Belar Pty Ltd (in liq) v Mahaffey

[1999] QCA 2

IN THE COURT OF APPEAL	99.2
SUPREME COURT OF QUEENSLAND

Appeal No. 8239 of 1997

Brisbane

[Mahaffey & Ors v Belar Pty Ltd]

BETWEEN:

HARLAN WILBUR MAHAFFEY,
MURRAY PETER MAHAFFEY,
PHILLIP JAMES MAHAFFEY and

TREVOR MAHAFFEY

(Defendants) Appellants

AND:

BELAR PTY LTD (In Liquidation)

(ACN 010 621 039)

(Plaintiff)	Respondent
Thomas JA Shepherdson J Jones J

Judgment delivered 5 February 1999.

Judgment of the Court.

APPEAL ALLOWED WITH COSTS. CROSS-APPEAL AND NOTICE OF CONTENTION DISMISSED WITH COSTS. ORDERS BELOW SET ASIDE AND IN LIEU THEREOF ORDER THE ACTION BE DISMISSED WITH COSTS INCLUDING RESERVED COSTS. LEAVE GRANTED TO ALL PARTIES TO PRESENT TO THE REGISTRAR SUBMISSIONS IN WRITING WITHIN 14 DAYS ON THE QUESTION OF FORM OF ORDER IN RELATION TO COSTS.

the conduct of the business of the trust - effect of change of trustee - claim for indemnity against beneficiaries - necessity of exhausting remedy against trustee before proceeding directly against beneficiaries - requirement of a fund or asset to exist to which the lien may attach - necessity of identifying trust property - costs against liquidator.

Edgar & Edgar v Ron Kingham Real Estate Pty Ltd (CA No 5003 of
1996, 8 August 1997)
Forster v Jododex Aust Pty Ltd (1972) 127 CLR 421
General Credits Limited v Tawilla Pty Ltd [1984] 1 Qd R 388
Knight v F P Special Assets Ltd (1992) 174 CLR 178
Marginson v Ian Potter & Co (1976) 136 CLR 161
Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360
Port of Melbourne Authority v Anshun Pty Ltd (1980) 147 CLR 589
In Re Earl of Winchilsea's Policy Trusts (1888) 39 Ch D 168
Re Indopal Pty Ltd (1987) 12 ACLR 54
Re Newark Pty Ltd (in liq.) [1993] 1 Qd R 409
Re Suco Gold Pty Ltd (in liq.) (1983) 7 ACLR 873
Kemp v Coastal Constructions Pty Ltd (CA No 171 of 1992, 17 March
1993 - order for costs)
Russian Commercial & Industrial Bank v British Bank for Foreign
Trade Limited [1921] 2 AC 438
Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319

Young v Queensland Trustees Ltd (1956) 99 CLR 560

Counsel:	Mr C. Francis for the appellants. Mr G. Brandis for the respondent.
Solicitors:	Lees Marshall Warnick for the appellants. Quinlan Miller & Treston for the respondent.
Hearing Date:	16 October 1998

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND

Appeal No. 8239 of 1997

Brisbane

Before Thomas JA
Shepherdson J
Jones J

[Mahaffey & Ors v Belar Pty Ltd]

BETWEEN:

HARLAN WILBUR MAHAFFEY,
MURRAY PETER MAHAFFEY,
PHILLIP JAMES MAHAFFEY and

TREVOR MAHAFFEY

(Defendants) Appellants

AND:

BELAR PTY LTD (In Liquidation)

(ACN 010 621 039)

(Plaintiff) Respondent

REASONS FOR JUDGMENT - THE COURT

Judgment delivered 5 February 1999

1. This is an appeal by defendants against an order in the District Court granting a declaration in

   favour of an insolvent trustee company. That company acted as trustee for several trusts, one of which

   was the Robelle Trust, of which the beneficiaries were members of the Mahaffey family.

   The parties

2. The appellants against whom the relevant declaration was made are the four surviving members of the five beneficiaries of the Robelle Trust.

   The respondent is Belar Pty Ltd (In Liq), the liquidators being Messrs Moloney and Geroff. It will be

   referred to as "the company".

   Facts and proceedings

3. The company became trustee under the Robelle Trust Deed on 19 March 1986. It was also

   at material times trustee of the Mahaffey Farm Trust of which the primary beneficiaries were HW and

   VM Mahaffey. Between 1986 and 1989 the company and the beneficiaries of both trusts engaged in

   various dealings which resulted in payments being made both to and from the trustee company. The

   books were poorly kept. On 5 April 1991, the company was wound up and the present liquidators

   appointed. The liquidators in due course found difficulty in ascertaining or characterising relevant details

   and seem not to have exercised their full powers of investigation. By the same token, members of the

   Mahaffey family seem to have been less than fully co-operative in the provision of relevant information.

4. It should have been a small and relatively simple liquidation. The aggregate liabilities of the

   company were estimated to be approximately $84,000.00. The statement of affairs provided by the

   directors disclosed assets limited to $13,000.00 in the form of debts owed to the company.

5. However, the liquidators found a statement of account of the company accompanying its 1989

   tax return in which the five members of the Mahaffey family (the beneficiaries) were said to be indebted

   to the trust. According to that statement of 30 June 1989, debts were owed by those persons as

   follows:

HW and VM Mahaffey	34,992.88
Trevor Mahaffey	17,445.00
HW Mahaffey, VM Mahaffey, MP Mahaffey
and PJ Mahaffey	23,079.04
MP Mahaffey	4,098.31

$79,615.23

It would seem that the above book debts appeared to the liquidators to be the only substantial asset of

the company, and that the liquidators decided to recover these alleged debts.

1. There were only a few creditors and it may be inferred that these had been incurred by the

   company in the performance of trust business, although there may be some doubt as to which trust

   business was involved. In the present proceedings, the company has sued four of the beneficiaries of

   the Robelle Trust for indemnity in respect of the trading debts incurred by the company as trustee.

2. The debts which the company set out to recover have now been very substantially increased

   by further claims for liquidator's costs of administration, and costs of litigation including those of a

   previous unsuccessful action. In argument it was further suggested that the liquidators may additionally

   in due course seek to obtain indemnity from the beneficiaries in respect of the company's costs of and

   incidental to the present rather expensive action. It may be doubted however that trust assets exist to

   an extent capable of satisfying such claims. Indeed one of the features of the present case is that the

   trustee company failed to prove whether the Trust has any assets or not.

3. On 9 September 1991, pursuant to a power in that behalf in the trust deed, the first appellant

   Mr HW Mahaffey removed the insolvent company as trustee of the Robelle Trust and appointed the

   fourth respondent, Mr Trevor Mahaffey, to be trustee in its place. From that date the trust estate vested

   in him as trustee.

4. The company and the liquidators had of course been notified of the removal of the company as

   trustee and the appointment of a new trustee. Notwithstanding this they caused the company to sue the

   alleged debtors for the "loans" mentioned in the 1989 statement of account, which they alleged to be

   moneys paid for and at the request of the defendants. It sued as trustee of the Robelle Trust in two

   actions commenced against the five named beneficiaries on 23 October 1991. It will be immediately apparent that the company was no longer the trustee, and that the action was misconceived. However,

   the company claimed that s.468 of the Corporations Law had the effect of avoiding any "removal" of

   trust property from the control of the plaintiff as trustee, that as the former trustee it had a lien over the

   trust property and that this meant that although it was no longer trustee, it retained the right to sue for

   "debts" owed to the trust. In a judgment given on 12 December 1991, Dorney ADCJ, rightly with

   respect, held that such assertions were incorrect and that the company had no action by way of debt.

   Both plaints were struck out as incompetent.

5. In due course (December 1993), the company commenced the present action, seeking relief

   against the five defendants in the following terms:

'(a)

A declaration that:

(i)	the loans pleaded in paragraph 10 hereof are assets of the plaintiff
(ii)	the plaintiff is entitled to be indemnified from the loans on account of liabilities incurred by it in its capacity as the trustee of the Robelle Trust

(b)

An order that the defendants pay to the plaintiff, to the extent of their respective shares, the amount of the loans referred to in paragraph 10 hereof in partial satisfaction of the plaintiff's indemnity'.

(The "loans pleaded in paragraph 10" are those set out in paragraph 6 of these reasons).

1. Counsel for the company accepts that the present claim is not a money count. It is brought as

   an equitable claim. It was submitted (correctly as it seems to us) that such a claim may be made either

   under s.68(1)(a)(i) of the District Court Act 1967 as an "equitable claim...for recovery of money" or

   as an action under s.69(1)(b)(viii) "for the execution of trust...where the estate or fund subject to the

   trust does not exceed the value of the monetary limit".

2. In order to succeed the company needed to show four things:

(1)	that the loans pleaded were valid and are subsisting (per (a)(i) above);
(2)	that such loans are assets of the company (per (a)(i) above);
(3)	an entitlement on the part of the respondent as former trustee to be indemnified by the

trust in respect of certain liabilities incurred by it as trustee (per (a)(ii) above); and

(4)	a right to enforcement of the trustee's equitable entitlement by direct order against the
appellants (per (b) above).

1. Curiously, no claim was ever brought against the new trustee in his capacity as trustee. The

   company made no such claim in the plaint, and despite clear indications in the defence of perplexity at

   the way in which the case had been formulated against the beneficiaries the company made no attempt

   at trial to correct the deficiency. As counsel for the company informed this Court, "it was considered

   unnecessary to do so". In the course of the trial, the company claimed that the "indebtedness" of the

   defendants had now grown to a sum in excess of $160,000.00, as account had to be taken of the

   liquidator's fees (although these had not been approved as required by the Supreme Court) and also

   of the costs of the earlier proceedings (which had been found to be incompetent and which had resulted

   in an order for costs against the company).

2. It was conceded on behalf of the company at trial that payments totalling $21,506.17 had been

   made by the defendants to the plaintiff which needed to be taken into account in the defendant's favour.

   Thus, the amount directly at issue in these proceedings, upon which the company sought to enforce its

   alleged equitable entitlement against the appellants,[1] would seem to be of the order of $58,000.00.

   Findings

   [1]            See para 12 (3) above.

3. The findings of the learned trial judge were substantially adverse to the company. They included

   the following:

(1)	In relation to the declaration asked for in para. (a)(i) above, her Honour found that such loans, even if proved, were not assets of the plaintiff. If the loans existed they would
be assets of the new trustee.
(2)	Her Honour found that in any event the loans were not satisfactorily proved. (The company had based its case on the balance sheet that had been attached to the 1989 income tax return of the company as trustee for the Robelle Trust, which asserted the above loans to be "assets" of the company rather than upon evidence of any transaction. Her Honour inferred that the tax return had been forwarded to Mr H. Mahaffey but not to other members of the Mahaffey family and ultimately that the balance sheet (and thus the loan account balances) had not been adopted by any of the defendants. That finding may be unsound so far as the defendant, HW Mahaffey is concerned, in that he had adopted the statement in his capacity as a director of the company. However, even if HW Mahaffey had adopted it, such a statement is a form of admission which produces only a rebuttable presumption in favour of the accuracy of the document. The accountant who prepared the statements had no personal knowledge of the details of any alleged loans or of the circumstances giving rise to them and noted the probability of inaccuracies in the return including the suggestion that share farming income had been earned for Robelle during 1988 and 1989 and numerous other reasons which cast doubt upon the accuracy of the 1989 statement. Her Honour noted that the company had not, by the time of the trial, undertaken the exercise of arriving at a balance and that it had simply relied on the balance shown in the balance sheet as at 30 June 1989 and some other exhibits which had been reconstructed under directions of the liquidators. In particular, no accounts had been prepared for the period between 30 June 1989 and the winding up of 5 April 1991, or to the time of appointment of the new trustee on 6 September 1991.)
(3)	Her Honour also found it "more probable than not that the loan account balances in the
accounts and schedules tendered by the plaintiff are inaccurate".

(There was substantial evidence of payments and repayments between the two trusts and evidence from the appellants that they made payments which should be taken into account by the liquidators in producing or eliminating any loan liability to the company. The company had however up to trial, failed to take into account any of those payments. That would seem to have been contrary to the rule in Cherry v Boultbee[2]. On the ninth day of trial the company sought and obtained an amendment pleading insolvency of the company, and then attempted to prove that various payments were preferences and accordingly that cross-payments could not be set off. This seems quite extraordinary when one considers not only the principles mentioned in Queensland Bacon Pty Ltd v Rees[3], but also the fact that the District Court lacks jurisdiction to determine preference issues under the Corporations Law. In the end however these issues are no longer pressed, and may be seen as one of the many false trails pursued in this unfortunate litigation. Her Honour's final conclusion was that the company had not discharged its onus of proving the loan accounts.)

[2] (1839) 4 My & Cr 442; 41 ER 171; cf R.WG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385, 397-9. These cases stress that a trustee who does not have a clear account is not entitled to be indemnified.

[3] (1966) 115 CLR 266, 286.

(4)	Her Honour further found that such accounts as existed between each appellant and the
company were running accounts in which case it would only be when a balance had
been struck or ascertained in consequence or taking an account that any sum would be
due by either party to the other. No such balance had been struck or ascertained.
(5)	Her Honour found that there was no evidence that the loans were repayable on
demand. That finding may be regarded as dubious in the light of Young v Queensland
Trustees Ltd[4]. The finding may have been based upon evidence from the appellants
that the loans were not repayable "until the loans between the two trusts had been settled". However we do not understand counsel for the appellants to place any
particular reliance on this particular finding.
(6)	Her Honour also found that "the loans to the defendants have been repaid or otherwise
extinguished, the extent of which can be ascertained by an accounting exercise". That
leaves open the question of how much had been repaid, as well as how much had been
advanced. In short, the court was completely unable, on the evidence presented, to
make any positive finding as to whether any money was still owing to the trust by any
of the appellants or not. It is consistent with the general finding above that the company
had failed to discharge its onus of proving the loan accounts.
(7)	In relation to the further question whether such liabilities as the company had incurred
to third parties had been incurred by it in its capacity as trustee of the Robelle Trust,
her Honour found that the company had not proved how much of those alleged
liabilities had been incurred in that capacity. Her Honour's findings include:

[4] (1956) 99 CLR 560.

"It is also necessary for the trustee to prove that the alleged liabilities arose solely from the trustee company carrying on the trust business: Re Byrne Australia Pty. Ltd. (1982) 1 ACLC 28. I consider that no such evidence has been given here, in respect of Belar as trustee of the Robelle Trust".

(8)	The company initially filed a notice of contention challenging some of the above findings
but withdrew it shortly before the hearing of the appeal. We do not understand counsel
for the company to challenge the above findings of fact.

1. In our view the company completely failed to establish each of the components necessary for

   relief pursuant to its claims in paras. (a)(i), (a)(ii) and (b).

17 It is surprising that after 16 days of litigation in which the parties presented extensive evidence
in relation to the accounts that her Honour did not simply dismiss the suit. Instead, certain orders were

made that did not advance the position of the parties in any material way and purported to leave the

door completely open for further litigation on the very issues that had been litigated. Having refused to

make the declaration sought in paragraph (a)(i) of the plaint, her Honour then saw fit to declare the

plaintiff company entitled to the relief sought in paragraph (a) (ii), "namely to be indemnified from the

loans on account of liabilities incurred by it in its capacity as the trustees of the Robelle Trust".

1. It is necessary then to examine what rights, if any, arose in favour of the company against these

   appellants pursuant to her Honour's findings, and whether any declaration of indemnity should have been

   made in favour of the company. Her Honour's order seems to be premised on the following somewhat

   perplexing statement:-

   "The plaintiff has a right to be indemnified, but this indemnity is not enforceable by

   means of the relief sought".

   The making of such a declaration was clearly dependent upon the granting of the declaration sought in

   paragraph (a)(i), which was rightly refused. Strictly speaking that should have led to the dismissal of

   the action, and, as we would apprehend, to the end of any further disputation between these parties on

   the issues litigated or which should have been litigated in this action. However some discussion is

   desirable in relation to the nature of the actual litigation, so that any future court may understand what

   has been litigated in the event that it becomes necessary to consider the question of estoppel at some

   future time.

2. The company inter alia set out to prove the existence of certain debts and to enforce a right of

   indemnity against the beneficiaries. A trustee's right to an indemnity against trust assets in respect of

   expenses properly incurred by the trustee in the conduct of the business of the trust is well recognised.
   In conducting the business of the trust, the trustee becomes personally liable for debts incurred.[5]

   [5]            Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319.

   "However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets".[6]

   [6]            Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 367.

   That is a reference to trust assets in the trustee's possession. When there is a change of trustee with the

   trust assets being vested in the new trustee, the former trustee no longer has direct access to such assets,

   and should make the necessary claim for indemnity against the trustee who represents the trust[7].

   [7]            Re Indopal Pty Ltd (1987) 12 ACLR 54.

3. The trustee's right of indemnity out of the trust assets is in the nature of a charge or lien in favour

   of the trustee and as such takes preference or priority over claims by the cestuis que trust. But of

   course when the assets have passed out of a trustee's possession the necessary claim for a trustee's

   indemnity should be made against the new trustee. An unco-operative new trustee who declined to

   exercise the powers to recover trust property in the hands of the beneficiaries could be made a

   defendant, and orders could be made which would in effect permit the former trustee to exercise such

   powers by subrogation.[8]

   [8]            Sharpe v San Paulo Railway Co (1873) L.R. 8 Ch.App. 597, 609-610; Re Johnson (1880) 15 Ch D 548.

1. There is ultimately a right to proceed directly against the beneficiaries but that right depends upon exhaustion of any remedy against the personal representative.[9]

   [9]            Ron Kingham Real Estate Pty Ltd v Edgar (CA No 5003 of 1996, 8 August 1997); compare Trusts Act 1973 s.109(2).

2. The present action was in essence a claim by a former trustee to be indemnified by the

   beneficiaries personally for liabilities properly incurred in the execution of a trust. A claim of that kind

   was successfully maintained in Ron Kingham Real Estate Pty. Ltd v Edgar[10] where it was shown that

   [10]           CA No 5003 of 1996, 8 August 1997; compare Hardoon v Belilios [1901] AC 118, 125.

   the beneficiaries who controlled the trustee wrongfully distributed the whole of the trust estate to

   themselves. The trustee was left with no assets at all, and the creditor of the trustee was in these

   circumstances able to say that it had exhausted all remedies against the trustee and was entitled to assert

   the trustee's rights of indemnity against the beneficiaries. That may be distinguished from the present

   case.

3. The creditor's right of subrogation of course depends upon the rights of the trustee[11]. This may

   [11]           Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319, 325, 336; cf. Turner L J in Ex p. Edmonds (1862) 4 De G F & J 488, 498; 45 ER 1273, 1277; Strickland v. Symons (1884) 26 Ch D 245.

   be affected by the trust instrument, and in the present case, where there had been a change of trustee,

   the focus must be upon the position of the new trustee. Whilst such an action is a personal action

   against the beneficiaries to assert a right of indemnity which the trustee would have against them, the

   authorities suggest that the right to subrogation is limited to the extent to which trust assets are available

   to satisfy the claim. As McPherson JA observed in Edgar "the precise question at issue seems always

   to have been whether the creditor was entitled to be subrogated to the trustee's claim to indemnity out

   of the trust assets". We do not understand Jacobs J in Marginson v Ian Potter & Co[12] to say

   [12] (1976) 136 CLR 161, 176.

   otherwise, that is to say that beneficiaries are liable to trustee's creditors to a greater extent than the trust

   estate is able to satisfy. Of course much may depend upon the trust deed and the extent (if any) to

   which a trustee has legal recourse against a beneficiary beyond the ambit of the trust property. But save for an exception of that kind, the general principle underlying a trustee's claim to indemnity is a right to

   be indemnified out of trust assets[13], and as McPherson JA observes in Edgar, all the authorities on this

   [13]           In Re Earl of Winchilsea's Policy Trusts (1888) 39 Ch D 168; cf. Trusts Act 1973, s.72.

   topic are limited to an indemnity to that extent.

4. A former trustee may assert its claims for indemnity against the continuing trustee, and in that

   respect may assert the right of the new trustee to indemnity by bringing an action against him. But in our

   view it must be shown that there is a fund or asset to which the lien may attach. This also seems to have

   been the assumption of King CJ in Re Suco Gold[14].

   [14]           Re Suco Gold Pty Ltd (in liq.) (1983) 7 ACLR 873, 881.

   '[The] liquidator 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'.

   and

   'The rights conferred by the lien passed to the liquidator. They would enable him to obtain and
   retain possession of the trust property until the right of indemnity has been exercised'.[15]

   [15] Ibid p882.

5. In a claim of the present kind, a fundamental fact that needs to be established is the existence

   and identity of the trust property. If that cannot be established the suit fails.

6. In relation to claims by creditors against an existing trustee with a view to obtaining recourse

   against the trust assets to satisfy the creditor's rights against the trustee,

   'the very least that might be expected is reliable evidence establishing that the judgment debt was a liability properly incurred by the trustee, who had an unqualified right to be indemnified out of the trust assets in priority to the claims of beneficiaries and perhaps of other trust creditors'.[16]

   [16]           General Credits Limited v Tawilla Pty Ltd [1984] 1 Qd R 388, 390 per McPherson J.

   In the present case her Honour observed "there is no evidence whatsoever as to the current state of the trust account". This then is another ground on which the company failed.

7. It is a troubling circumstance in the present litigation that Mr Trevor Mahaffey was in fact a

   defendant, but was never sued in his capacity of trustee. In some circumstances, even without formal

   amendment to recognise his representative capacity, a case may be so litigated that the rights of the

   parties in all capacities are dealt with[17]. In such a case it could be found that the remedies against the

   [17]           Banque Commerciale SA In Liquidation v Akhil Holdings Limited (1990) 169 CLR 279, 286-

   trustee had been exhausted and that the former trustee should be at liberty to recover its indemnity from

   beneficiaries directly. However that did not happen in the present case. The matter was adverted to

   and the plaintiff company deliberately refrained from asserting any liability against Mr Trevor Mahaffey

   as trustee. In the event the company failed to prove that it had exhausted its rights against the trustee,

   although such an issue was naturally one that would have been expected to be brought forward. This

   incidentally demonstrates another fatal flaw in the company's case against the beneficiaries.

8. The plaintiff's action therefore failed on a number of levels. Firstly, the evidence failed to

   establish the existence of trust assets. Secondly, the company failed to show that it had exhausted its

   remedies against the continuing trustee. Thirdly, it failed to prove that a debt or debts of any particular

   amount were reasonably incurred in or about the execution of the trust. The evidence did show that the

   company had acted only as a trustee company but there were several trusts and the merits of cross

   payments were unable to be determined. In this context, uncertainty as to the quantum and identity of

   the trust with respect to which particular payments were made was a matter of some importance, as the

   case was mounted directly against their beneficiaries notwithstanding that different beneficiaries existed

   in respect of the different trusts.

29 Against this background it is surprising that her Honour went on to make a declaration in favour
of the company's right of indemnity against the defendants. There is of course no dispute, that as a

matter of law a trustee is generally entitled to be indemnified out of trust assets in respect of liabilities

properly incurred in its capacity as trustee. Such a statement might be appropriate in a text book, or

in reasons for judgment, but the purpose of the declaratory remedy in litigation is to settle disputes

between litigants. It is generally accepted that there needs to be some utility in the making of a

declaration of right. "The question must be a real and not a

287.

theoretical question; the person raising it must have a real interest to raise it".[18] The declaration in the

[18]           Per Lord Dunedin in Russian Commercial and Industrial Bank v British Bank for Foreign Trade Limited [1921] 2 AC 438,448, cited with approval by Gibbs J in Forster v Jododex. Aust. Pty. Ltd. (1972) 127 CLR 421, 437-438.

present case seems to be entirely hypothetical. It is not based upon any findings that had been in

contention and had been resolved by the litigation. The declaration seems to have stemmed from a

perception on her Honour's part that some trust property and debts might yet be able to be proved, and

her Honour seems to have contemplated that some future process or the taking of a proper account

might prove the existence of trust assets and of debts that might allow an indemnity to be asserted.

Declarations are sometimes made which resolve only a limited area of dispute and a wide discretion is

involved in the making of such orders.[19] However the making of a hypothetical declaration such as this was erroneous.[20] The plaintiff simply failed to establish its case. The action should simply have been

[19]           Young-Declaratory Orders (2nd edn) para 702-704.

[20]           Compare Re O'Sullivan [1969] Qd R 516, 521.

dismissed, and it could not be saved by a declaration which is tantamount to "if the plaintiff could have

established the facts that it set out to establish the law would have granted a remedy".

1. In short, the company failed on all four of the issues on which it needed to succeed[21].

   [21]           See para 12 above.

2. We do not purport to bind any future court by these particular observations, but consider that

   something needs to be said by the court to discourage any resurgence of what has been excessive and

   unproductive litigation. The parties have well and truly had their day in court and the plaintiff has

   comprehensively failed. A party cannot litigate in this fashion, lose the action and then say "I still say that

   a debt exists and now I want an account taken". The present litigation was such that it was to be

   expected that the company would bring forward all means of recovery of the moneys that were sought

   from the defendants. These would include the bringing of claims in all relevant capacities and a choice

   whether to seek to prove a debt before the court or alternatively to obtain an order for the taking of an

   account. The opportunity to seek such relief was readily available but was not taken. The principles

   stated in Port of Melbourne Authority v Anshun Pty Ltd[22] might well be thought to preclude any

   [22] (1980) 147 CLR 589.

   further pursuit of the alleged debts and of any claims reasonably connected with them.

3. In the event her Honour made a declaration but declined to make any order for costs against

   either party, ordering that the appellants and respondents each pay their own costs of the action.

   Substantial submissions were advanced on this question on the appeal, but these need not now be

   addressed as the primary orders and judgment are to be set aside. However some questions still remain

   as to the appropriate form of order for costs on the dismissal of the company's action.

4. The question of disentitling conduct on the part of the trustee and of incompetent conduct by

   the liquidators such as to lose the right to indemnification were litigated. Her Honour did not consider

   that any rights that otherwise existed had been lost for those reasons. However this finding against

   particular bars raised by the defence can hardly be justification for the making of a positive declaration
   of right in favour of the plaintiff company.

5. Before commencing these proceedings the liquidators applied to a chamber judge under

   s.479(3) of the Corporations Law, for a direction that the proposed proceedings be commenced.

   Such a direction was given ex parte. It is not necessary for this court to canvass the extent of disclosure

   or argument presented to the learned Chamber judge. The effect of such a direction is simply to protect

   the liquidators from adverse claims (by creditors, contributories on the company itself) as a result of

   taking the steps the subject of the direction.[23] The obtaining of this direction of the court is not in our

   [23]           See Coats & Ors v Southern Cross Airlines Holdings & Barber (CA No 4718 of 1998, 12 June 1998); Re GB Nathan & Co Pty Ltd (1991) 24 NSWLR 674; Re Magic Aust Pty Ltd (in liq.) (1992) 10 ACLC 929, 931, 7 ACSR 742, 745.

   view relevant to the question of the costs order that should be made as between the plaintiff company

   and the defendants that the company took to court.

6. As mentioned above, the plaintiff company completely failed in its action. The fact that it

   succeeded on a few side issues (such as non-disqualification of the liquidators) does not approach the

   situation that calls for a special order for costs in respect of different issues arising in the litigation.[24] The
   unsuccessful plaintiff ought to be ordered to pay the costs of the successful defendants.

   [24]           Colburt v Beard [1992] 2 Qd R 67; Thiess v TCN Channel Nine Pty Ltd (No 5) [1994] 1 Qd R 156.

7. When an insolvent company, under the control of a liquidator, unsuccessfully brings litigation

   against another party, a simple order for costs against the company would carry a considerable risk and

   in some cases a virtual certainty that the costs would not be recovered. The present case is of this kind.

   The most usual order in such a case is that the liquidator pay the costs, and it is recognised that this

   makes the liquidator personally liable for such costs.[25] It is usual in such cases to permit the liquidator

   [25]           Re Newark Pty Ltd (in liq.) [1993] 1 Qd R 409, 420; Re Wilson Lovatt & Sons Ltd [1977] 1 All E.R. 274; Kemp v Coastal Constructions Pty Ltd (CA No 171 of 1992, 17 March 1993 - order for costs).

   to recover costs so far as this is feasible, from company assets, provided there has not been misconduct

   or other unusual circumstances. The exercise of such a discretion by the courts along the above lines

   is consonant with the principles under which orders for costs may be made against non-parties.[26] In the

   [26]           Knight v F P Special Assets Ltd (1992) 174 CLR 178; Kemp v Coastal Constructions Pty Ltd (above); Bent v Gough (1992) 36 FCR 204; 108 ALR 131.

   present matter there has been no opportunity for ventilation of any difference of view between creditor's

   contributories and the liquidator in this respect, and, as was done in Newark,[27] it seems preferable to

   [27]           Above at p 420.

   leave this question open in case any interested person wishes to dispute this prima facie right of the

   liquidator. This can be achieved by making the costs order without prejudice to any right the liquidators

   may have to recover their costs from company assets.

   Orders

8. The appeal should be allowed with costs and the cross-appeal and notice of contention should

   be dismissed with costs. The orders below should be set aside and replaced with an order that the

   action be dismissed with costs including reserved costs.

9. As at present advised it is proposed to order that in each instance the costs ordered against the

   company be paid by the liquidators. However full submissions were not received on this question, and

   we will afford a final opportunity to the parties to be heard in relation to it. To that end, leave is granted

   to all parties to present to the Registrar submissions in writing within 14 days on the question of form

   of order in relation to costs. The making of the final orders will be deferred until further consideration

   of any submissions so received.