Highland v Labraga (No 2)

[2005] NSWSC 1212

CITATION:	Highland v Labraga (No 2) [2005] NSWSC 1212
HEARING DATE(S):	11/10/05 [then written submissions]
JUDGMENT DATE :	29 November 2005
JURISDICTION:	Equity Division
JUDGMENT OF:	Young CJ in Eq
DECISION:	First defendant to pay plaintiffs' costs.

CATCHWORDS:	PROCEDURE [553]- Costs- Plaintiffs successful- Proceedings originally brought by a beneficiary of a discretionary trust- Proceedings amended to add trustee prior to hearing- Proceedings not incompetent prior to amendment- Whether plaintiffs to get whole of costs of suit or only those incurred after amendment. EQUITY [225]- Discretionary trust- Co-trustees deadlocked- Whether beneficiary had standing to bring derivative action to remove one trustee- Generally derivative action can only be brought in special circumstances- Beneficiary may bring derivative action where there is substantial impediment to trustee prosecuting proceedings.
CASES CITED:	Gandy v Gandy (1885) 30 Ch D 57 Hayim v Citibank NA [1987] AC 730 Middleton v O'Neill (1943) 43 SR (NSW) 178 Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (1999) 96 FCR 217 Re Gestetner Settlement [1953] Ch 672 Yeatman v Yeatman (1877) 7 Ch D 210
PARTIES:	Penelope Louise Highland (P1) Philip Edward Pomfret (P2) Julio Cesar Labraga (D1) Nowhere In Particular Pty Limited (D2)
FILE NUMBER(S):	SC 2466/05
COUNSEL:	G K Burton SC (P) M Ashhurst (D1)
SOLICITORS:	Dibbs Abbott Stillman (P) Kemp Strang (D1)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

YOUNG CJ in EQ

Tuesday 29 November 2005

2466/05 – HIGHLAND v LABRAGA (NO 2)

JUDGMENT

1 HIS HONOUR: I handed down reasons for judgment in this matter on 29 September 2005 ([2005] NSWSC 973) and made formal orders on 11 October 2005. However, I reserved for consideration after I had received further written submissions the question of costs.

2 As noted in my earlier reasons, the late Mr Highland whose estate was in question in the case, was a co-venturer with Messrs Pomfret and Labraga. Mr Highland’s will left his property to the Highland Family Trust and named Messrs Pomfret and Labraga as his executors. A common form grant of probate was made to those men.

3 The trustee of the Highland Family Trust at the relevant time was a company, Nowhere In Particular Pty Ltd, the directors of which were Messrs Pomfret and Labraga.

4 Mrs Highland was a beneficiary under the Highland Family Trust. Whilst, on a strict construction of the Trust Deed, she was only one of many possible beneficiaries under that trust, it would not take a jury long to find that, in practice, she would probably be its principal beneficiary.

5 Mrs Highland commenced these proceedings to remove Mr Labraga as executor.

6 That application was bound to fail for a number of reasons.

7 The proceedings were amended by order of Barrett J on 6 June 2005 by adding Mr Pomfret as a co-plaintiff and seeking an order that the grant be revoked and a fresh grant made. That order was made following my earlier reasons.

8 Mr Burton SC provided me with the plaintiffs’ submissions on the issue on 14 October. The plaintiffs say that, if Mrs Highland had standing before 6 June, the plaintiffs should get the whole costs of the suit. If, on the other hand, Mrs Highland did not have standing, Mr Labraga should be denied his costs from any source prior to the amendment actually effected on 9 June pursuant to Barrett J’s order.

9 The first matter to consider is whether Mrs Highland had standing prior to 9 June. In his two interlocutory judgements of 15 May and 6 June 2005, Barrett J strongly indicated his provisional view that Mrs Highland did not have standing.

10 In addition to the problem with standing, the estate not being fully administered, the executors had not become trustees so that the order sought could not be made.

11 Ordinarily, only a beneficiary can move the court for administration of an estate or a trust. However, there are at least two exceptions to this rule. First, with a discretionary trust, an object of benefaction may sue; see eg Re Gestetner Settlement [1953] Ch 672 at 678. Secondly, if the person having the right to sue declines, the beneficiary or object of benefaction may herself sue in what is called a derivative action; see eg Hayim v Citibank NA [1987] AC 730 at 747.

12 In the instant case, the first exception does not apply directly as the gift by will was to the trustee of the Highland Family Trust. However that exception is relevant to the second matter, namely, if there is a testamentary benefaction to the corporate trustee of a discretionary trust and the trustee’s administration is deadlocked, may an object of benefaction sue to remove the trustee?

13 The second exception is based on the scenario that it would be open to the beneficiary to bring an administration action against the trustees and, in that action, the trustee might be compelled by the court to sue. A court of equity, not being prone to allow procedure to stand in the way of justice will, in special circumstances, short circuit the process and allow the beneficiary to sue in her own name. However, the action is the same one that the trustee ought to have brought and only one such action can be brought. That is why the action is described as a derivative action. See the detailed discussion in Lewin on Trusts 17th ed (Sweet & Maxwell, London, 2000) at 43-05.

14 The rule clearly is that a beneficiary can bring a derivative action only in special circumstances. What are special circumstances has never been exhaustively defined. However, in Yeatman v Yeatman (1877) 7 Ch D 210 it was made clear that circumstances which would induce the court to answer affirmatively an inquiry as to whether proceedings ought to be instituted will, in general, suffice to entitle a person beneficially interested to sue in her own name.

15 In Middleton v O’Neill (1943) 43 SR (NSW) 178 at 186, Jordan CJ, with whom Davidson J agreed said that such proceedings may be supported in all cases where the relation between the executor and the third party is such as to present a substantial impediment to the prosecution of proper proceedings to protect the rights of the persons interested in the estate. See also Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (1999) 96 FCR 217 at 230.

16 In my view one can marry the two principles I have been discussing and say that a beneficiary (or at least a prominent beneficiary) under a discretionary trust may bring a derivative action to enforce the trust’s rights where there exists substantial impediment to the trustee prosecuting the proceedings.

17 In the instant case, in view of the lack of co-operation between Messrs Labraga and Pomfret, the present was such a case.

18 I do not consider that merely because the case was in Probate, that the principles I have discussed should not apply.

19 I would note that my view that Mrs Highland had standing is in line with modern authority on the subject of access to the courts that it is wiser not to block actions on technical points of standing, but rather to strike out unmeritorious proceedings if they arise.

20 I thus must turn to what order for costs ought to be made.

21 The history of the proceedings generally shows that the present proceedings were instituted as part of a general line of defence to proceedings brought by Mr Labraga who, at the time was vigorously pursuing an application for the appointment of a provisional liquidator of one of the co-venturers’ corporations.

22 The plaintiffs put that cases such as Gandy v Gandy (1885) 30 Ch D 57 lead to the result that there should be no order as to costs prior to 9 June 2005.

23 I must confess I find little assistance from that decision. Indeed questions of costs before the necessary amendment were not considered by the court hearing that case.

24 No order at all has been made for the costs of these proceedings.

25 The proceedings were in the end successful, but to a degree this was because the issues in these proceedings became subsidiary to issues in related proceedings.

26 The reason for the proceedings was that Mr Labraga had instituted action to prefer his own position in priority to that of the estate. The plaintiffs needed to bring these proceedings to protect the estate.

27 No one has made any submissions to the effect that the testator himself caused any part of the present problems.

28 As the suit before amendment was competent (although put in better form by the amendment of 9 June 2005) and as the proceedings succeeded, the proper order is that the first defendant pay the plaintiffs’ costs and I so order.

29 The second defendant really took no part in the proceedings and I should make no order as to its costs.

*************************