Czapp v Cassar and Caldwell
[2015] VSC 111
•27 March 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2011 03437
BETWEEN
| VICTOR CZAPP | Plaintiff |
| and | |
| ERICA CASSAR AND MARK CALDWELL, in their capacity as Executors and Trustees of the Estate of Gregory Czapp deceased | Defendants |
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JUDGE: | HARGRAVE J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 11 March 2015 |
DATE OF JUDGMENT: | 27 March 2015 |
CASE MAY BE CITED AS: | Czapp v Cassar and Caldwell |
MEDIUM NEUTRAL CITATION: | [2015] VSC 111 |
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PROBATE – Application to remove executors – Unfitness to act – Delay, lack of information, waste and conflict of interest – Executors removed – Administration and Probate Act 1958, s 34(1)(c) – Monty Financial Services Ltd v Delmo [1995] 1 VR 65; Miller v Cameron (1936) 54 CLR 572; Dimos v Skaftouros (2004) 9 VR 584 applied.
PROBATE – Whether executors improperly incurred costs – Whether executors should be deprived of usual indemnity from estate for their legal costs – No indemnity for improperly incurred costs or plaintiff’s costs – Nolan v Collie (2003) 7 VR 287 applied.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A Panna QC | MNG Lawyers |
| For the Defendants | Mr AG Uren QC with Mr J O’Bryan | Mark Caldwell, Lawyer |
TABLE OF CONTENTS
Factual narrative................................................................................................................................. 8
Should the defendants be removed as executors?..................................................................... 17
Who should pay the costs of the 4 March summons and the notice to produce?................ 27
Are the defendants entitled to have their costs, and any costs they are ordered to pay to the plaintiff, paid out of the assets of the estate?............................................................................................... 28
Who should be appointed as administrator?.............................................................................. 30
HIS HONOUR:
Gregory Czapp (‘the deceased’) died on 11 August 2010. He was survived by three children: his son, Victor Czapp (the plaintiff), his daughter Erica Cassar (the first defendant), and his other son, Gregory. From March 1999, the deceased had an impaired cognitive function and his financial affairs were controlled by Ms Cassar under a power of attorney she held on his behalf.
By his will, the deceased appointed Ms Cassar and his solicitor, Mark Caldwell, to be executors of his estate. Mr Caldwell is the second defendant and acts as solicitor for himself and the first defendant in the proceeding. The deceased left a modest estate, comprising mainly real estate which he gave to the trustees of discretionary trusts for his family. His residuary estate, comprised of cash and shares in corporate trustees of various discretionary trusts, which have no value, was left to his three children in equal shares.
The defendants obtained probate of the deceased’s will on 7 January 2011.
Prior to March 1999, the deceased built up a successful business in Victoria and other states, now known as ‘Airport Doors’. Its principal business is the manufacture, sale and installation of roller doors and grills. The business is substantial with an annual turnover of approximately $20 million. The business is conducted by Czapp Pty Ltd as trustee of the Czapp Business Trust, a discretionary trust of which the Czapp family members, including the plaintiff, are specified beneficiaries. In that capacity, Czapp Pty Ltd conducts the Victorian arm of its business from premises in Melton, including on a property known as Lot 5 Norton Drive, Melton. The property was purchased in 1981 as vacant land, in the names of five persons as tenants-in-common: the deceased, the plaintiff, Ms Cassar, her husband (Frank Cassar) and the deceased’s other son, Gregory. Following purchase, Czapp Pty Ltd built a factory on Lot 5 and its Victorian manufacturing operations are partly conducted at that factory (the ‘factory premises’).
Ms Cassar and her husband Frank are the only directors of Czapp Pty Ltd. Since at least 1999, they have together run the Victorian, South Australian and Western Australian components of the Czapp family businesses. Further, since 1999, Ms Cassar has had control of her father’s financial affairs in accordance with a power of attorney. Accordingly, Ms Cassar has had control of the financial arrangements made between Czapp Pty Ltd and the deceased (and, subsequently, the estate) and other beneficiaries of the trust.
According to the Inventory of Assets and Liabilities dated 27 October 2010, the deceased’s estate included his one-fifth share in the factory premises (valued by the defendants at $302,000), three unimproved lots in Phillip Island (valued by the defendants at $358,000 in total), and about $350,000 cash at bank. The deceased’s assets at his death also included a loan of $130,000 by him to Czapp Pty Ltd, on which he earned interest income of $250 per week. He gave a portion of this interest income to each of his wife and former wife, and directed that he did not wish the loan of $130,000 to be repaid by Czapp Pty Ltd to his estate until the death of both of them. His widow is still alive and so the loan has not been repaid. His former wife is deceased, and her share of the interest income is being accumulated in the estate. The present balance is approximately $139,000.
The deceased’s liabilities at his death included loans from Czapp Pty Ltd made over many years, which, according to the Inventory, were then estimated at about $305,000 excluding interest (the ‘Czapp Pty Ltd loans’) and about $6,000 in nursing home fees. The nursing home fees have been paid but the Czapp Pty Ltd loans have not. With compound interest they now total about $600,000. The estate has no cash to pay that liability because its cash resources have been exhausted, primarily by payment of legal costs.
On 11 July 2011, the plaintiff issued an application under part IV of the Administration and Probate Act 1958 seeking further provision out of the estate of his deceased father. The parties exchanged affidavits. The plaintiff’s affidavits disclosed that he had significant financial needs. He was unemployed, had few assets, and lived primarily on Centrelink payments. He had received payments from the Czapp Business Trust over the years to assist with his living expenses, but these payments were apparently loans. Ms Cassar’s affidavit in opposition disclosed that she and her husband had substantial income and no financial need, and nor did Gregory. Moreover, Gregory filed no affidavit, and so I infer that he had no financial need.[1] The parties conducted a mediation in March 2013 but the proceeding did not settle. It was fixed for trial on 29 May 2013. By that time, the plaintiff’s financial need had worsened. He had been forced to sell his home to pay legal fees and had cashed in his modest superannuation on hardship grounds.
[1]Anderson v Teboneras [1990] VR 527, 535.
On the eve of the trial, the defendants sought to vacate the trial date to enable a tax issue to be resolved. Mr Caldwell swore an affidavit in support of the application for an adjournment. He said that he could not conclude a current statement of the estate’s assets and liabilities because, during preparation for the mediation in March 2013, an issue was raised by counsel as to whether the Czapp Pty Ltd loans were taxable under div 7A of the Income Tax Assessment Act (‘the tax issue’).
According to Mr Caldwell, following counsel’s comment, he made enquiries of the accountants for Czapp Pty Ltd and was advised that the loans were not taxable under div 7A. In preparation for the trial, however, the accountants advised that they were not experts in this area and suggested expert advice be obtained. Another firm of accountants gave equivocal advice and suggested that advice be obtained from a tax expert.
Advice was then sought from alternative counsel about the tax issue. Counsel required further information, which, according to Mr Caldwell, would take ‘some weeks’ to be obtained as much of it had been archived. Mr Caldwell deposed that, when that information was obtained, it would take ‘some months’ before the estate’s taxation liability, and the amount of any tax penalties and interest, became known. He deposed that ‘it may be that there is no asset of the Estate that will be available for distribution to the beneficiaries of the Estate.’
The defendants’ application for an adjournment of the trial became a vehicle for further negotiations. The proceeding was settled and the parties entered into terms of settlement. In summary, the parties agreed that the plaintiff would receive all the net assets of the estate once the tax issue was resolved.
By the terms of settlement, the parties agreed as follows:
1The Parties will make application for consent orders to give effect to these terms of settlement.
2From the assets of the Estate of the Deceased, other than those assets identified in clause 3 and 4 of the will and any shares held by the deceased, the Defendants agree to pay to the Plaintiff out of the Estate the net proceeds of the Estate (‘the settlement sum’) following payment of all lawful liabilities and, if requested to do so by the Plaintiff, in satisfaction of the settlement sum or part thereof will transfer to the Plaintiff the properties or some of them, set out in clause 5(a), 5(b), 5(c) and 5(d) of the Will provided that they are not required to be sold to meet the liabilities of the estate.
3The Settlement Sum shall be paid to the Plaintiff’s Solicitors, Messrs MNG Lawyers, on or before 29 November 2013 or some other date mutually agreed by the parties in writing or by order of the Court.
4The plaintiff acknowledges that the defendants’ costs of and incidental to the proceeding are to be paid out of the estate such costs to be executors costs on an indemnity basis to be taxed if not agreed.
5The Defendants agree to undertake to the Court that they will expeditiously do all things reasonably necessary to verify and determine by 22 November 2013 to their reasonable satisfaction whether the Estate is subject to any payment of tax under Division 7A of the Income Tax Assessment Act in respect of the loan identified in the Inventory of Assets, dated 27 October 2010, allegedly owing by the Estate.
6In the event that the Defendants [have] not been able to verify and determine by 22 November 2013, to their reasonable satisfaction, whether the Estate is subject to any payment of tax under Division 7A of the Income Tax Assessment Act in respect of the said loan, unless otherwise agreed to in writing by the parties, the Defendants may apply to the Court and seek an extension of time to pay the settlement sum on proper material and making full and frank disclosure of all steps undertaken by them to verify whether any said tax is payable and seek an extension of time or further time from the Court in order [to] carry out the above said verification and determination.
7The defendants will provide to the Plaintiff’s solicitors a copy of any advice or ruling they receive in respect of the Estate’s liability in respect of the said tax within 7 days of receipt of such advice or ruling.
8The Defendants will by 7 June 2013 provide to the plaintiff’s solicitors:
(a)A copy of all relevant documents identifying how the said loan is calculated and made up.
(b)A schedule of all costs, disbursements and other liabilities incurred or owing by the Estate to date.
(c)A schedule of the Defendants’ costs of and incidental to this proceeding.
9The Plaintiff agrees to accept the Settlement Sum in substitution for his entitlement under the will of the deceased and in full and final settlement of this present claim pursuant to the provisions of Part IV of the Administration and Probate Act 1958 for further provision to be made for his maintenance and support out of the estate of the Deceased.
10Upon payment of the Settlement Sum or proof to the Plaintiff’s reasonable satisfaction that there are not assets available to pay the settlement sum:
(a)the Plaintiff agrees that he will thereupon release and forever discharge the Defendants in their representative capacity as Executors and the Estate of the Deceased, from all actions claims and demands which he, now has, or may hereafter have, in respect of the claim in this proceeding under Pt IV of the Administration and Probate Act 1958. [2]
[2]Emphasis added.
On the same day, Williams J made orders by consent in the terms of paragraphs 2, 3, 7 and 8 of the terms of settlement, on the basis of undertakings given by the defendants to the effect of paragraphs 5 and 6 of the terms of settlement.
The first undertaking required the defendants to act expeditiously in dealing with the tax issue.
The second undertaking, reflecting paragraph 6 of the terms of settlement, is expressed in apparently permissive language: that the defendants ‘may’ apply to the Court to extend the time to pay the settlement sum. However, on a proper interpretation of the terms of settlement and the undertakings in their context, it is clear that the defendants were agreeing and undertaking that they would apply to the Court for an extension of time to pay the settlement sum if the tax issue was not resolved by 22 November 2013, and that they would do so both expeditiously and with full and frank disclosure of relevant facts. In other words, reading the terms of settlement and the undertaking as a whole, ‘may’ should be interpreted as ‘will’. No other interpretation makes sense.[3]
[3]Cf Fitzgerald v Masters (1956) 95 CLR 420, 426-7; Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (LexisNexis Butterworths, 5th ed, 2015) [27-100].
As appears below, the defendants did not comply with their undertaking to expeditiously do all things reasonably necessary to determine whether the estate was subject to tax under div 7A. Further, when they had been unable to resolve the tax issue by 22 November 2013, the defendants did not, as they ought to have done, apply to the Court and seek an extension of time to determine the tax issue and pay the settlement sum.
By summons filed 4 March 2014 the plaintiff sought specific performance of the terms of settlement in the proceeding and corresponding orders made by Williams J. The plaintiff served a notice to produce on the defendants shortly prior to the first hearing, requiring the defendants to produce documents relevant to their conduct in pursuing the tax issue and in otherwise performing the terms of settlement. The parties’ costs of the summons and notice to produce have been reserved to date.
There are three remaining issues for determination:
(1) Should the defendants be removed as executors? If so, who should be appointed to administer the estate in their place?
(2) Who should pay the costs of the 4 March summons and the notice to produce?
(3) Are the defendants entitled to have their costs, and any costs they are ordered to pay to the plaintiff, paid out of the assets of the estate?
In assessing the defendants’ conduct for these purposes, six background factors bearing on their knowledge and responsibilities should be kept in mind.
First, when the terms of settlement were entered into, the defendants had been in office as executors for nearly three years since August 2010. Further, Ms Cassar had been in control of the deceased’s financial affairs since March 1999. In these circumstances, the defendants knew that the estate owed a significant debt to Czapp Pty Ltd, and that payment of that debt would likely require sale of some or all of the estate’s real property.
Second, the defendants had known about the tax issue since early March 2013, and thus had known of the consequent need to resolve the issue expeditiously. When the terms of settlement were signed, the defendants had done nothing which had in fact progressed the issue in nearly three months. They had sought advice from two accounting firms who were not experts in the field, and had been told by counsel that further documents were needed before he could advise. In the context of the trial listed for 28 May 2013, there had already been significant delay.
Third, the defendants’ conduct must be assessed in the context that they are defendants in a civil proceeding, and thus subject to the overarching obligations in the Civil Procedure Act 2010; in particular, the obligations in s 25 to act promptly and minimise delay, in s 22 to use reasonable endeavours to resolve disputes, in s 24 to ensure that costs are reasonable and proportionate, and in s 26 to disclose relevant critical documents.
Fourth, the defendants undertook to the plaintiff and the Court to act expeditiously to resolve the tax issue. They also undertook that they would apply to the Court and make full and frank disclosure if they could not resolve the tax issue by a particular time, namely 22 November 2013.
Fifth, the defendants are not only litigants. They are executors required to ‘exercise the same care as an ordinary, prudent person of business would exercise in the conduct of that business were it his or her own’.[4]
[4]Breen v Williams (1996) 186 CLR 71, 137; Nolan v Collie (2003) 7 VR 287, [51]-[53].
Sixth, the defendants knew that the plaintiff was in significant financial need.
Before considering the issues for determination, it is necessary to set out the relevant factual narrative following the settlement of the proceeding and the consent orders made by Williams J.
Factual narrative
Between 30 May 2013, the date of the terms of settlement and consent orders, and 28 August 2013, the defendants spoke with counsel briefed to advise on the tax issue and located some relevant documents. The material requested by counsel on 12 June 2013 was provided to him on 28 August 2013. Mr Caldwell deposes that, on that day, he sent a letter to the plaintiff’s solicitors advising that counsel had been briefed to advise on the tax issue. By this time, three months had already elapsed.
Between September and November 2013, the defendants telephoned and sent email correspondence to counsel ‘chasing his advice’. Counsel advised that he had lost the documents and asked that they be re-sent to him. Counsel was provided with further copies on 28 November 2013. By this time, the remaining three months to resolve the tax issue had passed.
By letter to Mr Caldwell dated 27 November 2013, the plaintiff’s solicitors noted that the settlement sum was due for payment on the next day and that, if payment could not be made, the trustees were required to apply to the Court for an extension of time and provide reasons why additional time was required. In the absence of a satisfactory response, the letter foreshadowed an application by the plaintiff to the Court to enforce the terms of settlement and for an order that the costs be paid by the defendants personally.
The defendants did not pay the settlement sum, apply to the Court for an extension of time, or provide a satisfactory response. Instead, Mr Caldwell wrote to the plaintiff’s solicitor and advised that the issue was ‘complex’, he was waiting for counsel’s advice, and proposed that the date for payment of the settlement sum be extended by consent for three months, to 28 February 2014. This did not amount to full and frank disclosure, as required by the second undertaking.
Mr Caldwell deposed in his affidavit sworn 3 April 2014 that he did not make an application to the Court for an extension of time because he ‘anticipated’ the plaintiff would agree to the further three month delay and the plaintiff’s solicitors did not write and object to his proposal. Given the lack of information provided to the defendants, that anticipation was not reasonably based.
From this time, the defendants continued to chase counsel for his overdue advice. Counsel’s advice was finally received on 9 January 2014. It advised that, on the information available to counsel, it was unlikely that Mr Czapp would be deemed under div 7A to have received a dividend and, accordingly, the estate was unlikely to be subject to tax under div 7A. Counsel noted, however, that a more definitive opinion could be provided once enquiries were made into a number of matters on which he had not received instructions. Mr Caldwell deposed that such enquiries were made and that counsel was provided with further instructions on 21 January 2014 and asked to provide a final advice on the tax issue. The defendants then did nothing until 18 March 2014 when, for unexplained reasons, counsel returned his brief without providing the requested advice based on the results of the recommended enquiries, and declined a fee for his services.
In the meantime, the plaintiff, understandably, had had enough. The summons seeking enforcement of the terms of settlement and court orders had been issued on 4 March 2014.
The plaintiff’s summons and the return of counsel’s brief stirred the defendants to take a different course to satisfy themselves about the tax issue. On 21 March 2014, they sought the advice of accounting firm Moore Stephens. By this time, nearly 10 months had elapsed since the orders of Williams J and the giving of the undertakings. Payment of the settlement sum was nearly four months overdue.
The plaintiff’s summons was returnable on 3 April 2014. Two days before, on 1 April 2014, the plaintiff served a notice to produce documents on the defendants. At the hearing on 3 April 2014, Mr Caldwell served an affidavit endeavouring to explain the defendants’ conduct concerning the tax issue. Some documents relating to counsel’s brief and endeavours to have him complete it were produced at the hearing pursuant to the notice to produce, but most of those requested were not. The hearing of the plaintiff’s application and the defendants’ objections to the notice to produce were accordingly adjourned to 23 April 2014.
In his affidavit sworn 3 April 2014, Mr Caldwell endeavoured to explain the delay in resolving the tax issue. In summary, Mr Caldwell deposed that:
(1) it was necessary to investigate the circumstances surrounding the making of the Czapp Pty Ltd loans, in circumstances where there were no written agreements. This had taken ‘some time’;
(2) counsel had been guilty of delay in providing his initial advice, including by misplacing the documents and failing to comply with promises to provide the advice in a timely manner;
(3) although counsel had been provided with further documents, as requested in January 2014, his final advice was never completed and he returned the brief for unexplained reasons on 18 March 2014;
(4) in these circumstances, Moore Stephens had been requested to advise on the tax issue on 21 March 2014 and a conference had been held on 28 March 2014 to discuss the issue. Moore Stephens had also requested that further information be obtained before coming to a final view on the tax issue. He had made arrangements for a conference to be held in the next fortnight for the purpose of providing the requested information;
(5) he anticipated that, once the information was provided, Moore Stephens would be able to express a final view on the tax issue ‘shortly thereafter’;
(6) if Moore Stephens formed the view that the estate had a tax liability, an application would be required to be made to the Commissioner of Taxation to exercise his discretion to relieve the estate of the consequences of non-compliance with div 7A of Income Tax Assessment Act;
(7) in any event, it was not known which of the estate’s properties would need to be sold to satisfy the deceased’s liability for repayment of the Czapp Pty Ltd loans and any unpaid tax;
(8) the estate had a liability to pay Gregory’s costs of another proceeding, but Gregory had not put forward a bill of costs for the defendants to consider; and
(9) in all the circumstances, it was not possible to predict with any certainty when the settlement sum could be paid to the plaintiff.
On the day prior to the hearing before the associate justice, Mr Caldwell provided the plaintiff’s solicitors with a copy of a letter of advice from Moore Stephens dated 17 April 2014. The letter advised that the estate was probably subject to tax under div 7A. The letter also advised that the Commissioner had a discretion to disregard div 7A where its operation was attracted by an honest mistake or inadvertent omission by a private company or its shareholders, and recommended that further work be undertaken with a view to making an application for the favourable exercise of that discretion. The letter also advised that the trial balance of the Czapp Business Trust as at March 2013 showed a loan balance of $255,079 owed by the plaintiff personally (as well as other loans owed to the Trust by other family members). Moore Stephens recommended that they receive instructions to ‘approach this matter more holistically’, identifying all div 7A issues involving other family members and family entities. From this time, it appears that the defendants acted with reasonable expedition in instructing Moore Stephens and providing the information sought by them.
On 24 April 2014, an associate justice heard argument concerning the plaintiff’s notice to produce. The defendants briefed counsel to oppose production of any further documents. It was ordered that the defendants file and serve an affidavit of documents concerning seven categories of documents. Considering the conduct of the defendants to this time, and the plaintiff’s substantial success at the contested hearing before the associate justice, I am well satisfied that the notice to produce was a reasonable one in all the circumstances. The defendants’ opposition to it was unreasonable. They had undertaken to the Court to provide full and frank disclosure of all relevant information in the event that an extension of time was requested. Plainly, they had not done so. Their opposition to the notice to produce was largely in breach of the second undertaking. Moreover, they were executors and owed a fiduciary duty to account to the plaintiff about the estate, especially in circumstances where he was by then the only beneficiary and had a clear financial need to have the settlement sum paid as soon as possible.
The plaintiff was unsatisfied with the defendants’ conduct following their adversarial opposition to the notice to produce at the hearing before the associate justice. By letter dated 8 May 2014 they requested the defendants to resign as executors. By letter dated 9 May 2014, the defendants refused, and said any removal application would be opposed.
On 15 July 2014, the defendants wrote to the plaintiffs and advised that they had received advice that the estate did have a div 7A issue. The letter invited the plaintiff and his lawyers to meet with Moore Stephens and Mr Caldwell to obtain an understanding of the tax issue. The letter also stated that it had ‘become necessary to have all the loans to the various family members considered’ in the context of the likely tax investigation concerning the tax issue. This was clearly a reference to the plaintiff’s alleged debt of $255,079 referred to in Moore Stephens’ advice. As to those loans, I note that Ms Cassar, in her affidavit in opposition to the part IV application, challenged the plaintiff’s need on the basis that he had received ‘financial benefits from the Czapp Business [Trust]’ over the years to assist with his living expenses, and ‘would continue to be provided for by the Czapp Business Trust’. She did not disclose that these ‘benefits’ were loans repayable by the plaintiff. In light of the likely demand for the plaintiff’s alleged debt of about $255,000 to Czapp Pty Ltd as part of the proposed discussions, the plaintiff and his lawyers chose not to participate.
The further hearing of the plaintiff’s application for payment of the net proceeds of the estate returned to Court on 23 July 2014. Again, the defendants arrived at Court with an affidavit sworn that day endeavouring to explain their delay in finalising the tax issue, and concerning other issues preventing payment of the settlement sum. In that affidavit, Mr Caldwell deposed that, in his opinion, the defendants had ‘acted expeditiously and done all things reasonably necessary to determine in our reasonable satisfaction if the Estate is subject to a taxation liability under Division 7A.’ He explained that the matter was complex because it ‘required an investigation into the history of the various loans not only to the Estate but to each of the relevant individuals and companies’ and the obtaining of expert advice. Considerable focus was, again, put on counsel’s failure to provide timely advice and the unexplained return of counsel’s brief. Mr Caldwell also deposed that, prior to applying to the Commissioner to resolve the tax issue, each of the members of the Czapp family with loan balances owing to the Trust, including the plaintiff, would need to come to an arrangement for repayment of their loans. He noted that, to this end, ‘in principle’ agreements had been reached with every such member except for the plaintiff. The further hearing of the application was adjourned until 31 July, to enable further information to be collated and for the responsible accountant at Moore Stephens, Clive Bird, to attend before the Court and explain the current position concerning the tax issue.
On 23 July 2014, following the hearing, the plaintiff’s lawyers wrote to the defendants requesting copies of the documents referred to in the affidavit of documents filed by the defendants on 4 June 2014. The defendants did not respond to this request. They should have provided the documents sought in a timely way.
On 29 July 2014, Mr Caldwell swore another affidavit. He produced a copy of a further letter of advice from Moore Stephens dated 25 July 2014 and again endeavoured to explain the defendants’ delay concerning resolution of the tax issue. The letter from Moore Stephens repeated earlier advice that there was a potential div 7A issue, that the Commissioner has a discretion to disregard the operation of div 7A because of honest mistake or inadvertent omission, and that such discretion was more likely to be exercised where the taxpayer had taken appropriate corrective action following discovery of the matter. It was recommended that a joint application to the Commissioner for the favourable exercise of the discretion be made by the Czapp family and related business entities controlled by the family in respect of all intercompany loans by the entities to various Czapp family members over many years (as opposed to limiting the application to one on behalf of the estate). In his affidavit, Mr Caldwell deposed that the defendants had determined to accept this advice, although this would cause some delay in the making of the application and the Commissioner’s response. It was proposed that the application be made by 15 August 2014.
At the hearing on 31 July 2014, Mr Bird of Moore Stephens gave helpful evidence as to the current position concerning the tax issue. An opportunity was provided for him to be asked questions by counsel for both parties and Mr Bird advised that, having reviewed additional material and undertaken further work on the issues concerning the broader Czapp family, he no longer considered that approaching the Commissioner on behalf of the estate only would detrimentally affect the exercise of his discretion. The Court was satisfied that the tax issue was, by that time, being handled competently and with expedition. The Court ordered that, on behalf of the estate, an application to the Commissioner for the favourable exercise of the discretion be made no later than 15 August 2014 and be pursued with as much expedition as the circumstances allowed. The proceeding was adjourned until 7 November 2014, taking account of Mr Bird’s estimate that it should take about two months for the Commissioner to resolve the application. As events transpired, a little longer was required. On 2 December 2014, Moore Stephens advised that the application process had taken longer than envisaged, ‘due to the added complexity in this case of a deceased estate.’
The issue was, in fact, resolved on the next day. By letter dated 3 December 2014, the Australian Taxation Office advised Moore Stephens and the defendants that the Commissioner would exercise his discretionary power in a manner favourable to the estate ‘on the condition that a loan agreement is entered into and repayments of principal and compounded interest are made, to bring the loan up to date, prior to 30 June 2015’ (the ‘ATO condition’).
Remarkably, given the history of the matter, it was not until 15 January 2015 that the plaintiff and the Court were advised of the Commissioner’s favourable exercise of discretion.[5] Even then, a copy of the 3 December 2014 letter was not provided to the plaintiff or the Court. Instead, the plaintiff was informed by letter from Mr Caldwell of the favourable exercise of discretion and the ATO condition. When the matter came before the Court again on 9 February 2015, this position remained unremedied. At the hearing, the defendants produced a draft statement of final position for the estate, estimating that there would be a net estate of about $400,000 to be paid to the plaintiff once some or all of the estate’s real estate was sold, the Czapp Pty Ltd loans and compound interest were repaid in accordance with the ATO condition, and the Czapp Pty Ltd debt to the estate was paid following the death of the deceased’s widow. Neither the Court nor the plaintiff received particulars as to how the loan balance (including compound interest) was calculated. In these circumstances, the Court ordered that the defendants file and serve a copy of the advice from the ATO and a copy of any loan agreement prepared to satisfy the condition referred to in that advice. The Court also ordered that the defendants file and serve a final statement of financial position of the estate, including full particulars of how the loan balance from the estate to Czapp Pty Ltd was calculated and full particulars of the defendants’ costs of and incidental to the plaintiff’s summons filed 4 March 2014 and the notice to produce filed 1 April 2014.
[5]According to Mr Caldwell, the reason for the delay was that the 3 December 2014 letter referred only to the 2010 financial year, requiring Moore Stephens to make enquiries with the Commissioner. Mr Caldwell deposed that it was only in early 2015 that the ruling related to the entire period in question.
The remaining issues for determination were addressed at the hearing on 11 March 2015. The night before the hearing the defendants filed a further affidavit sworn by Mr Caldwell, which essentially collated information previously provided, repeated statements in his earlier affidavits and included some additional information. In particular, the affidavit disclosed that it remains for the defendants to sell sufficient assets (namely, some or all of the three properties at Phillip Island and the estate’s 20 per cent interest in the factory premises) to repay the Czapp Pty Ltd loans and compound interest prior to 30 June 2015, in accordance with the ATO condition. According to Mr Caldwell, the Phillip Island properties have been placed on the market for private sale since August 2014 at $190,000 each. The agent has proposed listing the properties for public auction if they are not sold by Easter.
As to the factory premises, I infer that the lack of goodwill between the parties has prevented agreement for Czapp Pty Ltd (or a related company controlled by Ms Cassar and her husband) to purchase the two one-fifth shares of the property owned by the estate and the plaintiff respectively (valued together at $604,000 according to the October 2010 Inventory and probably worth more now), which would be the most sensible course of action. A sale of these shares should be sufficient to pay the outstanding loan to Czapp Pty Ltd and compound interest, thus satisfying the condition attaching to the Commissioner’s exercise of discretion. If necessary, one or more of the Phillip Island properties could then be sold to fund payment of any other estate liabilities, and the plaintiff could then be paid the settlement sum, including by taking any unsold property in specie as the terms of settlement allow.
Alternatively, the three Phillip Island properties could be sold and settled and the plaintiff could apply to Victorian Civil and Administrative Tribunal (‘VCAT’) for a partition order requiring the factory premises to be sold and the proceeds divided into five equal shares.
Moreover, Ms Cassar acknowledges that the Czapp Business Trust has never paid rent to the owners of the factory premises. If rent were paid, the plaintiff and the estate would be entitled to two-fifths of the total amount. On this issue, it is relevant to note that Ms Cassar deposed that Loganside Pty Ltd (the trustee of her family trust) owns a property in Melton that it leases to Czapp Pty Ltd for a commercial rent, and that Czapp Pty Ltd also pays rent for the use of two other properties which are owned by Lodgecam Pty Ltd (the trustee of another Czapp family trust). She has not explained why no rental is being paid for the factory premises.
At the hearing on 11 March 2015, the defendants acknowledged that there was a real risk that the estate would be unable to meet the ATO condition, as this would require both the sale and settlement of real estate before 30 June 2015. Assuming that the ATO condition can be extended to allow for property sales to take place and settle and for the loans and other estate debts to Czapp Pty Ltd to be paid (all of which will likely take about six months from now) the plaintiff will not receive the settlement sum until nearly two years after the date agreed in the terms of settlement. Even if it be accepted that the date was optimistic and likely to require some brief extension, that is unfair to the plaintiff. If Moore Stephens or other competent accountants had been briefed to advise initially, the Phillip Island properties had been placed on the market earlier and actively marketed, and, in the interests of the estate, the defendants had applied for partition and sale of the factory premises, the plaintiff would likely have received the settlement sum well before now. The defendants’ delays have cost the plaintiff the use of the money in circumstances where he has real financial need.
Against this factual background, I proceed to consider the issues.
Should the defendants be removed as executors?
At the hearing on 23 July 2014, the plaintiff made an application for the removal of the defendants as executors and trustees of the estate. His counsel accepted, however, the Court’s observation that it was then preferable for the application to be determined following resolution of the tax issue to avoid the incurrence of unnecessary costs. Since that time, the defendants have been able to resolve the tax issue, applying Mr Caldwell’s familiarity with the issues and relying on the advice of Moore Stephens. Their reasonable costs of that exercise, including accounting fees, were properly incurred. The removal application, however, remained unresolved.
The Court allowed the plaintiff to proceed with the removal application at the hearing on 11 March 2015, noting that there was overlap in the factual issues relevant to the removal application and the remaining costs questions, and that the plaintiff’s submissions filed on 9 February 2005 made clear that the issue remained alive.
Section 34(1)(c) of the Administration and Probate Act 1958 gives the Court power to order the removal of an executor who is ‘unfit to act in such office’. As to trustees, courts of equity have asserted and applied, over many years, an inherent jurisdiction to remove a trustee.[6] Where an executor is unfit to perform the duties of trustee (if he or she is also appointed to that position), the court can exercise its inherent jurisdiction to address this issue.[7]
[6]Monty Financial Services Ltd v Delmo [1995] 1 VR 65, 73.
[7]Ibid 76.
In Monty Financial Services v Delmo,[8] Ashley J considered what ‘unfitness’ means within the context of s 34(1)(c) of the Act. His Honour examined a number of authorities concerning the meaning of removal of an executor on the basis of ‘unfitness’ to act. Of particular relevance to this case, his Honour found that the following meaning given to the word ‘unfit’ by Nathan J in Old Colonists Association of Victoria v Cox, whilst obiter, was persuasive:
Unfitness bears its ordinary common meaning, that is that the person is not fit, adapted or suited to continue as an administrator, or is not deserving of continuing as an executor. It does not relate to the physical health of the executor, but relates to all matters which effect (sic) the capacities of a person to perform an executor’s tasks. If the attitude of mind is so lethargic that the tasks imposed are not performed with proper expedition or with attention to detail, then unfitness may become manifest.[9]
[8][1995] 1 VR 65.
[9]Ibid 83.
Ashley J concluded that unfitness could be demonstrated by misconduct or neglect of duty in the administration of the estate constituted by:
matters such as unwarranted delay in administration of the estate, failure to communicate with beneficiaries, failure to account, and unreasonable delay in paying beneficiaries their entitlement. … I find it impossible to accept that serious dereliction of duty as an executor does not make that person unfit to hold the office. It cannot matter whether the dereliction is born of intent, of carelessness, or of incompetence. In each case the actual or potential deleterious effect upon the estate and the beneficiaries is the same.[10]
[10]Ibid 73 (emphasis added).
Ashley J also concluded, setting out a number of carefully considered reasons, that although there was very little direct authority concerning the matter, ‘unfitness to act does comprehend a situation in which an executor has a conflict of duty and interest in carrying out his executorial duties’,[11] but not every conflict of duty and interest should result in removal of an executor.[12]
[11]Ibid 82.
[12]Ibid 83.
Ashley J’s analysis of the authorities in Monty Financial Services v Delmo has since been repeatedly approved, including by the Court of Appeal in Dimos v Skaftouros.[13]
[13](2004) 9 VR 584, 592 [12] (Winneke P), 608 [114] (Dodd-Streeton AJA) (Batt JA agreeing with Winneke P and Dodds-Streeton AJA).
In Miller v Cameron, Dixon J made the following statements of principle concerning the Court’s inherent power to remove trustees:
The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised.[14]
[14](1936) 54 CLR 572, 580-1 (Dixon J) (emphasis added). See also 575 (Latham CJ), 579 (Starke J, who emphasised that ‘the only guide is the welfare of the beneficiaries’).
The overarching principles governing the exercise of the Court’s discretion to remove executors were described by Winneke P in Dimos v Skaftouros in the following terms:
The Court will not lightly exercise its discretion its discretion to remove a person who has been chosen by the testator as the personal representative. However, it is the welfare of the beneficiaries and the protection of their interests in the estate which must be regarded by the court as the paramount considerations in exercising the discretion.[15]
[15](2004) 9 VR 584, 592-3 [13] (emphasis added).
The plaintiff relies on the following broad grounds for the removal of the defendants as executors and trustees of the estate:
(1) The defendants opposed the plaintiff’s part IV application on a misconceived basis. The plaintiff contends that the affidavits filed in the application clearly demonstrated that he was in a position of sustained financial need and that the other beneficiaries were not in such a position. As events transpired, the parties agreed that all of the estate’s net assets should be paid to the plaintiff. By opposing the plaintiff’s part IV application, the defendants unnecessarily caused the estate to be diminished and wasted legal costs. Although the terms of settlement provide that the defendants’ costs of the application are to be paid from the estate on an indemnity basis, this issue nevertheless remains relevant in determining whether the defendants should be removed as executors.
(2) The defendants did not act expeditiously to determine the estate’s tax liability. As described above, such failure was in circumstances where the defendants knew about the tax issue (and the need to resolve it expeditiously) from early March 2013, and undertook to do so to the Court on 30 May 2013.
(3) The defendants delayed the sales of the estate’s real estate in circumstances where it should always have been apparent to them that the sales were required to repay the Czapp Pty Ltd loans. Mr Caldwell’s 3 April 2014 affidavit indicated that the defendants were aware of the need to actively pursue sales of the real estate to enable repayment of the Czapp Pty Ltd loans. Despite this, they did not put the Phillip Island properties up for sale until August 2014, have not concluded an agreement regarding the estate’s share in the factory premises, and none of the properties have been sold to date.
(4) The defendants have consistently withheld information from the plaintiff and the Court that was clearly relevant to the resolution of the tax issue and administration of the estate, only providing information when ordered to do so. If the defendants had volunteered all such information, the estate likely would not have incurred anything like the large amount of legal costs that have been incurred in relation to the 4 March 2014 summons and notice to produce. The defendants’ opposition to the notice to produce was unreasonable in circumstances where they had not volunteered the necessary information. This conduct further wasted the assets of the estate, and is consistent with the defendants having adopted an adversarial attitude towards the plaintiff both before and after settlement of the part IV proceeding.
(5) The defendants ought to have complied with the plaintiff’s request to resign as executors on 8 May 2014, instead of opposing the request (and the plaintiff’s resulting application to the Court) and incurring unnecessary legal costs in further depletion of the estate. At the time of the initial request, the plaintiff was the sole beneficiary of the estate and there was clear antagonism between the parties.
(6) The defendants have a conflict of interest in continuing as executors and that should have been apparent to them when they were asked to resign:
(a) First, Ms Cassar’s conduct in managing Czapp Pty Ltd and her father’s affairs exposed the estate to the potential div 7A tax liability, including by failing to keep proper records, thus causing the incurrence of unnecessary legal and accounting costs to obtain the Commissioner’s exercise of a favourable discretion.
(b) Second, because Mr Caldwell has been the solicitor for both Ms Cassar and Czapp Pty Ltd for many years, he is not independent and his only interest is in earning and recovering his own legal fees in connection with the administration of the estate.
(c) Third, although not expressly relied on by the plaintiff in argument, it is apparent from the affidavits filed in the part IV application that Ms Cassar and her husband’s interests as directors of Czapp Pty Ltd are: (1) to recover the Czapp Pty Ltd loans and interest from the estate; (2) to purchase the estate’s one-fifth share in the factory premises for the lowest possible price; and (3) if past or future rent is payable by Czapp Pty Ltd for its use and occupation of the factory premises, to pay as little rent as possible to the estate for its one-fifth share. As to the last factor, I note that it is in Ms Cassar’s interest to defer any agreement to buy-out the estate’s share in the factory premises and, instead, to seek the sale of some or all of the Phillip Island properties to enable repayment of the Czapp Pty Ltd loans and interest. This interest clearly conflicts with the interests of the plaintiff as the sole beneficiary, who is being deprived of rental income from the factory, and who could repay the estate’s debt by disposing of the two one-fifth shares of the factory premises owned by him and the estate, perhaps without having to force the sale of the Phillip Island properties.
In short, in refusing to resign when they were asked, the plaintiff contends that the defendants have been supporting their own interests, not those of the trust estate.
The plaintiff informed the Court of his intention to have a new trustee investigate the conduct of the defendants in their management of the estate and consider whether an action should be brought against them for, among other things, waste. In this regard, the plaintiff referred to the Administration Account filed by the defendants on 16 February 2015, and the defendants’ particulars of their legal costs of the 4 March summons and notice to produce. These documents demonstrate that the overwhelming majority of the estate’s cash has been spent on legal fees. About $277,000 was paid as at 29 July 2014. Further legal fees of $35,000 were incurred until 9 February 2015. I estimate the costs of the hearing on 11 March 2015 (at which the defendants were represented by senior and junior counsel instructed by Mr Caldwell) at about $20,000 based on other disclosed fees. In all, legal fees of about $332,000 have been incurred in respect of an estate valued at about $828,000 in the 27 October 2010 Inventory. Even if the costs of the 4 March summons, the notice to produce and the removal application are excluded, the legal costs total about $257,000.
The defendants oppose the removal application for the following reasons:
(1) They were entitled to defend the plaintiff’s part IV application. No unreasonableness has been demonstrated and, in any event, their costs of opposing the application are, by agreement in the terms of settlement, to be paid from the estate. While the costs issue was agreed, I do not accept that the defendant’s opposition to the plaintiff’s application was reasonable or proportionate. Reading the affidavits as a whole, it was clear that the plaintiff was entitled to substantial provision from the estate and this should have been obvious to the defendants. The application should have been settled promptly without incurring large legal costs and the associated delay.
(2) Absent agreement between the parties, an application for an extension of time to pay the settlement sum was necessary. In terms of costs, there is no difference between whether the application was initiated by one party or the other. The necessity for the hearing arose out of the terms of settlement and not from any default by the defendants. In this regard, senior counsel noted that it must have been apparent at the time of settlement that it was most unlikely that the terms would be complied with, because the undertaking envisaged the tax issue being resolved by November 2013, and that also required the sale of some or all of the properties by that time. I do not accept that this is an answer to the removal application. The defendants were obliged by the second undertaking to themselves apply to the Court for an extension of time, on the basis of full and frank information. Had they done so, their costs of the application would have been greatly reduced.
(3) The filing of the 4 March summons, seeking specific performance of the orders — when it must have been apparent that those orders could not be complied with at that time — was not an appropriate way of addressing the plaintiff’s complaints and had resulted in the incurrence of unnecessary costs. It was contended that the Court’s intervention to resolve the tax issue was unnecessary as the matter was, by that time, well in hand and the parties would now be in the same position if the Court had not been asked to intervene. Instead of seeking specific performance of something that could not be done, the plaintiff’s solicitor ought to have engaged properly with the defendants and gained input into such matters as the sale of properties. I do not accept that contention either. Faced with delay and lack of information, it was appropriate for the plaintiff to bring the matter before the Court to enforce his rights. A summons seeking to enforce the terms of settlement and Court orders, supported by a notice to produce documents that the defendants ought to have volunteered in support an extension of time application, was an appropriate vehicle to enforce his rights.
(4) The defendants were entitled to argue before the Court that the scope of the notice to produce was too wide. For the reasons given above, I do not accept that submission. The defendants also contend that the plaintiff served the notice to produce two days before the date on which it was returnable, which was not a reasonable time. I do not accept that this is a relevant factor, as the defendants unreasonably objected to producing any further documents at the hearing before the associate justice.
(5) The defendants did act expeditiously with respect to the tax issue. Particular reliance was placed upon the failure of counsel to provide timely advice on the tax issue which, they submit, accounted for most of the delay. I do not accept that the defendants are entitled to rely on counsel’s delay as excusing a delay of about nine months. Given the six factors identified above, including the plaintiff’s known financial distress, and the need for the estate to sell trust property to repay loans to the deceased, the utmost expedition was required. In my opinion, the onus was on the defendants to establish that they acted expeditiously. They have not done so. In all the circumstances, the defendants ought to have withdrawn the brief to counsel when it became apparent that he was not attending to the task in an efficient and timely manner. Counsel’s loss of documents showed disorganisation and a lack of efficiency and expedition. There was no reason why more competent counsel could not have been briefed or, as was finally done, a reputable firm of accountants engaged to resolve the tax issue.
(6) The defendants also contend that part of the delay can be attributed to the plaintiff’s lawyers’ failure to engage in constructive discussions with Mr Caldwell regarding the tax issue and the sale of the properties. They refer in particular to his lawyers’ refusal to take up Mr Caldwell’s offer in his letter of 15 July 2014 to meet with him and Moore Stephens to discuss the tax issue and identify which of the estate’s properties the plaintiff desired be sold. I do not accept these contentions. By the time of the request to discuss the tax issue and property sales, the defendants ought to have already resigned in accordance with the plaintiff’s request in May 2014. Further, it was not for the plaintiff to sort out the estate’s tax issues — the defendants had agreed to do that expeditiously and it was unnecessary for him to be involved and incur legal costs by attending the proposed meeting.
(7) The defendants have acted expeditiously to sell the estate’s properties, so as to enable the loans from Czapp to be repaid and bring an end to the tax issue. They contend that the evidence establishes that the Phillip Island properties have been on the market for private sale since August 2014 and that, given they are vacant lots in a holiday region, there is no active market for them. Further, the defendants contend that they cannot be criticised for not selling the Phillip Island properties, because the plaintiff has not requested them to do so or complained that they have not done so. I do not accept that the mere placing of these properties with a real estate agent amounts to expeditious steps to sell these properties. The need to sell property to pay the loans was identified by Mr Caldwell in his 3 April 2014 affidavit. Since then, the peak holiday period of Christmas/New Year, during which sales of real estate in holiday regions are most often made, has passed without any evidence of active marketing or auctions. Moreover, it was not for the plaintiff to tell the defendants what to do in order to comply with the terms of settlement.
(8) The tax issue has now been effectively resolved and the properties are on the market for sale, so it would be inappropriate now to replace the defendants with administrators who are likely to charge higher fees and cause the estate to incur greater costs. I also reject this submission. There remains much to be done before the estate is concluded, including extending the time for compliance with the ATO condition, selling the Phillip Island properties, negotiating a sale of the estate’s one-fifth share in the factory premises (or applying to VCAT for a partition order and judicial sale), investigating whether the estate has valid claims against Czapp Pty Ltd for rent in respect of the factory premises, investigating the conduct of the defendants as executors in relation to waste and other issues, and commencing such proceedings, if any, as the new administrator may be advised as a result of such investigations.
The defendants advanced no substantial argument concerning their conflicts of interest. They contended only that there was no proof that their personal interests gave rise to conflicts ‘of a kind likely to effect the efficient and satisfactory administration of the estate’.[16] I do not agree. The history of this case demonstrates otherwise. However, as appears below, I would in any event remove the defendants as executors absent their conflicts of interest.
[16]They referred to Manocchio v Wilson [2012] VSC 76, [38 (Habersberger J).
In all the circumstances, I consider that the defendants should be removed as executors and trustees of the estate on the basis of their unfitness to act in such offices. The defendants have neglected their duties in administering the estate by:
(1) failing to resolve the plaintiff’s part IV application expeditiously and in a cost-effective manner;
(2) failing to deal with the tax issue expeditiously;
(3) withholding information from the plaintiff concerning issues relevant to the administration of the estate, including breaching the second undertaking and their unreasonable opposition to the plaintiff’s notice to produce;
(4) their delays in selling the Phillip Island properties and/or arranging the sale of the estate’s interest in the factory premises; and
(5) their adversarial attitude throughout this proceeding.
These matters in combination are, in my opinion, sufficient to justify removing the defendants as executors. If not, that is certainly the case when their conflicts of interest, as discussed above, are taken into account.
In all of the circumstances, the welfare of the plaintiff as the sole beneficiary of the estate would not be served by the defendants’ continued administration of the estate. The fact that the administration is coming to an end does not preclude the removal of an existing executor and trustee.[17]
[17]In Dimos v Skaftouros (2004) 9 VR 584, the executor criticised the trial judge for failing to take into account that the administration was almost complete. The Court of Appeal at 618 [167] noted that the transfer of property was not complete at the time of the trial and that the trial judge’s approach was informed by his conclusions as to the trustee’s antagonism to the beneficiaries.
Who should pay the costs of the 4 March summons and the notice to produce?
As noted above, the final two issues concern costs. I will deal first with the costs of the plaintiff’s summons, the defendant’s opposition to the notice to produce, and the costs of the removal application. For the reasons given above, the plaintiff was justified in bringing the summons, serving the notice to produce, and seeking to remove the defendants as executors. The defendants must pay the plaintiff’s costs of these issues. Further, they should pay those costs on an indemnity basis. Special circumstances have been demonstrated by the defendants’ refusal to resign when they clearly ought to have done so, by their breach of the second undertaking, and by their adversarial approach to providing information to a sole beneficiary, especially in relation to their objection to the notice to produce.
I turn to consider the remaining costs issue.
Are the defendants entitled to have their costs, and any costs they are ordered to pay to the plaintiff, paid out of the assets of the estate?
The relevant principle to be applied is that a trustee is entitled to indemnification for all costs and expenses incurred in relation to the trust estate which have been ‘properly incurred’. The principle was discussed by Ormiston JA (Batt and Vincent JJA agreeing) in Nolan v Collie,[18] where his Honour said the test can be framed in the negative — a trustee is entitled to indemnification for all costs and expenses which were ’not improperly incurred’.[19] In applying the test, the Court considers the act giving rise to the particular cost or expense and the duty with which the trustee was obliged to comply.[20] Indemnification may be refused where the trustees have acted beyond power, in bad faith or exercised power ‘with an absence of the care and diligence that a person of ordinary prudence should exercise’.[21] The test is primarily concerned with the objective standard of ordinary diligence and care, which should be applied ‘objectively but not over-zealously’, and ‘mere errors of judgment’ should not deny the right to indemnification.[22]
[18](2003) 7 VR 287, 306-8 [51]-[53].
[19]Ibid [51], adopting the proposition of Lindgren J in Re Beddoe [1893] 1 Ch. 547, 558 that the words ‘properly incurred’ are equivalent to the words ‘not improperly incurred’.
[20]Ibid.
[21]Ibid [53].
[22]Ibid [53].
In the context of legal proceedings, trustees are usually indemnified from a trust fund for legal expenses incurred in connection with the administration of the trust unless, in the course of the litigation, they have acted unreasonably, or for their own benefit rather than for that of the trust (for instance, through their own misconduct or by breach or culpable or gross neglect of duty[23]). Accordingly, a trustee’s lack of success in a proceeding does not automatically deny them reimbursement from the trust fund. The governing question is whether the costs were properly incurred in the administration of the estate.[24]
[23]See Tomasevic & Anor v Jovetic & Ors (No 3) [2012] VSC 558. This prima facie position is reflected by r 63.26 of the Supreme Court (General Civil Procedure) Rules 2005 and s 36(2) of the Trustee Act 1958.
[24]Dimos v Skaftouros (2004) 9 VR 584, 617 [165], referring to National Trustees Executors Agency Company of Australasia v Barnes [1941] 64 CLR 268.
In Miller v Cameron, Latham CJ noted that:
as a rule, a trustee is allowed his costs out of the trust estate if his conduct has been honest, even though it may have been mistaken. In the ordinary case a trustee brings or contests legal proceedings on behalf of the trust and not on his own behalf. … The position is admittedly different in a case of misconduct. In this case there has, however, been no misconduct in the management of the trust estate.[25]
[25](1936) 54 CLR 572, 578-9.
In that case, although not pleaded, there was evidence tending to establish misconduct by the trustee, who was the defendant in the case. In these circumstances, Latham CJ stated:
his refusal to resign in all the circumstances of the case has resulted in legal proceedings which ought to have been avoided. The defendant would have acted wisely and properly in resigning as soon as he was asked. In defending this action and in prosecuting this appeal the defendant has been representing and supporting his own interests and not those of the trust estate. He has failed to show that his interests coincide with the interests of the trust estate. In such a case I consider it quite proper that he should pay the plaintiffs' costs of the action and of the appeal to this Court.[26]
[26]Ibid 579.
The plaintiff contends that the same factors which justify removal of the defendants as executors of the estate, as discussed above, demonstrate that the defendants have improperly incurred legal costs in defending the 4 March summons, the notice to produce and the removal application. In response, the defendants repeat their arguments in opposition to the removal application.
For the reasons given above, the defendants’ opposition to the 4 March summons and notice to produce was unreasonable and unnecessary. Once the issues were brought before the Court, the defendants should have done nothing other than act promptly and provide full and frank disclosure as to all matters surrounding the tax issue, including the related issues concerning necessary sales of real estate, and provide the Court with a realistic estimate of the time by which the net assets of the estate could be finalised and paid or transferred as the settlement sum under the terms of settlement. Instead, they briefed counsel to oppose the notice to produce and have provided relevant information in an incremental, repetitive and haphazard way, usually by late affidavits filed on the eve or day of hearings. It was unnecessary for counsel to have been briefed on either the summons or notice to produce, as Mr Caldwell is a solicitor and could have himself appeared and simply provided the relevant information.
If the defendants had acted promptly, as required, their costs would have been far less and it is unlikely that the plaintiff would have incurred anything like the amount of costs that have been incurred in relation to his summons and notice to produce.
The above circumstances show that, in their conduct since entry into the terms of settlement in 2013, the defendants were not representing and supporting the interests of the estate. They were acting in a contentious manner as if there was still an unresolved dispute with the plaintiff when, in fact, he was the sole beneficiary of the estate. Further, I infer that Ms Cassar was acting to either deprive the plaintiff of his entitlement or to delay its provision for as long as she could. Such conduct has caused costs to be unnecessarily, and thus improperly, incurred.
For these reasons, the defendants are not entitled to indemnity from the estate for their liability for the plaintiff’s costs, or for their own costs, of and incidental to the 4 March summons, the notice to produce and the removal application.
Who should be appointed as administrator?
Upon removal of the defendants as executors of the estate, it will be necessary to appoint an administrator to take their place. In argument, it was suggested that State Trustees could be appointed. I think that would cause unnecessary costs in the context of this estate. The just and most cost efficient course would be to appoint the plaintiff as the administrator of the estate. He can then take control of his own destiny and resolve the remaining issues in his own interests, unburdened by the conflicts which affect the defendants, particularly Ms Cassar. The plaintiff can take legal and accounting advice as he sees fit. The Court expects the defendants, as executors appointed by the Court and, in Mr Caldwell’s case, as a solicitor and officer of the Court, to forthwith take all steps reasonably necessary to provide all relevant information and estate assets to the plaintiff as administrator.
I will hear the parties as to the form of orders.
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