Conlan v The Executor or Other Personal Representative as Executor of the Estate of Anthony John Croci (Dec) - [2009] WASC 266

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: CONLAN -v- THE EXECUTOR OR OTHER PERSONAL REPRESENTATIVE As Executor of the Estate of ANTHONY JOHN CROCI (DEC) [2009] WASC 266

CORAM: SIMMONDS J

HEARD: 27 JULY 2009

DELIVERED : 15 SEPTEMBER 2009

FILE NO/S: CIV 2284 of 2008

MATTER :Sections 89 and 92 of the Trustees Act 1962
Rowena Nominees Pty Ltd (ACN 008 818 273) (Receiver and Manager Appointed) (In Liq)
Oakleigh Acquisition Pty Ltd (ACN 008 879 454) (Receiver & Manager Appointed) (In Liq)

BETWEEN: MARK ANTHONY CONLAN
First Applicant
ROWENA NOMINEES PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQ) (ACN 008 818 273)
Second Applicant
MARK ANTHONY CONLAN As Liquidator of OAKLEIGH ACQUISITIONS PTY LTD (RECEIVER AND MANAGER APPOINTED) (IN LIQ) (ACN 008 818 273)
Third Applicant
OAKLEIGH ACQUISITIONS PTY LTD (RECEIVER & MANAGER APPOINTED) (IN LIQ) (ACN 008 818 273)
Fourth Applicant
AND
THE EXECUTOR OR OTHER PERSONAL REPRESENTATIVE As Executor of the Estate of ANTHONY JOHN CROCI (DEC)
MARY BRIDGET CROCI
ROY FENTON
MARY ZDENKA GEBERT
PHILLIP GEORGE HETHERINGTON
MARGARET CATHERINE HETHERINGTON
THE EXECUTOR OR OTHER PERSONAL REPRESENTATIVE As Executor of the Estate of MAXWELL EDWIN LADYMAN (DEC)
MARY JANE LADYMAN
FAYE CAROLIE STEWART
DONALD ROBERT TAYLOR
MONA BEATRICE TAYLOR
First Respondents
MILTON LYLE FREDERICK HUNT
Second Respondent

Catchwords:

Corporations - Application for declaration and directions to liquidator - Whether proceeds of settlement of action for breach of duties of auditor of trust account of finance broker were trust assets or assets of the finance broker in its own right - Whether costs of action and of distributing proceeds were chargeable on the settlement proceeds

Trusts - Application for declaration and directions to trustee - Whether proceeds of settlement of action for breach of duties of auditor of trust account of finance broker were trust assets or assets of the finance broker in its own right - Whether costs of action and of distributing proceeds were chargeable on the settlement proceeds

Legislation:

Companies Code (Vic), s 168
Corporations Act 2001 (Cth), s 197, s 479
Corporations Law (Vic), s 1069
Finance Brokers Control Act 1975 (WA), s 4, s 48, s 50, s 53, s 59, s 65
Trustees Act 1962 (WA), s 71, s 92, s 95

Result:

Application granted

Category: B

Representation:

Counsel:

First Applicant              :     Mr R J Price
Second Applicant          :     Mr R J Price
Third Applicant            :     Mr R J Price
Fourth Applicant           :     Mr R J Price
First Respondents         :     No appearance
Second Respondent       :     Mr J Lin

Solicitors:

First Applicant              :     Lavan Legal
Second Applicant          :     Lavan Legal
Third Applicant            :     Lavan Legal
Fourth Applicant           :     Lavan Legal
First Respondents         :     No appearance
Second Respondent       :     Jackson McDonald

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

Arakella Pty Ltd v Paton [2004] NSWSC 13
Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424
Edwards Karwacki Smith & Co Ltd v Jacka Nominees Pty Ltd (in liq) (1994) 15 ACSR 502
IMF (Australia) Limited v Meadow Springs Fairway Resort Ltd (in liq) [2009] FCAFC 9; (2009) 253 ALR 240
Mark Anthony Conlan (as liquidator of Oakleigh Acquisitions Pty Ltd) [2001] WASC 230
Murphy v Lew (1994) 13 ACSR 10
Re Rowena Nominees Pty Ltd; ex parte Mark Anthony Conlan as liquidator of Rowena Nominees Pty Ltd (Receiver and Manager Appointed) (In Liq) [2006] WASC 69; (2006) 199 FLR 415
Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171
Shirlaw v Taylor (1991) 31 FCR 222
Young v Murphy [1996] 1 VR 279

SIMMONDS J:

Background

This is an application by originating summons for declarations and directions concerning the proceeds of an action. Those proceeds are the total (called in the originating summons and these reasons the Gross Settlement Proceeds) of the money paid to the second applicant (Rowena) in settlement of the action commenced by Rowena in CIV 2767 of 2000, plus interest on that money. The originating summons was amended by leave I granted on 29 May 2009 (the amended originating summons).
At the hearing there were appearances for the applicants and for the second respondent.
The account that follows in this section of my reasons is for the most part drawn from the affidavit with its annexures of Mark Anthony Conlan sworn on 2 October 2008 in support of the present application.
The proceedings in CIV 2767 of 2000 (called in the amended originating summons and these reasons the Auditor Action) were against the auditors of the trust account of Rowena. The Auditor Action was for breaches of contractual and statutory duties and for breaches of duties of care in the defendants' conduct of audits of that trust account for the financial years ending 31 December 1995 and 1996. Those audits were conducted pursuant to an appointment of the auditors under a contract made in or around 5 October 1995 and contracts to conduct audits made then (for the 1995 financial year) and made in or around March 1996 (for the 1996 financial year).
As a finance broker licensed under the Finance Brokers Control Act 1975 (WA) (FBC Act) Rowena was required by that Act to maintain a trust account for moneys Rowena received for or on behalf of any other person in respect of loans Rowena negotiated or arranged. The FBC Act required Rowena to appoint an auditor to audit that trust account. The statement of claim in the Auditor Action dated 7 February 2001 pleaded that in respect of each of the pleaded breaches 'the plaintiff was exposed to the risk that … the plaintiff would in consequence become liable to investors for the monies lost and would be unable to recover those monies from the persons to whom they were paid' [26.3], [38.3]. By reason of that exposure, it was further pleaded, the plaintiff suffered loss or damage [28], [40].
Rowena is also the trustee of a fund (called in the amended originating summons and these reasons the Fund) made up of the trust monies the subject of the order made by Pullin J on 28 August 2003 in COR 131 of 1991 and the 'Fund' as defined in the Order as to Distribution of Fund made by me on 11 May 2006 in CIV 2252 of 2004, as varied by my orders of 4 September 2006. The Order as to Distribution of Fund (the Distribution Order) was made following my decision in Re Rowena Nominees Pty Ltd; ex parte Mark Anthony Conlan as liquidator of Rowena Nominees Pty Ltd (Receiver and Manager Appointed) (In Liq) [2006] WASC 69; (2006) 199 FLR 415. The Fund represents moneys held and to be held in connection with the finance broking business of Graeme Grubb Finance Broker, which business Rowena carried on. Those moneys represent the realisation or recovery of certain trust assets of Rowena and the fourth applicant for the benefit of investors of money with and borrowers of money from Rowena (called Claimants in the Distribution Order 'Dictionary', but whom I will call in these reasons the Trust Creditors).
The principal declarations and directions sought by the amended originating summons in the present proceedings are the following.
The principal declarations sought are two. The first declaration is that Rowena as trustee of the Fund is entitled to an equitable lien over the Gross Settlement Proceeds to secure the payment to it of the total (called in the amended originating summons and these reasons the Costs) of two sets of amounts. One set of amounts is the total (called in the amended originating summons and these reasons the Trustee's Administrative Costs) of the remuneration, paid by Rowena to the first applicant (Conlan) from the Fund and approved by Rowena's committee of inspection, in relation to the Auditor Action, plus interest on that amount. The second set of amounts (called in the amended originating summons and these reasons the Other Costs) is the amount representing the applicants' reasonable and proper costs, charges, expenses and remuneration of and incidental to these proceedings on a solicitor and own client basis, plus the amount representing Conlan's reasonable estimate of or the amount for the proper and reasonable costs, charges and expenses and remuneration of Conlan in respect of distributing the Gross Settlement Proceeds less the Costs to the secured creditors of Rowena.
The other principal declaration sought in the present proceedings is that, subject to the first declaration, and the rights of the secured creditors of Rowena, the Gross Settlement Proceeds are assets of Rowena in its own right.
It is not in contest that the secured creditors of Rowena were notified of these proceedings, and all but those persons shown as the first respondents consented to Conlan dealing with the Gross Settlement Proceeds in the terms of the originating summons. However, none of the first respondents took any part in these proceedings.
I should also note that the fourth applicant, for whom the third applicant is the liquidator, is another secured creditor of Rowena. However, the fourth applicant was a related company of Rowena and it is not in contest that, as one of the orders sought in the amended originating summons contemplates, any entitlement of the fourth applicant as a secured creditor of Rowena in respect of the Gross Settlement Proceeds may enure to the benefit of the Fund.
The principal directions sought in the present proceedings are also two. The first such direction is that the court approve Rowena as trustee (presumably of the Fund) relinquishing any claim to the Gross Settlement Proceeds other than in respect of the amount of the Costs. The other principal direction is, in its first part, that the court approve Conlan acting to cause Rowena to pay to the Fund the Trustee Administrative Costs and the other costs from the Gross Settlement Proceeds. Its second part is that the court approve Conlan distributing the Gross Settlement Proceeds less costs in the liquidation of Rowena as assets of Rowena with Conlan, having proper regard to the rights of persons having security over the assets of Rowena.
It is not in contest that the court has jurisdiction to make the first direction under Trustees Act 1962 (WA) s 92 read with s 95 and by virtue of the constitution of the present proceedings, to which the second respondent, a trust creditor in respect of the Fund (Hunt), was joined as a representative defendant (see Arakella Pty Ltd v Paton [2004] NSWSC 13).
It is also not in contest that the court has jurisdiction to make the second direction under Corporations Act 2001 (Cth) s 479(3) and by virtue of the constitution of the present proceedings as just described.
Further, it is not in contest that the court has jurisdiction to make the two declarations and ought to make the second declaration and the second part of the second direction if and only if the first issue before me is resolved in favour of the contentions of the applicants. That first issue is whether or not the rights of recovery against the defendants in the auditor action were assets the proceeds of which are money forming part of the Fund. The contention of the applicants was that they were not such assets but rather assets of Rowena in its own right. The contention of Hunt was that they were trust assets the proceeds of which are money forming part of the Fund.
There is a second issue before me. It arises only if the first issue is resolved in the applicants' favour. The second issue is whether and if so how the Gross Settlement Proceeds should bear the Costs, particularly for the benefit of the Fund.
I turn now to consider the two issues.

The first issue: applicable law

It was common ground that the applicable law for the purposes of resolving the first issue is as stated in Young v Murphy [1996] 1 VR 279. In Young one of the issues before the Court of Appeal was the correctness of the determination by the primary judge, in Murphy v Lew (1994) 13 ACSR 10 (Gobbo J), that new trustees of unit trusts had standing to make claims against the firm of auditors engaged by the former trustee (BPTC) to audit the trust accounts of the unit trusts. The unit trusts were established by the unit trust deeds, a consolidation of the trust deeds of one of the unit trust trusts being taken by the court to represent the terms of the trust deeds of all of the unit trusts. The unit trust deeds required the trustee to have the trust accounts audited. These covenants, as to appointment and auditing, were taken by the Court of Appeal to reflect the requirements of the Corporations Law (Vic) and the Companies Code (Vic): see 289 (Brooking J, with whose judgment concerning the claims against the auditor J D Phillips J, 317, and Batt J, 319, agreed). The auditor was alleged to be in breach of its duties to BPTC, both in contract and tort, in respect of the auditing of the trust accounts, and the new trustees claimed to sue as 'successors to the right of action vested in BPTC until its removal as trustee' (294, J D Phillips J). The Court of Appeal treated the resolution of the issue of the correctness of the determination of the primary judge, that the claim of the new trustees should be upheld, as turning on whether or not the causes of action for breach of the duties referred to were trust property of the unit trusts.
The Court of Appeal concluded that the causes of action were trust property. The principal judgments, upon which my attention was focussed by counsel for Rowena and counsel for Hunt, were of Brooking J and J D Phillips J.
Brooking J said this (291 ‑ 292):
A contract was held in trust by the former trustee if it was made in the course of administering the trust. A contract made by a trustee because he is administering a trust is not necessarily made in the course of the administration. It may be made for his private purposes as trustee as opposed to being made in the management of the trust estate. Elaboration on the distinction is unnecessary, since in the present case the contracts were beyond question made in the course of administering the trust.
I return now to the facts of the present case as pleaded. The torts alleged against Priestley & Morris are torts with respect to trust property, the claim being one for damages for economic loss. Until the appointment of the new trustees the proper plaintiff was BPTC, the legal owner of the trust property and the person to whom the duty of care was owed. The effect of the vesting order made by the Supreme Court of New South Wales is to vest in the new trustees the whole of the trust property, including the rights of action in tort set up in these proceedings in respect of loss sustained by the trust estate. As regards the rights of action in contract asserted in the statement of claim, the contracts alleged were, as I have said, plainly made in the course of administering the trust, so that the right of action for breach which resided in the former trustee was held by him as part of the trust property. It has passed to the new trustees, along with all the other trust property, by virtue of the vesting order. Whether or not the new trustees could without a vesting order have maintained an action for breaches of contract committed before their appointment (as to which see Wentworth v Gurner (1863) 2 SCR (NSW) Eq 105 at 112; (1864) 3 SCR (NSW) Eq 22 at 27), they may do so by virtue of the vesting order.
J D Phillips J contrasted another of the issues before the Court of Appeal, the matter of whether the rights of action for breaches of the duties of the directors of BPTC in Young were trust property of the unit trusts, with the matter of whether the rights of action against the auditor were such trust property. His Honour said this (302 ‑ 303):
The business activity of BPTC as trustee of these trusts was itself the framework within which the directors came to perform the duties which they owed to the company by virtue of their office as director; but the duties which were owed are nonetheless general duties and are not owed to the company in some specific role or character ‑ or at least they are not owed to the company in some specific role or character when the duties are alleged to have arisen only in virtue of the office which is held. In this, such duties may be contrasted with some specific contractual obligation undertaken by a third party to the company and undertaken to the company when acting in some particular capacity. Thus a valuer may contract with an individual who is in fact acting as executor of an estate; or he may contract with a company which is in fact acting as trustee of a trading trust. In such cases, the benefit of the contractual obligation may well be held by the executor or by the trustee for and on behalf of the deceased estate or the trust, as the case may be; but no sufficient basis is made here for any such conclusion in relation to the directors' duties which arose simply in virtue of the office.
It follows that if there be a breach by the directors of the duties which they did owe to the company, being the former trustee BPTC, and if the company was thereby damnified, BPTC might have a right of action against the directors for breach of their duties. In so far as those duties were founded in the common law, there might be a right of damages and, if they be fiduciary duties, there might be a right to equitable compensation. Either way, it is the company in which the right of action is vested. The plaintiffs now claim to have succeeded to that right of action by virtue of their appointment as new trustees, but by what right can that be so? The right of action held by the former trustee cannot be shown to have been trust property; there is no basis upon which to conclude that it was. Unlike the valuer whom I have used for illustration, the directors cannot be said on the pleading in this case to have owed their duties to the company only in relation to some particular trust or trusts; nor were those duties imposed upon them in relation to some particular item or items of trust property as such. Rather the existence of both the trusts and the trust property was but the context in which the duties fell to be discharged by those who owed duties to the company generally as its officers. There is no basis, then, for supposing that the right of action was trust property in the hands of BPTC or for supposing that the right of action passed to the new trustees, upon their appointment as such.
Later in his judgment, J D Phillips J said this (317):
Brooking J has dealt in detail with the claims against the auditors and I agree with what his Honour has written. In making the contract with Priestley & Morris to be auditors of the trusts, BPTC was clearly acting in the administration of the trusts and for the purposes of the trusts. It follows then that the benefit of the contract was itself trust property, with the result that any right of action arising thereunder was trust property too. Further, that is so, whether the respondents rest their claim in contract or in tort; for in either case, the circumstances giving rise to the duty are such that the cause of action is trust property so that the proceeds of any such action would property belonging to the beneficiaries and would not be property of BPTC available for its creditors generally. If, as counsel for the auditors submitted, the question whether the right of action is trust property depends upon all of the circumstances, including such connection as there is with the administration of the trust and the nature and extent of that connection, then in this case I think the connection is such that the rights of action being asserted against the auditors were trust property when vested in BPTC and therefore, upon appointment of the new trustees, passed to the new trustees for the benefit of the trusts.
I now consider the application to this case of these statements of the law.

The first issue: application of the law in this case

It may be noted, first, that Rowena's position as trustee was described in Australian Securities and Investments Commission v Rowena Nominees Pty Ltd [2003] WASC 112; (2003) 45 ACSR 424 [21] (Pullin J) as follows:
Whatever the outcome, the moneys referred to above in these two bank accounts are not moneys in which Rowena has any beneficial interest. These moneys are therefore held on trust to be distributed to the beneficiaries, being investors or others, once the facts become clearer, possibly in accordance with directions of the Court. See, for example, the type of order made by Austin J in ASIC v Nelson (2003) 44 ACSR 719. The moneys are probably to be shared between the beneficiaries of many trusts. For example, when Rowena received money from an investor under an obligation to hold the money and then pay it over to a borrower in return for a registered mortgage Rowena held the money on trust. Rowena was obliged under s 48 of the FBC Act to pay the money into the trust account. Normally a trustee would have to hold the money in a separate account, but s 48 of the FBC Act permitted a finance broker to maintain one trust account and to pay all trust moneys received into that account. Another investor who paid a separate sum of money to be advanced to another borrower became the beneficiary of another trust. In some cases there may have been several beneficiaries of one trust. I am not making any findings at the moment. I only mention this aspect so that it can be shown that I recognise that the moneys in the bank accounts the subject of this application are moneys which the beneficiaries of many separate trust arrangements will be claiming. The mixing of the moneys and the likely inability of anyone to trace the moneys as a result of the very many overdrawings of the account, make it necessary for Conlan to complete his process of recovery and then to approach the Court for orders providing for the distribution of the mixed fund.
It may further be noted that the obligations of Rowena to appoint an auditor and to have that auditor audit the trust accounts so described did not arise from any trust instrument. It is common ground that there was no such instrument: compare Young. Rather, the obligation to appoint an auditor arose under FBC Act s 53(2), while the obligation to have the trust accounts audited arose under s 50 of that Act.
FBC Act s 53 read at all times material to these proceedings as follows:
53. Appointment of auditor
(1)Subject to the provisions of this Division the auditor by whom the audit of, and reports on, a finance broker's trust accounts are to be made shall be appointed and employed for that purpose by that finance broker.
(2)A finance broker shall appoint his auditor at the time of applying for his licence.
(3)Subject to this Act, an auditor's appointment under this section is continuous unless the Board approves a subsequent change in the appointment.
The requirement for a finance broker to obtain a licence, as well as a 'current annual certificate', was in FBC Act s 26(1), read with s 4 'finance broker'. The former provision said a person 'shall not carry on business, or by any means hold himself or itself out, as a finance broker' without those qualifications.
FBC Act s 50 read at all times material to these proceedings as follows:
50. Duty of finance broker to have trust accounts audited
(1)Every person who carries on business as a finance broker during the whole or any part of that year shall cause his trust accounts for that year, or part of a year, as the case may be, to be audited by an auditor duly qualified or approved under this division.
(2)The auditor shall conduct the audit in accordance with accepted auditing practice, including selective testing when the auditor considers it appropriate and in accordance with such other requirements as are determined by the Board.
(3)The auditor shall within 3 months after the end of each year ‑
(a)deliver to the Board a report of the result of the audit, verified by statutory declaration of the auditor, in an approved form; and
(b)deliver a copy of the report so verified to the finance broker.
(4)The finance broker shall retain the copy of the report and produce it on demand pursuant to section 60 (3).
(5)The Board may, in circumstances it considers appropriate, extend the time limit for lodging reports.
(6)The auditor shall deliver an interim report to the Board if at any time he discovers any irregularity in the trust accounts of the finance broker or discovers any other matter in respect of those accounts which the auditor considers should be reported to the Board and he shall verify the interim report by statutory declaration and deliver a copy of the report so verified to the finance broker.
(7)The Board may require the auditor to furnish further information or carry out a further audit at any time, and the auditor shall comply with that requirement, and the cost of so doing shall be paid by the finance broker if the Board so directs but otherwise shall be paid by the Board.
(8)Apart from the annual audit and any interim audit provided for in this section, there shall be a quarterly audit in respect of the trust accounts of a finance broker for the first 3 months during which he carries on business as such after the appointed day, and such quarterly audit shall be conducted in accordance with such provisions of this division in respect of the annual audit as are capable of being applied to the quarterly audit, and the auditor shall within 2 months after the end of the first 3 months deliver to the Board a report of the result of such quarterly audit.
(9)The Board may, if it thinks fit, waive in respect of a finance broker's trust accounts the requirement of a quarterly audit mentioned in subsection (8).
FBC Act s 59 stated that certain matters had to be included in the auditor's report pursuant to s 50.
I note that these provisions did not give rise to any obligation to appoint an auditor to audit, or any requirement to have audited, other accounts maintained by a licensed finance broker, such as its own business accounts. In this respect, it may be said, as counsel for Hunt pressed on me, that it was only because Rowena had trust accounts that there arose the obligation to have an auditor and to have that auditor perform an audit function; and that that function related only to those trust accounts. In this way the position in respect of the duties arising out of or because of the contracts was different from the position in respect of the duties of the directors to whom J D Phillips J referred in Young 302 ‑ 303, above.
However, I note that simply because a contract was entered into as a result of a trustee's administration of its trust does not necessarily make that contract trust property: see Young 291 (Brooking J), above. In determining whether, in the words of Brooking J, the audit contracts in this case were made for the trustee's 'private purposes as opposed to being made in the management of the trust estate' (291), in my view it is relevant that the obligation to appoint the auditor and to have the appointee audit was solely statutory, under a statutory scheme which did not impose a requirement or standards for a trust instrument (compare Young and the provisions of the Corporations Law (Vic) s 1069 and the Companies Code (Vic) s 168 referred to by Brooking J at 289). In my view it is particularly relevant that the obligation to appoint the auditor arose at the point of Rowena's application for a licence to carry on business as a finance broker, not at the point when investors had placed monies with the finance broker, or the trust accounts to be audited had been established.
It may also be noted that under FBC Act s 65 the reasonable fees and expenses of the auditor for the audit were made payable by the finance broker. There was no reference in the statute to any payment of such fees out of the trust property or by the beneficiaries. The position of a trustee is of course that it has a right of indemnity in the first respect, and may well have such a right in the second respect (see Heydon J D and Leeming M J, Jacobs' Law of Trusts in Australia (7th ed, 2006) [2104], [2105]).
True it is, any right of indemnification by the beneficiaries may in general law be excluded by contract: see Jacobs' Law of Trusts [2106]. Here, assuming (without deciding) that there were any such right in respect of (presumably a proportionate part of) the cost of having the trust accounts audited, its exclusion (or preclusion) might be said to be the result of FBC Act s 65 (another matter I consider I do not have to determine).
While there is a question whether a trustee's right of indemnification from trust property may likewise at general law be excluded, given Trustees Act s 71 (see Jacobs' Law of Trusts [2106]), I accept that exclusion of any such right of a finance broker to indemnification is not inconsistent with the nature of a trust in respect of any cause of action against the auditor (see Jacobs' Law of Trusts [2104] and Corporations Act s 197(1)(b)(iii)). I consider that there is a strong argument that any right of indemnification against the moneys in a trust account could only arise by authorisation in the form of 'the prior written consent of all parties to the loan' (FBC Act s 48(3)). However, I consider I do not have to resolve that question.
In my view the statutory provisions for the finance broker's payment of the fees and expenses of the audit indicated that the appointment of the auditor and the performance of its function were the ordinary incidents of the business of a licensed finance broker. I consider this was a strong indication for my purposes that such appointment and performance were for the private purposes of the licensed finance broker, and not in the management of the trusts of which it was the trustee. That indication was further strengthened by the statutory provision as to when the obligation to appoint the auditor arose and of the statutory source of that obligation and the obligation to have the trust accounts audited.
Finally I note the authority cited to me by counsel for the applicants, Edwards Karwacki Smith & Co Ltd v Jacka Nominees Pty Ltd (in liq) (1994) 15 ACSR 502, where the Full Court of this court had occasion to refer to the decision in Murphy from which the appeal was taken in Young. Edwards Karwacki Smith was an appeal by auditors against dismissal of their application for summary judgment on a claim against them, by the liquidator of a finance broker and by investors of money placed with the finance company. The claim against the auditors by the liquidator was pleaded both in contract and tort, in respect of the auditors' audits of the trust account of the finance broker as required by FBC Act s 50 read with s 59. The claim against the auditors by the investors was pleaded in negligence and for breach of a statutory duty arising in the same circumstances. The court dismissed the appeals.
One of the arguments by the auditors in relation to the claim by the liquidator was that, as the person who ran the finance broker as a one man business had perpetrated the frauds which the auditors had failed to detect, and as the frauds were the frauds of the finance broker, those frauds were a defence to its action against the auditors for negligence. Nicholson J, with whom Malcolm CJ and Pidgeon J agreed, said this, as to a submission made against that argument by the finance broker which it rested on Murphy (emphasis supplied):
For the respondent reference was made to Murphy … where it was held that a replacement trustee was entitled to sue auditors of a unit trust in contract and tort in respect of alleged failures to detect breaches of trust perpetrated by the initial trustee through its directors without joining the beneficiaries of the unit trust. The question was whether the unit holders or the new trustee could sue. The findings as to standing were made on the assumption that the causes of action, including that against the auditor, were open in law, so that the case is no authority for the proposition a new trustee had a good claim against the auditor. In addition, in the present case the company has made its common law claims in its own right and not on behalf of the investors (who are not beneficiaries in a unit trust). The liquidator of the company does not and could not purport to be a new trustee. This authority does not add support to the respondent's case (516).
I consider the emphasised statement adds support to without requiring the view that the rights of action in the present case were rights of Rowena in its own right.
On the bases I have described, the issue of whether or not the rights of recovery against the defendants in the auditor action were assets the proceeds of which are money forming part of the Fund should be resolved in favour of the contention of the applicants, that is, that those rights of action were not such assets, but rather assets of Rowena in its own right.
It follows that, subject to the resolution of the second issue, a declaration should be made in the terms of the second declaration sought by the amended originating summons, and that a direction should be made in terms of the second part of the second direction so sought.

The second issue

It is not in contest that Rowena is entitled to an equitable lien over the Gross Settlement Proceeds to secure payment to it of the amount of the Costs. That equitable lien is the subject of the first declaration sought by the amended originating summons.
I consider that such a declaration is appropriate. See Mark Anthony Conlan (as liquidator of Oakleigh Acquisitions Pty Ltd) [2001] WASC 230 [11] ‑ [15] (Owen J) referring to, among other authorities, Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, 174 ‑ 175 (Dixon J) and Shirlaw v Taylor (1991) 31 FCR 222, 228 ‑ 231 (Sheppard, Burchett and Gummow JJ). I consider that the underlying principle is that stated in IMF (Australia) Limited v Meadow Springs Fairway Resort Ltd (in liq) [2009] FCAFC 9; (2009) 253 ALR 240, [46], [63], [80] and [81] (North, Emmett and Rares JJ). In particular, I note from IMF (Australia) [63] the following:
Where, as in this case, a party has, by its efforts, brought into Court a fund in the administration of which it and other parties are interested, the costs and expenses of that party in preservation and realisation of the fund will be a first claim upon that fund (Shirlaw … at 228). Thus, a receiver, who may be working for the benefit of all who have legitimate interests in particular assets, is entitled to look to the assets of which he is receiver to meet his remuneration and the liabilities and outgoings incurred in realising and preserving those assets. Further, where a person seeks to enforce a claim to an equitable interest in property, the Court will require, as a condition of giving effect to that equitable interest, that an allowance be made for costs incurred and for skill and labour expended in connection with the preservation, realisation and administration of the property (Shirlaw … at 230 ‑ 231).
In my view it follows that the first part of the second direction should also be made. That part provides a means of giving effect to the first declaration. It will permit the restoration to the Fund from the Gross Settlement Proceeds of the amounts from the Fund used in relation to the Auditor's Action, with interest on those amounts. It will also permit the costs, charges, expenses and 'remuneration' (which I would understand as an allowance for skill and labour) of the applicants in relation to the present proceedings, as well as the costs, charges, expenses and remuneration of Conlan in the distribution of the Gross Settlement Proceeds, to be met from the Gross Settlement Proceeds.
At the hearing before me counsel for the applicants put up a minute of orders dated 27 July 2009 which, with handwritten amendments made by counsel, for the most part reproduced the terms or was to the effect of the orders sought by the amended originating summons as above. However, there were three modifications.
One modification provides that the Trustee's Administrative Costs recovered from the Gross Settlement Proceeds are to form part of the Fund (minute order 6). I consider, as counsel for the applicants put to me, that this is an order that should be made for greater certainty, under the facility provided for in the Distribution Order 'Dictionary' 'Fund' (j) (including within the Fund 'monies ordered in these or other proceedings to be available for distribution to Claimants').
Another modification provides that 'the Applicant's reasonable and proper costs of and incidental to these proceedings (including in respect of any appearances in which costs were reserved) on a solicitor and own client basis form part of the Costs' (minute order 7). I note that there have been costs reserved in these proceedings. However, I am not entirely sure of the necessity of this proposed order, as by the Minute 'Dictionary' the 'Applicants … reasonable and proper costs, charges, expenses and remuneration of and incidental to these proceedings on a solicitor and own client basis' are included within the meaning of 'Other Costs'. However, I will hear from counsel for the applicants as to the necessity for the present proposed order.
Finally, there is a modification (minute order 8) providing that
[Hunt's] reasonable and proper costs of and incidental to these proceedings (including in respect of any appearances in which costs were reserved) on a solicitor and own client basis be paid by [Rowena] out of the Gross Settlement Proceeds
This proposed order would vary an order I made on 9 March 2009 [1.1] and [1.2], making Hunt's reasonable legal costs incurred in connection with these proceedings payable from the Fund. I consider such a variation to be appropriate, as it seems to me that Hunt's costs are part of the process of 'preservation, realisation and administration of the property' (IMF (Australia) [63]), being the Gross Settlement Proceeds, where that process is understood as securing those proceeds for the benefit of Rowena (including its secured creditors) in its own right.
However, I am not entirely sure of the necessity of this proposed order, for reasons similar to those for my doubt as to the necessity for the previous proposed order. By the Minute 'Dictionary' with the handwritten annotations '[Hunt's] reasonable and proper costs, charges, expenses and remuneration of and incidental to these proceedings on a solicitor and own client basis' are included within the definition of 'Other Costs'. However, as with the previous proposed order, I will hear from counsel for the applicants as to the necessity for the present proposed order

Conclusion and orders

It follows I would make orders in terms of the minute handed up at the hearing subject to the matters to be considered as I have indicated.