Bales v CHC (St Louis) Pty Ltd - [2018] WASC 137

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   BALES -v- CHC (ST LOUIS) PTY LTD [2018] WASC 137
CORAM:   MASTER SANDERSON
HEARD:   19 MARCH 2018
DELIVERED          :   8 MAY 2018
FILE NO/S:   CIV 3141 of 2017
MATTER:   An application under the Trustees Act 1962 (WA) and Order 58 of the Rules of the Supreme Court 1971 (WA)
and
The St Louis Estate Claremont Trust Deed

BETWEEN: KEITH RODDICK BALES in his capacity as Trustee of the St Louis Estate Claremont Trust Deed
Plaintiff

AND

CHC (ST LOUIS) PTY LTD
Defendant

Catchwords:

Trustees - Application for direction by trustee of retirement village - Turns on own facts

Legislation:

Retirement Villages Act 1992 (WA)
Retirement Villages Amendment Regulations 2015 (WA)
Rules of the Supreme Court 1971 (WA)
Supreme Court Act 1935 (WA)
Trustees Act 1962 (WA)

Result:

Direction given

Category: B

Representation:

Counsel:

Plaintiff	:	Mr S C Wong
Defendant	:	Mr J T Schoombee

Solicitors:

Plaintiff	:	Minter Ellison
Defendant	:	HWL Ebsworth Lawyers

Case(s) referred to in decision(s):

Barnes v Addy (1874) LR 9 Ch App 244
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66
Wood as Co‑executor and Trustee of the Will of the Deceased v Wood [No 4] [2014] WASC 393

MASTER SANDERSON:

By originating summons dated 15 August 2017, CHC (St Louis) Pty Ltd (CHC) commenced an action (CIV 2366 of 2017) against Keith Roddick Bales in his capacity as representative and trustee of the residents of a retirement village in Claremont known as St Louis Estate (St Louis). At the heart of those proceedings is a dispute between CHC and Mr Bales about the proper construction of the St Louis Estate Claremont Trust Deed (Trust Deed) dated 15 June 2004 which governs the operation of the estate. In those proceedings CHC inter alia sought the declaratory orders in relation to the operation of a 'sinking fund' established under the Trust Deed in addition to an order for the removal of Mr Bales as trustee and the appointment of a new trustee.
A Points of Claim dated 14 December 2017, attached to the affidavit of Edward Paul Wilson sworn 8 February 2018 and filed in CIV 3141 of 2017, alleged that Mr Bales was in breach of trust by spending trust funds in defending the proceedings and seeking orders that Mr Bales personally pay the costs of the proceedings without any recourse to any trust funds under the Trust Deed. CHC sought to have these costs paid on an indemnity basis.
On 18 December 2017 Mr Bales commenced this application under s 92 of the Trustees Act 1962 (WA), O 58 r 2 of the Rules of the Supreme Court 1971 (WA) and s 16(1)(d)(i) of the Supreme Court Act 1935 (WA) for judicial advice that:
(a)he is justified in defending the claim made against him in the Supreme Court of Western Australia being CIV 2366 of 2017; and
(b)he is entitled to have his costs paid out of the trust account or the sinking fund as defined in the Trust Deed on an indemnity basis.
It is often the case applications such as these proceed on an uncontested basis. However, experience has shown that if a party opposes the making of an order, it is as well to join that party as a defendant to the proceedings and hear the matter on what is effectively a contested basis. That approach has two advantages. First, it allows a party who may be affected by the judicial advice to put their case and have their point of view considered. Second, as with all adversarial proceedings, there is a contradictor that is likely to crystallise or flush out the issues rather than have a decision made in a vacuum. It is certainly my usual practice when a party has an interest in the outcome of an application for judicial advice to allow that party to be heard. That is what was done in this case.
It was Mr Bales' position that this was a 'standard instance' in which it was appropriate for a trustee to apply for judicial advice and 'is not to be seen as one which would rarely if ever succeed'. See Macedonian Orthodox Community Church St Petka Inc v His Eminence Petarthe Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 [70]. CHC opposes the directions on the basis that the owner of CHC, Ms Rhonda Peploe, and her son‑in‑law, Mr Edward Paul Wilson, the chief executive of CHC, believe their personal relationship with Mr Bales has broken down. Mr Wilson, with the authority of Ms Peploe and on behalf of CHC, is willing to have the issue as to the proper construction of the Trust Deed ventilated and resolved in an appropriate forum (either before a judge or arbitrator) if Mr Bales resigns as representative and trustee. There appears to be a degree of personal animosity between Mr Bales on the one hand and Mr Wilson and Ms Peploe on the other. Whatever the state of their relationship, it has no bearing on the outcome of this application.
The background to the application was set out in detail by counsel for Mr Bales in his written submissions. What follows is largely taken from those submissions and is uncontroversial.
Mr Bales is 77 years old and is a current legal practitioner. He has held the office of representative and trustee of the estate since 14 March 1996. The operation of the estate is governed by the Trust Deed. Residents of the estate must execute a licence to occupy a unit in the estate. The licence requires the resident to pay a Sinking Fund Contribution 'towards the funding of substantial repairs to, replacements in and renovation and maintenance of the estate including its common areas, units and facilities'.
Clause 8.15 of the Trust Deed obliges the owner to establish the sinking fund. Clause 8 of the Trust Deed states:
The obligations imposed on the Owner by Clause 8 operates for the benefit of the Representative and the Residents jointly and each of them severally.
Clause 8.15 of the Trust Deed is in the following terms:
The Owner must establish a Sinking Fund to be applied at the discretion of the Owner for funding (or reimbursing the Owner for prior costs and expenses incurred by the Owner for) substantial repairs to, replacements in, and renovations and maintenance of the Estate, Estate Common Areas and facilities and the Units. The Owner must deposit the contributions of Residents under their respective Licences to the credit of the Sinking Fund after the termination of the term of each Licence.
The Sinking Fund must be deposited in the name of the Owner with the Representative. Until the Sinking Fund is required for the purposes of this clause, it may be invested only in investments authorised by law for the investment of trust money.
All interest (if any) earned by the invested Sinking Fund must form part of the Sinking Fund as an accretion to it.
The sinking fund is a substantial fund. As at 31 January 2018, the balance of the sinking fund was $750,738.94. It is Mr Bales' view that the sinking fund could not be used for upgrades. Any upgrade to the estate would benefit the owner which Mr Bales viewed as a contravention of cl 8 of the Trust Deed. In Mr Bales' view, it would have enabled the owner to increase the underlying real estate value of the estate and thereby increase the financial return to the owner through the ability to market the units in the estate at a higher value. Mr Bales also took the view it would be contrary to the regulations of the Retirement Villages Act 1992 (WA) which limits the use of funds contributed by the residents or former residents to 'return the units to a reasonable condition'. I will come back to these regulations later in these reasons.
In October 2016, Mr Bales came to the view CHC was, or might have been, using the sinking fund in an inappropriate fashion. Substantial funds had been spent on the units. Mr Bales considered that some of the claims by CHC might have been for upgrades contrary to cl 8.15 of the Trust Deed. In particular, he came to the view that money might have been spent for something other than 'substantial repairs to, replacements in, and renovations and maintenance' of the estate. From October 2016 Mr Bales raised questions about the increased expenditure with the village manager. In January 2017 the village manager said that claims against the sinking fund were now being managed by Mr Wilson. On 4 February 2017, Mr Bales formalised his request for explanations in writing. He was not satisfied with the response. On 11 February 2017 and 1 March 2017, Mr Bales exercised rights under a debenture charge to replenish the sinking fund by paying the proceeds from transactions concerning unit 139 and unit 100, respectively, of the estate into the sinking fund.
On 21 April 2017 Mr Bales wrote to CHC raising his concerns and requesting a meeting. He received a response from CHC's solicitors which stated that CHC did not agree with Mr Bales' position. On 24 July 2017, Mr Bales sought to refer the dispute to the Department of Mines, Industry, Regulation and Safety for investigation by the commissioner under s 9 of the Retirement Villages Act as he saw this as a low cost dispute resolution mechanism. That was when CHC commenced proceedings in this court. As a consequence of those proceedings, the Department of Mines, Industry Regulation and Safety decided to suspend its investigation. On 4 September 2017 Mr Bales retained his present solicitors.
Between mid‑September and late December of 2017 attempts were made to resolve the differences between the parties but those attempts came to nothing. On 14 December 2017 CHC's lawyers sent a letter threatening to obtain an injunction on an urgent basis preventing Mr Bales from using trust funds to defend the claim. On the same day CHC's solicitors sent two further letters. One contained an open offer of settlement; the other threatened to sue Mr Bales' solicitors under the second limb of Barnes v Addy (1874) LR 9 Ch App 244 for being knowingly concerned with a breach of trust. On 15 December 2017, Mr Bales repaid amounts used to pay invoices from his solicitors back into the sinking fund from his personal bank account pending resolution of this application.
There was no dispute between the parties as to the relevant legal principles. Section 92 of the Trustees Act enables a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee's duties. The relevant principles have been considered in numerous cases. In this jurisdiction, the decision of Wood asCo‑executor and Trustee of the Will of the Deceased v Wood[No 4] [2014] WASC 393 [98] ‑ [104] is perhaps the most relevant.
Mr Bales says that there are four reasons why the discretion found in s 92 ought be exercised in his favour. First, he says he has no financial interest in the sinking fund. It is therefore unfair to require him to fund litigation from his personal assets for the benefit of the residents of the estate. Mr Bales currently receives about $10,000 a year for work as the representative. He is not charging for his time in relation to the dispute. Furthermore, the proceedings raise issues of some complexity and it is reasonable for the trustee to elect to be represented by legal counsel and solicitors. Allied to this submission, it was said that if the direction was not given, Mr Bales would not be in a position to exercise his discretion and judgment to protect the trust property without exposing himself and his legal advisors to the risk of liability should the defence be unsuccessful.
Second, Mr Bales submits the litigation benefits the residents of the estate. The sinking fund was depleted from $588,000 to a little over $14,000 between August and October 2016. Mr Bales says that depletion of the sinking fund could leave an insufficient buffer for substantial repairs to, replacements in and renovations and maintenance of the estate to the detriment of the residents, particularly if urgent repairs were required. Even if CHC is declared to be the 'proper and sole beneficiary' of the sinking fund, there will be a benefit to the residents in having the dispute as to the terms of the Trust Deed ended once and for all.
Third, Mr Bales says there are sufficient prospects in defending the claim, and for the purposes of this application, a direction ought be given. It was on this ground that Mr Bales and CHC differed entirely. I will come back to this issue. For present purposes, it is enough if I note that Mr Bales submitted the position was arguable and no detailed consideration of the merits of the underlying proceedings was necessary.
Finally, Mr Bales says he has considered the cost of litigation in defending the proceedings and the cost exposure to the trust assets if unsuccessful. As at 31 January 2018 the balance of the sinking fund was $750,738.94. Taking into account the cost of the litigation and Mr Bales' concern as to the interests of the residents, he is of the view that the costs involved are proper and necessarily incurred to remove uncertainty. Mr Bales points out that it is open to CHC to submit the dispute to arbitration under cl 10.7(c) of the Trust Deed. However it is only CHC who can submit the matter to arbitration - that right is not given to the trustee. That being so, Mr Bales says he is not in a position where the dispute between the parties can be resolved other than by litigation.
On the part of CHC it was said there were three main reasons why the application ought be refused. The first of these was the lack of any merit with respect to the argument put by Mr Bales. As I mention below, it was Mr Bales' position that it was only for the court to determine whether his position was arguable in an application such as this. No detailed consideration of the merits was necessary. CHC accepted it was not appropriate to conduct a 'mini trial' as Justice Kenneth Martin used that expression in the Wood case referred to above. Counsel for CHC did then undertake a reasonably detailed analysis of the merits of the main action. I do not propose to rehearse these arguments but contrary to what was submitted on behalf of CHC, it does seem to me there are two concepts - separate and distinct concepts - embodied in cl 8. Clause 8.9 refers to 'unit upgrading'. That has to be a different thing from repairs, replacements, renovations and maintenance which is referred to in cl 8.15. Of course it must necessarily be a question of degree when there is 'repair' and when there is 'upgrade'. Given the two concepts are treated separately in cl 8, deciding which is which does seem to me to be an issue of some importance.
It is in this regard that the provisions of the Retirement Villages Amendment Regulations 2015 (WA) are important. These regulations draw a distinction between repair and replacement on one hand and upgrades on the other: see in particular reg 7K. Contravention of these regulations can incur a penalty. That surely is an indication of the seriousness with which the legislator views the distension between repair and upgrade. To that extent, Mr Bales is correct to say that an important issue is at stake.
Second, CHC argues that Mr Bales' position is 'unrealistic'. This seems to suggest that CHC is entitled to use the sinking fund as it sees fit without the exercise of any discretion on Mr Bales' part. That begs the question as to why there should be a trustee at all. It also suggests that attention needs to be directed at the role of the trustee in a dispute such as this - an issue which has both particular application in this case and general application to retirement villages.
Finally, CHC says that Mr Bales has been removed as trustee and no longer has a role to play. That removal arises it is said because of Mr Bales' unjustified use of the sinking fund to pay his legal fees. The fact he has repaid the money expended is neither here nor there it is alleged; once there has been a breach of trust, the trustee is liable to removal and Mr Bales has been removed. While accepting there is an argument on this issue, it does seem to me in the circumstances of this case the point is debateable; it will no doubt form part of the case ventilated between the parties at the hearing of the main action.
On balance I am satisfied Mr Bales should have the orders he seeks. There is sufficient merit in his defending the main proceeding not to warrant a conclusion there is no serious question to be tried. Once that point is reached as a trustee Mr Bales should be indemnified for the costs incurred. I would accept the costs are substantial and are likely to seriously deplete the sinking fund. That is simply a fact of life when litigation in this court takes place. Of course, it remains open to CHC to refer the matter to arbitration and it may choose to do so. As long as the main proceedings are on foot, Mr Bales should have the protection of an order that he is justified in maintaining a defence to those proceedings.
I will give the parties the opportunity to more fully consider the form of orders proposed by Mr Bales before making any order on this application.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DG
ASSOCIATE TO MASTER SANDERSON
8 MAY 2018