Lane v Deputy Commissioner of Taxation - [2017] FCA 953

FEDERAL COURT OF AUSTRALIA
Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953

File number(s): QUD 198 of 2017

Judge(s): DERRINGTON J

Date of judgment: 18 August 2017

Catchwords:
BANKRUPTCY AND INSOLVENCY – trustee in bankruptcy’s right to insolvent trustee’s right of exoneration – discussion of the nature of the right of exoneration – whether the funds are to be distributed to all creditors or only to trust creditors – whether right of indemnity “property divisible among the bankrupt’s creditors” or trust property

BANKRUPTCY AND INSOLVENCY – trustee’s right of indemnity – whether bankruptcy changed the nature of the right of exoneration – whether the priority regime in s 109 of the Bankruptcy Act 1966 (Cth) applies to the use of the right of exoneration – trust creditors paid pari passu – whether the right of exoneration ought to be exhausted before dividends are paid – “hotchpot” principle considered

BANKRUPTCY AND INSOLVENCY – costs expenses and remuneration of trustee in bankruptcy – use of the right of indemnity to meet the costs expenses and remuneration of bankruptcy trustee – consideration of Berkeley Applegate principles – consideration of Universal Distributing principles – reasonableness of remuneration of trustee

TRUSTS AND TRUSTEES – trustee’s right of indemnity – nature of the trustee’s right of indemnity – trustee’s equitable lien supporting the right of exoneration – whether trustee’s right of indemnity is trust property

Legislation:
Bankruptcy Act 1966 (Cth), ss 5, 58, 108, 109, 116, 117, 122, 132, 133, 134, 140, 433

Bankruptcy Act 1966 (Cth) sch 2 Insolvency Practice Schedule (Bankruptcy)ss 5-15, 90-15(1), 90-20(1)(a)

Corporations Act 2011 (Cth), ss 473, 555, 556, 562

Bankruptcy Regulations 1996 (Cth), r 6.02

Companies Act 1961 (Qld), s 293

Companies Act 1961 (Vic)

Companies Act 1962 (SA), s 292

Trustee Act 1925 (NSW)

Trusts Act 1973 (Qld), ss 72, 76, 101

Cases cited:
13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377
Adsett v Berlouis (1992) 37 FCR 201
Agricultural Land Management Limited v Jackson (No. 2) (2014) 48 WAR 1
Akers v Deputy Commissioner of Taxation (2014) 223 FCR 8
Australian Securities and Investment Commission v Letten (No. 17) (2011) 286 ALR 346
Australian Securities and Investments Commission v Idylic Solutions Ltd (2009) 76 ACSR 129
Balkin v Peck (1998) 43 NSWLR 706
Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466
Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation (2011) 193 FCR 442
Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111
Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171
Cirillo v Citicorp Australia Ltd [2004] SASC 293
Cleaver v Delta American Reinsurance Company (in liq) [2001] 2 AC 328
Combis in the matter of Reehal Holdings Pty Ltd (in liq) [2017] FCA 793
Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226
Coumanios v Giunti [2017] FCA 678
CTP Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98
Cummings v Claremont Petroleum NL (1986) 185 CLR 124
Dixon v Wieselmann (2013) 93 ACSR 576
Dowse v Gorton [1891] AC 190
Elders Trustee and Executor Company Limited v EG Reeves Pty Ltd (1987) 78 ALR 193
Fletcher v Collis [1905] 2 Ch 24
Freelance Global v Bensted Ltd (in liq) [2016] VSC 181
Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29
Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158
Hardoon v Belilios [1901] AC 118
Hewett v Court (1983) 149 CLR 639
Hood’s Trustees v Southern Union General Insurance Co of Australasia Ltd [1928] 1 Ch 793
In re Akerman [1891] 3 Ch 212 at 219
In re Blundell; Blundell v Blundell (1889) 40 Ch D 370
In re Johnson (1880) 15 Ch D 548
In re Johnson [1880] 15 Ch D 548
In re Kaupthing Singer & Friedlander Ltd (No 2) [2012] 1 AC 804
In re Marine Mansions Co (1867) LR 4 Eq 601
In re Oriental Hotels Co (1871) LR 12 Eq 126
In Re Regent’s Canal Ironworks Co (1875) 3 CH D 411
In re Richardson [1911] 2 KB 705
In Re Stucley [1906] 1 Ch 67
In re Suco Gold (1983) 33 SASR 99
In the matter of North Food Catering Pty Ltd (2014) 32 ACLC 14-049
Jennings v Mather [1902] 1 KB 1
Kelly v Mina [2014] NSWCA 9
Kite v Mooney; In the matter of Mooney’s Contractors Pty Ltd (in liq) (No.2) [2017] FCA 653
Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550
Lerinda Pty Ltd v Laertes Investments Pty Ltd [2010] 2 Qd R 312
Liverpool Mortgage Insurance Co’s Case [1914] 2 Ch 617
Mannigel v Aitken (1983) 77 FLR 406
McDonald v Young [2012] FCAFC 127
Melbourne Tramways Trust v Melbourne Tramway & Omnibus Company Ltd (1887) 13 VLR 487
MF Global Limited (in liq) (No 2) [2012] NSWSC 1426
Mooney’s Contractors Pty Ltd (2017) FCA 653
Nissen v Grunden (1912) 14 CLR 297
NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90
Octavo Investments v Knight (1979) 144 CLR 360
Official Assignee v Jarvis [1923] NZLR 1009
Owen v Delamere (1871) LR 15 Eq 134
Re AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 (in liq) [2014] NSWSC 1004
Re ADM Franchise Pty Ltd (1983) 7 ACLR 987
Re Amerind Pty Ltd (in liq) [2017] VSC 127
Re Application of Sutherland (2004) 50 ACSR 297
Re Australian Home Finance Pty Ltd [1956] VLR 1; (1955) 63 Arg LR 247
Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32
Re Byrne Australia Pty Ltd (No.2) [1981] 2 NSWLR 364
Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394
Re Clarke; Ex parte Beardmore [1894] 2 QB 393
Re Doyle (1943) 13 ABC 128
Re Dungowan Manly Pty Ltd (in liq) (2015) 105 ACSR 648
Re Enhill Pty Ltd [1983] 1 VR 561
Re Evans, Evans v Evans [1887] 34 Ch D 397
Re Exhall Coal Company (Limited) (1866) 35 Beav 449 [55 ER 970]
Re Freeman’s Settlement Trusts (1887) 37 Ch D 148
Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361
Re Harrington Motor Co Ltd; Ex parte Chaplin [1928] 1 Ch 105
Re Hillion Protection Pty Ltd (in liq) [2014] NSWSC 1299
Re Independent Contractor Servicers (Aust) Pty Ltd (in liq) (2016) 305 FLR 222
Re Kaupthing Singer and Friedlander Ltd (in administration) (No 2) [2012] 1 AC 804
Re Kayford Ltd [1975] 1 All ER 604
Re Law Guarantee Trust and Accident Society Ltd: Liverpool Mortgage Insurance Co’s Case [1914] 2 Ch 617
Re Mamounia Pty Ltd (in liq) [2017] VSC 230
Re Matherson (1994) 49 FCR 454
Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426
Re Pumfrey (1882) 22 Ch D 255
Re Raybould [1900] 1 Ch 199
Re Rhodesia Goldfields Ltd [1910] 1 Ch 239
Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17
Re Suco Gold Pty Ltd (1983) 33 SASR 99
Re Trio Capital Ltd (in liq) (2012) 88 ACSR 700
Re Universal Distributing Co (in liq) (1933) 48 CLR 171
Rogers v Asset Loan Co (2006) 4 ABC(NS) 293
Rothmore Farms Pty Ltd v Belgravia Pty Ltd (1999) 2 I.T.E.L.R. 159
RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385
Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] 118 ASCR 333
Savage & Whitelaw v Union Bank of Australasia Ltd (1906) 3 CLR 1170
Seafish Tasmania Pelagic Pty Ltd v Burke, Minister for the Sustainability, Environment, Water, Population and Communities [2013] FCA 782
Selangor United Rubber v Cradock (No 4) [1969] 1 WLR 1773
Sonenoco (No.77) Pty Ltd v Silva (1989) 24 FCR 105
Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307
Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319
Whyte v Williams (1903) 29 VLR 69; 9 ALR 98
Wilson v Official Trustee in Bankruptcy [2000] FCA 1251
Woodgate, in the matters of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583
Worrall v Harford (1802) 8 Ves 4
Zen Ridgeway Pty Ltd v Adams [2009] 2 Qd R 298

Date of hearing: 2 June 2017

Date of last submissions: 19 July 2017

Registry: Queensland

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: General and Personal Insolvency

Category: Catchwords

Number of paragraphs: 206

Counsel for the Applicants: Mr M Eade

Solicitor for the Applicants: Cooper Grace Ward

Counsel for the First Respondent: Ms A Wheatley

Solicitor for the First Respondent: Australian Tax Office

Counsel for the Second to Fifth Respondents: The Second to Fifth Respondents did not appear

Table of Corrections

4 September 2017 The appearances for the Respondents have been corrected

ORDERS

QUD 198 of 2017

IN THE MATTER OF THE BANKRUPT ESTATE OF WARWICK GORDON LEE

BETWEEN:
MORGAN GERARD JAMES LANE

First Applicant

RAJENDRA KUMAR KHATRI

Second Applicant

AND:
DEPUTY COMMISSIONER OF TAXATION

First Respondent

JANET MAY LEE

Second Respondent

WESTPAC BANKING CORPORATION (and others named in the Schedule)

Third Respondent

JUDGE:

DERRINGTON J

DATE OF ORDER:

18 AUGUST 2017

SUBJECT TO RECEIVING FURTHER SUBMISSIONS WITHIN SEVEN (7) DAYS AS TO THE PRECISE WORDING, THE ORDERS OF THE COURT WILL BE AS FOLLOWS:
1.That the name of the Respondent be amended to “Deputy Commissioner of Taxation” and that the matter shall continue as if the action were started against that office holder.
2.The Applicants are entitled to the following directions:
(a)That, subject to order 4 hereof, the sum of $599,782.02 being the proceeds of sale of assets of the Warwick Lee Family Trust (“the Funds”) are subject to Mr Lee’s right of exoneration out of the trust assets and, subject to the following orders herein, are available to be distributed to trust creditors to the exclusion of non-trust creditors.
(b)The Applicants are entitled to distribute the Funds prior to the payment of any dividend from the bankrupt’s estate.
(c)The Australian Taxation Office is not entitled to priority out of the Funds pursuant to s 109(1)(e) of the Bankruptcy Act 1966 (Cth).
(d)The provisions of ss 108 and 109 of the Bankruptcy Act 1966 (Cth) do not apply in relation to the distribution of the Funds which are to be paid to the trust creditors pari passu.
(e)In the distribution of the personal estate of the bankrupt amongst all creditors, the trust creditors must bring into “hotchpot” the amount which they have received from the Funds as trust creditors.
(f)The Applicants are entitled to paid from the Funds (prior to any payment to any creditors) the amount of $89,326.56 (being 46.76% of $191,032) for their costs, expenses and remuneration relating to work undertaken in respect of causing the trust creditors to be paid by the application of the trustee’s right of exoneration.

3.It is declared that, pursuant to s 76 of the Trusts Act 1973 (Qld) that the Applicants, in their capacity as trustees in bankruptcy of the estate of Mr Warwick Gordon Lee, acted honestly and reasonably and ought fairly be excused for any breaches, failures or omissions relating to the administration of the bankrupt estate, arising from the payment of $139,137.04 for their remuneration from the right of indemnity funds.
4.The parties have liberty to relist the remainder of the Application for further hearing in relation to the question of the characterisation of the proceeds received by the Bankruptcy Trustees from the Australian Taxation Office as an unfair preference.
5.Liberty to apply.
6.The Bankruptcy Trustees’ costs being their costs in the administration.
7.Otherwise the question of the costs of any other party is reserved.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
DERRINGTON J:
Introduction

The application before the Court is for directions and relief pursuant to ss 90-15(1) and 90-20(1)(a) of the Insolvency Practice Schedule (Bankruptcy) (Schedule 2 of the Bankruptcy Act1966 (Cth) (the Act)) in relation to the administration of the bankrupt estate of Mr Warwick Gordon Lee (Mr Lee). The directions and forms of relief sought by Mr Lee’s trustees in bankruptcy in this application are numerous and traverse a wide range of significant and complex issues. Central to many of the questions raised is the issue of whether Mr Lee’s right of indemnity out of certain assets which were held by him on trust can be utilised for the purposes of meeting the claims of “non-trust” creditors or the claims of the trustees in bankruptcy for their costs, expenses and remuneration of the administration of the estate. Other questions arise as to the entitlement of the Australian Taxation Office (ATO) to priority over other “trust creditors” in respect of an asserted Superannuation Guarantee Charge and as to the proportions in which funds may be distributed amongst the creditors.
Nomenclatures used in these reasons
It is important to keep steadily in mind that each debt incurred by Mr Lee in his capacity as trustee was one for which he was personally liable. The “trust” is not a legal entity which has rights or to which duties and obligations are owed (Agricultural Land Management Limited v Jackson (No. 2) (2014) 48 WAR 1 at 58; [302]). It is merely the label given to that bundle of rights and obligations, both personal and proprietary, which constitute the relationship between a beneficiary and a trustee (Kelly v Mina [2014] NSWCA 9 at [103]). As a trust has no separate existence, so far as third parties are concerned the trustee’s obligations to those parties are not limited in any way by reference to the assets of the trust, save in the case of an express agreement (Elders Trustee and Executor Company Limited v EG Reeves Pty Ltd (1987) 78 ALR 193 at 253). In the context of the Bankruptcy Act, any of the trustee’s creditors were entitled to make the application for the sequestration order regardless of whether the debt to them was incurred in the course of the administration of the trust or otherwise.
Despite the above, and although it is legally inaccurate to imply that a trust has some independent existence apart from the trustee in whom the trust obligations are reposed, in these reasons the creditors of Mr Lee whose debts arose in the proper performance by him of his obligations as trustee are referred to by the short-hand expression “trust creditors”. The debts owing to “trust creditors” are referred to as “trust debts”. Conversely, the creditors whose debts arose in the course of Mr Lee’s personal dealings are identified as “non-trust creditors” and their debts are referred to as “non-trust debts”.
Throughout these reasons the expression ‘insolvent trustee’ shall be used to distinguish that trustee from the trustee administering the insolvent trustee’s estate, which is referred to as a ‘bankruptcy trustee’.
Summary of principles regarding the use of a trustee’s right of exoneration in a bankruptcy
As a result of the large number of directions which the Bankruptcy Trustees have sought in this application and the uncertain state of the law in relation to the matters under consideration, the reasons for judgment in this matter are necessarily extensive. That being so, it is appropriate to attempt to succinctly identify some general principles which ought to guide a bankruptcy trustee when dealing with a bankrupt trustee’s right of indemnity out of trust assets.
(1)A trustee has, amongst other rights of indemnity, a right to indemnification from the assets of the trust in respect of trust debts which have been properly incurred and for any tortious liability which has been not-improperly incurred.
(2)The right of indemnity from the trust assets falls into two discrete parts. A right of recoupment (being the right to recoup money from the trust assets in respect of liabilities which the trustee has previously discharged from their own funds) and a right of exoneration (being a right to discharge trust liabilities directly from the assets of the trust).
(3)The value of the trustee’s right of indemnity can only be fully ascertained upon the taking of the accounts of the trust, which includes the application of the “clear accounts rule”. In general terms, the value of the indemnity is equal to the extent to which the balance of the accounts favours the trustee regardless of the quantum of trust debts owing.
(4)The trustee has an equitable lien which supports their rights of indemnity (both exoneration and recoupment). The consequence of the existence of the right of indemnity and lien is that the trustee has a beneficial interest in the assets held upon the terms of the trust and, to that extent, the beneficiaries’ interest in the trust property is diminished.
(5)On the occasion of the trustee’s insolvency all existing trust creditors are equally entitled to be subrogated to the trustee’s right of exoneration and supporting lien although not to the right of recoupment.
(6)Both the right of recoupment and the right of exoneration will form part of the personal property of the insolvent trustee which will pass to the bankruptcy trustee as “property of the bankrupt divisible amongst creditors”. Neither is trust property. The benefit of the supporting equitable lien will also pass to the bankruptcy trustee. It also is not trust property.
(7)The exercise of the right of recoupment by a bankruptcy trustee will result in trust funds being transferred beneficially to the estate of the bankrupt which are then available to meet the claims of both trust and non-trust creditors. The distribution of such funds accords with the usual distribution of the proceeds of the bankrupt’s property pursuant to the priority regime in the Bankruptcy Act 1966 (Cth) (the Act).
(8)The right of exoneration is much more limited. Its exercise by the bankruptcy trustee will only result in the transfer of trust funds directly to the trust creditors in payment of their debts. The exercise of the right does not result in the beneficial receipt of funds by the bankrupt’s estate which might be used to meet the claims of non-trust creditors.
(9)Whilst the right of exoneration is property of the bankrupt, it is not capable of being realised so as to create “proceeds” which might be applied pursuant to ss 108 and 109 of the Act. It is merely a limited right to use trust funds to discharge trust debts and that is the only manner in which a bankruptcy trustee may exercise it in the course of the administration of the bankrupt’s estate.
(10)As all trust creditors have equal rights of subrogation to the right of exoneration and supporting lien, it follows that the payments to them consequent upon the exercise of the right of exoneration occurs pari passu.
(11)In the distribution of the proceeds of the bankrupt’s property under ss 108 and 109, the “hotchpot” principle applies such that the trust creditors must bring into account the amounts which they have received by the application of the right of exoneration, prior to participating in the distribution.
(12)The limited nature of the right of exoneration has the consequence that it is not capable of being used to pay the costs, expenses and remuneration of the bankruptcy trustees. However, the principles in Re United Distributing and Berkeley Applegate provide a justification for allowing payment to the bankruptcy trustees of certain amounts from the pool of funds generated by their work before the right of exoneration is exercised.
(13)The costs, expenses and remuneration which might be paid to the bankruptcy trustees pursuant to the principles in Re United Distributing and Berkeley Applegate are limited to that relating to the performance of work necessary for exercising the right of exoneration. However, where the sole business of the bankrupt was acting as trustee, it is likely that a substantial proportion of the costs, expenses and remuneration of the administration of the estate will be chargeable out of the pool of funds produced by the bankruptcy trustees.
(14)Whether the amount of the bankruptcy trustee’s entitlement can be debited against the interest of the trust’s beneficiaries as opposed to the interest of the trust creditors in the pool of funds created need not be determined in this case as no “trust assets” remained.
Background facts

The Warwick Lee Family Trust was established by a deed dated 11 March 1998. The trustees initially appointed under that deed were Mr Lee and his wife, Wendy Ellen Lee. By the time of his bankruptcy in February 2013, Mr Lee was the sole trustee. The trust was a discretionary trust of which, inter alia, Mr Lee, Mrs Lee and Mr Lee’s children were “beneficiaries” in the sense that they were objects of the exercise of the trustee’s discretionary power to distribute income and in whom the corpus of the trust vested on the Vesting Day.
Prior to his bankruptcy, Mr Lee, as trustee, operated the business of a Subway franchise located in the suburb of Brassall in the State of Queensland. In the course of the operation of that “fast-food” business, Mr Lee employed a number of staff and incurred a number of significant liabilities. Importantly, for the claims of the Deputy Commissioner of Taxation in this matter, he did not employ anyone in his private capacity. Apparently, the Subway business was not a financial success. It was advertised for sale and a contract for its purchase by an unrelated third party was entered into on 18 December 2012. Settlement took place on 19 February 2013. Three days later, on 22 February 2013, Mr Lee was made bankrupt on a debtor’s petition. Mr Rajendra Kumar Khatri and Mr Morgan Gerard James Lane were appointed as the trustees in bankruptcy of Mr Lee’s estate. For convenience, and to distinguish them from the trustee of the Lee Family Trust, they are referred to herein as the “Bankruptcy Trustees”.
On the day prior to the execution of the contract of sale of the Subway business, being 17 December 2012, the trust deed of the Warwick Lee Family Trust was amended to remove a provision which would have disqualified Mr Lee from continuing to act as trustee in the event of his bankruptcy. No explanation has been proffered as to why that occurred. Nevertheless at all material times he has remained as the trustee of the Warwick Lee Family Trust.
From the material filed by the Bankruptcy Trustees, it is apparent that the operation of the trust was somewhat disorganised and unsophisticated. This has little relevance to the core issues to be determined, but it does have some significance with respect to the quantum of remuneration sought by the applicants. In any event, after a not-inconsiderable amount of work, the Bankruptcy Trustees have ascertained the nature and scope of Mr Lee’s personal estate. Necessarily, that required that they also ascertain the nature and scope of the trust estate.
The net proceeds of the sale of the Subway franchise, in the sum of $448,659.49, were received by the Bankruptcy Trustees in the period from 20 March 2013 to 28 May 2013. The evidence shows that monies were received “in response to a demand being made by the Trustees in Bankruptcy pursuant to Mr Lee’s right of indemnity”. By way of a letter dated 26 February 2013 to Mr Graham Roberts of Cooper Grace Ward, who was then Mr Lee’s solicitor, the Bankruptcy Trustees asserted that the trustee’s right of indemnity under the Warwick Lee Family Trust vested in them and, on that basis, they requested the transfer to them of the sale proceeds. Prior to any such transfer of the funds pursuant to that request, Mr Roberts held them for his client, Mr Lee, who, in turn, held them as trustee of the Warwick Lee Family Trust. It seems, therefore, that the funds which were then held in trust (and which were subject to the equitable lien protecting the trustee’s right of indemnity) were paid out of the trust and to the Bankruptcy Trustees in a purported realisation of the trustee’s personal right of indemnity. However, the Bankruptcy Trustees have indicated that they have kept these funds separate from the personal estate of Mr Lee and they are prepared to deal with the funds in the manner in which the Court directs. It is presumed that, by this the Bankruptcy Trustees accept that if the funds ought not to have been paid to them by Mr Lee’s solicitors consequent upon their demand, they will deal with the funds as they ought to have been dealt with in the first instance.
In the course of the administration of Mr Lee’s estate, the Bankruptcy Trustees recovered an unfair preference payment of $322,447.58 from the ATO which had been paid by Mr Lee in discharge of taxation liabilities arising from the operation of the Subway franchise. On the return of the money from the ATO it was apportioned between the trust on the one hand and Mr Lee’s personal estate on the other. The rationalisation for this was that Mr Lee had used an amount of $171,659.00 of his own funds to pay part of the tax debt such that it was appropriate to return an equal amount to his estate on the transaction being rendered void. The Deputy Commissioner has asserted that the whole of the funds should form part of the personal estate of Mr Lee so as to be available for all creditors. This was a submission made in writing well after the oral hearing had been concluded and it is dealt with at the end of these reasons.
In their written submissions the Bankruptcy Trustees identified that at the date of the filing of this application the creditors of Mr Lee in his capacity as trustee were the following:
(a)ATO (superannuation liability in respect of the Subway employees) in the amount of $128,574.88;
(b)ATO (trust tax liability) in the amount of $1,037,171.40;
(c)Bevmont Pty Ltd as trustee for the Lee Family Trust in the amount of $330,000; and
(d)Janet May Lee in the amount of $73,727.37.
Further, the Bankruptcy Trustees assert that Mr Lee’s personal creditors were as follows:
(a)ATO (personal taxation liability) in the amount of approximately $295,291.71;
(b)Janet May Lee in the amount of $27,000;
(c)Westpac Bank in the amount of $26,363.26; and
(d)the Lee Family trust in the amount of $399,720 (which appears to be a loan made to Mr Lee by the trust).
The ATO has given notification that its claim against Mr Lee of $128,574.88 is the subject of a Superannuation Guarantee Charge (SGC) with the result being that it is entitled to the payment of that amount as a priority pursuant to s 109(1)(e) of the Act. This superannuation liability arose in the course of conducting the Subway franchise and it is a liability of the trust. However, r 6.02 of the Bankruptcy Regulations 1996 (Cth) limits the amount of any such priority under s 109(1)(e) at a set amount per employee with the consequence that the ATO’s priority amount will be capped at $100,969.52. That leaves a shortfall to be recovered as a non-priority trust debt in the sum of $27,605.36.
The asset and liability position of the bankrupt’s estate and the trust are as follows:
(a)Mr Lee’s estate has assets of $183,750.22 and creditors of $876,949.85; and
(b)The trust creditors total $1,317,165.35 and the trust assets are said to be $599,782.02.
The Bankruptcy Trustees have now finalised all recovery actions, have ascertained all known unsecured creditors and are in a position to distribute the funds under their control. However, due to some legal uncertainties they seek directions as to the appropriate method of disposal. In that respect, at paragraph 20 of their written submissions (filed 22 May 2017) they submit:
A number of the issues the subject of the directions sought have no direct legal authority that has been located, and others are the subject of conflicting or inconsistent single judge and intermediate appellate decisions.
There is no doubt that there exists some not-insubstantial uncertainty and confusion in this area of the law as is evidenced by the numerous inconsistent authorities and commentaries which surround it. In that environment it is not surprising that the Bankruptcy Trustees made this application for directions and other relief. It appears from the material filed that all persons who have an interest in the outcome of this application have been served or notified of it. Only the Deputy Commissioner of Taxation has appeared to make submissions.
The making of an application for directions under the Bankruptcy Act
As mentioned, this application purports to be made by the Bankruptcy Trustees pursuant to ss 90-15(1) and 90-20(1)(a) of sch 2 of the Act which affords the Court power to make any orders it thinks fit in relation to the administration of a regulated debtor’s estate. By s 5-15 of that schedule, a “regulated debtor” includes a person who is bankrupt. Section 90-15(1) appears to have replaced, in part, the now repealed s 134(4) which had permitted a bankruptcy trustee to make an application to the court for directions.
For present purposes the relevant parts of s 90-15 provides:
90-15 Court may make orders in relation to estate administration
Court may make orders
(1) The Court may make such orders as it thinks fit in relation to the administration of a regulated debtor’s estate.
…
Examples of orders that may be made
(3) Without limiting subsection (1), those orders may include any one or more of the following:
(a) an order determining any question arising in the administration of the estate;
…
(f) an order in relation to remuneration, including an order requiring a person to repay to the estate of a regulated debtor, or the creditors of a regulated debtor, remuneration paid to the person as trustee.
The power conferred by this section is wide and obviously intended to facilitate the resolution of contentious matters as they arise in the course of the administration of a bankrupt’s estate. It is not limited to the making of directions as was the former s 134(4) which was encumbered with various inherent limitations (See Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111 and the cases cited therein). The power granted by s 90-15 is sufficiently wide to make the directions or give the relief which is sought in the Application.
Whether the funds are to be distributed to all creditors or only to “trust creditors”
The first question raised by the Bankruptcy Trustees in relation to the use of the funds held by them allegedly as proceeds of the right of indemnity is stated in the following terms:
Whether the $599,782.02 received by the applicants pursuant to Warwick Gordon Lee’s right of indemnity as trustee… be distributed amongst creditors of Mr Warwick Gordon Lee as trustee or amongst creditors of both Mr Warwick Gordon Lee as trustee and Mr Warwick Gordon Lee personally.
As posed, the question fails to acknowledge some of the more difficult issues surrounding the nature of a trustee’s right of indemnity and the manner in which it might be dealt with by those who administer the insolvency of a trustee and in whom such indemnity is vested. Much has been said in the recent authorities and commentaries concerning these issues and there is a danger that adding to that discussion might only serve to confuse rather than elucidate. However, whilst both of the parties before the Court acknowledged the acute difficulty of the issues raised, each asserted that their consideration was essential to the directions and the relief which the Court is asked to give.
The statutory regime pursuant to which the issue arises
In this matter it is the provisions of the Act which fall to be construed and applied. In many of the authorities to which reference was made in the course of argument, it was the cognate insolvency provisions of the relevant companies’ legislation which were the subject of consideration. Whilst, in some cases, differences in the various insolvency regimes may provide a legitimate ground for distinguishing certain decisions, the essential issue raised in cases of this ilk, concerns the manner in which a trustee’s right of indemnity can be utilised by those responsible for administering the estate or property of the insolvent trustee. Neither the nature of that right nor the manner in which it is held by a trustee, will alter depending upon whether the trustee is an individual or a corporation. On the other hand, the method by which the property of the insolvent trustee might be disposed of under the alternative insolvency regimes may provide some legitimate ground of differentiation. That being so, it is necessary to consider the legislative context in which the assets and rights of the bankrupt are to be administered under the Act.
Section 58 of the Act causes certain property to vest in the bankruptcy trustees on an individual’s bankruptcy. Relevantly, that section provides:
58 Vesting of property upon bankruptcy-general rule
(1) Subject to this Act, where a debtor becomes a bankrupt:
(a)the property of the bankrupt, not being after-acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; …
The expression “the property of the bankrupt” as it is used in s 58 is defined in s 5 of the Act, inter alia, as follows:
the property of the bankrupt, in relation to a bankrupt means:
(a)Except in subsections 58(3) and (4):
(i) the property divisible among the bankrupt’s creditors; and
(ii) any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; …
The meaning of the phrase “property divisible among the bankrupt’s creditors”, is explained in s 116 of the Act in the following terms:
116 Property divisible among creditors
(1)    Subject to this Act:
(a)    all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b)    the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge;
…
is property divisible amongst the creditors of the bankrupt.
(2)    Subsection (1) does not extend to the following property:
(a)    property held by the bankrupt in trust for another person.
In the interpretation of the expression “the property divisible among creditors”, consideration must also be given to the separate definition of “property” in s 5 which is:
“Property means real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.”
Reference also needs to be made to the provisions empowering the bankruptcy trustees to pay the claims of the creditors. These provisions are contained in Division 2 of Part VI which is headed “Order of Payment of Debts”. In particular s 108 provides:
108 Debts proved to rank equally except as otherwise provided
Except as otherwise provided by this Act, all debts proved in a bankruptcy rank equally and, if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately.
Section 109 of the Act imposes an order of priority in respect of the payment of debts from the “proceeds of the property of the bankrupt” and the chapeaux of s 109(1) provides:
109 Priority payments
(1) Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order:
Thereafter, the subparagraphs of subsection (1) establish the priority regime for payments from the proceeds which are realised from the bankrupt’s property.
The expression “proceeds” in the phrase “proceeds of the property” as used in ss 108 and 109, has the usual meaning of the “sum, amount, or value of land, investments, or goods, etc., sold, or converted into money” as defined in Jowitt’s Dictionary of English Law (4^th ed), p 1920. Indeed, given the context, it is likely that it means the “net proceeds” of realisation after the expenses of sale are deducted. (See the definition of “proceeds” in Stroud’s Judicial Dictionary (9^th ed)).
It can be immediately observed from this suite of provisions that the “property of the bankrupt” which vests in a bankruptcy trustee is not necessarily the property which is actually distributed to the creditors once the estate is otherwise fully administered. Whilst under s 58(1)(a) the bankruptcy trustee takes possession of all of the “property of the bankrupt” (ss 58 and 116), it is only from the “proceeds” of the realisation process that payments are made to the creditors under ss 108 and 109 (cf s 134(1)(ac)). Occasionally, some of the bankrupt’s property is not capable of being realised so as to produce “proceeds”. It may be of such a nature that possession of it results in additional expense to the holder. This may occur in the case of a lease or mortgaged land where the income or anticipated realisation to be derived is less than the cost of its retention and maintenance. In those circumstances the bankruptcy trustee has power to disclaim the onerous property (s 133 of the Act). Other property of the bankrupt, which may be in the nature of rights or powers, may be productive of little or no realisation due to their inherent limitations. Consequently, the “proceeds” which are to be used to meet the creditors’ claims in accordance with the priority provisions, are not equivalent to the “property of the bankrupt” which vests in the bankruptcy trustee on the making of the sequestration order.
It did not seem to be disputed before the Court that an insolvent trustee’s right of indemnity from trust assets might be within the description of “property” which vests in a bankruptcy trustee, although it was also acknowledged that there are a variety of inconsistent authorities on this issue. Generally, the authorities (albeit from a corporate insolvency context) which hold that the right of indemnity is not property which vests in the bankruptcy trustees, do so on the basis that the indemnity is effectively “trust property”, see for instance Re Independent Contractor Servicers (Aust) Pty Ltd (in liq) (2016) 305 FLR 222 and Re Amerind Pty Ltd (in liq) [2017] VSC 127.
Putting aside for one moment the impact of s 116(2)(a) of the Act, it can be readily accepted that an insolvent trustee’s equitable right to be indemnified in respect of liabilities incurred in the not-improper administration of a trust, would be within the concept of “property divisible amongst the creditors of the bankrupt”. The right to be indemnified out of trust assets is personal property, being a right to exercise power with respect to “property” within the meaning of s 116(1)(b) as informed by the definition of s 5. Not insignificantly, there are also a number of authorities which have held that a trustee’s right of indemnity is part of a trustee’s personal estate which will pass to a bankruptcy trustee in the event of the trustee’s insolvency. Some of the more significant are Savage & Whitelaw v Union Bank of Australasia Ltd (1906) 3 CLR 1170 at 1188 and 1196; Octavo Investments v Knight (1979) 144 CLR 360 at 367-368 (Octavo) and In re Suco Gold (1983) 33 SASR 99 at 102 (Re Suco Gold). On one view, the binding effect of these authorities might be thought of as foreclosing most of the issues concerning the first question asked of the Court on this application. However, as certain recent decisions have suggested that a trustee’s right of indemnity is actually property held “on trust” such that it falls within the meaning of s 116(2)(a) (or not property of the company in a corporate insolvency), the question requires further consideration. It is also appropriate to acknowledge that there exists an argument that the decision in Octavo did not expressly identify the scope of creditors whose claims may be met by the use of the right of indemnity. In that case all of the creditors were trust creditors and it has been said that the High Court did not expressly hold that the right of indemnity could not be utilised to meet the claims of non-trust creditors. This is also a matter which requires detailed consideration.
Nature of the trustee’s right of indemnity

In the course of submissions it was suggested that one explanation for the inconsistency amongst the authorities concerning the use of a trustee’s right of indemnity in an insolvency context, was a somewhat less than strict adherence to the doctrine of precedent in relation to certain High Court decisions, including Octavo. Whilst there is possibly some force in that submission, it is more likely that, properly analysed, conflicts between some of the authorities are more apparent than real and that the distinguishing of the various High Court authorities can be legitimately defended. However, it is true that it is not possible to reconcile all of the authorities, some of which are diametrically opposed.
It is apt to keep in mind in the consideration of the authorities that the rights of exoneration and recoupment from the trust assets which are considered in this matter, are only part of the protection afforded to a trustee in relation to liabilities not-improperly incurred in the performance of a trust. For example, in the absence of contrary provisions in the trust instrument, a trustee is also entitled to a personal indemnity from the beneficiaries who are all sui juris and absolutely entitled to the trust assets in relation to all debts and liabilities incurred in the performance of the trust; (Hardoon v Belilios [1901] AC 118; Balkin v Peck (1998) 43 NSWLR 706); a trustee has a right to retain the interest of a beneficiary who owes the trustee money (Re Akerman [1891] 3 Ch 212 at 219); trustees have a right to contribution and/or indemnity from any co-trustee in relation to the trust debts and liabilities; and a trustee can impound the interest of a beneficiary who has instigated or requested that the trustee act in a way which involves a breach of trust (Fletcher v Collis [1905] 2 Ch 24 at 30-32). The essential point is that the trustee has a number of rights which are inherent to their position and which operate to hold them harmless from liabilities incurred in the fulfilment of their duties. The entitlement to an indemnity from the trust assets is merely part of that suite of rights. Whilst these various rights have the effect of preventing or avoiding any diminution of the trustee’s personal estate, they do not all operate by way of replenishing the trustee’s estate once the trustee has personally incurred a debt or liability. Some of them operate by exonerating the trustee from liability by ensuring that a trustee is not required to discharge a trust liability in the first place.
As the trustee is personally liable for the debts incurred in the conduct of a trust, it is a necessary incident of the office of trustee that they have an entitlement to indemnity out of the trust assets for all charges, expenses and liabilities appropriately incurred. That principle, which was stated by Lord Eldon LC in Worrall v Harford (1802) 8 Ves 4; 32 ER 250, it is now enshrined in most State legislation regulating trusts. For the purposes of the trust instrument before the Court the relevant legislative provision is s 72 of the Trusts Act 1973 (Qld) (Trusts Act) which provides:
72 Reimbursement of trustee out of trust property
A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.
In this case, the trust instrument itself also makes provision for the trustee to have a right of indemnity from the assets of the trust in a similar manner. By clause 21 of the trust instrument it is provided that:
INDEMNITY OF TRUSTEES
21.The Trustee shall be indemnified and held harmless out of the Trust Fund against all claims, costs, damages, losses, fees, expenses, taxes, duties and impositions which arise in connection with or in consequence of this Deed or the Trusts hereby created except to the extent that the same arises from the Trustee’s own dishonesty provided that the Trustee shall have not right of indemnity against any one or more of the Beneficiaries.
The right of indemnity in the trust instrument is wider than that which exists in equity or under the Trusts Act, in respect of the range of liabilities for which the trustee is indemnified. In equity, the trustee’s right of indemnity only extends to liabilities incurred by the trustee in the “proper performance of the trust” and to tortious liability where that liability has been incurred in the “not improper” performance of the trust (In re Blundell; Blundell v Blundell (1889) 40 Ch D 370 at 376-7; Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 104 per King CJ). By comparison, the scope of the indemnity provided for in the trust deed in this case extends to any expense or liability arising in connection with the trust save to the extent to which it arises by the trustee’s own dishonesty. Otherwise, the expression “shall be indemnified and held harmless” in clause 21 connotes the same procedure for satisfying the indemnity as exists in equity; namely the reimbursement of expenses paid by the trustee or the direct payment of liabilities from the assets of the trust.
Two alternative rights of indemnity – recoupment and exoneration
As appears from the statement of the principle in s 72 of the Trusts Act, the right of a trustee to be indemnified from the assets of the trust falls into two distinct parts. First, where a trustee has discharged a trust debt out of their own funds, the trustee is entitled to reimbursement out of the trust funds in an equivalent amount. That occurs by money being transferred from the trust funds to the trustee who receives an absolute, beneficial interest in that money. That right in relation to satisfied trust liabilities is often referred to as the right of “recoupment”. Second, the trustee is entitled to meet unsatisfied trust debts directly from the trust assets by utilising the right of “exoneration”. Pursuant to this right, the trustee directly applies trust assets to discharge the indebtedness by paying trust funds directly to the trust creditor (Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245–246; Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 105; Re Exhall Coal Company (Limited) (1866) 35 Beav 449 [55 ER 970] per Lord Romilly MR; see also the discussion of the right in H J A Ford, Trading Trusts and Creditors’ Rights, (1981) 13 Melb LR at 1, 3, 4, 14 – 19 and 26 and the discussion in Hon BH McPherson, “The Insolvent Trading Trust” in Finn PD (ed), Essays in Equity (Law Book Co, 1985), Chapter 8 at p 147). This process of “exoneration” does not involve the trustee obtaining any beneficial interest in the assets which are used to discharge the trust debts. The nature of the right has been identified by the learned authors of Ford & Lee: The Law of Trusts (Thomson Reuters Westlaw AU online version) at [13:030] in the following terms:
In a trust of any magnitude the trustees will necessarily incur administration expenses. They are entitled to, and for administrative reasons preferably should, meet those expenses directly from the trust fund. This inherent right of the trustee is articulated in trustee legislation
(Emphasis added)
The duality of the trustee’s right of indemnity out of trust assets appears in the statement of principle found in Halsbury’s Laws of England, Trusts and Powers (Vol 98, 2013, LexisNexis online edition) at [342]:
A trustee is entitled to be reimbursed from the trust funds, or may pay out of the trust funds, expenses properly incurred by him when acting on behalf of the trust… (Footnotes omitted)
As expressed in that passage, the right of the trustee is either to be reimbursed for expenses already paid by the use of his or her own funds, or to raise funds from the trust estate for the purposes of satisfying the liabilities which have been incurred. This position is recognized succinctly in the commentary to the American Third Restatement of the Law of Trusts (at § 88) p 256 in the following manner:
The trustee’s right of indemnification (§ 38(2)) entitles the trustee either to pay proper expenses directly from the trust estate (exoneration) or to obtain reimbursement from the trust when the trustee has personally paid those expenses.
That duality is also referred to by the learned authors of Scott and Ascher on Trusts (5^th ed, Wolters Kluwer) at § 22.1.1, p 1627:
The trustee may use trust funds to pay expenses properly incurred in administering the trust. A trustee who properly incurs an obligation on behalf of the trust is entitled to discharge the obligation out of trust funds, though applicable law designates the obligation as the trustee’s own. A trustee has, in other words, not merely a right of reimbursement for trust expenses already paid out of the trustee’s own funds, but also a right of exoneration, i.e., the power to use trust funds to discharge obligations that have arisen out of trust administration.
(Footnotes omitted)
The important distinction between these two aspects of the trustee’s right of indemnity is usefully assayed in Ong D, Ong on Subrogation (The Federation Press, 2014), Chapter 2 and in Mitchel and Watterson, Subrogation, Law and Practice (Oxford University Press) at Chapter 12. In the former work (at pp 31 – 32) the learned author identifies that a trustee is restricted in the use of the right of exoneration to using it for the purpose of discharging his liability to the trust creditors and no other.
Lest it be thought that the distinction identified above is “hair-splitting”, it ought to be observed that the duality of the right of indemnity from trust assets reflects a similar attribute in the right of indemnity which the trustee has as against the beneficiary. In the latter case, a trustee is entitled to discharge the trust liabilities by use of their own funds and then seek to be reimbursed by the beneficiary, or obtain an order in equity requiring the beneficiary to pay the creditor once the debt falls due; Subrogation, Law and Practice at p 428; para [12.11]. The learned authors of Jacob’s Law of Trusts in Australia (8^th ed, Butterworths, 2006) at [21-05], p 515 identify that the “usual order will be one requiring the beneficiary to pay the creditor or otherwise procure the release or discharge of the trustee”. Where the trustee has already paid the debt, the beneficiaries will be required to pay an equivalent amount to the trustee.
As the discussion below identifies, some of the authorities concerning the trustee’s right of indemnity from the trust assets do not always maintain this critical distinction between the right of “recoupment” or “reimbursement” on the one hand and the right of “exoneration” on the other. However, the distinction is fundamental. If what comes into the hands of a bankruptcy trustee is a trustee’s right of recoupment, it is a right to take money from the trust funds for the benefit of the insolvent trustee’s estate. It is, in effect, the payment of an amount owing to the trustee for the purposes of reimbursing the trustee’s personal estate. Such a payment is received by the bankruptcy trustee as part of the bankrupt’s personal estate and is available to meet the claims of both trust and non-trust creditors. However, the position is markedly different when what the bankruptcy trustee receives is merely a right or entitlement to have trust assets applied to discharge trust debts. That is a considerably more limited right.
The distinction between the right of recoupment (or reimbursement) on the one hand and the right of exoneration on the other was emphasised in In re Richardson [1911] 2 KB 705. That case concerned a bankruptcy trustee’s entitlement to the benefit of the insolvent trustee’s right of indemnity from a beneficiary. At 711, Cozens-Hardy MR, in effect, held that where the trustee has paid a trust debt out of his own money, the right of reimbursement is the trustee’s own property absolutely and, if the trustee is insolvent, any bankruptcy trustee might use that right of reimbursement for the benefit of all of the creditors of the trustee’s estate. However, the right of exoneration is merely a power which is exercisable by the trustee solely for the purposes of paying the expenses of the trust. That latter conclusion is in keeping with the remedy which would be awarded in an action to enforce the right; being that the beneficiary would be ordered to pay the creditor directly once the debt has become owing Mitchell and Watterson, Subrogation, Law and Practice (Oxford University Press, (Rev ed) 2007) at p 428; The Law of Contribution and Reimbursement (Oxford University Press, 2003, para [14.38]–[14-45]). Although in In Re Richardson the Master of the Rolls was dealing with a trustee’s right of indemnity from a sui juris beneficiary rather than any right of exoneration out of the trust assets, the relevant distinction between exoneration and recoupment necessarily appears from his Lordship’s reasons.
The decision of In re Richardson also supports the proposition that, whilst in a bankruptcy administration a right of exoneration might vest in the bankruptcy trustee, it does not change its character to become a right to use trust funds to pay non-trust creditors. If the right of exoneration is limited in the trustee’s hands, it is equally limited in the hands of the bankruptcy trustee. Neither the trustee nor, in his stead, the bankruptcy trustee, is entitled to use funds which are the subject of the right of exoneration to discharge non-trust liabilities (In re Richardson [1911] 2 KB 705 at 714, per Fletcher Moulton LJ). These principles hold true even though in In Re Richardson the right of exoneration from the beneficiary may have been wider in different circumstances.
The nature of the right of exoneration as a mere right or power to use trust funds to meet debts incurred in the operation of the trust, can also be detected in the origins of the rights of trust creditors to be subrogated to that right on the trustee’s insolvency. This right evolved as a remedy in an administration action where the creditors of the executors, were entitled to prove in the estate under the administration decree and, where their debts were accepted, they would be paid directly out of the estate. The trustee was not entitled to assume beneficial ownership of the funds for the purposes of discharging the trust debts (see the discussion by HJA Ford in Trading Trusts and Creditors’ Rights, (1981) 13 Melb LR 1, 18 – 19).
In the context of this consideration of the nature of the rights of recoupment and exoneration, it is important to observe that there is no “third entitlement” of a trustee to indemnification for trust expenses and liabilities out of the assets of the trust estate. Particularly, there is no right for the trustee to take from the trust a sum of money equivalent in amount to the existing trust debts and for the trustee to appropriate that money to themselves with the intention of paying the trust debts out of their own assets which have been swelled by the trust funds. Prima facie, that would constitute a breach of trust on the basis that the trustee would be profiting from his position by assuming beneficial ownership of trust property (In re Johnson (1880) 15 Ch D 548 at 552). There does not appear to be any express judicial authority for the existence of such a right save that the reasons of Lush J in Re Enhill Pty Ltd [1983] 1 VR 561 at 568, might be taken as inferentially supporting its existence. It is a view that was rejected by the reasoned observations of King CJ in Re Suco Gold at pp 105–106 who held that, if the trustee takes trust funds into his possession for the purposes of meeting trust debts, the funds do not lose their character as trust property (see also Re Matherson (1994) 49 FCR 454 at 466.) Despite that, it should be recognised that in Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158, McLelland J identified that this “third entitlement” of a trustee to appropriate funds beneficially to themselves was assumed to exist in the decision in Re Enhill. His Honour said (at p 161):
In the judgment of the Full Court of the Supreme Court of Victoria in Re Enhill Pty Ltd (1982) 7 ACLR 8, the existence of this third element in a trustee's entitlement to indemnity was certainly assumed, and must be taken as having been decided. In that case the court expressly declined to follow the decision of Needham J in Re Byrne Australia Pty Ltd and the Companies Act [1981] 1 NSWLR 394 (and see Byrne Australia Pty Ltd and the Companies Act (No 2) [1981] 2 NSWLR 364) in which it had been held that a trustee's entitlement to indemnity out of trust assets in respect of trust liabilities did not authorize appropriation of trust funds to the trustee's general estate free of any obligation to apply them in satisfaction of trust liabilities. In each case a specific question before the court was whether trust assets might be applied by the liquidator of a company which was a trading trustee, in satisfaction of the costs and expenses of the winding up, including the liquidator's remuneration. This question was decided in the negative in Re Byrne Australia Pty Ltd and in the affirmative in Re Enhill Pty Ltd.
The difficulty with his Honour’s approach was the acceptance of an implicit assumption of the existence of a hitherto unknown “third entitlement” as part of the trustee’s right of indemnity in the absence of any supporting authority or principled analysis justifying its existence. Whether that was a correct approach or not need not be considered further as the decision in Grime Carter & Co predated that of the South Australian Full Court decision in Re Suco Gold which eschewed the existence of any such entitlement. Indeed, subsequently in Re ADM Franchise Pty Ltd (1983) 7 ACLR 987, McLelland J recanted his earlier reliance on Enhill. Instead, he followed Re Suco Gold and accepted that no such third entitlement existed.
An accurate analysis of the nature and scope of the trustee’s right of exoneration as opposed to the right of recoupment, was undertaken by Farrell J in Woodgate, in the matters of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 (Bell Hire Services). There, the liquidator of a corporate trustee applied for directions under both the Corporations Act 2011 (Cth) and the Trustee Act 1925 (NSW). The insolvent company’s sole undertaking had been that of conducting a business as trustee of a family trust. No replacement trustee had been appointed and the company retained possession of the trust assets. In dealing with an argument as to how the costs of the winding up were to be paid, Farrell J succinctly identified the distinction between the right of recoupment and the right of exoneration and the different ways in which they might be utilised by a liquidator. At [36] – [37] her Honour said:
[36] The fact that the trustee enjoys an indemnity secured generally over trust property and that it is proprietary in nature does not automatically bring trust property within the general pool of creditors’ claims in a winding up or the statutory order of priority for payment. A trustee company is not entitled, in exercise of its indemnity, to appropriate trust property before payment of a trust debt so that the amounts appropriated become available to the company’s creditors generally in the liquidation. It is only if the creditors of the trust have been paid out of the trustee company’s own funds that the company’s general creditors are entitled to be paid out of trust assets appropriated to satisfy the trustee’s right of recoupment; the statutory order of priority for payment then applies. Unpaid trust creditors are entitled to stand in the shoes of the trustee and to obtain payment from the trust property; the right of subrogation must be exercised in their favour; trust property is therefore not property divisible among the trustee’s creditors generally and the statutory order priority does not apply.
[37] It has been observed that careful attention must be paid to whether the trustee’s indemnity is being asserted as a right of recoupment or exoneration. Where it is exoneration, the trustee may resort to trust property only for the purpose of discharging trust liabilities. “Company law ends and trust law takes over” at a point earlier than where the right being exercised is the right of recoupment: see the useful discussion in D’Angelo, N “Commercial trusts in practice: the trust as a surrogate company” (Paper presented at the Annual Commercial and Corporate Law Conference, Supreme Court of New South Wales, 15 November 2016) and in his book Commercial Trusts (LexisNexis Butterworths, 2014), particularly at 5.124–5.127 under the heading “The true nature of the exoneration limb: a power to apply assets for the benefit of creditors”. I endorse that view. It is inconsistent with principle to apply the statutory order of priority for payment of the company’s debts out of its own property to the order of distribution of trust property. That this might result is two regimes (for trust property and property of the company) is unfortunate, but it is something which courts have had to accommodate.

Her Honour’s exhortation to precision when identifying the nature of the trustee’s right of indemnity is most appropriate and, when an issue arises concerning the manner in which the right of exoneration might be dealt with, it is necessary to constantly keep in mind her Honour’s adept description of the very limited nature of that right being that “the trustee may resort to trust property only for the purpose of discharging trust liabilities”.
The equitable lien which supports the rights of exoneration or recoupment
The trustee’s right of indemnity (whether it be the right of “recoupment” or “exoneration”) is protected by an equitable lien or charge which, subject to any term in the trust deed to the contrary, entitles the trustee to retain possession of the trust assets against the beneficiaries (or possibly new trustees; as to which see Rothmore Farms Pty Ltd v Belgravia Pty Ltd (1999) 2 I.T.E.L.R. 159, referred to in Hayton D, Matthews P and Mitchell C, Law of Trusts and Trustees (18^th ed) (Butterworths: LexisNexis, 2010), para [81-33]) until the trustee’s liabilities have been discharged. The lien is enforceable against the trust assets even after they have passed from the original trustee’s possession and have vested in a new trustee. It also has the effect of conferring a priority in the administration of the trust in favour of the trustee over the beneficiaries (Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 (Buckle) at 245 – 246; Re Exhall Coal Company (Limited) (1866) 35 Beav 449 [55 ER 970]).
The impact of the existence of the right of indemnity and associated lien on the trust assets is far from clear. In Buckle it was suggested that, despite the existence of the trustee’s indemnity and lien, the beneficial interest of the beneficiaries in the assets of the trust remains “unencumbered”, although the proprietary rights in respect of those assets were ordered in such a way that the trustee’s interest prevailed. It was explained that, the assets which were held upon the terms of the trust were not “trust assets” to the extent to which they were subject to the trustee’s right of indemnity because the “trustee’s right 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’” (at 247). That said, the High Court also accepted that the trustee’s interest was a “beneficial interest” in the trust assets to the extent of the value of the right of indemnity and that a court would authorise the sale of trust assets to satisfy the right to recoupment or exoneration. In substance that is effectively an equitable charge over the “trust assets” which protects the trustee’s rights. However, the Court was clear that the trustee’s interest in the trust assets did not amount to a security interest or right (at 247). Similar views were expressed in Octavo (at 367) where it was held that the effect of the indemnity and lien is that the trust assets are subject to the beneficial interests of the trustee in priority to that of the beneficiaries. The consequence of this was (at 370) that the trustee’s interest in the trust property amounted to a “proprietary interest” and was not property held in trust for another person for the purposes of s 116(2) of the Bankruptcy Act. In Re Suco Gold Pty Ltd (1983) 33 SASR 99 at 104 King CJ identified the “beneficial interest” as only consisting of the right of indemnity and a supporting lien.
After a careful analysis of these issues by Robson J in Re Amerind Pty Ltd (in liq) [2017] VSC 127 at [96] (Amerind), his Honour reached the contrary conclusion, namely that the right of indemnity itself was “trust property” and not a personal asset of the trustee. As such, it was a right which could only be used to meet trust debts rather than the personal debts of the trustee. In part, his Honour reached this conclusion on the basis that the lien which supported the right of indemnity gave the trustee (and the creditors by subrogation) an interest in the trust assets and any money arising from the enforcement of the lien would necessarily be trust money (see Amerind at [51], [53] and [256]). With respect to the learned Judge, that reasoning tends to elevate the equitable lien above the right of exoneration which the lien exists to protect. Additionally, the lien merely impacts upon the beneficiaries’ beneficial ownership of the trust assets by affecting those rights to the extent to which the lien will be enforced by the Court at the suit of the trustee. As was said in Buckle, “to the extent that the trust assets held by the trustee are subject to their application to reimburse or exonerate the trustee, they are not “trust assets” or “trust property” in the sense that they are held solely upon trusts imposing fiduciary duties which bind the trustee in favour of the beneficiaries.” (at 246; [48]). The comments in the unanimous decision of the High Court in CTP Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98, 120-121; [50]-[51] are to a similar effect. There the High Court identified that the assets of the trust could not be identified until the rights of reimbursement and exoneration were satisfied. In other words, the trust assets were those assets which were held by the trustees less the amount of value of the trustee’s right of indemnity. In this respect Robson J’s view that the trustee’s right of indemnity is “trust property” does not seem to be entirely consistent with the views of the High Court as expressed in the two cases mentioned above.
The nature of the trustee’s right in the assets held on trust arising from the right of indemnity has, historically, been regarded as a “right” over the assets which are held on trust and, as such, when ascertaining the trust assets, the value of the trustee’s charge is to be deducted from the trust property as a whole (Re Exhall Coal Company (Limited) (1866) 35 Beav 449 [55 ER 970]). The concept of the “trust property as a whole” is different to that of the “property belonging to the beneficiaries”. The latter can only be ascertained after the value of the trustee’s charge is deducted from the former as the property which is held upon trust is subject to the incidents of the trustee’s office in priority to the rights of the beneficiaries. One of those incidents is the right of indemnity which applies indifferently across all of the assets held on trust. In this respect the interest of the trustee in the assets held on trust is more aptly identified as being a paramount beneficial interest in the assets of the trust rather than a security interest or part of the “trust property” (Buckle at 247; Octavo at 367; Ong D, Ong on Subrogation, The Federation Press, 2014 at p 17).
Additionally, as the lien which protects the right of exoneration is merely an equitable lien, it is only enforceable by judicial sale or by the appointment of a receiver and the making of an order by the Court that the trustee is to be reimbursed or exonerated. A trustee has no further “ownership rights” which, necessarily, would need to exist before a trustee would be entitled to the remedy of foreclosure or sale out of Court (Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550 at 553-554 at [18]; Melbourne Tramways Trust v Melbourne Tramway & Omnibus Company Ltd (1887) 13 VLR 487 at 490; Re Pumfrey (1882) 22 Ch D 255 at 262; In Re Stucley [1906] 1 Ch 67). Given the above, it is difficult to ascertain how these limited rights in the trustee could be described as amounting to “trust property” which is legally owned by the trustee but which beneficially belongs to the beneficiaries and which is only to be used for their benefit.
The fluctuating and fluid nature of the right of indemnity and supporting lien is reflected in its characteristic that it is not limited to the assets in the trust at the time when the trust liability was incurred, but applies over all assets of the trust under the control of the trustee (Dowse v Gorton [1891] AC 190 at 206; Re Amerind Pty Ltd (in liq) [2017] VSC 127 at [102]). Additionally, it is not limited temporally or in relation to any specific asset of the trust and it does not apply differentially to particular assets of the trust (Octavo at 367).
The right of exoneration is also subject to the state of accounts as between the trustee and the beneficiaries. If that is in favour of the beneficiaries, there is nothing to which any creditor might be subrogated. This was identified by Jessel MR in In re Johnson (1880) 15 Ch D 548 at 552 – 3 where his Lordship said:
But if the trustee has wronged the trust estate, that is, if he has taken money out of the assets more than sufficient to pay the debts, and instead of applying them to the payment of the debts has put them in his own pocket, then it appears to me there is no such equity, because the cestuis que trust are not taking the benefit. The trustee having pocketed the money, the title of the creditor, so to speak, to be put in the place of the trustee, is a title to get nothing, because nothing is due to the trustee. It does not appear to me that in the case the creditor, who has never contracted for anything who has only got the benefit of this equity, if I may say so, by means of the trustee, through the lucky accident of there being a trust, ought to be put in a better position than any other creditor.
This passage highlights that a trustee’s entitlement to indemnity is subject to the rule in Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171 which is sometimes mistakenly referred to as the “clear accounts rule”. The effect of that rule is that a trustee’s right of indemnity might be limited by any “offsetting” liability which the trustee owes to the trust estate. The extent of the right of indemnity is the net value of the expenses properly incurred less any amount which is owed by the trustee to the estate.
During the course of submissions, it was suggested that the “clear accounts rule” only applied to tortious wrongs which were committed by the trustee and that there were no allegations in this case of any such wrongdoing which would operate to limit the trustee’s right of exoneration. That submission understates the limits of the “clear accounts rule” or, at least, the more general rule of which the “clear accounts rule” is but an example. There is no doubt that the general principle operates in circumstances where the trustee has engaged in a breach of trust which has resulted in loss to the trust, such that no right of indemnity exists until the trustee remedies his default (RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 at 397 per Brooking J; Australian Securities and Investment Commission v Letten (No. 17) (2011) 286 ALR 346 at 353 [20] per Gordon J). However, the rule also extends to any occasion where the trustee is otherwise indebted to the “trust”. The following passage from Jacobs’ Law of Trusts (8th ed) at 514 identifies the rule as extending to debts as well as tortious liabilities:
The trustee does not always have a right of indemnity. In the first place, it is submitted that where the trustee is a debtor to the trust (which can occur without any breach of trust), the indemnity cannot be exercised without the debt first being repaid by the trustee (unless the trust instrument provides to the contrary): this follows from the rule in Cherry v Boultbee. Hence, if there is any doubt about the matter, both the indemnity and the lien protecting it may be suspended pending investigation of the trustee’s accounts.
The reference in that quote to the rule in Cherry v Boultbee might well be taken as being a reference to a more general rule that “a person cannot share in a fund in relation to which he is also a debtor without first contributing to the whole by paying his debt” (In re Akerman [1891] 3 Ch 212 at 219 (per Kekewich J) and recently, In re Kaupthing Singer & Friedlander Ltd (No 2) [2012] 1 AC 804 at 815. This wider rule applies to all debts regardless of whether they are ascertained or ascertainable at the relevant time. In Re Rhodesia Goldfields Ltd [1910] 1 Ch 239, Swinfen Eady J refused to allow a right of indemnity to be enforced until a claim that the trustee was indebted to the trust had been resolved. His Honour said at 247:
In my judgment the rule is of general application that where an estate is being administered by the Court, or where a fund is being distributed, a party cannot take anything out of the fund until he has made good what he owes to the fund. It is immaterial whether the amount is actually ascertained or not. If it is not actually ascertained it must be ascertained in order that the rights of the parties may be adjusted, and it would be a strange travesty of equity to hold that in distributing the fund Partridge was entitled to be paid at once all that was due to him out of the company’s money, and subsequently to find, after it had been established that he owed money to the fund, that the amount could not be recovered from him.
This passage was cited with approval by Ungoed-Thomas J in Selangor United Rubber v Cradock (No 4) [1969] 1 WLR 1773 at 1778, and, more recently, by the House of Lords in In re Kaupthing Singer & Friedlander Ltd (No 2) [2012] 1 AC 804 at [18]. However, a contrary view as to the extent to which any claim against the trustee had to be ascertained was suggested in the New South Wales Supreme Court (Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29). Despite these interesting authorities, ultimately, there does not appear to be any dispute as to what liabilities will be taken into account when considering the balance of account between the trustee and the beneficiary (Mitchell and Watterson, Subrogation, Law and Practice, Oxford University Press, (Rev ed), 2007, p 432).
In the present matter, the evidence discloses that the trust debts total $1,569,473.65 and, it is presumed that they were all incurred in the proper, or at least not-improper, performance of the trust. In the ordinary course, that would result in Mr Lee being entitled to exoneration from the trust assets in that amount. However, it is said that Mr Lee is indebted to the trust in an amount of $399,720. The impact of that is to reduce the quantum of the right of indemnity (exoneration) to $1,169,753.65 although in a pragmatic sense, that does not actually impact upon the worth of the indemnity as the value of the trust assets is only $599,782.02. Consequently, whilst there remain assets which are held upon the terms of the trust, there no longer exists any “trust assets” in the sense of assets held only for the beneficiaries and subject to the fiduciary duties of the trustees. The trustee’s right of exoneration has completely overwhelmed the rights of the beneficiaries.
This side excursion into the scope of the clear accounts rule has a particular relevance in the context of the insolvency administration of a trustee. The foregoing brief discussion discloses that the ascertainment of the scope of an insolvent trustee’s right of exoneration or recoupment may be no simple matter. It will often require a consideration and understanding of the state of the accounts of the trust and of the personal accounts of the trustee as well as an examination of the stewardship of the trust by the trustee. These actions will necessitate expense and effort and, where the insolvent trustee’s accounts are not well maintained, that may be a lengthy and expensive exercise. This is a pertinent consideration when a Court is asked to give directions about the extent to which an insolvency administrator might be entitled to receive benefits from any fund generated by them for the purposes of utilising the right of exoneration to meet the claims of creditors.
Creditors’ rights to subrogation
Some authorities which have examined the manner in which a trustee’s right of indemnity might be dealt with on insolvency have identified that the trust creditors’ right of subrogation to the indemnity is important in ascertaining whether the indemnity can be used to meet the claims of non-trust creditors. There is, no doubt, a clear tension between the existence of the trust creditors’ right to subrogate themselves to the right of exoneration and the proposition that it is available to be used to meet the claims of all creditors. Prima facie, if bankruptcy trustees are entitled to use the right of exoneration to meet the claims of all creditors, the trust creditors’ right to subrogation would be inutile.
One matter which requires emphasis at this point is that the trust creditors’ right of subrogation only arises in relation to the trustee’s right of exoneration. It does not, and cannot, arise in relation to the trustee’s right of recoupment. By definition, the trustee’s indebtedness to the trust creditors will have been discharged to the extent to which the payment by the trustee of trust debts out his or her own funds has given rise to the right of recoupment.
It is also of particular importance that the trust creditors’ rights of subrogation to the trustee’s right of exoneration only crystallise when the trustee is insolvent or it is otherwise reasonable to assume that obtaining a judgment against the trustee would be pointless (Owen v Delamere (1871) LR 15 Eq 134 at 139–140 per Sir James Bacon VC; Re Pumfrey (1882) 22 Ch D 255 at 263 where Kay J identified that before the right of subrogation arose, it had to be shown that the trustee could not pay and that every reasonable means of making him pay had been exhausted). Prior to the insolvency of the trustee or to the inability of the trustee to pay, trust creditors have no right to execute against the trust assets. Their only right is to pursue the trustee in an action for “debt”. However, in the event of the trustee’s insolvency, they become entitled to be subrogated to the trustee’s beneficial interest created by the right of indemnity (Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319). A modern statement of those principles was succinctly expressed by Wilson J in Zen Ridgeway Pty Ltd v Adams [2009] 2 Qd R 298 at [12] – [13]:
[12] … The creditor's right is derivative of the trustee’s, and cannot exceed the extent of the trustee's legitimate claim on the trust estate. Further, it is subject to whatever interests in the trust assets the trustee has lawfully created in favour of third parties.
[13] However, the right of access to the trust assets by way of subrogation is inchoate unless the trustee is insolvent or it is otherwise reasonable to assume that obtaining a judgment against the trustee would be pointless. The following passage from Deancrest Nominees Pty Ltd v Nixon is apposite to this case:
‘… it has been held that a creditor does not have a right of subrogation simply by virtue of the existence of a debt owed to it by a trustee, but it must reasonably appear, at least, that any attempt to recover the debt from the trustee would be fruitless. That is, the right of subrogation does not exist simply as an alternative means by which a creditor may recover a debt owed by a trustee. In the present case, there is nothing to suggest that the debt could not reasonably be recovered by Deancrest from the trustees concerned.’
(Footnotes omitted)
It was this principle, that the trust creditor’s right of subrogation only arises on the trustee’s insolvency, that was particularly important to the conclusion of King CJ in Re Suco Gold at p 108 that the right of exoneration could not be used to meet the claims of all creditors. There is much force in his Honour’s reasoning and, indeed, it complements the precise identification of the right of exoneration as being merely a right to meet the claim of trust creditors out of the assets of the fund. Prior to insolvency that is the only purpose for which the trustee could have used the right and, when insolvency intervenes, the creditors are entitled to seek an order that the right be exercised for their benefit. There is nothing which suggests that the intervention of bankruptcy changes the nature of the right. That being so, it is difficult to see how the right might be used to meet the claims of non-trust creditors.

In Re Universal Distributing the company being wound up had issued debentures which were secured by a floating charge over all of its undertaking. Its assets were insufficient to meet the claims of the debenture holders, yet the liquidator sought to be allowed his remuneration and disbursements from the proceeds realised in the sale of those assets. The debenture holders objected to the granting of this priority to the liquidator at the expense of their secured entitlements. Central to the decision of Dixon J was the notion that, regardless of how the assets were realised, the cost of doing so would inevitably be borne by the debenture holders. If they were realised at the suit of the holders themselves, they would bear the realisation costs as they could only ever receive the net proceeds of sale after the Court appointed receivers’ costs had been deducted. Necessarily, that foundational conclusion resulted in a distinction being drawn between the work which was necessary to be carried out in the preservation and realisation of the secured assets on the one hand, and the conduct of the winding up on the other. In this respect Dixon J concluded at pp 174 - 175:
In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realisation of the property. In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands, as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.
The principle in Re Universal Distributing has been applied in a variety of cases to justify the payment to a liquidator or a bankruptcy trustee their costs, expenses and remuneration in relation to the realisation of trust funds which are otherwise subject to the subrogated lien of trust creditors. In Re Dungowan Manly Pty Ltd (in liq) (2015) 105 ACSR 648 at [85] Black J suggested that the Re Universal Distributing principle extended the liquidators entitlement to recover expenses for work performed for the purpose of “identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them”. He did so by reference to the comments of Finkelstein J in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 at [34]. It is, perhaps, arguable that the comments of Finkelstein J were actually directed to the related principle in Berkeley Applegate rather than that in Re Universal Distributing, although Finkelstein J, himself, may not have differentiated between them. Whether or not that is so may not matter given that any difference in the range of activities for which compensation might be allowed within the scope each principle is probably insignificant.
In the recent decision of Freelance Global v Bensted Ltd (in liq) [2016] VSC 181 at [64], Riordan J considered that the Universal Distributing principle entitled a liquidator of a trust company who has acted reasonably, to be indemnified out of the trust assets for their costs and expenses in “identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; and distributing trust assets to the persons beneficially entitled to them” (see also the discussion by Markovic J in Kite v Mooney (No 2) at [142]ff). In Dixon v Wieselmann (2013) 93 ACSR 576 at 588; [41], Robson J identified that it was not necessary to demonstrate that the work and expenses actually had the consequence of adding value or benefiting the persons interested in the property. What was necessary in order to establish the entitlement to remuneration and the recovery of costs was that the work was necessary, that the costs were reasonably incurred, and that there was a sufficient nexus with the “salvage objective”.
It has been observed that the right created by the Universal Distributing principles gives the entity undertaking the work in the realisation of the assets a charge over the proceeds derived by their work (Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307; Coumanios v Giunti [2017] FCA 678 at [75]).
Many of the cases to which reference has been made have also relied upon the somewhat parallel equitable principle which was applied by Mr Edward Nugee QC sitting as a Deputy High Court Judge in Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32. In that matter the liquidator of an insolvent trustee company, before incurring substantial expenses, took the precautionary step of seeking advice from the Court as to his entitlement to an indemnity out of the assets held on trust for his costs, expenses and remuneration. In his reasons, at pp 49 – 50, His Honour considered a number of authorities concerning the application of the maxim that “he who seeks equity must do equity”. He regarded that maxim as meaning that “a person who comes to seek the aid of a court of equity to enforce a claim must be prepared to submit in such proceedings to any directions which the known principles of a court of equity may make it proper to give” (Halsbury’s Laws of England, “Equitable Jurisdiction” Vol 47(2), paragraph [110]). He identified that, in the case before him, the debenture holders required the assistance of a court of equity to secure their rights and, on that basis, he said (at p 50):
“As a condition of giving effect to their equitable rights, the court has in my judgment a discretion to ensure that a proper allowance is made to the liquidator. His skill and labour may not have added directly to the value of the underlying assets in which the investors have equitable interests; but he has added to the to the estate in the sense of carrying out the work which was necessary before the estate could be realised for the benefit of the investors. As was the case in Scott v Nesbitt (1808) 14 Ves 438, [1803–13] All ER Rep 216, if the liquidator had not done this work it is inevitable that the work, or at all events a great deal of it, would have had to be done by someone else, and on an application to the court a receiver would have been appointed whose expenses and fees would necessarily have had to be borne by the trust assets. On the evidence before me, the beneficial interests of the investors could not have been established without some such investigation as has been carried out by the liquidator.
His Honour then stated that the allowing of a fair compensation to the liquidator was a proper application of the rule that, “he who seeks equity must do equity”. His Honour continued (at pp 50 – 51):
The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in Re Marine Mansions Co (1867) LR 4 Eq 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt (1808) 14 Ves 438, [1803–13] All ER Rep 216), and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Boardman v Phipps [1966] 3 All ER 721, [1967] 2 AC 46). In my judgment this is a case in which the jurisdiction can properly be exercised.
His Honour observed that this principle had a variety of applications and was akin to the salvage doctrine. In this respect the underlying rationale was similar to that relied upon by Dixon J in Re Universal Distributing. His Honour also noted that the principle applied so as to afford to the person actually undertaking the work in question the benefit of the entitlement to reimbursement and remuneration. That overcame the difficulty that, if the amount of the costs and remuneration was paid to the insolvent corporate trustee, they would have to be applied in accordance with the requirements of the insolvency provisions. In the result, his Honour allowed the liquidator his proper expenses and remuneration out of the fund which had been created.
Many of the authorities on which Mr Nugee QC relied concerned the rights of debenture holders in the context of a corporate liquidation, and the competing claims of liquidators who had undertaken work in the realisation of the company’s property including that covered by securities. (See In re Marine Mansions Co (1867) LR 4 Eq 601; In re Oriental Hotels Co (1871) LR 12 Eq 126; In Re Regent’s Canal Ironworks Co (1875) 3 CH D 411 amongst others). Needless to say, in such situations the secured creditors are interested to be paid their debts out of the realisations obtained by the liquidator and, to that extent, it is undeniable that the actions of the liquidators enure for their benefit. However, the same clarity in respect of the receipt of a benefit by the trust creditors does not always translate to the tripartite situation of a trust (trustee, beneficiary and creditor) where a corporate trustee is being wound up or an individual trustee’s affairs are being administered in bankruptcy. In Berkeley Applegate the trustee, along with the trust, was being wound up for the benefit of the investor / beneficiaries in the mortgage scheme. The expenses incurred in the winding up of the trust were necessarily incurred as part of its administration and it was appropriate that the liquidators received their costs, expenses and remuneration out of the trust assets such that the burden appropriately fell upon the beneficiaries. The position is quite different when the trustee is being wound up or their estate is being administered, yet the trust, itself, remains solvent and is intended to continue in existence. In that scenario, the identification of assets, their realisation for the purposes of creating a fund from which the right of exoneration might be used, and the payment of creditors is primarily for the benefit of the trust creditors rather than the beneficiaries. It would follow from the general principles identified by Mr Nugee QC that the liquidators’ costs, expenses and remuneration should be borne by the trust creditors who will benefit from being paid from the right of exoneration, rather than permitting the liquidators to take additional funds from the trust assets. That said, it is foreseeable that arguments might be made in a converse scenario that the payment of trust creditors might advance the interests of the both beneficiaries and the trust creditors, depending upon the circumstances of the case.
In 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377, Finkelstein J considered the scenario where a trustee and its trusts were being wound up for the benefit of the beneficiaries as well as the creditors. His Honour noted that the principles in Berkeley Applegate and Re Universal Distributing required that attention be directed to identifying the entities for whose benefit the work by the liquidator was conducted. In that case, it was held that to the extent to which the work was done by the liquidator in what was, effectively, the administration of the trust, the costs, expenses and remuneration were to be paid out of the trust assets (at p 385). To the extent to which the work done was in the ordinary winding up of the company, referred to by his Honour as “general liquidation matters”, it was to be paid for out of the assets beneficially owned by the company. Where the company in liquidation only acted as a trustee of the relevant trust, and the trust itself is insolvent, it might be that much of the work involved in “general liquidation matters” was necessary in the proper administration of the trust and, therefore, chargeable against the trust assets. On the other hand, where the insolvent trustee has only non-trust creditors but insufficient assets of its own to meet the costs, expenses and remuneration of a liquidator or bankruptcy trustee, it is difficult to identify any basis on which an order might be made permitting recourse to the trust assets or the right of exoneration to satisfy the shortfall.
The parallel principles found in Berkeley Applegate and Re Universal Distributing provide a much surer foundation to support an order that an insolvency administrator have recourse to trust assets or to the right of exoneration to meet the costs, expenses and remuneration of their administration. Generally, there will be no need to distinguish between the two principles as they each cover the relevant expenses under consideration. It should, however, be kept in mind that much will depend upon the circumstances of the case. In most cases where the trust, itself, is insolvent in the sense that the right of exoneration overwhelms the beneficiaries’ interests in the assets held on trust, no great difficulty arises. The insolvency regimes require that the trust creditors be paid in the course of the liquidation or administration and, for that to occur, the trust itself needs to be wound up. Consequently, the insolvency administrators are entitled to be paid from the fund they create for the purposes of applying the right of exoneration. Where, in such a case, the only business of the trustee was to operate the trust, there are good arguments in favour of the view that all the costs of the administration can be paid out of the fund created to meet the right of exoneration (Combis in the matter of Reehal Holdings Pty Ltd (in liq) [2017] FCA 793 at [29]). Where, however, the insolvent trustee has other non-trust creditors, only those amounts referable to the creation of a fund and the payment of trust creditors might be met from the fund so created. Further, where a right of exoneration does not exist at all, there are likely to be strong arguments to the effect that the liquidators will not be entitled to access any trust funds to meet their costs, expenses and remuneration of the administration.
The application of the Berkeley Applegate/Universal Distributing principles in the present matter
Here the question as to whether the burden of the Bankruptcy Trustees’ imposts ought to fall on the trust creditors or the beneficiaries does not need to be decided. The right of exoneration overwhelms the value of any property held upon the terms of the trust with the consequence that there are no remaining “trust assets” in which any beneficiary has an interest. That being so, the only property relevant to the work undertaken for the purposes of meeting the trust creditors’ claims is the right of exoneration and the “fund” of money created pursuant to that right. It follows that the burden of meeting the Bankruptcy Trustee’s imposts will fall on the trust creditors for whose benefit that work will enure.
Necessarily, the scope and value of the right of exoneration and the use to which it might be put can only be known after substantial work is completed in relation to the insolvent trustee’s affairs. Such work, includes identifying the assets of the trustee and distinguishing between those which are beneficially owned and those which are held on trust; identifying the liabilities of the trustee and distinguishing between the trust and non-trust liabilities; recovering the trust assets which are sufficient to meet the right of exoneration; realising or attempting to realise trust assets; ascertaining the state of account as between the trustee and the beneficiaries; and, if there is a balance in favour of the trustee, exercising the right of exoneration from the fund of money created. Unless this work is undertaken the right of exoneration cannot be applied in favour of the trust creditors. Any receiver appointed by the Court at the suit of the trust creditors would need to perform those tasks in order to secure payment to those entitled. In cases such as the present, the intervention of the trustee’s insolvency has prevented the trustee from being able to discharge the trust debts and the Act obliges the Bankruptcy Trustees to assume the trustee’s responsibility and discharge the trust debts. Regardless of how the matter is viewed, the work identified had to be completed and paid for in order that the trust creditors’ claims are met.
This is also a case where the trust creditors require the assistance of the Court to secure their rights to the extent to which they assert that they are entitled to payment from the trust assets by use of the right of indemnity. In their capacity as creditors they may claim in the bankruptcy in the usual way. However, in order to secure their advantage as trust creditors they need to rely upon the trustee’s equitable right of exoneration and the additional equitable entitlement to be subrogated to that right. It should be kept in mind that the right of subrogation is more of a remedy than it is a right and, being a remedy available in equity, it is only granted where the court considers appropriate (Lerinda Pty Ltd v Laertes Investments Pty Ltd [2010] 2 Qd R 312 at [7]). Although the process of obtaining the court’s assistance in the enforcement of their rights is modified by the statutory bankruptcy regime for proving debts, the trust creditors are still required to assert their entitlements in equity to achieve their preferential treatment. Additionally, outside of the proving of debts in bankruptcy, the enforcement of the lien over the trust assets, on which the trust creditors necessarily rely, would require the assistance of the Court.
From the facts just identified it is apparent that the Berkeley Applegate principle is applicable to the present matter. The Court can require, as a condition of the trust creditors being paid by the exercise of the right of exoneration, that the costs, expenses and remuneration of the Bankruptcy Trustees relating to their payment be met from the pool of funds “created” by the Bankruptcy Trustees. Those imposts are to be paid in priority from the funds which have been made available to satisfy the right of exoneration. This is not to suggest that the right of exoneration can be put to any unauthorised use. However before that right can be exercised, a pool of funds is required to be established from which the payments to the trust creditors can be made. The bankruptcy trustee or liquidator whose work has created that fund is entitled to be paid from it the reasonable costs, expenses and remuneration for doing so. The fulfilment of that entitlement is imposed in equity upon the trust creditors and their right to receive payment pursuant to the subrogated right of exoneration.

The above analysis has occurred within the scope of the Berkeley Applegate principles, however, the same result would be reached by the application of the decision in Re Universal Distributing. The work which was done by the Bankruptcy Trustees was necessary to ensure that the trust creditors received the benefit of their subrogated right of exoneration. The appointment of the Bankruptcy Trustees following the intervention of the trustee’s insolvency, created the relevant “necessity” which required them to administer the trust so as to create the pool of funds from which the trust creditors’ claims could be met. The legislative imperatives required that work to be done, at least, for the purposes of ascertaining the assets of the bankrupt which might be used to meet the claims of creditors. If that had not been undertaken by the Bankruptcy Trustees the trust creditors would have been required to make an application to the Court for an order that their lien be enforced, that receivers be appointed to take possession of trust property and that they sell it. The Court’s leave would be required to make such an application and, where there exists a bankruptcy trustee who is able and willing to act to undertake the statutory duties, it might be unusual were a Court to upset the orderly administration of the estate by granting leave. If a receiver was appointed, a necessary part of their obligations would be the identification of all of the trustee’s creditors and distinguishing between the trust and non-trust creditors. The receiver would also have to, effectively, undertake an account in relation to the trust to ascertain the extent of the trustee’s right of exoneration, if any. If a right of exoneration existed, the receiver would then have to realise the available trust assets so as to aggregate funds which might be used to meet the trust creditors’ claims. As the circumstances required the Bankruptcy Trustee to perform all of these tasks, the “salvage principle” in Re Universal Distributing applies such that the trust creditors are not entitled to receive the benefit of the right of exoneration without accounting to the Bankruptcy Trustees in respect of their costs, expenses and remuneration relating to that entitlement. The Bankruptcy Trustees are entitled to a charge on the fund of money created to preserve their entitlement as against the trust creditors.
The consequence of the above is that the Re Berkeley Applegate and Universal Distributing principles provide similar outcomes. Either provides a more rational path to an order entitling the Bankruptcy Trustees their costs, expenses and remuneration than do the approaches of deeming those imposts to be priority trust debts or, by an expansive construction of the powers of the Court to allow trustees remuneration from the trust assets.
Scope of the work for which costs, expenses and remuneration should be allowed
It follows from the above discussion that the work in respect of which the Bankruptcy Trustees are entitled to their costs, expenses and remuneration in priority to the claims of the trust creditors, is that which was undertaken to ensure that the right of exoneration could be used to meet the claims of trust creditors. It includes work concerned with:
(a)the identification of the trustee’s assets and liabilities and distinguishing between trust and non-trust assets;
(b)the identification of trust creditors and distinguishing between them and non-trust creditors;
(c)the ascertaining of the state of the accounts between the beneficiaries and the trustee;
(d)the recovering or attempts to recover trust assets;
(e)the securing of trust assets (or their value);
(f)the realisation or the attempted realisation of trust assets to create a fund to meet the right of exoneration;
(g)the distribution of funds which are the subject of the right of exoneration to those who are entitled to them;
(h)any matter in the administration of the trust which is ancillary to the above to the extent to which it was reasonably necessary to be undertaken for the purposes of the identified tasks.
The benefit which the trust creditors receive from the work of the bankruptcy trustees in cases of this kind includes the ascertainment of their debts and the accumulation of funds from which the debts might be paid. Work may well have been performed to that end which does not result in an accretion to the pool of funds. Indeed, work may well be performed which actually results in a diminution of the value of that fund. The reasonable pursuit of recovery action against a trustee or a third party which does not succeed is a good example. Nevertheless, so long as the action was reasonably taken in an attempt to realise the assets so as to create funds from which the trust creditors might be paid, the associated costs, expenses and remuneration are recoverable by the insolvency administrators.
Reasonableness of remuneration
The Bankruptcy Trustees also seek directions or relief in relation to the reasonableness of their remuneration, expenses and charges. Given the relatively small size of this estate and the relatively modest amounts involved it is not inappropriate that the Court determine this matter as part of the wider application. However, a court would often be justified in refusing to give a direction of this nature when it is sought as an addendum to a much more substantive and complicated application as is the case here. Recent authorities mandate that the courts must necessarily give careful and complete consideration to any applications by insolvency practitioners in respect of their remuneration and reimbursement. That is so whether the application is made in a personal or a corporate insolvency. Those authorities identify that courts are now much more astute to carefully examine such claims and, it follows, an appropriate amount of time is required in any hearing to allow the applicants to justify them.
The total of the “remuneration” in respect of which directions are sought is $191,032 though it is presumed that this includes costs and expenses as well. It seems that the liquidators have already met some of their claims from the funds held in the personal estate of Mr Lee or, to the extent to which they relate to the utilisation of the right of exoneration, from the trust funds in their possession.
As is appropriate in the insolvency administration of a trustee or erstwhile trustee, the Bankruptcy Trustees have maintained two separate operating accounts or ledgers in respect of their remuneration, costs and expenses. One is attributable to work in relation to the trust funds and the other to work done on the bankrupt’s personal estate. Costs, charges and remuneration claims have been appropriately apportioned to those accounts. The evidence before the court discloses that 46.76% of the total cost, expense and remuneration relates to the work done in relation to the trust funds. That apportionment ought to be accepted and, on the basis that the percentage conforms to what has been said in the above discussions, the relevant amount can be paid from the funds in the hands of the Bankruptcy Trustees which represents the pool of funds to be used to satisfy the right of exoneration.
The Bankruptcy Trustees have sought to calculate their remuneration on a time costing basis. In recent years, this method has been the subject of some controversy with Brereton J questioning its appropriateness (Re AAA Financial Intelligence Ltd (in liq) [2014] NSWSC 1270 at [45] at [53]; Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) (2016) 305 FLR 222 at 233-234; [31]-[33] and Re Hillion Protection Pty Ltd (in liq) [2014] NSWSC 1299). As one of Australia’s leading corporations lawyers whose learning and experience in this area is unrivalled, his Honour’s views require the utmost respect. Indeed, they would resonate with the views of any experienced legal or insolvency practitioner. Recent experience has shown that charging on a time-costing basis can lead to situations where any financial benefit to a liquidation is dwarfed by the insolvency practitioner’s costs. That is not to say that such an outcome is necessarily inappropriate. It is frequently the case that insolvency administrators are confronted with extremely complex corporate and financial arrangements which are exacerbated by poor compliance with appropriate accounting standards. In such circumstances it is not surprising that the cost of merely ascertaining the nature, structure and financial state of the undertaking is a most expensive exercise. Nevertheless, the “time costing” basis of charging for such work can, and often does, lead to poor and inefficient practices within legal and accounting offices. That being so, in order for a liquidator or bankruptcy trustee to convince a Court of the appropriateness of their time costed claims, they will necessarily be required to establish the reasonableness of the work done, the length of time that the work was done, and the rates at which various staff are charged. However, the production to the court of vast amounts of data disclosing individual entries for individual pieces of work with associated assertions of time spent and charge out rates is unlikely to be sufficient. More often than not, much of that information has limited meaning without an appropriate analysis of the nature of the work done and an explanation for its necessity.
Recently, in Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] 118 ASCR 333, on appeal from Brereton J, the New South Wales Court of Appeal considered the principles to be applied on an application for the approval of liquidator’s remuneration under the Corporations Act 2001 (Cth). Whilst the consideration by that Court of s 473(3) and (10) of the Corporations Act is not directly referable to the court’s discretion in the present matter, the principles there identified have more than a passing relevance. At first instance Brereton J favoured the calculation of remuneration on an ad valorem basis rather than on a time costing basis. His Honour considered that to be appropriate in circumstances where the time costed value of the liquidator’s work was proportionately excessive when compared to the resulting benefits to the company. The Court of Appeal (consisting of Bathurst CJ, Beezley P, Gleeson JA, Barrett AJA and Beach AJA) acknowledged that it was well settled that the onus is on the liquidator to establish that the remuneration claimed is reasonable and that the court is to determine the appropriateness of the remuneration on a consideration of the material before it and by bringing an independent mind to bear on all relevant issues (at [54]). It noted that, in making that determination, proportionality is a “well recognised factor in considering the question of reasonableness” (at [55]). The question of proportionality must be considered in terms of the work done when compared to the size of the property, the subject of the insolvency administration or the benefit to be obtained from that work. Moreover, the work which has been performed must be appropriately proportionate to the difficulty and importance of the task in the context in which it is to be performed. In considering the reasonableness of the remuneration claimed, the percentage that the remuneration constitutes of the total realisation in the administration is a useful objective measure. On the other hand the Court of Appeal accepted that the mere fact that work performed does not significantly, or at all, augment the funds available for distributions does not necessarily negate a liquidator’s claim to be remunerated for it. That is particularly so in cases where it was reasonable to pursue recovery action albeit that the proceedings were not successful (at [58]). In such circumstances it cannot be said that a “time costing” approach will always be inappropriate even though the criticisms of that approach must be kept in mind.
In this matter the total amount of the costs, expenses and remuneration claimed by the Bankruptcy Trustees are large when compared to the size of the estate, although the work undertaken appears to have been necessary. On the basis that the calculations provided in submissions broadly coincides with the entitlements of the Bankruptcy Trustees pursuant to the Berkeley Applegate and Universal Distributing principles, it is appropriate to make the direction that the Bankruptcy Trustees are entitled to receive 46.76% of $191,032 or $89,326.56 from the proceeds of sale of the Subway business in partial discharge of their claim for costs, expenses and remuneration of the administration of the estate of Mr Lee. The remainder of the Bankruptcy Trustees’ costs, expenses and remuneration are payable from the proceeds of the sale of the assets in Mr Lee’s personal estate.
Declaration as to the reasonableness of the Bankruptcy Trustee’s conduct
Not content with the above directions and relief, the Bankruptcy Trustees also seek the making of declarations which will afford them relief from their conduct in causing the payment of the sum of $139,137.04 to themselves from the funds which are available to meet the claims of trust creditors. The power to make the declaration arises under s 76 of the Trusts Act 1973 (Qld) although they can only be made on the basis that Bankruptcy Trustees have acted honestly and reasonably.
It is appropriate to make the declaration sought. The Bankruptcy Trustees and their legal advisers have acted reasonably and honestly throughout the administration. As these reasons establish, the law in this area is both uncertain and complex. Even if it was the case that the wide variety of cases on the various topics could not be reconciled, there was certainly sufficiently strong authority which justified the payment of the sum of $139,137.04 for the costs, expenses and remuneration. That remains so despite the fact that the Bankruptcy Trustees may have to return some money to the trust. They will, however, be able to obtain payment for the remaining costs, expenses and remuneration from the personal estate of Mr Lee to the extent to which there are funds available after the payment of the priority debts.
A question not answered
After the oral hearing of this matter Markovic J handed down her decision in Kite v Mooney and, at the request of the Court, the parties provided written submissions in relation to the effect of that decision. Without leave of the Court, the Commissioner of Taxation filed additional submissions relating to the question of the characterisation of money which was received by the Bankruptcy Trustees from the Commissioner as a void preference. The provision of those additional submissions did not occur with the consent of the applicants. It is not appropriate for a party to make additional written submissions to the Court in such circumstances. The practice of parties providing gratuitous written submissions to the Court in addition to those in respect of which leave is given is not to be encouraged. As was said by McHugh ACJ and Gummow, Callinan and Heydon JJ in NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at [192] in relation to such conduct:
This is unsatisfactory. It is impermissible to file further submissions without leave, and this cannot be evaded by adding on to submissions filed with leave other material for which leave should have been obtained.
(Footnotes omitted)
See also Seafish Tasmania Pelagic Pty Ltd v Burke, Minister for the Sustainability, Environment, Water, Population and Communities [2013] FCA 782 at [4] where, in relation to those observations of the High Court, Logan J said:
[4] Those observations, though made in relation to the exercise of appellate jurisdiction, are no less pertinent in relation to the exercise of original jurisdiction. There is an important principle which underlies those observations. That is, the judicial power of the Commonwealth must be exercised in open court, save in respect of a restricted class of case (of which the trial was not one) which may truly be dealt with in chambers, and fairly.
It is not doubted that that the provision of the additional submissions was done with the best of intentions and in an attempt to fully resolve all matters concerning the administration of the estate of Mr Lee. However, the point sought to be raised by the Commissioner would impact upon the rights of the trust creditors. Those persons would not have been aware from the material served upon them for the hearing of this matter that this point was to be agitated in the course of the hearing. They are entitled to fair notice of it.
In those circumstances, and in accordance with the principles referred to above, it is not appropriate for the additional question to be agitated. The matter can be relisted for argument with respect to this further issue after all parties who might be affected by it are duly notified.

I certify that the preceding two hundred and six (206) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington.
Associate:
Dated: 18 August 2017

SCHEDULE OF PARTIES

QUD 198 of 2017

Respondents

Fourth Respondent:

BEVMONT PTY LTD AS TRUSTEE FOR THE LEE FAMILY TRUST

Fifth Respondent:

WARWICK GORDON LEE

File number(s):	QUD 198 of 2017
Judge(s):	DERRINGTON J
Date of judgment:	18 August 2017
Catchwords:	BANKRUPTCY AND INSOLVENCY – trustee in bankruptcy’s right to insolvent trustee’s right of exoneration – discussion of the nature of the right of exoneration – whether the funds are to be distributed to all creditors or only to trust creditors – whether right of indemnity “property divisible among the bankrupt’s creditors” or trust property BANKRUPTCY AND INSOLVENCY – trustee’s right of indemnity – whether bankruptcy changed the nature of the right of exoneration – whether the priority regime in s 109 of the Bankruptcy Act 1966 (Cth) applies to the use of the right of exoneration – trust creditors paid pari passu – whether the right of exoneration ought to be exhausted before dividends are paid – “hotchpot” principle considered BANKRUPTCY AND INSOLVENCY – costs expenses and remuneration of trustee in bankruptcy – use of the right of indemnity to meet the costs expenses and remuneration of bankruptcy trustee – consideration of Berkeley Applegate principles – consideration of Universal Distributing principles – reasonableness of remuneration of trustee TRUSTS AND TRUSTEES – trustee’s right of indemnity – nature of the trustee’s right of indemnity – trustee’s equitable lien supporting the right of exoneration – whether trustee’s right of indemnity is trust property
Legislation:	Bankruptcy Act 1966 (Cth), ss 5, 58, 108, 109, 116, 117, 122, 132, 133, 134, 140, 433 Bankruptcy Act 1966 (Cth) sch 2 Insolvency Practice Schedule (Bankruptcy)ss 5-15, 90-15(1), 90-20(1)(a) Corporations Act 2011 (Cth), ss 473, 555, 556, 562 Bankruptcy Regulations 1996 (Cth), r 6.02 Companies Act 1961 (Qld), s 293 Companies Act 1961 (Vic) Companies Act 1962 (SA), s 292 Trustee Act 1925 (NSW) Trusts Act 1973 (Qld), ss 72, 76, 101
Cases cited:	13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 Adsett v Berlouis (1992) 37 FCR 201 Agricultural Land Management Limited v Jackson (No. 2) (2014) 48 WAR 1 Akers v Deputy Commissioner of Taxation (2014) 223 FCR 8 Australian Securities and Investment Commission v Letten (No. 17) (2011) 286 ALR 346 Australian Securities and Investments Commission v Idylic Solutions Ltd (2009) 76 ACSR 129 Balkin v Peck (1998) 43 NSWLR 706 Bastion v Gideon Investments Pty Ltd (in liq) (2000) 35 ACSR 466 Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation (2011) 193 FCR 442 Bufalo v Official Trustee in Bankruptcy [2011] FCAFC 111 Cherry v Boultbee (1839) 4 Myl & Cr 442; 41 ER 171 Cirillo v Citicorp Australia Ltd [2004] SASC 293 Cleaver v Delta American Reinsurance Company (in liq) [2001] 2 AC 328 Combis in the matter of Reehal Holdings Pty Ltd (in liq) [2017] FCA 793 Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 Coumanios v Giunti [2017] FCA 678 CTP Custodian Pty Ltd v Commissioner of State Revenue (Vic) (2005) 224 CLR 98 Cummings v Claremont Petroleum NL (1986) 185 CLR 124 Dixon v Wieselmann (2013) 93 ACSR 576 Dowse v Gorton [1891] AC 190 Elders Trustee and Executor Company Limited v EG Reeves Pty Ltd (1987) 78 ALR 193 Fletcher v Collis [1905] 2 Ch 24 Freelance Global v Bensted Ltd (in liq) [2016] VSC 181 Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29 Grime Carter & Co Pty Ltd v Whytes Furniture (Dubbo) Pty Ltd [1983] 1 NSWLR 158 Hardoon v Belilios [1901] AC 118 Hewett v Court (1983) 149 CLR 639 Hood’s Trustees v Southern Union General Insurance Co of Australasia Ltd [1928] 1 Ch 793 In re Akerman [1891] 3 Ch 212 at 219 In re Blundell; Blundell v Blundell (1889) 40 Ch D 370 In re Johnson (1880) 15 Ch D 548 In re Johnson [1880] 15 Ch D 548 In re Kaupthing Singer & Friedlander Ltd (No 2) [2012] 1 AC 804 In re Marine Mansions Co (1867) LR 4 Eq 601 In re Oriental Hotels Co (1871) LR 12 Eq 126 In Re Regent’s Canal Ironworks Co (1875) 3 CH D 411 In re Richardson [1911] 2 KB 705 In Re Stucley [1906] 1 Ch 67 In re Suco Gold (1983) 33 SASR 99 In the matter of North Food Catering Pty Ltd (2014) 32 ACLC 14-049 Jennings v Mather [1902] 1 KB 1 Kelly v Mina [2014] NSWCA 9 Kite v Mooney; In the matter of Mooney’s Contractors Pty Ltd (in liq) (No.2) [2017] FCA 653 Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550 Lerinda Pty Ltd v Laertes Investments Pty Ltd [2010] 2 Qd R 312 Liverpool Mortgage Insurance Co’s Case [1914] 2 Ch 617 Mannigel v Aitken (1983) 77 FLR 406 McDonald v Young [2012] FCAFC 127 Melbourne Tramways Trust v Melbourne Tramway & Omnibus Company Ltd (1887) 13 VLR 487 MF Global Limited (in liq) (No 2) [2012] NSWSC 1426 Mooney’s Contractors Pty Ltd (2017) FCA 653 Nissen v Grunden (1912) 14 CLR 297 NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 Octavo Investments v Knight (1979) 144 CLR 360 Official Assignee v Jarvis [1923] NZLR 1009 Owen v Delamere (1871) LR 15 Eq 134 Re AAA Financial Intelligence Ltd (in liq) ACN 093 616 445 (in liq) [2014] NSWSC 1004 Re ADM Franchise Pty Ltd (1983) 7 ACLR 987 Re Amerind Pty Ltd (in liq) [2017] VSC 127 Re Application of Sutherland (2004) 50 ACSR 297 Re Australian Home Finance Pty Ltd [1956] VLR 1; (1955) 63 Arg LR 247 Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 Re Byrne Australia Pty Ltd (No.2) [1981] 2 NSWLR 364 Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394 Re Clarke; Ex parte Beardmore [1894] 2 QB 393 Re Doyle (1943) 13 ABC 128 Re Dungowan Manly Pty Ltd (in liq) (2015) 105 ACSR 648 Re Enhill Pty Ltd [1983] 1 VR 561 Re Evans, Evans v Evans [1887] 34 Ch D 397 Re Exhall Coal Company (Limited) (1866) 35 Beav 449 [55 ER 970] Re Freeman’s Settlement Trusts (1887) 37 Ch D 148 Re French Caledonia Travel Service Pty Ltd (in liq) (2003) 59 NSWLR 361 Re Harrington Motor Co Ltd; Ex parte Chaplin [1928] 1 Ch 105 Re Hillion Protection Pty Ltd (in liq) [2014] NSWSC 1299 Re Independent Contractor Servicers (Aust) Pty Ltd (in liq) (2016) 305 FLR 222 Re Kaupthing Singer and Friedlander Ltd (in administration) (No 2) [2012] 1 AC 804 Re Kayford Ltd [1975] 1 All ER 604 Re Law Guarantee Trust and Accident Society Ltd: Liverpool Mortgage Insurance Co’s Case [1914] 2 Ch 617 Re Mamounia Pty Ltd (in liq) [2017] VSC 230 Re Matherson (1994) 49 FCR 454 Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 Re Pumfrey (1882) 22 Ch D 255 Re Raybould [1900] 1 Ch 199 Re Rhodesia Goldfields Ltd [1910] 1 Ch 239 Re Stansfield DIY Wealth Pty Ltd (in liq) (2014) 291 FLR 17 Re Suco Gold Pty Ltd (1983) 33 SASR 99 Re Trio Capital Ltd (in liq) (2012) 88 ACSR 700 Re Universal Distributing Co (in liq) (1933) 48 CLR 171 Rogers v Asset Loan Co (2006) 4 ABC(NS) 293 Rothmore Farms Pty Ltd v Belgravia Pty Ltd (1999) 2 I.T.E.L.R. 159 RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385 Sanderson as liquidator of Sakr Nominees Pty Ltd (in liq) v Sakr [2017] 118 ASCR 333 Savage & Whitelaw v Union Bank of Australasia Ltd (1906) 3 CLR 1170 Seafish Tasmania Pelagic Pty Ltd v Burke, Minister for the Sustainability, Environment, Water, Population and Communities [2013] FCA 782 Selangor United Rubber v Cradock (No 4) [1969] 1 WLR 1773 Sonenoco (No.77) Pty Ltd v Silva (1989) 24 FCR 105 Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307 Vacuum Oil Pty Ltd v Wiltshire (1945) 72 CLR 319 Whyte v Williams (1903) 29 VLR 69; 9 ALR 98 Wilson v Official Trustee in Bankruptcy [2000] FCA 1251 Woodgate, in the matters of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583 Worrall v Harford (1802) 8 Ves 4 Zen Ridgeway Pty Ltd v Adams [2009] 2 Qd R 298
Date of hearing:	2 June 2017
Date of last submissions:	19 July 2017
Registry:	Queensland
Division:	General Division
National Practice Area:	Commercial and Corporations
Sub-area:	General and Personal Insolvency
Category:	Catchwords
Number of paragraphs:	206
Counsel for the Applicants:	Mr M Eade
Solicitor for the Applicants:	Cooper Grace Ward
Counsel for the First Respondent:	Ms A Wheatley
Solicitor for the First Respondent:	Australian Tax Office
Counsel for the Second to Fifth Respondents:	The Second to Fifth Respondents did not appear

Table of Corrections
4 September 2017	The appearances for the Respondents have been corrected

QUD 198 of 2017
IN THE MATTER OF THE BANKRUPT ESTATE OF WARWICK GORDON LEE
BETWEEN:	MORGAN GERARD JAMES LANE First Applicant RAJENDRA KUMAR KHATRI Second Applicant
AND:	DEPUTY COMMISSIONER OF TAXATION First Respondent JANET MAY LEE Second Respondent WESTPAC BANKING CORPORATION (and others named in the Schedule) Third Respondent

JUDGE:	DERRINGTON J
DATE OF ORDER:	18 AUGUST 2017

QUD 198 of 2017
Respondents
Fourth Respondent:	BEVMONT PTY LTD AS TRUSTEE FOR THE LEE FAMILY TRUST
Fifth Respondent:	WARWICK GORDON LEE