Re Frosthollow Pty Ltd

[2015] VSC 512

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
IN THE PRACTICE COURT

S CI 2015 4363

IN THE MATTER of an Application by Frosthollow Pty Ltd (ACN 151 816 401) for Judicial Advice and Directions under Rule 54.02 of the Supreme Court (General Civil Procedure) Rules 2005.

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JUDGE:	McDONALD J
WHERE HELD:	Melbourne
DATES OF HEARING:	10 and 17 September 2015
DATE OF JUDGMENT:	25 September 2015
CASE MAY BE CITED AS:	Re Frosthollow Pty Ltd
MEDIUM NEUTRAL CITATION:	[2015] VSC 512

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TRUSTS AND TRUSTEES — Judicial advice — Trustee’s right to indemnification from trust assets — Plaintiffs and five defendants beneficiaries of trust — Trustee alleged to have breached duties as trustee — Sole shareholder and director of trustee is a defendant and is alleged to have procured the breach of trust — Counsel’s opinion in support of application for judicial advice based on instructions from director of trustee — No indication that trustee would advance arguments in addition to those to be advanced by other defendants — Advice of counsel supports conclusion that trustee has proper basis to defend proceeding —  Not appropriate to fund defence out of assets of trust — Supreme Court (General Civil Procedure) Rules 2005 (Vic) O 54.

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APPEARANCES:	Counsel	Solicitors
For the Applicant Frosthollow Pty Ltd	Mr C E Shaw	Norton Gledhill
For the Objectors	Mr M S Osborne QC and Mr P Creighton-Selvay	Strongman & Crouch

HIS HONOUR:

1    On 18 November 2011, Frosthollow Pty Ltd (‘Frosthollow’) was appointed as trustee of the Ying Mui Trust (‘YMT’). On 8 December 2011, Frosthollow was appointed as trustee of the Amore Trust (‘AT’). The sole director of Frosthollow is Lynn Hoh. The YMT is a discretionary trust with approximately 30 natural persons as beneficiaries, as well as a number of incorporated beneficiaries.  Nine of the beneficiaries of the YMT are the four plaintiffs[1] and five of eight defendants[2] in proceedings in the Supreme Court of Victoria which are listed for hearing before Hargrave J in February 2016 (‘the principal proceeding’). Lynn Hoh is the third defendant and Frosthollow is the seventh defendant in the principal proceeding.

[1]Ying Mui Pty Ltd (ACN 002 992 449); Amore Corporation Pty Ltd (ACN 097 964 175); Kiang Po Hoh (also known as George Hoh) and Han Keyet Hoh.

[2]Frank Kiang Ngan Hoh, Pooi Yoke Lim Hoh, Lynn Yook Lien Hoh, Ian Han Lok Hoh, Lokit Investments Pty Ltd (ACN 006 855 741).

2    The amended statement of claim in the principal proceeding comprises some 437 paragraphs, including schedules of particulars. The pleading runs to some 160 pages. 

3    It is unnecessary to recount in detail the raft of allegations which are made by the plaintiffs against the defendants and the defendants against the plaintiffs by way of counterclaim. Suffice to observe that underlying the litigation is a long standing dispute between members of the Hoh family, particularly George (the third plaintiff) and Frank and Lynn Hoh (the first and third defendants). The amended statement of claim pleads three causes of action against Frosthollow:

(i)A claim challenging the appointment of Frosthollow as trustee of the YMT and AT and the transfer of properties to Frosthollow. This claim is based on alleged wrongdoing by the first to fourth defendants. The plaintiffs’ prayer for relief includes a claim for a declaration that Frosthollow’s appointment as trustee of the YMT and the AT is invalid and of no force and effect. Hereafter, I shall refer to this claim as the trustee removal claim.

(ii)Ying Mui Pty Ltd, the first plaintiff, alleges that it is entitled to an indemnity out of the assets of the YMT in respect of interest free loans advanced to it by George Hoh (the third plaintiff), Robert Hoh (the father of Han Keyet Hoh the fourth plaintiff) and Lokit Investments Pty Ltd (the fifth defendant).  It is alleged that Ying Mui Pty Ltd incurred a liability to repay these loans on demand in its capacity as trustee of the YMT and for the benefit of YMT. The plaintiffs allege that for the year ending 30 June 2011 the accounts of YMT recorded that Ying Mui Pty Ltd had a liability of $3,230,250 (the total value of the three loans) to Artimax Investments Ltd (‘Artimax’). Artimax is a company incorporated in Hong Kong controlled by George Hoh and Frank Hoh. The plaintiffs allege that their loans were not repaid and that they did not consent to a novation of these loans for the benefit of Artimax. The plaintiffs’ prayer for relief seeks a declaration that Ying Mui Pty Ltd is entitled to an indemnity out of the assets of the YMT in respect of the first and second loans which were advanced by the third plaintiff and the fourth plaintiff’s father, out of the assets of the YMT. The value of these loans totals $2,153,499.  Hereafter, I shall refer to this claim as the loan indemnity claim.

(iii)The plaintiffs allege that distributions from YMT totalling $1,493,508 (of which $1,293,580 was distributed to the fifth defendant, Lokit Investments Pty Ltd) were in breach of trust. The plaintiffs further allege that the first and third defendants knowingly assisted, procured or counselled breaches of trust. The first and second defendants jointly own all of the shares in the fifth defendant, and the first to third defendants are directors of the fifth defendant. Hereafter, I shall refer to this claim as the distribution claim.

4 Frosthollow has sought orders pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2005 (‘Order 54’) that it would be appropriate for it to defend the loan indemnity claim and the distribution claim. Frosthollow accepts that it is not appropriate for it to actively defend the trustee removal claim. It also seeks an order that it is appropriate that it have recourse to the assets of the YMT and the AT to pay its costs of defending these claims and the costs of the current application.

5 Order 54 operates as an exception to the court’s ordinary function of deciding disputes between competing litigants. It affords a facility of giving private advice in that its function is to give personal protection to the trustee.[3] The obtaining of judicial advice resolves doubts about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. Resolving these doubts means that the interests of the trust will not be subordinated to the trustee’s fear of personal liability for costs.[4]

[3]Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand & Anor (2008) 237 CLR 66, [64] (‘Macedonian Church’);  see also Morris v Smoel & Ors [2013] VSCA 11, [22]-[24].

[4]Macedonian Church [71].

6 Order 54 is not to be construed such that some discretionary factors are ‘always more significant or controlling than others. The adversarial nature of the proceedings and the fact that the trustee is being sued for breach of trust are not matters of special significance’.[5] There is no principle governing an application under Order 54 to the effect that the adversarial nature of the proceedings has the result that it is inappropriate to give advice.

[5]Ibid [60].

7    Frosthollow’s application was heard in the Practice Court on 10 and 17 September 2015.  Prior to the hearing on 10 September, Frosthollow filed a memorandum of advice by counsel. During the course of the hearing on 10 September, I advised Mr Shaw, who appeared for Frosthollow, that based on the contents of his advice, the Court could not provide advice that was appropriate for Frosthollow to defend the claims against it. I provided Frosthollow with an opportunity to file a supplementary advice. This advice was filed in advance of the hearing on 17 September 2015.

8    I have concluded that the estimated costs of Frosthollow in defending the proceedings are not disproportionate, having regard to the quantum of the claims against it and the value of the assets of YMT. An affidavit was filed in support of the application deposing that the costs of Frosthollow in defending the claims was estimated to be up to $260,000. Evidence before the Court indicates that YMT currently has assets of approximately $7.5 million.

9    Based on the two advices of counsel referred to above, I am satisfied, albeit with some degree of hesitation, that Frosthollow has sufficient prospects of success to warrant advice that it is justified in proceeding with a defence to the loan indemnity claim and to the distribution claim.  I have had regard to counsel’s advice regarding the prospects of Frosthollow successfully defending the indemnity claim and the distribution claim. The Court is constrained in disclosing the contents of this advice because it is privileged. Counsel’s advice relies heavily upon instructions which he has received from the third defendant, the sole shareholder and director of Frosthollow. This is not a criticism of Mr Shaw. Rather it is an observation regarding the limitations of the material upon which his advice is based. It is those limitations which is the source of the reservations which I have expressed above.

10    Notwithstanding counsel’s advice, I have refrained from giving advice that the trustee is justified in accessing trust funds for the purposes of its defence of the claims.

11    Whether it is appropriate for a trustee to have access to trust funds to defend its defence will depend on what is in the best interests of the trust[6] having regard to the particular circumstances of the case. Relevantly, such circumstances will include:

[6]See, for example, Macedonian Church [71]-[72] and [196]; Re Perrot Mill Pty Ltd (No 2) [2013] VSC 428, [3] quoting Marley v Mutual Security Merchant Bank [1991] 3 All ER 198 (PC), 201; Re Estate Late Chow Cho-Poon; Application for Judicial Advice [2013] NSWSC 844, [45] and [182].

·the nature of the trust;

·whether the trustee has a pecuniary interest in the outcome of the litigation;

·the nature of the allegations against the trustee including whether there is an allegation of breach of trust;

·whether the beneficiaries of the estate have a substantial financial interest in defending claims, including claims which are made against the trustee;

·the financial means of the beneficiaries to fund their defence;

·the merits and strengths of the claim against the trust estate;

·the extent to which recourse to the trust’s estate for defence costs would deprive the successful claimant of the fruits of litigation; and

·whether the costs likely to be incurred by the trustee in defending the claims, including potential exposure to a costs order in favour of the plaintiffs, are proportionate.[7]

[7]Macedonian Church [76], [84] and [162].

12    YMT is a discretionary trust. The four plaintiffs and five of the defendants are beneficiaries. The primary proceeding involves competing allegations between these beneficiaries. There is no evidence before me which suggest that the defendants do not have capacity to fund their defence.  The defendants will be active contradictors to both the loan indemnity claim and the distribution claim. The third defendant is the sole shareholder and director of Frosthollow. Mr Shaw has not pointed to anything that could be advanced by way of Frosthollow’s defence to the indemnity claim and the distribution claim over and above that which will be advanced by the defendants.

13    The estimated costs of $250,000 to $260,000 are not disproportionate to the assets of YMT and AT. Nevertheless, such costs are still significant. Further, if Frosthollow actively defends the allegations against it and those allegations are ultimately upheld, this will increase its potential liability to contribute to any order of costs made in favour of the plaintiffs. The plaintiffs’ costs are estimated to be in the range of $1.5 million to $1.6 million dollars.

14 The fact that Frosthollow is alleged to have acted in breach of trust by distributing assets of the trust is not, of itself, a determinative factor. In appropriate circumstances, an application under Order 54 by a trustee sued for breach of trust is ‘a standard instance’ in which Order 54 can apply.[8] On the other hand, where there is a non-charitable private trust involving a conflict between beneficiaries, some of whom allege a breach of trust, and where the defendants have a personal capacity to fund the defence, it might not be correct to give the trustee an opinion or advice.[9]

[8]Ibid [70].

[9]Ibid [67].

15    The particular allegations of breach of trust made against Frosthollow, viewed in conjunction with other considerations, support the conclusion that the Court should refrain from providing advice that it is appropriate for the trustee to access the funds of YMT for the purpose of defending the claims. Frosthollow has a direct pecuniary interest in defending the allegations by four beneficiaries of the trust that it acted in breach of trust by making distributions to the first and third defendant, who are also beneficiaries. Frosthollow’s direct pecuniary interest arises from the fact that the plaintiffs claim equitable compensation against it, which if granted, could equate to the $1,493,508 distributed to the first and third defendants allegedly in breach of trust. These allegations of breach of trust bring into sharp focus the fact that the primary proceeding is underpinned by a family dispute in which the competing protagonists are beneficiaries of YMT.

16    The third defendant is a beneficiary of the trust and has a pecuniary interest in defending both the indemnity claim and the distribution claim.  So much is clear from the defence which has been filed in the proceedings on her behalf. The instructions which have been provided to Mr Shaw by the third defendant have not been provided by a disinterested third party. Ms Hoh is a defendant in the primary proceedings. Inevitably, her instructions to Mr Shaw for the preparation of his advice conform with those which she provided to her own counsel for the purposes of her own defence in respect of the loan indemnity and distribution claims. It is therefore unsurprising that Mr Shaw conceded during the course of the hearing on 10 September 2015 that he could not identify any matters that would be likely to be raised additional to anything in defending the claims against it, which added anything to the matters which would be put in opposition to those claims by other defendants.

17    If Frosthollow decides to actively defend the loan indemnity claim and the distribution claim it may ultimately be successful at trial.  In those circumstances, it would be entitled to seek an order for costs.  It would also be entitled to seek an order that it should be indemnified for the costs incurred in defending the proceeding out of the assets of the trust. Whether such orders should be made will be a matter for the trial judge.[10] In the meantime, however, the costs of any defence to those claims should not be borne out of the assets of YMT.

[10]Ibid [165].

18 Frosthollow is entitled to an order for its costs in respect of the application under Order 54. Although there is a real question as to whether it was required to make the current application,[11] it cannot be said that Frosthollow acted inappropriately in bringing the current application. The fact that the Court has declined to give advice that it is appropriate to access trust funds to fund the defence has clarified the position of Frosthollow as trustee of YMT. This outcome has vindicated the position of Frosthollow in making the application.

[11]Cf Macedonian Church [67] and [74]; See also Perpetual Investment Management Ltd as Responsible Entity for 10 Schemes listed in the Summons [2014] NSWSC 784, [49] – [65].

19    I shall make no order for costs in favour of the objectors. The objectors were not necessary parties to the proceeding. The oral and written submissions advanced on behalf of the objectors have had no impact upon the outcome of the present application. The role of the objectors in the current proceedings is to be contrasted with the position of the objectors who appeared before Croft J in Re Perrot Mill Pty Ltd (No 2).[12] In those proceedings, Croft J made an order for costs in favour of the objectors in circumstances where the objectors drew the Court’s attention to substantive matters which had not been raised by the applicant for advice, which impacted upon the question of whether the advice should have been given.

[12][2013] VSC 428.

20    The orders of the court will be:

(i)     Frosthollow Pty Ltd is directed that it would be appropriate to and it would be justified in defending the claims made against it in its capacity as trustee of the Ying Mui trust in proceeding number S CI 2012 6147 of the Honourable Court (‘2012 Proceeding’) as follows:

(a)   The claims made in paragraphs 363 to 371 and paragraph UU of the prayer for relief in the amended statement of claim dated 26 June 2015 in the 2012 proceeding (the ‘amended statement of claim’); and

(b)   The claims made in paragraphs 424 to 430 and paragraphs RR to TT in the prayer for relief of the amended statement of claim;

(ii)   Frosthollow Pty Ltd is directed that it would be appropriate to and it would be justified in playing no active role in and abiding by the judgment of the Court in its capacity as trustee of the Ying Mui trust and the Amore trust in relation to the claims in the 2012 proceeding made in paragraphs 144 to 161 and paragraphs LL to QQ in the prayer for relief of the statement of claim;

(iii)  Subject to further order of the Court, Frosthollow Pty Ltd is directed that it would not be appropriate and Frosthollow Pty Ltd is not justified in paying the costs of defending the 2012 proceeding out of the assets of the Ying Mui trust; and

(iv)  Frosthollow Pty Ltd’s costs of the originating motion dated 19 August 2015 are to be paid out of the assets of the Ying Mui trust.