Gatsios Holdings v Nick Kritharas Holdings

[2002] HCATrans 451

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S129 of 2002

B e t w e e n -

GATSIOS HOLDINGS PTY LIMITED

Applicant

and

NICK KRITHARAS HOLDINGS PTY LTD (IN LIQUIDATION)

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 5 NOVEMBER 2002, AT 11.29 AM

Copyright in the High Court of Australia

MR P.L.G. BRERETON, SC:   May it please the Court, I appear with my learned friend, MR D.P.M. ASH, for the applicant.  (instructed by Conway Leather Shaw)

MR M.B. EVANS:   May it please the Court, I appear for the respondent.  (instructed by the Australian Government Solicitor)

MR BRERETON:   May it please the Court, these proceedings so far have produced from four judges of the Supreme Court of New South Wales four different answers to the question, “What is the correct test for determining when a trustee who incurs liability to a third party by reason of contravention of the Trade Practices Act is or is not entitled to indemnity from the assets of the trust.

GLEESON CJ:   That might just mean there are four different reasons why you were wrong.

MR BRERETON:   But one of those reasons, that adopted by the trial judge, would hold that I was correct.  There are, therefore, arguably three different reasons inconsistent with years of authority as to why I am wrong.

GUMMOW J:   Just a minute.  Does the evidence disclose the connection between Gatsios Holdings and Nick Kritharas Holdings, these two companies?

MR BRERETON:   The relationship ‑ ‑ ‑

GUMMOW J:   They are successive trustees, are they not?

MR BRERETON:   Exactly, your Honour.  Gatsios Holdings is the new trustee.

GUMMOW J:   Yes, I know, but are they under the same control?

MR BRERETON:   I think there is no evidence as to that, your Honour.

GUMMOW J:   And these contraventions of the Trade Practices Act were in connection with what business transactions?

MR BRERETON:   The marketing of franchises for the supply of packaging of the goods.

GUMMOW J:   So the benefit, to use that term, of those transactions flowed into the trust?

MR BRERETON:   That may well be so, your Honour, and if the beneficiaries or if the trust was seeking to obtain relief, that might be very relevant to whether some condition as to relief ought to be imposed.  It, of course, is not seeking that.  It is simply resisting a claim by the trustee to be indemnified as to the trust assets.

GUMMOW J:   Well, it has had the benefit and it will not take the burden.  That is another way of looking at it.

MR BRERETON:   It has never been given the opportunity to state whether it will take the burden.  Now, in short ‑ and I will come to the detail on this in a moment ‑ the four different tests so far enunciated are first by the trial judge that the test is whether the trustee was personally at fault.

GUMMOW J:   I am sorry to hold you up, Mr Brereton.

MR BRERETON:   Not at all, your Honour.

GUMMOW J:   But judgment that was recovered in the Federal Court was by the ACCC, was it not?

MR BRERETON:   Yes, your Honour.

GUMMOW J:   They are not a party to this proceeding?

MR BRERETON:   They are not, your Honour.

GUMMOW J:   I know you did not constitute it, the suit, but it is odd because if there was any right of indemnity it would be secure, would it not?

MR BRERETON:   It would be subject to a charge.

GUMMOW J:   And subrogated.

MR BRERETON:   Yes, your Honour.

GUMMOW J:   So these declarations are not worth much if they do not bind the ACCC because it owns it.  It owns the right really.

MR BRERETON:   It would seem, your Honour ‑ and your Honour can draw inferences from the identity of the solicitor for the plaintiff in the proceedings below and for the respondent in this Court ‑ that presumably, although the proceedings have been brought in the name of the former trustee, that they have been brought pursuant to some right of subrogation because it is the Australian Government Solicitor that it is on.

Now, so far as the four tests are concerned ‑ and I will need to elaborate on each of these ‑ essentially the trial judge Justice Hamilton said that the test was whether the trustee was personally at fault.  Essentially, we embrace what the trial judge said and submit that it is endorsed by years of decisions although not many of them.

Secondly, Justice Meagher in the Court of Appeal, who gave the principal judgment there, said that the trustee would be disentitled from its indemnity only if it acted in breach of trust or criminally or fraudulently.

Thirdly, the President of the Court of Appeal who essentially concurred with Justice Meagher subject to a very important qualification, said that the trustee was disentitled from indemnity if it was unjust in the circumstances for the trust assets to take the burden of the consequence of the respondent’s conduct.  That, with respect, is a palm tree or chancellor’s foot test which replaces a statement of principle in the old authorities with, in essence, a discretion of the yardstick and fourthly, by the Chief Justice, that the trustee was disentitled from indemnity only in a case of violation or culpable neglect of its duty, although his Honour added a rider relevant to breach of a trustee’s duty of care and diligence, vis-à-vis, the beneficiaries.

May I begin then, against that background, by going to the findings that were made as to the quality of the defaulting trustee’s conduct because this is the subject of ‑ ‑ ‑

GUMMOW J:   What do you say the principle is?

MR BRERETON:   The principle is as articulated in Scott on the Law of Trusts, that a trustee is entitled to be indemnified in respect of liabilities incurred in the proper performance of the trustee’s duties and the proper exercise of its powers and the converse of that is that it will be disentitled in the case of a liability in tort or quasi‑tort, for want of a better word, if the conduct was reckless or improper or otherwise than in the ordinary course of business or ‑ and this is the critical point ‑ if the trustee did not act with due diligence and reasonably or was otherwise personally at fault.            So at the heart of our submissions is the concept of personally at fault.  The quality of the conduct to be ‑ ‑ ‑

GLEESON CJ:   That would include negligence?

MR BRERETON:   Personal negligence, as distinct from negligence by an agent, yes, your Honour.  Now, if we then go to page 4 of the appeal book, the findings of fact were largely based on the findings made by Justice Tamberlin in the Federal Court.

GLEESON CJ:   When you say largely based, I thought I saw somewhere that the case was conducted on the basis that your side just tendered the judgment of Justice Tamberlin.

MR BRERETON:   I should say the findings of fact were based on it.  They extend slightly beyond it because Justice Hamilton drew some inferences from what Justice Tamberlin had found.

GLEESON CJ:   And that is one reason we do not know the relationship between Gatsios and Kritharas.

MR BRERETON:   Yes, and as a matter of principle, that relationship can make no difference.

GUMMOW J:   I am not so sure about that.

MR BRERETON:   I said page 4 , I meant paragraph 4 at page 7.  At line 31, Justice Hamilton noted that:

Tamberlin J found that the plaintiff is a corporation under the direction and control of the Nicholas Kritharas family interests.  His Honour found that the relevant actions of the plaintiff were carried out by Nicholas Kritharas as its agent, he being a director and manager of that corporation . . . Nicholas Kritharas, who was also a respondent in the Federal Court proceedings, was guilty of being involved in the conduct –

At page 8, still paragraph 4, line 38, his Honour noted that:

A breach of s 59, unlike a breach of s 52, may attract a criminal penalty:  see s 79. 

True it was, as his Honour said, there was no criminal prosecution, no finding on “the criminal onus” and therefore no “criminal offence” established here, but the conduct which was found proven was conduct which was subject, if proven to the criminal onus, to a penal sanction under section 79.  To that extent it was criminal conduct.

GUMMOW J:   But Mr Kritharas was involved.  Was he a party to the Federal Court proceedings?

MR BRERETON:   Yes, your Honour, and he was held liable under section 75B as being ‑ ‑ ‑

GUMMOW J:   Yes, for knowing involvement.

MR BRERETON:   Exactly, and I am coming to that, and if we come to page 11, at the top of page 11 about lines 13 to 15, Mr Kritharas was found to be:

knowingly involved in such conduct within s75B –

and on the authority of this Court’s decision in Yorke v Lucas that necessarily incorporates a finding that Mr Kritharas knew that the misrepresentations were being made and knew that the representations were false.  So although his Honour did not proceed to find common law fraud, the finding under section 75B because of Yorke v Lucas necessarily involved a finding that Mr Kritharas, who was the person by whom the company acted, knew of each component of the contravention including the falsity of the representations.

CALLINAN J:   Were these matters fully argued, do you know, that is the matters that gave rise to the inferences from the judgment?

MR BRERETON:   Before Mr Justice Tamberlin?

CALLINAN J:   No.

MR BRERETON:   Or before Mr Justice Hamilton?

CALLINAN J:   Before Mr Justice Hamilton.

MR BRERETON:   I was not there, your Honour.  My learned junior was not there.  He understands it was, but I think I am hearing from Mr Evans that it was not.

CALLINAN J:   Because they are fairly far‑reaching inferences.

MR BRERETON:   In my submission, your Honour, the suggestion from the judgment is that they must have been argued at some length because in Justice Hamilton’s judgment commencing at page 18 paragraph 14 his Honour turns to the relevance of the corporate trustee being held responsible and, in particular, at paragraph 15 “to the mental state” of the company and the Tesco issues.  Now, those issues would only have been addressed by his Honour if attention was directed at the trial to the role and responsibility of Mr Kritharas in making the relevant representations.

CALLINAN J:   That seems to be right, if you look at the last line of page 18:

On the one hand, it was argued ‑ ‑ ‑

MR BRERETON:   Now, against that background, his Honour made, in essence, these findings that Mr Kritharas knew that the representations were being made, that he knew they were false and that he was the relevant controlling mind of the company and his Honour, at page 23 line 10, concluded that while – because his Honour decided it on another ground to which I will come:

It is therefore not necessary for me to determine whether the trustee could be said to be at fault . . . If I had to determine it, I should certainly be inclined to the view that the conduct which led to the judgment was conduct which involved fault in Nick Kritharas; furthermore it seems tome that Nick Kritharas in doing what he did was acting as the controlling mind of the trustee company, which ought therefore be regarded as being at fault.

Now the trial judge said that the relevant test ‑ and this is at page 17 line 50 ‑ was:

whether or not the trustee is personally at fault –

page 18 line 10.  From that his Honour concluded at line 23 that:

Whatever the substance –

of some academic criticism was, that was the result –

produced by the application of the existing rules of law ‑ ‑ ‑

GUMMOW J:   Now, can you just look at page 16 about line 43?

MR BRERETON:   Yes, your Honour.  I was coming to that, your Honour.

GUMMOW J:   Which is the extract from Scott.

MR BRERETON:   Exactly, your Honour.

GUMMOW J:  

where the trustee is personally at fault in committing a tort he cannot throw the loss –

but look at the examples.

MR BRERETON:   Yes.

GUMMOW J:   They are not this sort of case.  In this sort of case it is committed for the advantage of the trust.

MR BRERETON:   I accept that that is potentially a distinction.  Whether it is ‑ ‑ ‑

GUMMOW J:   I think that is why Scott says “ordinarily”.

MR BRERETON:   Whether it is, in fact, a distinction is a matter which the cases have never analysed and considered and that, in itself, is an important question.  But what is important about those qualifications is that, with respect, it supports my answer to your Honour the Chief Justice that the proposition which I advance includes mere negligence on the part of the trustee.

In that passage to which your Honour refers from Scott on which the trial judge found ‑ and may I go back first of all to page 15?  At the top of that page commencing at line 12 the author is dealing with “contract”, but he sets out a passage commencing:

Where the trustee acting within his powers –

a passage which was cited with apparent approval by this Court in Buckle v Commissioner of Stamp Duties.  Coming to paragraph 247, “Liability for Tort”, the author states the general principle as to where indemnity is available, that is:

incurred in the proper administration of the trust and the trustee was not personally at fault –

for which Benett v Wyndham and Raybould are cited, authorities which have otherwise stood since late last century.

GUMMOW J:   I know, but what was happening in those cases?  What were the torts?

MR BRERETON:   Both were torts of negligence.  Benett v Wyndham was a case in which the trustee sent woodcutters to fell wood.  They were negligent in so doing.  The trustee was held entitled to indemnity because the negligence was not that of himself, but of his agent.

GUMMOW J:   And in Raybould?

MR BRERETON:   Just let me go back to Raybould.  The trustee carried on a colliery business.

GUMMOW J:   Yes.

MR BRERETON:   He let down the surface of the land ‑ ‑ ‑

GUMMOW J:   Next door.

MR BRERETON:   Injured the buildings of an adjoining owner.

GUMMOW J:   Yes.

MR BRERETON:   But he had the benefit of some engineering advice as to the appropriateness of what he was doing and he was held not liable essentially because he was acting on reasonable advice.  Then, after the passage to which I have just referred at line 30, Scott deals with the circumstances in which indemnity is available and then, at page 16 line 45, comes to the contrary position when indemnity is not available which your Honours have already noted.

Now, what is important about all of that for present purposes is that the trial judge, founding on those well‑established authorities and, in particular, on Scott, reached the conclusions which his Honour reached at pages 17 to 18 and applied them to the facts, albeit not having to do so formally at page 23 to reach what, on this issue, would have been a conclusion favourable to the present applicant.  His Honour held the issue was, however, within clause 13 and I need to come back to deal with that. 

Can I then turn to the Court of Appeal?  The principal judgment was that of Justice Meagher at page 50.  His Honour asked rhetorically:

What are the limits to be placed on this right to indemnification?

At line 11 says:

Presumably if the activity which generated the liability in question were a breach of trust . . . if it were criminal –

and if it were fraudulent, at line 20:

I find it difficult to formulate any other limitations.  United States authorities –

suggest –

“reasonable”, and . . . “proper”.  In my view, neither such limitation exists in Australian law.

His Honour does not directly address the question of being at fault personally and essentially his Honour concludes that reasonableness and propriety are not necessary elements of the trustee’s conduct to found a claim to indemnity.

Mr Justice Mason at page 47 said at paragraph 36 that his Honour agreed “with the reasons of Meagher JA”, that paragraph 37:

the following remarks –

did not –

qualify my concurrence, save in the final paragraph of my reasons.

The final paragraph of his Honour’s reasons at paragraph 42 was an expression of:

no view on the broader issue whether a trustee’s conduct must be “reasonable” and/or “proper” –

In our submission, that flew in the face of the ratio of Justice Meagher’s judgment which was to reject reasonableness and propriety as the test.  So the qualified concurrence of Justice Mason placed on Justice Meagher’s judgment was a qualification on concurrence with the ratio.

We then come to the Chief Justice, page 41.  His Honour concluded at paragraph 14:

that the right of indemnity cannot be availed of if expense was incurred by conduct outside the scope of the trust –

but then added:

The same result should ensue when a trustee incurs expenses as a result of conduct in breach of a duty which the trustee owed to the trust, including the duty to execute the trust with reasonable diligence and care –

which comes back very closely to the original test in Raybould and Benett.

In our submission, that leaves the law entirely unclear in this country as to what the appropriate test is.  One of the best ways of illustrating that is to look at what the respondent says in its submissions at page 72.  Just before line 20 it, in essence, argues that Benett v Wyndham has been misunderstood.  At line 40 it argues that Re Raybould:

was not based on the authority of Benett v Wyndham –

and at page 73, lines 12 to 15, the respondent argues that Scott is wrong.  To uphold the decision of the Court of Appeal the respondent needs to argue, in essence, that the old authorities have been misunderstood and that the learned author of Scott is wrong.

GUMMOW J:   I am not sure that is right for reasons I was pointing out to you.

MR BRERETON:   If we then come, and if I can grapple with the question which is troubling your Honour Justice Gummow, I accept that there is arguably a distinction, at least of fact, between acting, supposedly in the interests of the trust, and not doing so.  If there be such a distinction, it has not yet been articulated in the cases and if there is it needs to be articulated so that trustees and beneficiaries know where they stand.

GLEESON CJ:   Yes, thank you, Mr Brereton.  We do not need to hear you, Mr Evans.

Some of the questions raised in argument in this matter, as to which there were differences of approach in the Supreme Court of New South Wales, are of general importance.  However, on the facts before the Supreme Court, the trial judge and all the members of the Court of Appeal were agreed as to the result. 

Having regard to the limited basis on which the facts were presented, the case is not a suitable vehicle for a general review of the law on the subject of a trustee’s right to indemnity, and there are insufficient prospects of success of an appeal to warrant a grant of special leave.  The application is refused with costs.

We are going to adjourn for a moment to reconstitute.

AT 11.51 AM THE MATTER WAS CONCLUDED