Hayman v Equity Trustees Ltd
[2003] VSC 353
•8 September 2003
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
PRACTICE COURT
No. 7466 of 2001
| GRAHAM SANDERS HAYMAN | Plaintiff |
| v | |
| EQUITY TRUSTEES LTD | Defendant |
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JUDGE: | KELLAM J. | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 2 September 2003 | |
DATE OF JUDGMENT: | 8 September 2003 | |
CASE MAY BE CITED AS: | Hayman v Equity Trustees Ltd | |
MEDIUM NEUTRAL CITATION: | [2003] VSC 353 | |
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TRUSTS AND TRUSTEES – Application by life tenant for vesting order pursuant to rule in Saunders v Va utier - Trustee refusing to agree to distribution on basis that it has indemnity over the trust fund in respect of the costs of defending proceedings by the plaintiff against it for breach of trust – Whether trustee has indemnity by way of charge or lien over trust assets which has priority over plaintiff’s claim for a vesting order – Trustee Act 1958 s.51(2)(v).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mrs C.M. Kenny | Ebsworth and Ebsworth |
| For the Defendant | Mr S.W. Kaye Q.C. with Mr R.T.A. Waddell | Harry M. Hearn |
HIS HONOUR:
Background
The father of the plaintiff died in July 1976 and by his will he appointed the defendant (“Equity Trustees”) as his executor and trustee and established a testamentary trust (“the trust”) to pay the income from his estate to his widow, Dorothy Hayman, and to the plaintiff for life, and on the death of the survivor, to pay the residue to Geelong Grammar School (“Geelong Grammar”).
Dorothy Hayman died in February 1984 leaving the plaintiff as the sole life tenant and Geelong Grammar as the remainderman.
The Litigation
In September 2001 the plaintiff issued proceedings in this Court claiming that Equity Trustees were in breach of trust in their administration of the trust. The principal allegation of the plaintiff is that Equity Trustees were negligent in their management of the portfolio of shares which formed the bulk of the estate left by the testator to be administered by his trustees.
Regrettably, the litigation has been beset by delays and disproportionate cost caused by, amongst other things, a change in the solicitors acting for the plaintiff. The date for trial has been refixed on several occasions. The proceeding is now fixed for trial on 26 November 2003.
The application in the Practice Court
By summons filed 15 August 2003 and returnable in the Practice Court on 2 September 2003 the plaintiff sought leave to file and serve an amended statement of claim which statement of claim sought orders that the trust be wound up and that the defendant transfer the entire trust property to the plaintiff, subject to any properly incurred trustee charges.
Upon the summons coming on before me on 2 September 2003 the plaintiff, through his counsel Ms Kenny, sought to rely upon a similar claim to that made by the summons, which had been made by way of originating motion issued and served upon the defendant late on 1 September 2002. The originating motion sought an order directing the defendant to transfer the residuary property of the trust to the plaintiff.
Notwithstanding the somewhat unorthodox manner in which the application was before the court, Mr Kaye of Her Majesty’s Counsel who appeared with Mr Waddell of counsel for Equity Trustees, consented to the hearing of the application now made by originating motion before me in the Practice Court. Accordingly, the summons dated 15 August 2003 was withdrawn by the plaintiff and the hearing proceeded on the basis of the claims made by originating motion with reliance upon the affidavits which had been filed in support of, or in opposition to the now withdrawn summons.
The plaintiff’s application that the entire trust property be transferred to the plaintiff is based upon the well known rule in Saunders v Vautier[1] and/or pursuant to s.51(2)(i) of the Trustee Act.
[1](1841) 4 Beav 115; 49 ER 282.
It is clear law that if all the beneficiaries of a trust are of full age and capacity and between them entitled to the entire beneficial interest under the trust, they may terminate the trust by requesting the trustee to transfer the trust assets to them, or by their direction.[2] Indeed, it appears to be clear also that the fact that property is settled on trust for a life tenant and remaindermen does not prevent the operation of the rule. As soon as the life tenant and the remainderman are of full age and capacity the trust can be terminated and the life tenant may commute the life interest in return for a capital sum, with the remainderman sharing the balance of the estate.[3]
[2]See Stephenson v Barclays Bank Trust Co Ltd [1975] 1 WLR 882 at 889, 1 All ER 625 at 637.
[3]See Jacobs, The Law of Trusts, Law Book Company, 6th Ed., (1997), at p.695-8; Auson v Pather (1879) 13 Ch D 141; Re White [1901] 1 Ch 370; Stephenson v Barclays Bank Trust Co Ltd and Quinton & Ors v Proctor [1988] 4 VR 469.
Under s.51(1)(i) of the Trustee Act 1958 the court may make a vesting order on the grounds set out in s.51(2). In particular, s.51(2)(i) provides that such an order may be made:
“Where a trustee neglects or refuses to convey any property … according to the direction of the person absolutely entitled to the same for twenty‑eight days next after a request in writing has been made to him by the person so entitled.”
According to the learned authors of Principles of the Law of Trusts:[4]
“This provision envisages a situation where the active duties of the trustee have come to an end because all the beneficiaries under the trust are of full age and capacity. The duty of the trustee in such case is to vest the title to the trust property in the beneficiaries so clothing the equitable title with the legal estate. If the trustee fails to perform this duty recourse may be had to this provision. It should be shown that the trustee has failed to perform her or his duty and if this is not shown a vesting order may be refused, although the Court may direct the trustee to take steps to ensure the vesting.”
[4]Ford and Lee, Principles of the Law of Trusts, Law Book Company, 3rd Ed., (1996) at para 840.8.
The plaintiff submits that all that need occur for the trust to end is that all the beneficiaries entitled in the trust, whether immediately or successively, consent to the termination of the trust and direct the trustee accordingly. The plaintiff, amongst other things, relies upon a deed of settlement dated 10 March 2003 executed by the plaintiff and an apparently authorised officer of Geelong Grammar School.
The deed of settlement is dated 10 March 2003. By its recital, it provides that “the life tenant and the remainderman have agreed that the settlement created by the said will shall be terminated by a division of the said property between them as set out hereunder”.
“… the life tenant and the remainderman have agreed that … the total value of the estate shall be transferred to the life tenant for his own absolute use and benefit”.
“ … such an appropriation shall at all times be used by the life tenant for his well being and upkeep”.
The operative clauses of the Deed provide as follows:
“1.In pursuance of the Agreement between the parties that the settlement created by the said Will shall be terminated and the total value of the estate be transferred to the life tenant for his own absolute use and benefit and in consideration of the execution of the premises herein and subject always to Clause 2 herein the life tenant hereby releases the remainderman from all sums of money, claims, demands, actions, proceedings and accounts whatsoever in respect of the settlement created by the Will of the said BRIAN SANDERS HAYMAN.
2.The life tenant acknowledges that if he receives, pursuant to his Supreme Court action number 7466 of 2001 against Equity Trustees whether by settlement or judgment, an amount equal to or greater than the capital value of the estate transferred to the life tenant, he shall be obliged to repay the remainderman an amount equal to the capital value of the estate which was transferred to him pursuant to this deed.”
Notwithstanding the signing of the deed on 10 March 2003, a copy of the deed was not provided to the defendant. Rather, on 3 April 2003, the former solicitors for the plaintiff faxed a letter from them dated 26 March 2003 addressed to the defendant care of its solicitor, Mr Hearn, which letter was counter-signed by Harwood Andrews, purportedly acting on behalf of Geelong Grammar School.
“RE: HAYMAN v EQUITY TRUSTEES
As foreshadowed, we advise that the Geelong Grammar school has now agreed that the settlement created by the will of Brian Sanders Hayman dated 13 November 1967 shall be terminated, and the total value of the estate transferred to Mr Hayman as life tenant, for his own absolute use and benefit.
Accordingly, we request that the trust please be wound up and the net value, which we understand to be in the Order of $240,000.00, paid to our client care of this office as soon as possible.
The signature of Harwood Andrews, Lawyers, on behalf of Geelong Grammar school appears at the foot of this page.”
The letter was countersigned as follows:
“We, Harwood Andrews, on behalf of Geelong Grammar school consent to the present value of the estate of Brian Sanders Hayman being paid to the life tenant, Graham Hayman.”
The plaintiff submits that this letter was sufficient request from the beneficiaries to the defendant trustee to wind up the trust and to distribute the assets to the plaintiff. Ms Kenny submits that as from 26 March 2003 the trust “ceased to exist from that date” and that from that date the plaintiff had a “proprietary right to the trust assets”.
It appears, from Exhibits HMH2 and HMH3 to the affidavit of Mr Hearn sworn 20 August 2003 that the fax of 3 April sent from the plaintiff’s former solicitors to Mr Hearn contained a letter from Harwood Andrews, solicitors for Geelong Grammar, dated 31 March 2003. If that is so, that letter was not produced before me in evidence. However, it is clear that at that stage the defendant was not prepared to act further upon the direction of the plaintiff without the execution of an appropriate deed, executed by both the plaintiff and the Geelong Grammar School. This in my view is perhaps not surprising. The defendant was entitled to clear evidence that the life tenant and the remainder wished the trust to vest. Mr Hearn at this stage was in ignorance of the deed signed by the plaintiff and the representative of Geelong Grammar on 10 March 2003, and in terms of authority and direction, had only the plaintiff’s faxed letter of 3 April 2003 and its attachments with which to advise his client.
On 16 April 2003 Mr Hearn wrote to the former solicitors for the plaintiff confirming a telephone conversation he had had with them, following their fax to him of 3 April 2003, whereby he stated that he would draft a deed of surrender and direction. In this letter he stated that the deed to be drawn by him would reflect that the trustees “are entitled to be indemnified out of the residuary estate in relation to all costs in defending the present Supreme Court action in the event that it successfully does so and accordingly will retain sufficient funds against costs already incurred and projected costs to the end of the trial”. Accordingly, it is apparent that from this time onwards the defendant has asserted its right to indemnity for costs in this proceeding.
On 2 May 2003 Mr Hearn wrote to both the then solicitors for the plaintiff and to Harwood Andrews, the solicitors for Geelong Grammar, enclosing a deed of surrender and direction to be executed by the parties. As earlier foreshadowed by him, the draft deed drawn by him, apart from containing an appropriate direction from the plaintiff as life tenant and from Geelong Grammar as remaindermen to pay and transfer the residuary estate, provided that such transfer was to be subject to the retention of such sum as may properly be required by the trustee to indemnify itself for its projected costs of defending the proceedings.
The deed drafted by Mr Hearn on behalf of the defendant has not been executed by any party.
On 11 June 2003, the plaintiff’s present solicitors, Messrs Ebsworth & Ebsworth (“Ebsworths”), took over conduct of the proceedings on his behalf.
On 16 June 2003, Ebsworths faxed a letter to Mr Hearn rejecting his client’s right to maintain an indemnity for costs. Attached to the letter was a draft deed of surrender drawn by Ebsworths that the plaintiff was prepared to execute. The draft deed is exhibited as JG4 to the affidavit of John Goulias sworn 14 August 2003. It appears to me, although no submissions about this issue are before me, that had it been signed by the plaintiff and appropriately executed on behalf of Geelong Grammar, prima facie it would have been sufficient request for transfer of the trust funds to enable the plaintiff to maintain an application to the court under s.51(2)(i) of the Trustee Act. However, it was not so signed.
On 24 June 2003, Ebsworths wrote to Mr Hearn informing him of the plaintiff’s intention to make application to court for a vesting order. On the same day Mr Hearn spoke by telephone to the solicitor acting for Geelong Grammar. Mr Hearn’s diary note of that conversation reveals that Geelong Grammar was not prepared to sign the deed of indemnity submitted to it by Mr Hearn because of the provision in it relating to the defendant’s right to indemnity for costs. Mr Hearn was, however, clearly of the opinion after that conversation that the school wished to unconditionally abandon any interest it had in the estate as remainderman.
Accordingly, at this time it appears that although the deed submitted by Mr Hearn and counter-submitted by Ebsworth had not been executed, Mr Hearn was satisfied that the plaintiff was absolutely entitled, and the focus of the negotiations about the issue of the winding up of the trust shifted to the question of the defendant’s entitlement to indemnity for costs, at least, it appears, in the mind of Mr Hearn.
Between 24 June 2003 and 15 August 2003, a substantial amount of correspondence and negotiation took place between the parties. Ebsworths at all times maintained that the plaintiff had a right to wind up the estate and have the assets of the estate vested in him, and Mr Hearn at all times asserted the defendant had a right to retain funds as authority for its costs. Nevertheless, a cheque for $58,236.45 representing cash held by the trust, was paid by Equity Trustees to the plaintiff on 11 July 2003 and shares to the value of $39,822 were transferred into the name of the plaintiff on 14 August 2000.
The facsimile sent by Mr Hearn to Ebsworths on 14 August 2003 advising of the transfer of shares to the plaintiff in addition, stated as follows:
“On 11th July last I forwarded you a cheque for $58,236.45.
The transfer of the cash and the above shares represents a total of assets transferred to your client to date of $98,058.45 which, in fact, is slightly more than the figure of $96,092.29 indicated in the attachment to my letter to you of 8th July 2003.
I am further instructed to advise that the remainder of the assets are being retained by my client in exercise of its right of indemnity against the assets of the Estate as previously advised.”
On 15 August 2003 the plaintiff filed the summons returnable in the Practice Court seeking a vesting order. The summons sought leave to file an amended statement of claim in the form exhibited to an affidavit sworn on 14 August 2003 by Mr John Goulias, a partner of Ebsworths. In addition, the summons sought a vesting order in favour of the plaintiff of the entire trust property held by the trustees.
The aforesaid affidavit of Mr Goulias and the draft statement of claim relied upon the deed of assignment signed by the plaintiff and apparently on behalf of Geelong Grammar on 10 March 2003 as evidence of the agreement between them that the trust be terminated and the estate “transferred to the plaintiff for his absolute use and benefit”.
Furthermore, the plaintiff filed an affidavit sworn 13 August 2003 by Mr Andrew Moore, the commercial director of Geelong Grammar School, which states that “Geelong Grammar School willingly entered into a deed (with the plaintiff) whereby it assigned its rights as remainderman of (the trust) to (the plaintiff).”
The affidavit of Mr Moore further states, at paragraph 3:
“Geelong Grammar School hereby acknowledges that it has no beneficial entitlement to the remainderman interest in the Trust and that in light of the aforesaid assignment of its equitable chose in action on the terms contained within the Deed, has no objection to Equity Trustees Limited making a distribution whether partial or exhaustive to Mr Hayman in accordance with Mr Hayman’s instructions”.
The originating motion upon which the plaintiff now relies likewise relies upon the deed executed by the plaintiff and a representative of Geelong Grammar in that it avers, by paragraph 5, that “on or about 10 March 2003 the plaintiff and Geelong Grammar agreed to wind up the trust and to direct the defendant to pay the residuary estate to the plaintiff”.
By his affidavit sworn 20 August 2003, in opposition to the plaintiff’s summons, Mr Hearn states that the service upon him of the summons and the affidavits in support, on 15 August 2003, was the first time he or the defendant were aware of the existence of the deed. This is clearly so, upon the materials before me.
The submissions of the defendant in relation to whether the plaintiff is entitled to a vesting order
Mr Kaye, QC submits that the deed of settlement dated 10 March 2003 is not effective to vest in the plaintiff an absolute interest in the remainder of the estate for the purposes of the rule in Saunders v Vautier. This submission is based upon two grounds.
First, he submits the deed is unintelligible. The two operative clauses of the deed do not by their terms contain any transfer of the interest of the remaindermen to the life tenant. In fact, he submits that clause 1 of the deed, insofar as it is intelligible, appears to assume that such a transfer has already taken place.
Secondly, he submits that if the deed did operate to transfer the interests of the remaindermen to the life tenant, that transfer is not absolute as required for the rule in Saunders v Vautier, but rather is conditional. He points out that the deed contains an express proviso that “ … such appropriation shall at all times be used by the life tenant for his well being and upkeep.” Clause 2 of the deed requires that the life tenant repay to the remaindermen an amount equal to the capital value of the estate, if in these proceedings the plaintiff (by settlement or judgment) receives an amount equal to or greater than the capital value of the estate. In other words, he submits that even if there has been a transfer of the remainder by Geelong Grammar to Hayman, that transfer is entirely conditional in that if the plaintiff in the present proceeding succeeds in obtaining an amount equal to or greater than the amount transferred to him by Geelong Grammar, he must repay to Geelong Grammar the whole of the capital of the estate which was transferred to him.
Mr Kaye further submits that in order for the rule in Saunders v Vautier to apply, the plaintiff must have an immediate and absolute interest in the remainder. He relies upon Saunders v Vautier;[5] Montefiore Home v Howell & Co[6]; and s.134 of the Property Law Act 1958 in support of this submission.
[5](1841) 4 Beav. 115.
[6](1984) 2 NSWLR 406 at 420.
Further, Mr Kaye submits the circumstances in which the deed was executed and the delay in bringing that deed to the attention of the defendant trustee, are circumstances which require investigation at the trial of the action.
In my view, there is some force in the attack made by Mr Kaye upon the deed executed by the plaintiff and the representative of Geelong Grammar on 10 March 2003. The basis of that attack may be the reason why the deed was not provided to the defendant by the plaintiff’s former solicitors and possibly may explain the submission of a further draft deed of surrender and direction by the present solicitors for the plaintiff on 16 June 2003.
However, and notwithstanding the apparent defects in the deed of surrender drafted by the plaintiff’s former solicitors, it appears to me that the court, on an application for a vesting order, is entitled, in considering whether to make an order under s.51 of the Trustee Act, to look at all of the evidence before it at that time as to whether a request to a trustee in writing has been made by a person or persons absolutely entitled to make the order.
The only beneficiaries entitled in the trust now under consideration are the plaintiff and Geelong Grammar. The evidence before the court includes the deed of 10 March 2003, unsatisfactory as it might be, the letter from the plaintiff’s former solicitors of 26 March 2003, the conversation Mr Hearn had with the solicitors to Geelong Grammar, and the affidavit of Mr Moore sworn 13 August 2003 to the effect that Geelong Grammar acknowledges that it has no beneficial entitlement to the remainderman interest. As stated above, the fax of 3 April 2003 from the plaintiff’s former solicitors to Mr Hearn appears to have enclosed a letter from Geelong Grammar which has not been produced before me in evidence.
If the only issue before me was the question of whether the plaintiff had satisfied me of a sufficient basis to make a vesting order under s.51 of the Trustee Act, the evidence before me, notwithstanding the deficiencies of the deed and the circumstances of its recent production to the defendant, would go a considerable way towards establishing that the requirements of s.51 of the Trustee Act have been satisfied. It must be remembered that, in the circumstances of this hearing, the right to cross-examine any witness who had sworn an affidavit was abandoned. Perhaps if this issue was to be further considered, there might be a basis for hearing oral evidence, but, that said, there is a good basis to say that the sole remaining beneficiaries of the trust have made sufficient request to the trustee on the evidence now before the court to convey the property of the trust.
It is apparent that this was the view formed by the defendant upon the advice of Mr Hearn before he became acquainted with the fact and contents of the deed of 10 March 2003. His conduct in transferring part of the trust property to the plaintiff is explicable on no other basis.
The claim of the defendant to hold trust funds pursuant to its indemnity for trust costs and expenses
But the issue of whether the plaintiff has an absolute entitlement by reason of the surrender of any rights of the remainderman to the vesting of the trust property or the question of whether the absolute beneficiaries are entitled to relief under s.57 of the Trustee Act, although now contentious by reason of the terms of the deed of 10 March 2003, are not in reality the central issue before me.
That issue is whether the defendant has any right to retain trust funds as an indemnity against its costs of a successful defence of this proceeding.
The plaintiff’s submission in relation to the indemnity claimed by the defendant
The contention of Ms Kenny is that the defendant has no right to resist a vesting order and to retain trust funds on the basis of any entitlement to an indemnity for costs. She submits that the defendant has “effectively seized the plaintiff’s assets as security for costs without seeking any direction from the court or making any formal application for security for costs.”
She submits that if the defendant seeks security for costs it must do so in accordance with the Rules of Court, in this case rule 62.02. There is, she submits, no precedent for a trustee circumventing the procedure set out in rule 62.02 on the basis that it may have a possible right to be indemnified out of the trust receipts. In this regard she relies upon Alsop Wilkinson v Neary[7], in which case trustees who were in hostile litigation with beneficiaries sought an order, before the hearing of the litigation, that their costs of the litigation be paid out of the trust fund. Their application for what was described in the decision as a “pre-emptive order of costs” was refused. However, a reading of that decision makes it clear that the question of whether an order for costs should be made at an early stage in hostile litigation involving beneficiaries and trustees is an issue different from whether a trustee has a lien over trust funds in respect of a potential order for indemnity in the future.
[7][1985] 1 All ER 431.
However, Ms Kenny submits that the defendant has no right to a lien. She points out that in a case such as that now before the court any right to indemnity will arise only in the event that a costs order is made against the plaintiff which is not satisfied. She submits that –
“Neither r 63.26 or 63.03 of the Supreme Court Rules operates so as to create an exception to the security for costs rule so as to create a preferred position for a trustee involved in hostile litigation with beneficiaries. Rule 63.26 does nothing more than preserve the right of a trustee to be indemnified in respect of costs, charges and expenses properly incurred by him in the administration of the trust.”
There can be no argument that Ms Kenny is correct in submitting as she does that the ordinary rules of litigation apply to a proceeding such as the hostile litigation between the plaintiff and the defendant now before the court. Ms Kenny relies upon Miller v Cameron[8], Plimsoll v Drake[9], Drummond v Drummond[10] and Armitage v Nurse[11] in support of that proposition and her argument that the defendant’s right of indemnity will arise only if it succeeds in the defence of these proceedings and an order made for costs against the beneficiaries is not satisfied.
[8](1936) 54 CLR 572.
[9]Supreme Court of Tasmania, Zeeman J – unreported 1995.
[10][1999] NSWSC 293.
[11][1998] Ch 241.
I accept that in the event that the plaintiff succeeds against the defendant in his claim for breach of trust there is more than a distinct possibility that the defendant will be disentitled to indemnity from the trust fund. Does that, however, mean that the trustees must now pay over all of the trust fund to absolutely entitled beneficiaries? There is, of course, a distinct possibility that if the defendant trustees succeed in their defence of the proceedings, their costs will be indemnified by resort to the trust fund. Whilst the plaintiff submits that the defendant has effectively stifled the litigation against it for breach of trust by not vesting all the trust funds, the defendant’s position is that if it succeeds it will have no recourse to its rights of indemnity because the funds will have been dissipated in the conduct of these proceedings by the plaintiff.
The defendant’s submission that it is entitled to indemnity in the nature of a charge over trust assets
The submission of Mr Kaye to the contrary is that –
“The defendant trustee is entitled to be indemnified for its costs of these proceedings unless (at trial) the plaintiff is able to prove conduct by the defendant which disentitles it to that indemnity. Unless and until the plaintiff proves that the defendant has been guilty of that conduct, the defendant has a present right, in the nature of a first charge, over the assets of the estate to satisfy its right to indemnity. That right has priority over any right of the plaintiff to call for distribution of the assets of the estate.”
Mr Kaye submits that the principle that the defendant has such a present right with priority over any right of the plaintiff to call for distribution is clearly established by a number of authorities and principles which he submits arise from those authorities.
First, he submits, correctly in my view, that as a general proposition a trustee is entitled to be indemnified in respect of its costs and expenses involved in the administration of an estate, and that such general entitlement includes costs incurred by the trustee in defending litigation against it. He relies upon Turner v Hancock[12], Nissen v Grunden[13] and the provisions of Rule 63.26.
[12](1882) 20 CLD 303 at 305, 306.
[13](1912) 14 CLR 297 at 309.
The fact that the right of indemnity is in the nature of a lien or first charge which has priority over the rights of any other claimant is, Mr Kaye submits, established by Jennings v Mather[14], Commissioner of Australian Federal Police v Cornwell[15], Savage v Union Bank[16] and Octavo Investments[17], and the published decision contains an analysis of a number of those cases.
[14](1902) 1 KB 1.
[15](1990) 98 ALR 677 at 681-2.
[16](1906) 3 CLR 1170 at 1186 to 1189, 1191 to 1192, 1196.
[17](1979) 144 CLR 360 at 369 to 370.
In Jennings v Mather the question arose upon an interpleader issue between the trustee in bankruptcy of one Mather, and a creditor of the bankrupt who had obtained a judgment against the bankrupt, and upon which the goods in dispute were taken in execution. Collins MR said[18] –
“The claimant, no doubt, as Mather’s trustee in bankruptcy, is not entitled to claim the goods taken in execution passed to him as property of the bankrupt; but he claims to stand in the bankrupt’s shoes with regard to any lien he may have on the trust estate, and says that, as against the execution creditor, he is entitled to have the goods remain available for the purposes of the indemnity to which the bankrupt was prima facie entitled. It is clear, as I have pointed out, that the execution creditor has in truth no title whatever to these goods; but it is in effect contended that we are bound under the circumstances to consider, for the purposes of the interpleader issue, that he had a right to have these goods taken in execution. I do not, however, see how the wrongful seizure of the goods in execution can displace the equitable right, which Mather, as trustee, prima facie, had with regard to the trust estate by way of indemnity against the personal liabilities incurred by him in fulfilling his trust. It is not, I think, for the claimant to begin by proving a negative, namely, that Mather had not been guilty of any default which did away with his right to indemnity. The claimant shews that prima facie Mather had a right to a lien on the goods; and, assuming that the execution creditor, who has in truth no title to the goods, could be heard in the matter, which I doubt, it is, as it appears to me, for him to shew by way of answer that the prima facie right of Mather has been done away with by his default.”
[18]At pp.5-6.
In the same case Stirling LJ said[19] –
“A trustee has for his protection a right to have costs and expenses properly incurred by him in the administration of the trust paid out of the trust property, and the amount of such costs and expenses constitutes a first charge upon that property. A Court of Equity will never take trust property out of the hands of a trustee without seeing that such costs and expenses are reimbursed to him, and that he is relieved from personal liability in respect of them; and, when the legal title to trust property is vested in the trustee, he has a right to resort to that property, without the assistance of the Court, for the purpose of indemnity against liabilities properly incurred by him in the administration of the trust. It is most important that this right should be maintained. A trustee is prohibited by law from making any profit for himself out of the trust estate, a rule which is enforced with great stringency; it is only just that, on the other hand, he should be legally protected against all liabilities properly incurred by him in the administration of the trust estate.”
[19]At p.8.
Mathew LJ put the position succinctly at p.8 when he said –
“The position originally taken up by the execution creditor left out of sight altogether the right of Mather as a trustee to indemnity out of the trust property, and to hold the goods seized as part of such property until his rights in respect of them are ascertained. That right appears to me clearly to exist, and to form a part of Mather’s estate which passed to the claimant as his trustee in bankruptcy.”
Mr Kaye contends that Jennings v Mather is authority for the principle that not only is the right of indemnity of a trustee in the nature of a lien or first charge, but it demonstrates that in order to rely upon the right of indemnity, the trustee does not bear the onus of proving a lack of conduct on its behalf which might disentitle it from its right as a trustee, and that unless and until such conduct is proven, the trustee retains its right of indemnity.
In Commissioner of Federal Police v Cornwell[20] Burchett J stated –
[20]At p.681.
“The fact that a trustee has a right to repayment, out of trust property, of sums properly paid in the discharge of the trust, and that the trustee’s right is not a mere claim in personam but is the first charge on the property, was declared by Lord Romilly MR a very long time ago: Re Exhall Coal Co Ltd; Re Bleckley (1866) 35 Beav 449 at 452-3; 55 ER 970 at 971. Lord Romilly said:
‘On considering the whole matter, I am of opinion that Mr Bleckley is entitled to this sum. He was the trustee of the mine, including the fixtures, the plant and machinery; he is the owner of this property at law, and when called upon to account in equity, he is entitled to deduct, out of trust property in him, all that is necessary for the purpose of repaying him the sums he has properly paid, and of indemnifying him against such sums as he is liable to pay in the discharge of his trust; and, in my opinion, this liability to repay and to indemnify him is the first charge on the property.’
This authority is cited in Jacobs’ Law of Trusts in Australia 5th ed, 1986, para [2102], where it is stated:
‘[A] trustee is entitled to be reimbursed out of the trust property in respect of all the charges and expenses properly incurred in the execution of the trust; this is the position at general law, and in all States the trustee legislation provides that a trustee may reimburse himself, or pay or discharge of of the trustee [sic] property all expenses incurred in or about the execution of his trusts and powers. Further, the purely equitable right goes beyond the statutes by making the right of reimbursement and indemnity a first charge on the trust property.’
The whole position is quite elaborately stated in Scott on Trusts, 4th ed, vol IIIA, para 244. Scott says: ‘The trustee may advance his own money in discharging obligations properly incurred by him in the administration of the trust, and is then entitled to reimbursement out of the trust estate for the amount so advanced … Where the trustee incurs an obligation on behalf of the trust estate, it is frequently the individual obligation of the trustee; but if the obligation was properly incurred by him in the administration of the trust he is entitled to discharge it out of the trust property. He has, in other words, not merely a right of reimbursement where he has made payment out of his individual funds, but he has a right of exoneration, a power to use the trust property in discharging the obligation.’
In para 244.1, Scott draws the conclusion: ‘A trustee who is entitled to reimbursement or exoneration for expenses properly incurred in the administration of the trust cannot be compelled to surrender the trust property to the beneficiaries until his claim for reimbursement or exoneration has been satisfied. He has in other words a security interest in the trust property.”
In Savage v Union Bank of Australia Ltd, the High Court followed Jennings and Mather. Burton J said in relation to goods which were the subject of a trust[21] –
“It necessarily follows, as it seems to me, that the trustee has a right to prevent any person from carrying away those goods, and to say to everybody, including the cestuis que trust, ‘I am entitled to an indemnity out of those goods, and have, therefore, a pecuniary interest in them.’ Of course, when the accounts come to be made up, if it should appear that nothing is due to the trustee on the trading, there is nothing in respect of which he needs to be indemnified, and his lien over the goods is gone; but until the accounts are made up, he is entitled to a lien over all the assets of the estate. A lien (putting aside the question of bankruptcy, with which I will deal directly) has always been held to be sufficient titled as against the world to hold the goods until. That lien is satisfied, or is proved not to exist.”
[21]At p.1193.
In Octavo Investments Pty Ltd v Knight,[22] Stephen, Mason, Aitken and Wilson JJ in a joint judgment stated –
“Property which is an asset of a trading estate carried on by a trustee is properly described as trust property: Dowse v Gorton; Jennings v Mather. However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. . The trustee’s interest in the trust property amounts to a property held solely in the interests of the beneficiaries of the trust and the trustee’s interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt.”
[22]At p.369.
Similarly, in Chief Commissioner of Stamp Duties for New South Wales v Buckle and Ors[23] a case which involved a question of whether a supplemental deed was subject to stamp duty as a conveyance, the High Court confirmed that a trustee had a beneficial interest in trust property to the extent of a right of reimbursement or exoneration for the discharge of liabilities incurred in administering the trust. The Court, in a joint judgment, said[24] –
“ … the assets held by the trustee are ‘no longer property held solely in the interests of the beneficiaries of the trust’. The term ‘trust assets’ may be used to identify those held by the trustee upon respective proprietary rights, in order of priority, of the trustee and the beneficiaries. The interests of the beneficiaries are not ‘encumbered’ by the trustee’s right of exoneration or reimbursement. Rather, the trustee’s rights to exoneration or recoupment ‘takes priority over the rights in or in reference to the assets of beneficiaries or others who stand in that situation’. A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the ‘trust assets’ which may be enforced in the same way as any other equitable charge. … , the enforcement of the charge is an exercise of the prior rights conferred upon the trustee as a necessary incident of the office of trustee.”
[23][1998] 192 CLR 226.
[24]At pp.246-247.
Although, as Ms Kenny submits, no reported decision can be found dealing with the precise circumstances now before me, the authorities relied upon by Mr Kaye do establish to my satisfaction that prima facie the defendant trustee does have a present right to indemnity in the nature of a first charge or lien against the trust assets which can be relied upon, so far as is reasonably necessary to protect such indemnity, to resist any claim by absolute beneficiaries to distribution of the estate. I do not consider that the reported cases support the contention of Ms Kenny that the right of the trustee to such indemnity arises only when, after successful defence of the proceedings, the plaintiff fails to meet any costs order made.
Rather, the authorities establish (albeit in different fact circumstances) that the right of indemnity, in the nature of a first charge or lien, exists from such time as the trustee properly incurs costs and expenses in the administration of the estate. The fact that such costs and expenses are incurred in defending a claim by a beneficiary who is otherwise absolutely entitled to a vesting order does not in my view alter the nature of the right. As Williams, J. said in National Trustees Executors & Agency Co. of Australia v Barnes[25],
“If a trustee is sued by beneficiaries who complain of some act or omission by the trustee, he is entitled to defend his conduct as an incident of such administration. Even if he fails in the suit, he may be allowed his costs out of the estate, but if he succeeds as in this case, he is clearly entitled thereto.”
[25](1941) 64 CLR 268 at 279.
Of course it may be that the plaintiff will succeed in his action, in which case the court may well conclude that the conduct of the defendant was such as to disentitle it to recourse to the indemnity. However, the fact that such an event may occur in the future does not, in my view of the authorities, entitle the plaintiff to say that there is no right to indemnity at this stage. It is, of course, regrettable that the plaintiff considers that he is unable to fund the litigation against the defendant without the trust fund being distributed to him. In this regard he is, of course, in no worse position than a beneficiary who has no absolute entitlement to the vesting of an estate and who wishes to bring proceedings against a trustee for breach of trust. However, in the circumstances, I am bound to find that the defendant is entitled to resist the vesting of the trust estate to the defendant, on the basis that its right to indemnity in the nature of a first charge has priority over any right of the plaintiff to call for distribution of the estate.
That said, it is, of course, apparent that the defendant would have no right to resist distribution of all trust assets to those absolutely entitled in circumstances where the value of the assets vastly exceeded the likely reasonably incurred costs of the administration of the estate, including the defence of the proceedings. This, however, is not an issue in the proceedings now before me.
The trustees now hold assets valued at $135,492, of which $10,771 is owed in commission. The future costs of the trustees in defence of the proceedings have been assessed in the sum of $83,470 by a respected costs consultant. The costs consultant has assessed the defendant’s legal costs up to the end of August in a sum of approximately $130,000, including disbursements in excess of $48,000. In the event that the defendant successfully defends the action and the court does not otherwise order pursuant to rule 63.26, the entitlement to payment of costs which may then accrue to the defendant is likely to exceed the sum now held on trust.
Accordingly, satisfied as I am that the defendant is entitled to rely upon its right of indemnity by way of first charge or lien which has priority over any claim by the plaintiff or beneficiary to distribution of the estate, I do not consider it appropriate to make the vesting order sought by the plaintiff. That does not, however, in my view, give any entitlement to the defendant to endeavour to have recourse to funds which have already been paid by it to the plaintiff upon the basis that the defendant was entitled to them.
However, in circumstances where counsel for the defendant informs me that the defendant trustee will not seek recourse to funds already paid no good purpose is served by giving further consideration to the issue of whether a vesting order should be made.
Clearly the trust should continue until such time as the decision of the Court in the plaintiff’s proceeding against the defendant is handed down and orders are made in respect thereof by the Court. Accordingly, the appropriate order is that the proceeding brought by originating motion on 1 September 2003 be dismissed.
I turn to the issue of costs. Under normal circumstances an order for the costs of a proceeding commenced by originating motion would follow the event, which would entitle the defendant in this case to an order in its favour. However, the plaintiff submits that the costs of this application should be reserved. Ms Kenny submits that the circumstances under which the application is before the Court are unusual. She submits that there is no authority precisely on point and that in the particular circumstances of this proceeding the trial judge will be in the best position to consider the question of costs.
In my view, the appropriate order is that the costs of this application should be reserved. There are unusual aspects to the application. I have found that the defendant has an indemnity by way of charge over the trust funds held by it in preference to any claim for a vesting order by the plaintiff. The right of the defendant however to exercise that indemnity is entirely contingent upon future orders of the Court in the principal litigation relating to the claim of the plaintiff that the defendant is in breach of trust. In such circumstances it appears to me that a proper exercise of my discretion is to reserve the costs of the application (being those of the summons and the originating motion) to be determined by the trial judge.
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