my opinion, that the assets of the trust remained vested in the Ferellas at the time of their bankruptcy.

33 As to the challenge to the deed, a finding of falsity as sought by the defendant requires cogent evidence to support it. In my opinion, the evidence in this case does not provide a sound basis for the finding that the deed was falsely dated. The information in the company search strongly indicates the probability that the deed was executed on the same date that Riva was incorporated. It also enables me, on balance, to accept the evidence of Angelo Ferella on the point. The information in the statements of affairs, the correspondence with Champion Finance, and the absence of reference to Riva in the affidavit of 1 November 2000 are matters consistent with the fact that the trust property remained vested in the Ferellas by reason of their failure to cause it to be vested in the new trustee once the change had been made.

34 I reject the defendant’s challenge to the validity of the deed by which Riva was appointed trustee. No point was taken that the procedure adopted by the parties to the deed was not compliant with cl 15(a) and/or cl 15(b) of the trust deed. Accordingly, I hold that Riva became the new trustee under the deed of 19 April 2005, but the trust assets have never been vested in it.

The defendant’s claim for indemnity

35 The defendant claims the right to be indemnified out of the fund against personal liabilities incurred by the Ferellas in the performance of their duties as trustees. Determination of those claims which are opposed by the plaintiffs are made with regard to the following propositions taken from the authorities:

(i) A trustee is entitled to be indemnified from the trust assets against personal liability incurred in conducting the business of the trust, and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets ( Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319; Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360, p 367).

(ii) The trustee has a beneficial interest in the trust assets to the extent of its right to be indemnified out of those assets against personal liabilities incurred in the performance of the trust, and that interest will be preferred to the beneficial interests of the cestuis que trust ( Chief Commissioner of Stamp Duties (NSW) v Buckle (1995) 38 NSWLR 574, p 586; on appeal [1998] HCA 4; (1998) 192 CLR 226, p 247; RonoriPty Ltd v ACN 101 071 998 Pty Ltd [2008] NSWSC 246, per Barrett, J, pars 14-16).

(iii) For the purpose of indemnification the trustee is entitled to retain possession of the trust property as against the beneficiaries. His interest in the property is a proprietary interest which will pass to the trustee in bankruptcy for the benefit of the creditors of the trust’s trading operations should the trustee become bankrupt ( Octavo Investments, pp 369-370; Re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99; (1983) 7 ACLR 873; Re Matheson; Ex parte Worrell v Matheson [1994] FCA 1021; (1994) 49 FCR 454).

(iv) If the trustee has discharged the liability he is entitled to recoup himself out of the trust property. If he has not discharged the liability, he is entitled to resort to the trust property for the purpose of discharging the liability thereby freeing his personal estate from the burden of the liability. If the trustee is bankrupt and the trust liabilities have been discharged the trustee in bankruptcy is entitled to recoup the bankrupt estate out of the proceeds of the trust property. If the liabilities have not been discharged the trustee in bankruptcy 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 ( Re Suco Gold, pp 878 and 881).

(v) The lien is ancillary to the right of indemnity. The rights conferred pass to the trustee in bankruptcy and enable him to obtain and retain possession of the trust property until the right of indemnity has been exercised, and to realise the trust property in the course of exercising it. When the right of indemnity has been exercised by recoupment of any amounts which the trustee has paid in connection with the trust and by payment out of the trust fund of any outstanding liabilities, the lien ceases and the balance of the trust property becomes available to a new trustee or the cestuis que trust as the case may be ( Re Suco Gold, p 882).

(vi) As it is an equitable lien, it is a right against property which arises to secure the discharge of an actual or potential indebtedness. It is a form of equitable charge over the subject property in that it does not depend upon possession and, where the lien is over a fund, may be enforced by an order for payment thereout ( Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, p 663).

(vii) A trustee has a lien over the trust fund for all his liabilities as a trustee, including his proper costs and expenses, which extends to an indemnity against future, and outstanding contingent, liabilities ( X v A [2000] 1 All ER 490; Kennett v Charlton [2007] NSWSC 190).

(viii) The trustee is entitled to have all the trust property remain available to protect his rights of indemnity against it until such rights have been ascertained and discharged. However, he has no right to resist distribution of all trust assets to those absolutely entitled in circumstances where the value of the assets vastly exceeds the likely amount of reasonably incurred costs of the administration of the trust ( Jennings v Mather [1902] 1 KB 1 (“No 2”), pp 5-6 and p 8; Savage & Whitelaw v Union Bank of Australia Ltd [1906] HCA 37; (1906) 3 CLR 1170, pp 1192 and 1196; Hayman v Equity Trustees Ltd [2003] VSC 353, pars 62 and 65).

36 The trust deed included:

“12.1 The Trustee shall have power to pay out of the Trust Fund or the income thereof any consultants, legal, professional or other fees costs conditions [sic] or expenses incurred in the establishment or maintenance of the trusts hereby declared or in maintaining proper records and accounts relating to the Trust Fund and in respect of the supervision management acquisition development disposal or otherwise [sic] dealing in any of the investments of the Trust Fund and all expenses disbursements costs fees [sic] and other moneys incurred in accordance with the exercise of any of the Trustee’s powers pursuant to this Deed.”

The claims

37 The plaintiffs accepted that the defendant is entitled to a lien over the fund in respect of the following items:

(i) Costs of Ervin and Keiko Otvosi in Supreme Court proceedings no. 2583/03 in the sum of $74,656.

(ii) Costs of Woollahra Municipal Council in the sum of $22,564.16.

(iii) Costs of A M T Engineers Pty Ltd in the sum of $140,397.78.

(iv) Costs of Peter Klimt solicitor, in the sum of $15,501.96.

(v) Judgment in favour of J E C Air Conditioning Services Pty Ltd in the sum of $11,530.64.

38 The defendant did not press claims in respect of the following items:

(i) Cost of work by the Neustein Rosenberg partnership in the sum of $13,752.85.

(ii) Office of State Revenue in the sum of $45,332.20.

39 I turn now to the disputed claims. These are claims in respect of liabilities as yet unpaid. The defendant proposes to pay them, and seeks recoupment from the fund, whilst it is available.

40 A claim is made in respect of the legal costs of Ervin and Keiko Otvosi (the Otvosis) as petitioning creditors’ costs in the sum of $2,354.60. It was opposed by the plaintiffs who contended that the Ferellas’ liability is unconnected to the trust, and related only to the bankruptcy proceedings, and was not authorised by the beneficiaries. It was put that these costs were payable out of their personal estate, not from the trust assets.

41 The evidence was that the bankruptcy petitions were founded on the failure of the Ferellas to pay a judgment debt for the sum of $74,656 for costs incurred by the Otvosis in the proceedings in Supreme Court no. 2583/03 which concerned the development of the property. The sequestration orders were made on 16 October 2005. On about 17 October 2005 the Ferellas applied to the Federal Magistrate’s Court of Australia for annulment of the bankruptcies. The applications were refused on 10 March 2006. In mid-November 2005 the Ferellas were involved in applications for a stay of proceedings.

42 As earlier noted, the plaintiffs accepted that the defendant was entitled to a lien in respect of the Otvosis’ costs, and in respect of the costs of Peter Klimt. The last mentioned included items relating to the property, and to the bankruptcy petitions.

43 In my opinion, the petitioning creditors’ costs were directly related to the situation which resulted from the failure to pay the debt for costs which the plaintiffs accepted was incurred in the conduct of litigation concerning the trust property. Obviously, the debt was incurred for the purposes of the trust. The failure to pay it was an omission in, and an incident of, the conduct and management of the trust. The Ferellas would have been, and now the defendant is, entitled to be indemnified from the fund against liability for the costs of the petition which resulted in the bankruptcies. This conclusion is consistent with acceptance of the defendant’s rights in respect of the Otvosis’ litigation costs and the costs of Peter Klimt.

44 The defendant claims indemnity in respect of the legal costs of the Otvosis incurred in opposing the Ferellas’ applications for a stay in the sum of $3,990, and in opposing the annulment applications in the sum of $2,651.25. These claims are opposed by the plaintiffs who argued that they were unconnected with the trust, and were in respect of actions personal to the Ferellas for the purpose of freeing themselves from bankruptcy.

45 In my opinion, for the reasons given in respect of the last mentioned claim, the defendant is entitled to indemnity in respect of each item. The Ferellas became bankrupt by reason of their conduct as trustees. The liabilities incurred in the course of attempting to change that status are sufficiently related to such conduct as to entitle the defendant to recoup from the fund the amounts required to discharge them.

46 The defendant next claims in respect of the legal costs of the Otvosis’ incurred in the hearing of the cross-claim in Supreme Court proceedings no. 2583/03 in the sum of $114,258.61.

47 The plaintiffs accepted, as they must, that it was incurred in litigation concerning the property, and thus arose in the course of the trust’s affairs. They accepted the amount. The claim was opposed on the basis that the liability was neither actual nor contingent, and that a lien could extend only to actual debts.

48 The evidence is that on 23 September 2005 Hamilton J upheld the relief claimed by the Otvosis under the cross-claim, and held they were entitled to an injunction restraining the development of the property. On 1 November 2005 his Honour indicated his readiness to make a costs order in favour of the Otvosis but that he was precluded from doing so by reason of the Ferellas’ bankruptcy. No formal costs order has been made, but the amount of costs has been prepared for assessment in the sum of $114,258.61.

49 In my opinion the evidence established that, because no order for costs has been made, liability in respect of them is within the category of potential or contingent liability which supports a lien over the fund (Hewett; Kennett). Accordingly, the defendant is entitled to have the fund remain available to it to protect its right of indemnity until the liability has been ascertained or discharged (Jennings No 2; Hayman). The authorities make plan that a trustee’s lien extends to contingent liabilities.

50 Having regard to the principles earlier referred to, I hold that, in the circumstances, the defendant is entitled to a lien in respect of the potential liability for these costs in the claimed amount, $114,258.61. Of course, unless and until the Otvosis obtain from the Court an order for costs on the cross-claim in their favour the defendant incurs no liability to pay them. As the defendant stands in the shoes of the Ferellas as trustees, in my opinion it has a duty to take all reasonable steps which are necessary to require the Otvosis to have the issues of liability and quantum finally determined one way or the other. If this was the only claim, the defendant’s entitlement to maintain the lien in whole or in part would turn on whether the Otvosis can prove liability and, if so, the amount thereof.

51 The defendant’s next claim was in respect of the legal costs claimed by Sachs Gerace Lawyers, in the amount of $50,000 for work done for the Ferellas. My understanding was that the plaintiffs agreed that part of this amount probably related to work for the trust.

52 However, the amount for which there is a relevant liability is presently uncertain. In the circumstances, in my opinion, it is appropriate to treat the defendant’s claim as one in respect of a contingent liability similar to the claim in respect of the Otvosis’ costs in the cross-claim.

53 Accordingly, I hold the defendant is entitled to a lien to protect it against liability for a potential claim of $50,000 by Sachs Gerace Lawyers pending ascertainment of the amount actually incurred in relation to the trust’s affairs. As with the other claim, the defendant must take the necessary reasonable steps to have finally determined the actual amount for which it is liable, either by agreement or by assessment in the ordinary way.

54 The defendant next claims a lien over the whole fund in respect of a contingent liability to the Deputy Commissioner of Taxation for capital gains tax following the sale of the property.

55 There is no evidence that any tax return referable to the sale has been lodged with the Australian Taxation Office by any of the plaintiffs. As the property was sold on 11 April 2006, it was assumed that the proceeds would be brought to account in the trust’s taxation return for the financial year ending 30 June 2006. It is common ground that no assessment of the amount, if any, of taxation payable, or any claim for same, has been made by the taxation authority. On behalf of the defendant, its accountant, Mr Philip Madden, guided by information on the website of the Australian Taxation Office, made a calculation which was based on the raw figures for the purchase and sale prices of the property, namely $3,850,000 and $7,950,000 respectively. On this basis he estimated the amount of capital gains tax to be $1,025,000. The defendant accepted that the trust’s final taxation position depended upon other aspects of its financial position during the relevant year of which Mr Madden had no knowledge. In cross-examination, Mr Madden accepted that, at present, the issue of capital gains tax was a matter of speculation.

56 The plaintiffs led no evidence on this issue.

57 The plaintiffs denied the claim to a lien in respect of this taxation liability on grounds that it is not the subject of an existing claim, and at present is incapable of precise calculation, and is so remote that it should not be categorised as either possible or potential. In short, it was put that the defendant had failed to prove the existence of a potential liability, and should not be permitted to hold the fund available in order to meet it. Nevertheless, no submission was made in denial of the likelihood of a liability for capital gains tax arising in the future.

58 The defendant submitted that the underlying transaction which was likely to attract the taxation liability, namely the sale of the property, had taken place. Accordingly, it was put, there was already the likelihood or real probability of such liability upon lodgement of the relevant return and completion of the assessment process.

59 The real question under this head is whether the prospect of a claim by the Deputy Commissioner of Taxation, albeit unquantified, is sufficient in the circumstances to justify the defendant in holding the fund until such time as a claim is crystallised.

60 In Jennings v Mather [1901] 1 KB 108, Kennedy J said (p 113):

“… It necessarily follows, as it seems to me, that the trustee has a right to prevent any person from carrying away those goods, and to say to everybody, including the cestuis que trust, ‘I am entitled to an indemnity out of those goods, and have, therefore, a pecuniary interest in them.’ Of course, when the accounts come to be made up, if it should appear that nothing is due to the trustees on the trading, there is nothing in respect of which he needs to be indemnified, and his lien over the goods is gone; but until the accounts are made up he is entitled to a lien over all the assets of the estate. A lien (putting aside the question of bankruptcy, with which I will deal directly) has always been held to be sufficient title as against the world to hold the goods until that lien is satisfied, or is proved not to exist.”

(This passage was quoted with approval by the High Court of Australia in Savage, p 1192).

61 On appeal, in Jennings No 2, the law as stated by Kennedy J was held to be correct. In addition, Matthew LJ said (p 9):

“… the right of Mather as a trustee to indemnity out of the trust property, and to hold the goods seized as part of such property until his rights in respect of them are ascertained. That right appears to me clearly to exist, and to form a part of Mather’s estate which passed to the claimant as his trustee in bankruptcy. It is impossible at this stage to take an account as between Mather and the trust estate. I think the claimant is entitled to say that such an account cannot be gone into now, but must be taken hereafter in due course, and that, in the meantime, it is sufficient, in order to entitle him to succeed on the interpleader issue as against the execution creditor, who has no title whatever to the goods, that there is prima facie this equitable lien on the goods in favour of Mather’s estate which has passed to him as Mather’s trustee in bankruptcy.”

62 Since then, the courts have recognised the entitlement of a trustee to hold a lien or equitable charge over trust assets until questions of liability and quantum have been decided. For example, in In re Pauling’s Settlement Trusts (No2) [1963] Ch 576, Wilberforce J held that the trustee’s right of indemnity extended to any costs awarded in its favour and to the possible liabilities for estate duty. In X v A, Arden J held that the trustee’s lien extended to an indemnity against future and contingent liabilities which included potential liability for remediation costs of contaminated land under a statutory scheme not then in force. In Kennett, Gzell J held that a trustee was entitled to indemnification against possible income tax penalties and interest arising from the failure to lodge income tax returns.

63 The cases show that the law affords protection to a trustee against a future contingent claim by way of lien or an equitable charge over the trust assets pending determination and discharge of any actual liability. A contingent claim is one which is uncertain, and may or may not happen. Although the trustee must demonstrate that the prospect of liability is real and not fanciful to obtain the protection which the law allows, it is not required to go so far as to show that the liability will become certain, or the necessary conditions will be fulfilled.

64 In the circumstances of this case, I find that there is a real possibility that a claim for capital gains tax will be made for which the defendant may become liable. That is the effect of Mr Madden’s evidence which I took to refer to a liability which at present is likely but uncertain. It follows, in my opinion, that the defendant is entitled to a lien over all of the fund in respect of this contingent liability until the liability has been ascertained and discharged, or is proved not to exist (Jennings, p 113).

65 As a matter of reality and commonsense, the Ferellas are well placed, no doubt in co-operation with the defendant, to proceed promptly to have any liability for taxation determined. The right to indemnification is commensurate with the liability in respect of this and the other claims considered above. Once issues of liability and quantum have been ascertained the defendant would be bound to release the balance of the fund presently held and cause it to vest in its successor under cl 15(d) trust deed.

Conclusion

66 For the above reasons, I hold that the defendant has succeeded in establishing its entitlement to a lien over the fund in respect of the disputed claims.

67 The defendant also raised for consideration the question of its remuneration for costs and expenses in relation to the trust’s affairs. I was left with the understanding that it was common ground that the approach to be taken was to be consistent with that explained in Re Application of Sutherland [2004] NSWSC 798 by Campbell J, and that the parties will frame the terms of the appropriate order to be made. In the circumstances, there is no requirement for a ruling on this issue.

68 It is appropriate that I direct the parties to bring in short minutes of orders which give effect to these reasons and to the conclusion. Failing agreement the parties should also be given the opportunity to address me in relation to the costs of these proceedings. Arrangements should be made with my Associate by 4pm 15 July 2008 for the re-listing of this matter.

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24/07/2008 - Counsel for the plaintiff advised the court on 24.07.08 an amendment should be made pursuant to the slip rule to the last sentence in par 48. The amendment is consented to. - Paragraph(s) 48