Jeffrey Laurence Herbert as trustee for the Blenkinsop Family Trust as trustee for the Blenkinsop Family Trust No 2 v Blenkinsop - [2018] WASC 369

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   JEFFREY LAURENCE HERBERT as trustee for THE BLENKINSOP FAMILY TRUST AS TRUSTEE FOR THE BLENKINSOP FAMILY TRUST NO 2 -v- BLENKINSOP [2018] WASC 369
CORAM:   ALLANSON J
HEARD:   7 MAY 2018
DELIVERED          :   30 NOVEMBER 2018
FILE NO/S:   CIV 2825 of 2017
BETWEEN:   JEFFREY LAURENCE HERBERT as trustee for THE BLENKINSOP FAMILY TRUST AS TRUSTEE FOR THE BLENKINSOP FAMILY TRUST NO 2
Applicant
AND
JUDITH ANN BLENKINSOP
First Respondent
KIM ROSINA HOLLAND
Second Respondent
SCOTT FREDERICK BLENKINSOP
Third Respondent
TRACEY ANN JAKOVICH
Fourth Respondent
CHRISTINE MARION THURTELL
Fifth Respondent
ROSS ALEXANDER BLENKINSOP
Sixth Respondent

Catchwords:

Trusts - Where trustee seeks direction regarding settlement of claim - Where liability allegedly incurred by former trustees - Whether full consideration given and proper advice taken

Legislation:

Trustees Act 1962 (WA), s 42, s 92, s 95(2)

Result:

Directions not given

Category: B

Representation:

Counsel:

Applicant	:	Mr S C M Wong
First Respondent	:	Mr M D Cuerden SC
Second Respondent	:	No appearance
Third Respondent	:	In person
Fourth Respondent	:	No appearance
Fifth Respondent	:	No appearance
Sixth Respondent	:	No appearance

Solicitors:

Applicant	:	HWL Ebsworth Lawyers
First Respondent	:	Williams & Hughes
Second Respondent	:	No appearance
Third Respondent	:	Scott Blenkinsop Legal
Fourth Respondent	:	No appearance
Fifth Respondent	:	No appearance
Sixth Respondent	:	No appearance

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

Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247
Australian Executor Trustees Ltd v Attorney General (WA) [2015] WASC 439
Blenkinsop v Blenkinsop Nominees Pty Ltd [2015] WASC 463
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226
Coates v McInerney (1992) 7 WAR 537
CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98
Deancrest Nominees Pty Ltd v Nixon [2007] WASC 304
Gisborne v Gisborne (1877) 2 App Cas 300
Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405
In re Earl of Strafford, deceased; Royal Bank of Scotland Ltd v Byng [1980] 1 Ch 28
Ireland v Retallack [2012] NSWSC 1179
Karger v Paul [1984] VR 161
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008); 237 CLR 66
Messina v Rodi As Executor of the Estate of Virginia Silvestro (Dec) [No 2] [2014] WASC 32
Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360
Plan B Trustees Ltd v Maitland Parker [2012] WASC 392
Re Atkinson (dec'd) [1971] VR 612
Re Wilson; Kerr v Wilson [1942] VLR 177, 183
Southern Wine Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162
Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319
Whishaw v Stephens; Re Gulbenkian's Settlement Trusts [1970] AC 508

ALLANSON J:

Background

These proceedings were commenced by originating summons filed on 26 October 2017.
The applicant, Jeffrey Laurence Herbert is the trustee of two family trusts: the Blenkinsop Family Trust and the Blenkinsop Family Trust No 2. He was appointed by order of this court on 15 December 2015, replacing Blenkinsop Nominees Pty Ltd and Silverglade Pty Ltd.[1] Consequential orders were made vesting the property of the trusts in Mr Herbert.
[1] Blenkinsop v Blenkinsop Nominees Pty Ltd [2015] WASC 463.
The Blenkinsop Family Trusts are discretionary trusts. The six respondents are beneficiaries, but not the only beneficiaries.
The first respondent, Judith Ann Blenkinsop, also is or claims to be a creditor of each trust.
The respondents are also directors of the two former trustee companies.
Mr Herbert seeks advice and direction pursuant to s 92 of the Trustees Act 1962 (WA) as to whether he is justified in settling claims by Mrs Blenkinsop against each trust on terms contained in Heads of Agreement and Deeds of Settlement and Release, which he has put before the court, and in allocating the payments of the settlement sum between the two trusts in the manner set out.
The first respondent, Judith Ann Blenkinsop, appeared and supported the application. It was opposed by the third respondent, Scott Frederick Blenkinsop. Mr Blenkinsop was the only one of the respondents who actively opposed the application.
I have no doubt that Mr Herbert has acted wisely in seeking directions under s 92, as any decision he makes is likely to be scrutinized and challenged. The acrimony between members of the Blenkinsop family has spilled over into the relationship of at least some of them with Mr Herbert. There is a history of litigation, at times bitterly contested.

The Loan Account Proceedings

At the time of Mr Herbert's appointment there were continuing proceedings between Mrs Blenkinsop, and the former trustees (the Loan Account Proceedings).[2] The action was commenced by writ with indorsed statement of claim on 23 April 2014. It had, accordingly been prosecuted for over three years at the time of the mediation at which the proposed settlement was reached.
[2] In these reasons I will refer to that action (CIV 1537 of 2014) as the '2014 action'.
Mrs Blenkinsop claimed:
(1)Blenkinsop Nominees, as trustee of Trust No 1, is indebted to her for the sum of $1,969,995.13;
(2)Silverglade, as trustee of Trust No 2, is indebted to her for the sum of $2,526,455.56.
Mrs Blenkinsop pleaded that the debts arose, in part, from loans and from the transfer of property by Mrs Blenkinsop and her husband to the trusts, and from contributions she and her husband made to the purchase price of properties held as trust assets.
The former trustees opposed Mrs Blenkinsop's claims. Proceeding in the action was slow and beset by difficulties, caused in part by Mrs Blenkinsop being a director of the trustee companies and supported in her action by another director[3], and in part by the fact that Blenkinsop Nominees and Silverglade were unable to operate effectively due to discord among the directors. It was the inability of the companies to function effectively, and to carry out their duties as trustees, that led to the orders for the replacement of the trustees. The defendants to the writ, Blenkinsop Nominees and Silverglade, were represented by two firms between May 2014 and May 2016. There are unresolved questions regarding their ability to properly instruct solicitors.
[3] The fifth respondent.
In 6 May 2016, the new trustee, Mr Herbert, was named as a party to the action by Mrs Blenkinsop.

The proposed settlement

Mr Herbert deposes that following his appointment as trustee he proposed a general strategy to the directors of the former corporate trustees to liquidate the assets of the trusts and distribute the proceeds of sale as part of an early vesting. He sought the assistance of the directors and the provision of any further documents that they may have to assist in his review of Mrs Blenkinsop's alleged loan accounts.[4]
[4] Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017 [18] ‑ [19].
Mr Herbert then conducted a loan account analysis 'to understand, with the input of beneficiaries … the nature, calculation and extent of amounts alleged to be owing by the trusts to [Mrs Blenkinsop]'.[5]
[5] Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017 [21].
In 2016, Mr Herbert decided that the trustee should defend the Loan Account Proceedings, and advised the beneficiaries that he would.[6]
[6] Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017 [28].
On 15 March 2017, Mrs Blenkinsop filed a substituted statement of claim in which she claimed:
(a)$1,819,926.77 in relation to Trust No 1; and
(b)$685,675.70 in relation to Trust No 2.
Mrs Blenkinsop also claimed costs which could be in the range of $350,000 ‑ $400,000; the claim for interest, should the claims succeed, could exceed $600,000, depending upon when repayment was validly demanded.[7]
[7] Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017 [33].
Following a mediation in August 2017, Mr Herbert and Mrs Blenkinsop recorded the terms of their settlement in Heads of Agreement, subsequently formalised into a Deed of Settlement and Release in September 2017. The settlement and payment of the settlement sums is conditional upon the court granting a direction under s 92 of the Trustees Act that Mr Herbert is justified in settling the claim on the terms set out.
Mr Herbert considers that the settlement of the Loan Account Proceedings forms part of an overall commercial strategy to have the trusts vest early, as being a way to resolve the disputes between the family members. That overall strategy is, apparently, not in dispute. But as someone with experience of the proceedings between members of this family, I expect that any step towards its implementation will be contested.
The estate held by the two trusts is relatively large. It has already met legal costs from earlier proceedings and is likely to be further substantially diminished by legal costs as well as the costs of administration of the trusts by Mr Herbert.

The evidence

Evidence was on affidavit.
The applicant read two affidavits of Mr Herbert, sworn 24 October 2017 and 16 April 2018. The earlier affidavit included a confidential exhibit containing legal advices, including senior counsel's advice. The confidential exhibit had been disclosed to such of the beneficiaries of the trusts as wished to see it.
The first respondent read an affidavit of Judith Ann Blenkinsop, sworn 31 March 2018.
Mr Blenkinsop sought to read (or refer to) 12 specified affidavits and 'any subsequent affidavits or documents filed in the proceedings or referred to in other parties' submissions or affidavits.' Ultimately he read his affidavits of 17 March 2015, 23 October 2015, 14 June 2016, 14 August 2017, 22 January 2018, 3 April 2018, and 2 May 2018. He also sought to read affidavits of the second respondent, Kim Rosina Holland, sworn 23 October 2015 and 29 January 2018; an affidavit of the sixth respondent, Ross Alexander Blenkinsop, sworn 21 April 2017; and affidavits of Mr Herbert sworn 7 February 2017, 15 May 2017, and 24 October 2017. Many of those affidavits were sworn in other proceedings. Although no party objected to them being read, my opinion on reading them was that little of the evidence was relevant.
Mr Herbert set out in detail the considerations to which he had regard in deciding to settle the proceedings:
(1)a global settlement would avoid protracted litigation and avoid the trusts incurring legal costs;
(2)the likely costs of proceeding to trial having regard to the history of interlocutory disputes, the likely length of trial, and the cost and complexity of interrogating the financial records of the trusts which were incomplete and fragmented;
(3)the prospects of successfully defending the claim and the possible cost exposure to the trusts if the defence was unsuccessful;
(4)particular legal and factual issues arising in the proceedings, including whether the former corporate trustees would be required to be joined as parties to the proceedings;
(5)the incomplete nature of the information available;[8]
(6)the loan amount recorded in the financial accounts was far larger than that claimed in the substituted statement of claim;
(7)the solvency of the trusts; and
(8)the overall strategy to wind up the trusts and distribute the remaining assets which could not be done without bringing the Loan Account Proceedings to an end.[9]
[8] Mr Herbert describes the records of the trusts' former accountant as 'only in hard copy, fragmented and incomplete. Many of the records were missing, and in some cases, records for complete financial years were missing. The records rarely included supporting documentation of transactions, and the general ledger printout (if available) was the main source of information on individual transactions. Even then, the transaction descriptions in the general ledger were not comprehensive'. Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017 [49(c)].
[9] Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017 [49].
I do not intend in these reasons to analyse the Deed of Settlement and Release in any detail. It is, however, important to note the mutual releases. Mrs Blenkinsop releases Mr Herbert and the former trustees and any employees, officers, advisers and agents of the trustee and the former trustees:
from all or any Claims which Mrs Blenkinsop has or, but for this deed, may have had against [the released parties]:
(i)arising from or the subject of the Action or at any time pleaded in the Action; and
(ii)arising from any transaction recorded in or forming part of the balance of the Loan Accounts, including without limitation, monies advanced to the Trusts, assets advanced to the Trusts, property purchased on behalf of the Trusts, distributions made by the Trusts in favour of Mrs Blenkinsop, credit applied to the Loan accounts in respect of wages, journal adjustments applied to the Loan accounts, and other entries included in the Loan accounts (even where some or all of the details of those entries are currently unknown),
irrespective of any demand being made or any legal proceedings being commenced and whether such claims were known or unknown to Mrs Blenkinsop at the date of this Deed.[10]
[10] Affidavit of Jeffrey Laurence Herbert, sworn 24 October 2017, JLH 12, 136.
Mr Herbert, as trustee, provides a corresponding release of Mrs Blenkinsop from any claims which he may have had.
Mrs Blenkinsop, as plaintiff in the 2014 action, wishes to compromise those actions in the terms agreed.

Principles applicable to the application

Section 42 of the Trustees Act provides, relevantly:
A trustee may, if and as he thinks fit ‑
…
(c)pay or allow any debt or claim on any evidence that he thinks sufficient; or
…
(f)compromise, compound, abandon, submit to arbitration or otherwise settle any debt, account, claim or thing whatever relating to the trust or to the trust property;
and for any of those purposes may enter into, give, execute, and do such agreements, instruments of composition or arrangement, releases, and other things as to him seem expedient, without being responsible for any loss occasioned by any act or thing so done by him in good faith.
As s 42 makes clear, the power to compromise is not limited to the compromise of an action, but extends to any debt, account, claim or thing whatever relating to the trust or to the trust property.
By s 92(1) of the Trustees Act 1962 (WA):
Any trustee may apply to the Court for directions concerning any property subject to a trust, or respecting the management or administration of that property, or respecting the exercise of any power or discretion vested in the trustee.
The only jurisdictional bar to relief under s 92 is that the applicant trustee must point to the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument.[11] The decision whether to compromise a claim relating to the trust property raises questions respecting the management or administration of the trust property and is within s 92. That is, the jurisdiction of the court to give advice may be properly exercised and advice given as to whether Mr Herbert is justified in settling the Loan Account Proceedings and other claims by Mrs Blenkinsop on the terms proposed.
[11] Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008); 237 CLR 66 [58].
The authorities provide guidance on the exercise of the jurisdiction. The proceedings are for the purpose of the court providing private and personal advice to the trustee but have 'another and no less important purpose' of protecting the interests of the trust.[12]
[12] Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar [65], [72].
In Australian Executor Trustees Ltd v Attorney General (WA), Martin CJ said of the jurisdiction under s 92:
[T]he powers conferred by provisions like s 92 of the Act should generally be exercised for the purposes for which they are conferred, which are the protection of the property of the trust and the protection of a trustee acting properly and in accordance with the directions of the court. Subject to conformity with those overarching purposes, the exercise of the powers conferred by such provisions is discretionary and will depend upon the particular facts and circumstances of each case, unconstrained by inflexible rules or prescriptive standards.
Nevertheless, the cases do provide some guidance with respect to the exercise of the discretion conferred upon the court. In exercising its powers, the court will generally endeavour to act in the best interests of the beneficiaries of the relevant trust and, where appropriate, will take account of the views of those beneficiaries. Further, ordinarily the court will not exercise its jurisdiction in such a way as to usurp the roles and responsibilities of trustees in relation to the making of commercial decisions or with respect to the conduct of litigation. Rather, the court will be concerned to ensure that the trustee has taken proper advice and given full consideration to all relevant matters before arriving at a reasoned and appropriate decision. If satisfied of those matters, in appropriate cases the court will give the directions sought and thereby confer protection upon a trustee taking action in accordance with those directions.[13]
[13] Australian Executor Trustees Ltd v Attorney General (WA) [2015] WASC 439 [32] - [33]. See also Plan B Trustees Ltd v Maitland Parker [2012] WASC 392 [45] - [47].
The present application and the responses to it raised several issues:
(1)would Mr Herbert act properly in settling the claims when the debts alleged were incurred by the former trustees and there is no issue or dispute between Mr Herbert and Mrs Blenkinsop in relation to the claimed debts;
(2)was the decision to enter into the compromise agreement made in good faith;
(3)did Mr Herbert give fair consideration to the relevant issues with the assistance of legal and accounting advice.
There is then a separate question about whether it is proper for Mr Herbert to apportion the settlement sum between the two trusts in the manner proposed, particularly when the effect will be to compromise the claim against Trust No 2 for an amount greater than that claimed in the Loan Account Proceedings.
It is first necessary to consider the effect of the replacement of the trustees since the commencement of the Loan Account Proceedings. That issue goes to whether it is proper for Mr Herbert to compromise the Loan Account Proceedings, and precedes questions of his discretion.

The replacement of the trustees

The claim by Mrs Blenkinsop is for debts incurred by the former trustees.
Blenkinsop Nominees and Silverglade are liable for any debts they incurred to Mrs Blenkinsop, even if those debts were incurred in the performance of their roles as trustee and for the benefit of the trust estate. As trustees, they were entitled to be indemnified out of the trust property for debts each incurred as trustee in the administration of the trust.[14]
Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration.[15]
[14] Chief Commissioner of Stamp Duties (NSW) v Buckle[1998] HCA 4; (1998) 192 CLR 226 [48]; Octavo Investments Pty Ltd v Knight[1979] HCA 61; (1979) 144 CLR 360, 367.
[15] Fratcher WF, Scott on Trusts (4th ed, Little Brown, 1987) Vol IIIA § 246, quoted and approved in Chief Commissioner of Stamp Duties (NSW) v Buckle [48].

The right of indemnity arose when relevant trust related liabilities were incurred. The rights of exoneration in discharging a debt incurred in the administration of the trust operate as a charge or lien on the trust property. While they were in possession of the trust property, Blenkinsop Nominees and Silverglade could retain possession as against a beneficiary until their right of indemnity was exercised.[16] Loss of office and loss of possession of the trust estate would result in loss of the former trustees' lien, but does not deprive them of an accrued right of indemnity.[17] On the vesting of the trust property in Mr Herbert as new trustee, he took the property subject to the rights of the former trustees.[18] He did not, however, assume liability for any debt - the liability remained with the former trustees.
[16] Octavo Investments v Knight (369 - 370).
[17] Coates v McInerney (1992) 7 WAR 537; Southern Wine Corp Pty Ltd (in liq) v Frankland River Olive Co Ltd [2005] WASCA 236; (2005) 31 WAR 162 [30].
[18] Octavo Investments v Knight, 370; Chief Commissioner of Stamp Duties v Buckle, 246. The trust deeds for the two Blenkinsop Family Trusts do not exclude any property from the lien, which extends over all of the trust property: Octavo Investments v Knight, 367.
The former trustees' right to exoneration takes priority over the rights of the beneficiaries, and the entitlement of the beneficiaries 'is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them'.[19] As the court said in CPT Custodian Pty Ltd v Commissioner of State Revenue:
Until satisfaction of rights of reimbursement or exoneration, it was impossible to say what the trust fund in question was.[20]
[19] Chief Commissioner of Stamp Duties (NSW) v Buckle [48], [50]. Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979) 144 CLR 360, 367.
[20] CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98 [51].
Thus, while Mr Herbert did not assume responsibility for the debts of the former trustee, the entitlements of the beneficiaries in Trust No 1 and Trust No 2 are subject to the right of indemnity of the former trustees.
Mr Blenkinsop argued that no coercive orders could be made against the former trustees, as they are not parties to the proceedings. But that, in my opinion, does not address the relevant question. The question is whether the present trustee may properly settle Mrs Blenkinsop's claims as claims or things relating to the trust or the trust property. They are claims in relation to the trust property because the entitlement of the beneficiaries 'is confined to so much of those assets as is available after the liabilities in question have been discharged or provision has been made for them'.
It is not necessary that Mrs Blenkinsop has a claim against Mr Herbert. Were Mrs Blenkinsop successful in her claim against the former trustees, she could, indirectly, have recourse to the trust funds. Creditors to whom a trustee has become indebted in the course of carrying on the trust business have no direct claim in law upon the assets of the trust. But in equity they may be subrogated to the trustee's right of indemnity or lien.[21] In that sense the creditors' claims upon the assets of the estate are indirect, but they are claims in relation to the trust fund.
[21] Vacuum Oil Co Pty Ltd v Wiltshire [1945] HCA 37; (1945) 72 CLR 319, 336.
Because there is a potential claim through subrogation, Mr Herbert is not simply a volunteer settling the liability of a third party.
Further, there are reasonable grounds to conclude that any attempt to recover the debt from the former trustees would be fruitless. The former trustees' right of indemnity against the trust property appears to be their only significant asset. In Re Wilson; Kerr v Wilson, O'Bryan J said:
There appears to be no reason in principle why a creditor must pursue his common law rights to judgment before he will be allowed to be subrogated to the trustees' indemnity against the estate. It is one thing to refuse him an order for administration as a matter of discretion if no more appears than the fact of the debt, but if he has demanded payment from his debtor and has failed to receive payment and the circumstances are such as to lead to the reasonable conclusion that a judgment, if obtained, would be fruitless, it would be a harsh and unnecessary rule that required him first to proceed to judgment. The principle of this right of subrogation is stated in Halsbury's Laws of England (2nd ed.), vol 13, p 189, in the following terms - 'the executor is personally liable for the debts of the business, but he has a right of indemnity against the assets of the testator's estate, so far as they are authorised to be employed in the business; the creditor, on the other hand, has no legal claim against the estate, but he is allowed in equity to enforce on his own behalf the executor's right of indemnity. He is subrogated to this right, while he retains also his legal claim against the executor.' This statement of the law, in my opinion, is justified by the authorities (In re Johnson; Shearman v Robinson; In re Frith; Newton v Rolfe). In the latter case the creditor's right of subrogation was recognised and given effect to although he does not appear to have sued the trustee at law (see also In re Bracey; Hull v Johns).[22]
[22] Re Wilson; Kerr v Wilson [1942] VLR 177, 183; and see Deancrest Nominees Pty Ltd v Nixon [2007] WASC 304 [49].
In these circumstances, there is no reason why such a settlement could not be a proper exercise of the power of the trustee to protect the trust property in the interests of the beneficiaries, without requiring the creditors of the former trustees to first proceed to judgment against them.
There is no suggestion here of disentitling conduct by the former trustees that would disqualify them from relying on the right of indemnity, so that the derivative claim of the creditor would be lost.
The fact that the former trustees are no longer named as parties to the Loan Account Proceedings is procedural, and could be remedied if required. It does not make the proceedings a nullity, particularly where they were originally brought against the former trustees. The re-joining of the former trustees would be a formal step, particularly if the substitution of Mr Herbert was procedurally incorrect.
In short, I am satisfied that Mr Herbert has power to compromise the claims as they relate to the trust or to the trust property, even if the claim is for a debt incurred by his predecessors in office. It is not a requirement of s 42 that the compromise be of a debt incurred by the trustee, merely that it relate to the trust property. Nor does s 42 require that there first be proceedings against the trustee.

The application for advice

The application is concerned not only with whether Mr Herbert may compromise the claim, but he also approaches the court for directions in relation to the terms of the compromise.
This case raises the question of the proper role of the court in an application for directions regarding a decision which lies in the discretion of the trustee.

The trustee's submissions

Mr Herbert submitted that, under the trust deeds and at law, he has wide powers to deal with the trust assets, including the power to take such action as he thinks fit for the adequate protection of any part or parts of the Trust Fund and to do all such other things as may be incidental to the exercise of the powers and authorities conferred on the trustee by the trust deeds.
Counsel for Mr Herbert referred the court to the discussion in Ireland v Retallack,[23] referred to by Le Miere J in Messina v Rodi As Executor of the Estate of Virginia Silvestro (Dec) [No 2].[24] In short, counsel submitted that the court is to consider whether it is proper for the trustee to consider a compromise. Whether the trustee does compromise the action and the terms of the compromise will be for the trustee to determine.
[23] Ireland v Retallack [2012] NSWSC 1179.
[24] Messina v RodiAs Executor of the Estate of Virginia Silvestro (Dec) [No 2] [2014] WASC 32 [13].
In exercising the power, Mr Herbert says that he carefully considered the relevant issues, which involved a detailed analysis of the financial records of the trusts, supplemented over many months by further matters raised by some of the guardians.[25] Mr Herbert took into account the advice of legal advisors on a range of matters, including the prospects of successfully defending the claims as well as the possible cost exposure of the trusts.
[25] Each of the respondents is also a guardian of each trust.
Mr Herbert says that he also had regard to the broader interests of all beneficiaries in exploring a 'global settlement' involving the early vesting of the trusts.
Finally, counsel submitted that the settlement documentation is reasonable and appropriate. The deed of settlement not only covers the claims the subject of the Loan Account Proceedings, but also any claims 'arising from any transaction recorded in or forming part of the balance of the Loan Accounts'.
On this basis, Mr Herbert submitted that his decision is proper, and that he has exercised his discretion in good faith and given fair and thorough consideration to the relevant issues.

Mrs Blenkinsop's submissions

Counsel for Mrs Blenkinsop submitted that, in compromising a claim made against the trust or the trust property, the criterion prescribed by s 42 is whether the proposal seems 'expedient' to the trustee, that is, desirable and fair for the trust as a whole or (which is the same thing) in the interests of all the beneficiaries.[26]
[26] In re Earl of Strafford, deceased; Royal Bank of Scotland Ltd v Byng [1980] 1 Ch 28, 44 ‑ 45.
Mrs Blenkinsop submitted that trustees with such a discretionary power have three duties:
(a)to act honestly and in good faith;
(b)to act upon genuine consideration, that is, to take an informed view of whether or not to exercise their discretion, and not to act 'irresponsibly, capriciously or wantonly'; and
(c)to exercise their power with due consideration for the purpose for which it was conferred, and not for some ulterior purpose.
Mrs Blenkinsop submitted that the trustee's discretion in this case is absolute or uncontrolled, and will be limited only by the obligation to act in good faith, which includes acting for a proper purpose and on genuine and real consideration.[27] In particular, Mrs Blenkinsop relied on the observations of McGarvie J in Karger v Paul:
[I]t is relevant to look at evidence of the inquiries which were made by the trustees, the information they had and the reasons for, and manner of, their exercising their discretion. However, it is not open to the Court to look at those things for the independent purpose of impugning the exercise of discretion on the grounds that their inquiries, information or reasons or the manner of exercise of the discretion, fell short of what was appropriate and sufficient. Nor is it open to the Court to look at the factual situation established by the evidence, for the independent purpose of impugning the exercise of the discretion on the grounds that the trustees were wrong in their appreciation of the facts or made an unwise or unjustified exercise of discretion in the circumstances. The issues which are examined by the Court are limited to whether there has been a failure to exercise the discretion in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred. In short, the Court examines whether the discretion was exercised but does not examine how it was exercised.[28]
[27] Gisborne v Gisborne (1877) 2 App Cas 300, 305, 306, 310 ‑ 311, 311 ‑ 312; Whishaw v Stephens; Re Gulbenkian's Settlement Trusts [1970] AC 508, 518; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405, 427, 428 ‑ 429.
[28] Karger v Paul [1984] VR 161, 164 - 165.
Mrs Blenkinsop submitted that the court's jurisdiction is limited to advising or directing as to whether the proposed compromise of litigation would be a lawful or proper exercise of the trustee's discretionary power. The court does not assess the reasonableness of the trustee's decision, or even ascertain whether the trustee's consideration of the matter was appropriate or sufficient. The court is solely concerned to determine whether the trustee has complied with his obligation to exercise the relevant discretion in good faith, upon genuine consideration and in accordance with the purposes for which the discretion was conferred.
Further, the consideration by the trustee is not limited to the legal merits of the claim or defence, but includes commercial and practical considerations relevant to the exercise of a commercial judgment which the trustee is called upon to make.

Mr Blenkinsop's submissions

Mr Blenkinsop filed two written submissions. After the hearing he also sent various submissions in correspondence to the court. He neither sought nor was granted leave to make further submissions and I have not had regard to that later material.
Much of what he presented was directed to matters not relevant to the exercise of the court's jurisdiction under s 92. In particular, he went into detail on facts relating to the adequacy of the loan account analysis. He also sought to use these proceedings to question the independence of Mr Herbert and, generally, to attack the conduct of Mr Herbert in the administration of the trusts.
Mr Blenkinsop submitted that the trustee had not taken advice on the whole of the claims to be compromised. In particular, the advice of senior counsel was given about 10 months before Mrs Blenkinsop filed a substituted statement of claim.
Mr Blenkinsop also wanted to dispute the factual basis of the advice provided to Mr Herbert.
The second submission was principally directed to the power of Mr Herbert to compromise the claims, and questioned the reliance on s 42 of the Trustees Act.
Mr Blenkinsop submitted that the court must consider whether:
(1)the trustee's decision to agree to the conditional compromise was within power;
(2)there was any impropriety in the trustee's decision;
(3)the trustee exercised his discretion in good faith; and
(4)the trustee gave fair consideration to the relevant issues.
He submitted that the Loan Account Proceedings are not properly brought against Mr Herbert, with the result that the mediation, the Heads of Agreement and the Deed of Settlement and Release are nullities. He characterised the current application as seeking approval for a coercive order for payment against the former trustees.
Mr Blenkinsop also submitted that the trustee had not fairly considered the relevant issues and was not acting in good faith. Much of his submission was based on the argument, which I do not accept for the reasons given above, that the claims by Mrs Blenkinsop are not claims relating to the trust or the trust property. In part, he relied on the limited advice considered by the trustee regarding the prospects of the claims.

Consideration

In my opinion, the submissions of the trustee and Mrs Blenkinsop, in particular the latter, impose too great restrictions on the consideration by the court as to whether the proposed compromise is justified.
The procedure under s 92 of the Trustees Act enables the trustee to apply for advice as to whether the proposed settlement is justified.
These are not proceedings in which the court should determine disputed issues of fact. The application for judicial advice 'is founded upon facts stated to the Court by the trustee, untested by adversarial procedure, and assumed by the Court to be true' - although 'only for the purpose of the application'.[29] The advice is given on that basis. The trustee must fully and fairly disclose the facts known to him to the court. The protection afforded to the trustee is lost should he have been guilty of any fraud or wilful concealment or misrepresentation in obtaining the direction.[30]
[29] Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar [79].
[30] Trustees Act 1962 (WA) s 95(2).
In applications for advice about whether a trustee is justified in bringing or defending proceedings, it has been held that the matter should be sufficiently investigated to determine whether or not the proceedings would be fruitless.[31] In Application of Macedonian Orthodox Community Church St Petka Inc (No 3), in a passage later quoted by the High Court, Palmer J said:
In a judicial advice application in which the trustee asks whether it is justified in prosecuting or defending litigation, all the Court does is to reach a view as to whether the Opinion of Counsel satisfies it that there are sufficient prospects of success to warrant the trustee in proceeding with the litigation. Counsel's Opinion must address the facts necessary to support the legal conclusions reached and must demonstrate that the propositions of law relied upon for those conclusions are properly arguable. Whether, in the light of Counsel's Opinion, there are 'sufficient' prospects of success calls for another judgment, founded upon such considerations as:
-the nature of the case and the issues raised;
-the amounts involved, including likely costs;
-whether the likely costs to be incurred by the trustee are proportionate to the issues and [the] significance of the case;
-the consequences of the litigation to the parties concerned;
-in the case of a charitable trust, any relevant public interest factors.[32]
[31] Re Atkinson (dec'd) [1971] VR 612, 615.
[32] Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247, [80].
The same approach should, in my opinion, apply to a proposed settlement. The proceedings are for the 'no less important' purpose of protecting the interests of the trusts, which requires the court to endeavour to act in the best interests of all beneficiaries.
I have earlier set out the considerations which Mr Herbert said have guided his decision (subject to the court's direction). There is no dispute that a settlement would avoid the trust incurring legal costs, but that has to be balanced with the prospects of successfully defending any claim. Mrs Blenkinsop brings her claim as a creditor, not a beneficiary. She is an ordinary litigant and, should she be unsuccessful, may be personally liable for costs and not entitled to be indemnified out of the trust estates.
Mr Herbert has taken the advice of senior counsel, but before the amendment to the statement of claim. There is no later advice properly addressing the prospects of successfully defending the claim, so as to enable the court to be satisfied that there has been proper consideration of whether settlement in the sum proposed is in the interests of all of the beneficiaries. The amount of the claim in the amended statement of claim is substantial and, in total, about a third of the trust assets.
I accept that it is a relevant consideration that the trustee believes it is in the best interests of the beneficiaries to wind up the trusts and, to achieve that end, thinks it fit to resolve any potential liability out of the trust property to Mrs Blenkinsop.
The court is not assessing either the correctness of the trustee's decision or the reasonableness of the settlement as a decision in his discretion. But it should consider whether there has been sufficient consideration to enable the court to determine that the proposed settlement is justifiable as in the interest of all of the beneficiaries. Specifically, the court should consider whether counsel's opinion supports the propositions relied on in the settlement. The opinion is confidential, and I will not set out the content. It is sufficient to say that the claims in the amended statement of claim, and the foreshadowed (but not particularised) further claims on which Mrs Blenkinsop relies, have not been considered. The opinion is comprehensive, but its utility is limited by the questions counsel was considering.

As Martin CJ said in a passage quoted earlier in these reasons:
[O]rdinarily the court will not exercise its jurisdiction in such a way as to usurp the roles and responsibilities of trustees in relation to the making of commercial decisions or with respect to the conduct of litigation. Rather, the court will be concerned to ensure that the trustee has taken proper advice and given full consideration to all relevant matters before arriving at a reasoned and appropriate decision.[33]
[33] Australian Executor Trustees Ltd v Attorney General (WA) [33].
On the material before me, I am not satisfied that it is appropriate to give the directions sought.

The allocation of the settlement sum

Although it is not necessary, having regard to my decision on the primary question, the allocation of the settlement sums was fully argued and I will briefly give my views.
The Deed of Settlement and Release does not specify or allocate which trust would pay the settlement sum, or the proportion to be paid by each of them.
Mr Herbert said that it is not proposed that settlement sum will be paid equally from each trust. He does not base the allocation between each trust on the amount claimed in the Loan Account Proceedings against each of them, but on the following factors:
(a)the differences in the balances of the loan accounts recorded in the trusts' previous financial statements;
(b)the difference in the vesting date of each trust (2023 and 2072 respectively); and
(c)the difference in the number of beneficiaries of each trust.
As Mr Blenkinsop correctly submitted, the trustee proposes to compromise a claim against the trustee of Trust No 2, and thus a claim that relates to the trust fund in Trust No 2, for more than the amount now claimed in relation to that trust fund.
As a result of matters raised by Mr Blenkinsop, Mr Herbert provided further evidence regarding his proposed allocation of the settlement sum in his affidavit of 16 April 2018. In particular, he responded to the suggestion that the settlement sum should be in proportion to the sums pleaded in the substituted statement of claim. Mr Herbert demonstrated that under that proposed method of allocation, Trust No 1 would be liable for 73.39% of the payment when, based on the book value of the loan balances according to the financial statements between each trust in the loan account analysis set out in his first affidavit, it only owed 31.9%.[34]
[34] Affidavit of Jeffrey Laurence Herbert, sworn 16 April 2018 [73].
With respect to the trustee, I cannot see what difference the vesting dates for each trust makes to how the payment of the claims under the proposed settlement should be allocated.
The trustee's proposal requires that the two trust estates be, in effect, treated as one. The allocation subordinates the interests of the beneficiaries in Trust No 2 to the interests of the beneficiaries in Trust No 1. The beneficiaries are not identical.
The book value of the loan accounts is of little relevance where there are unresolved limitation issues in relation to the claims and, more generally, where there is no legal advice permitting an analysis of the prospects of recovery by Mrs Blenkinsop against each trust for the full amount of the book value of the account.

Conclusion

Mr Herbert has power to compromise the claims of Mrs Blenkinsop as they relate to the trusts and to the trust property. The material before the court does not, however, enable me to direct that the proposed settlement is justified. The legal advice obtained by the trustee does not enable the court to determine that proper consideration has been given to the claims as now formulated and the prospects and consequences of defending them. I can make no finding whether the proposed directions would protect the interests of all beneficiaries.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
ZW
ASSOCIATE TO THE HONOURABLE JUSTICE ALLANSON
30 NOVEMBER 2018