Re Matheson; ex parte Worrell v Matheson
[1994] FCA 198
•14 APRIL 1994
Re: FREDERICK JAMES MATHESON
Ex Parte: IVOR WORRELL v. FREDERICK JAMES MATHESON
No. QB 206 of 1993
FED No. 198/94
Number of pages - 13
Bankruptcy - Equity - Federal court
(1994) 49 FCR 454
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
SPENDER J
CATCHWORDS
Bankruptcy - Administration of property - property available for payment of debts - property divisible amongst creditors - property held on trust - whether a bankrupt trustee's right to recoupment/indemnity from trust funds passes to Trustee in Bankruptcy - whether bankrupt trustee's lien over trust property supporting right to recoupment/indemnity passes to Trustee in Bankruptcy - whether, if trust funds are acquired by Trustee in Bankruptcy from trust, Trustee in Bankruptcy can use trust funds to pay non-trust creditors and/or Trustee in Bankruptcy's own costs and remuneration.
Bankruptcy - Proceedings in connection with sequestration - effect of bankruptcy on property - whether bankruptcy of a person who is a trustee vests property held on trust in the Trustee in Bankruptcy - effect of bankruptcy of a trustee on that trustee's position as such - whether bankruptcy of a trustee requires removal of that trustee by the Court.
Equity - trusts and trustees - appointment and removal of trustees - effect of bankruptcy on trustee's right to carry on as such - nature of jurisdiction to remove trustee on ground of insolvency - effect of bankruptcy on trustee's right to recoupment/repayment from trust funds for trust debts incurred by the trustee - effect of bankruptcy on trustee's lien over trust property.
Federal court - original jurisdiction - application of state laws - jurisdiction over trusts and trustees.
Bankruptcy Act 1966 (Cth) ss. 5(1), 58(1), 116(2)
Trusts Act 1973 (Qld) s. 80
Jurisdiction of Court (Cross-vesting) Act 1987 (Cth) s. 9(2)
Jurisdiction of Courts (Cross-vesting) Act 1987 (Qld) s. 3
Vacuum Oil Co. Pty Ltd v. Wiltshire (1945) 72 CLR 319
Octavo Investments Pty Ltd v. Knight (1979) 144 CLR 360
Re Enhill Pty Ltd (1983) 1 VR 561
Davies v. The English, Scottish and Australian Bank Ltd (1933-34) 7 ABC 210
In Re Suco Gold Pty Ltd (In Liq.) (1982) 33 SASR 99
Miller v. Cameron 136 CLR 572
Letterstedt v. Broers (1884) 9 AC 371
Re Whitehouse (1982) Qd R 196
Chambers v. Jones (1902) SR NSW 177
Re Byrne Australia Pty Ltd and the Companies Act (No. 2) (1981) 2 NSWLR 364
HEARING
BRISBANE, 8 February 1994
#DATE 14:4:1994
The applicant appeared in person.
Counsel for the respondent: Mr Eleftheriou
Solicitors for the respondent: James Walker
ORDER
THE COURT ORDERS THAT:
1. From the funds presently held in trust between Ivor Worrell as Trustee of the Bankrupt Estate of Frederick James Matheson and the Matheson Family Trust in the sum of twenty-four thousand and ten dollars ($24,010.00) plus interest be disbursed to and in respect of the debts owing as at today's date to Mini Tankers, Workers' Compensation Board, Bank of Queensland, John McGaw, Solicitor, the sum of four thousand dollars ($4,000.00); to Ivor Worrell the sum of four thousand dollars ($4,000.00) and the balance to be paid to the Trustee of the Matheson Family Trust.
2. In respect of claims of Norm Lean, Advance Bank, Lindum Service Station and Enzed Brisbane Central that as these claims are currently in dispute that steps be taken by 30 July, 1994, for these creditors to provide full details to the Trustee of the Matheson Family Trust as to whether or not they are Trust creditors and if so determined, then they are to be paid or compromised by the Trustee of the Matheson Family Trust by that date - i.e. 30 July, 1994.
3. In the event that no such payment or compromise occurs or other claims become apparent, the applicant, Ivor Worrell, is to be indemnified by awritten indemnity agreement to be executed within the next fourteen (14) days by the Trustee of the Matheson Family Trust which undertakes to meet preparation costs in relation thereto.
4. This indemnity is to ensure that the applicant is indemnified for all and any claims that are made by proved Trust creditors of the Matheson Family Trust who remain unpaid or are not paid by the Matheson Family Trust.
5. This indemnity is to run for a period of two (2) years.
6. It is a term between the parties that the bankrupt, Frederick J. Matheson, is within fourteen (14) days to provide a proposal of composition suitable to the Trustee in Bankruptcy with a view to the annulment of his bankruptcy.
7. There be no further order as to costs in this matter.
8. Liberty to apply on seven days' notice.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
SPENDER J This is an application brought by the trustee of the bankrupt estate of Frederick James Matheson, Mr Ivor Worrell ('the Trustee').
On 3 February 1993, a sequestration order was made against the estate of Mr Matheson on the petition of one of his creditors, Queensland Industrial Sandblasting Pty Limited.
Mr Matheson is the sole trustee of the Matheson Family Trust ('the family trust'). The circumstances of the family trust and Mr Matheson's involvement in it were the subject of questioning in an examination of Mr Matheson by the Trustee on 30 July 1993 pursuant to s. 77C of the Bankruptcy Act 1966 ('the Act'). A transcript of the examination is exhibited to an affidavit of the Trustee in this application. Regrettably, the material before the court on the present application is less than complete, and the submissions of the parties have not been focussed or helpful. It is not good enough for a party simply to say this is what is sought and leave it to the Court to work out whether what is sought is able to be granted, and if so, whether on the evidence it should be. Of major concern is the fact that the terms of the trust are not before me. In particular, the material is silent as to the rights of the trustee in respect of his costs of administering the trust, and as to the issue of appointment of trustee.
From what is before the Court, the position seems to be that Mr Matheson was appointed as trustee of the family trust on 11 April 1975 and resigned his appointment on 15 January 1993. He was reappointed on or about 24 May 1993. The family trust is a trading trust which operates an earthmoving business. Its assets are two Kato excavators which are unencumbered and are worth $87,500.00, and $22,000.00 paid by the Port of Brisbane Authority for work done by the family trust, which is currently invested in a joint account between the Trustee and the family trust's solicitor pending resolution of the issues in the bankrupt's estate.
The liabilities relating to the family trust, at least insofar as they have been incurred by Mr Matheson, amount to $26,373.00. There is nothing in the evidence as to whether there are any further outstanding liabilities relating to the family trust apart from those incurred for its benefit by Mr Matheson.
It seems (although this also is not clear) the family trust's earthmoving business continues to operate. In the last financial year it earned an estimated net profit before tax of $60,000.00. Mr Matheson, despite his bankruptcy, continues to be the sole trustee and the sole person responsible for the direction and control of the trust and its operations. However, despite his role in operating the trust (a task which would seem to be quite onerous), Mr Matheson is unemployed and has been in receipt of unemployment benefits for the last few years. He maintains that he is paid nothing by the family trust and has taken no loans from it. He is not a beneficiary of the family trust. The only living beneficiary is Janice May Lenz, Mr Matheson's sister. However, no distributions have been made to her as the family trust funds have been utilised in paying creditors and increasing equity in the earthmoving equipment.
The Trustee has brought an application seeking:
. that the Trustee be appointed as "Receiver" of the Trustee of the Matheson Family Trust;
. that fees, remuneration and costs resultant from such order be paid from the trust;
. that the trust pay to the applicant as Trustee of the bankrupt's estate an amount of $35,000.00 or such other amount as determined by the Court; and . that the first respondent pay the costs of and incidental to this application to be taxed.
Before proceeding to the various aspects of the application, it is helpful to outline the general legal framework within which the Trustee's application arises.
A trustee who incurs debts in the course of discharging his duties as a trustee is personally liable for such debts. As Latham CJ said of a trustee of a trading trust in Vacuum Oil Co. Pty Ltd v. Wiltshire (1945) 72 CLR 319 at 324:
" In respect of debts incurred by him in so carrying on the business, he is personally liable to the trading creditors - the debts are his debts. "
See also Octavo Investments Pty Ltd v. Knight (1979) 144 CLR 360 at 367: Jacobs Law of Trusts in Australia at (2102). As a corollary of this, it is my opinion that when a trustee becomes bankrupt, the creditors of that person's estate will include creditors whose claims arise out of debts existing at the date of bankruptcy incurred by the bankrupt person for trust purposes ('the trust creditors'). According to the examination of Mr Matheson pursuant to s. 77C of the Act, there is approximately $26,000.00 of trust debts owing by Mr Matheson in his capacity as trustee of the family trust. What was the position at the date of Mr Matheson's bankruptcy is not clear.
The trust creditors of the bankrupt person are not without redress. The position is explained in Octavo Investments (supra) in the joint judgment of Stephen, Mason, Aickin and Wilson JJ at pp 367-8:
" We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co. Pty. Ltd. v. Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co. Pty Ltd v. Wiltshire (1945) 72 CLR 319. The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business: Dowse v. Gorton (1891) AC 190. In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied: Vacuum Oil Co. Pty. Ltd. v. Wiltshire. These principles lead naturally to the conclusion that the beneficial interests which, by subrogation, the creditors whose claims arise from the carrying on of the business have in the assets held by a bankrupt trustee form part of the property of the bankrupt divisible amongst his creditors: Save v. Union Bank of Australia (1906) 3 CLR at p 1188; Jennings v. Mather (1901) 1 QB 108, at p 116; Governors of St Thomas's Hospital v. Richardson (1901) 1 KB 271. The definitions of both 'property' and 'property of the bankrupt' in s. 5 of the Bankruptcy Act are apt to include such a beneficial interest. "
See also Re Enhill Pty Ltd (1983) 1 VR 561 at 563 and 567-9.
It is necessary to have regard to some of the provisions of the Act. Section 58(1) provides:
" 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 s. 156A, in that registered trustee. "
The terms "property" and "the property of the bankrupt" are defined in s. 5 of the Act.
" '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 incidental to any such real or personal property; ...
'the property of the bankrupt' in relation to a bankrupt, means:
(a) except in sub-sections 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; and
(b) in subsections 58(3) and (4):
(i) the property, rights and powers referred to in paragraph (a) of this definition; and
(ii) any other property of the bankrupt. "
Insofar as is relevant, s. 116 provides:
" 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 has devolved or devolves on him, after the commencement of the bankruptcy and before his 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; "
Section 116 of the Act determines what property is divisible amongst the creditors of the bankrupt. Section 58 and the associated definition sections have the effect of requiring reference to s. 116 to determine whether an interest in the trust, be it legal or equitable, passes to the trustee. See Davies v. The English, Scottish and Australian Bank Ltd (1933-34) 7 ABC 210, especially at 214.
Section 116 has the effect that trust property is not property divisible amongst the creditors of the bankrupt. However, the trustee's lien on trust assets for trust debts is not property held in trust; it is not a trust asset; it is therefore not excluded by s. 116(2)(a) from being "property divisible amongst the creditors of a bankrupt".
As trustee, Mr Matheson has a right of indemnity in respect of funds which he has expended from his own funds in satisfaction of trust debts; also he has an entitlement to use trust assets to pay trust debts, and a charge or right of lien over trust assets for that purpose. Neither this right, nor the charge, is a trust asset, and it therefore is not covered by s. 116(2)(a) and is therefore "the property of a bankrupt divisible amongst the creditors of a bankrupt".
The High Court in Octavo Investments stated at 369-70:
" (The) argument was that the money paid to Octavo by Coastline was trust property and that therefore that property would not under any circumstances have been property divisible among the creditors of Coastline had Coastline been an individual trustee.
The appellant referred the Court to s. 116(2)(a) of the Bankruptcy Act. This section, which has appeared in the bankruptcy legislation of both the United Kingdom and Australia from the inception of the legislation, provides that the property which is divisible amongst the creditors of a bankrupt does not include 'property held by the bankrupt in trust for another person'. Property which is an asset of a trading estate carried on by a trustee is properly described as trust property; Dowse v. Gordon (1891) AC 190; Jennings v. Mather (1901) 1 QB, at p 111. However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest, and is sufficient to render the bald description of the property as 'trust property' inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee's interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt. "
Octavo Investments, and subsequent considerations of that case (see Re Enhill; In Re Suco Gold Pty Ltd (In Liq.) (1982) 33 SASR 99) establish that Mr Matheson's right to recoupment from trust assets is property which passes to the Trustee. Similarly, in my view, Mr Matheson's equitable lien over the trust property in support of his obligations to trust creditors also passes to the Trustee.
The next difficulty that arises in the application of the principles in Re Octavo is how rights which pass to the Trustee are to be exercised. One view is that the legal interest in the family trust property passes to the Trustee along with the limited equitable interest arising out of the lien. Should this be so, the Trustee, (being, by operation of law, in possession of both legal control of, as well as an equitable interest in, the trust property) will be in a position to realise the trust assets to the benefit of the trust creditors.
The question whether the legal interest in trust property passes to a Trustee in bankruptcy with the equitable interest arising out of the trustee's lien was considered in Octavo Investments (supra) at p 370-1 where it is observed that:
" Conflicting views have been expressed on the question of whether the legal title to trust property over which a bankrupt trustee has a charge vests in the trustee in bankruptcy. In several cases it has been held that it does: Carvalho v. Burn (1833) 4 B. and Ad. 382 (110 ER 499); affd.
(1834) 1 Ad and E 883 (110 ER 1445); Morgan v. Swansea Urban Sanitary Authority (1878) 9 Ch D 582, at p 585; Jennings v. Mather (1901) 1 QB 108; affd. (1902) 1 KB 1; Governors of St Thomas's Hospital v. Richardson (1910) 1 KB 271; Savage v. Union Bank of Australia Ltd. (1906) 3 CLR 1170. It is noted in Halsbury's Laws of England, 4th ed., vol. 3, par. 636, that it is doubtful 'whether, in cases where the bankrupt has a beneficial interest and is also a trustee the legal estate does not pass'. The learned author of Lewin on Trusts 16th ed. (1964), p 400, is more emphatic and declared himself for the proposition that the legal estate does not pass. He submits that Sir George Jessel MR was wrong when he said in Morgan v. Swansea Urban Sanitary Authority: 'under the Bankruptcy Act, where a trustee has no beneficial interest, the legal estate does not pass; but where he has it does pass.' However, that same passage was cited with approval by the Court of Appeal in Governors of St Thomas's Hospital v. Richardson (1910) 1 KB 271, at p 284.
...
In our respectful opinion the controversy to which we have alluded is of little moment in the present case and we find it unnecessary to decide the particular question. "
The reason for that last observation was that Octavo itself did not involve a trustee in bankruptcy and a bankrupt natural trustee. Rather, it arose in the context of the liquidation of a trustee company. The liquidator of the trustee company had attacked payments made to Octavo by the trust company as voidable preferences. To achieve this, the liquidator was directed to the provisions of the Act by s. 293 of the Companies Act 1961 Qld which provided:
" (1) Any transfer, mortgage, delivery of goods, payment, execution or other act relating to property made or done by or against a company which, had it been made or done by or against an individual, would in his bankruptcy be void or voidable shall in the event of the company being wound up be void or voidable in like manner. "
The High Court therefore was concerned with whether the payments would have been voidable preferences if made by a prospective bankrupt under the Act. The central argument of the appellant was that the payments could not be voidable preferences because the money paid was trust property which was not property of a bankrupt available to the bankrupt's creditors because of s. 116(2)(a). The Court's response to that argument, as noted above, was that the bankrupt trustee's equitable interest in the trust property arising out of his right to access trust property in satisfaction of trust debts, and the lien over the trust property in support of that equitable interest, was not trust property but rather was property of the bankrupt.
In relation to the question of legal ownership, however, it was not necessary for the Court to decide the issue because in that case the trustee was a company. Stephen, Mason, Aickin and Wilson JJ explained at p 371:
" In the case of the winding up of a company the legal title to all company property, including trust property, remains in the company. The liquidator of a company takes the position of the directors and, in the absence of a court order under s. 233(2) of the Companies Act, acquires no title to company property... "
It is the separation of control of assets from legal ownership of assets present in the trustee company context which made the issue of legal ownership irrelevant. The liquidator's control of the company makes it possible for the liquidator to control the trust assets despite the fact that legal ownership remains with the company. This separation of control from ownership does not exist in the bankruptcy context because bankruptcy involves natural persons rather than corporations. The question of whether legal ownership passes to the Trustee in bankruptcy is an important one from a practical point of view.
I note that in oral submissions, counsel for the Trustee indicated that the Trustee was seeking appointment of the Trustee as trustee of the family trust, rather than for confirmation that the Trustee already is, by operation of law, the trustee of the family trust.
I have not had the benefit of argument on the question, but having regard to s. 116(2)(a), I think the better view is that while the Trustee has a charge or right of lien over the trust property, in respect of trust debts as at the date of bankruptcy, the legal title to the trust property does not pass to him on Mr Matheson's bankruptcy.
The terms of s. 80(2) of the Trusts Act 1973 (Qld) ('the Trusts Act') set out below, conferring statutory power on the Supreme Court to remove a bankrupt trustee as trustee comprehends that the mere fact of bankruptcy does not pass the legal title in the trust property to the Trustee in bankruptcy. The exercise of the inherent power to remove a bankrupt trustee, as exemplified in Miller v. Cameron 136 CLR 572 is a similar recognition of that proposition.
I now turn to consider the relief sought on the application. As stated above, counsel for the Trustee indicated that first ground of the application was directed at having the Trustee appointed as trustee of the family trust.
The first consideration is whether, and on what basis, this Court has power to remove Mr Matheson as trustee of the family trust. The state Supreme Courts, including the Supreme Court of Queensland, have both statutory and inherent jurisdiction to appoint and remove trustees. The statutory jurisdiction of the Supreme Court of Queensland arises pursuant to s. 80 of the Trusts Act which so far as is relevant provides:
" (1) The Court may, whenever it is expedient to appoint a new trustee or new trustees, and it is found inexpedient, difficult or impractical to do so without the assistance of the Court, make an order appointing a new trustee or new trustees either in substitution for or in addition to any existing trustee or trustees or although there is no existing trustee.
(2) In particular and without prejudice to the generality of sub-section (1), the Court may make an order appointing a new trustee in substitution for a trustee who desires to be discharged, or who is convicted of a crime or misdemeanour or is a bankrupt...or for any other reason whatsoever appears to the Court to be undesirable as a trustee. "
The inherent jurisdiction of the Supreme Court of Queensland is based upon s. 22 of the Supreme Court Act 1867 Qld which conferred upon the Supreme Court "the power and authority to do, exercise and perform all acts, matters and things necessary for the due execution of such equitable jurisdiction as is possessed by the Lord High Chancellor or other equity judges of England".
While in the past there may have been difficult questions as to how much of this jurisdiction is vested in the Federal Court of Australia (see Adam P Brown Male Fashions Pty Ltd v. Philip Morris Inc. (1981) 148 CLR 170 and Parsons v. Martin 58 ALR 395 at 401), such difficulties have been alleviated by the cross-vesting scheme. As a result of that scheme, this Court has jurisdiction to appoint and remove trustees.
Section 9(2) of the Jurisdiction of Court (Cross-vesting) Act 1987 (Cth) provides:
" The Federal Court...may:
(a) exercise jurisdiction (whether original or appellate) conferred on that court by a provision of this Act or of a law of a State relating to cross-vesting of jurisdiction;
... "
Section 3 of the Jurisdiction of Courts (Cross-vesting) Act 1987 (Qld) provides:
" 'State matter' means a matter -
(a) in which the Supreme Court has jurisdiction otherwise than by reason of a law of the Commonwealth or of another State;
... "
Section 4 of that Act relevantly provides:
" (1) The Federal Court has and may exercise original and appellate jurisdiction with respect to State matters. "
Turning now to the issues relating to the exercise of the jurisdiction, there is some debate as to whether the ambit of the statutory jurisdiction is more limited than that of the inherent jurisdiction. The ambit of the statutory jurisdiction is limited to circumstances in which it is "expedient" to appoint a new trustee and also "inexpedient, difficult or impractical to do so without the assistance of the court". There are, in addition, other suggested limitations on the statutory jurisdiction. (See Ford and Lee Principles of the Law of Trusts at 347 and Jacobs Law of Trusts at (1546).)
However that may be, in my opinion, the exercise of both the statutory and inherent jurisdiction require a consideration of the principles expressed in the cases of Letterstedt v. Broers (1884) 9 AC 371 and Miller v. Cameron (1936) 54 CLR 572. These authorities were reviewed by Macrossan J (as he was then) in Re Whitehouse (1982) Qd R 196 at 205-6:
" So far as the position of C. M. Whitehouse as trustee is concerned there is an undoubted power of removal. The question is whether it should be exercised. The leading authority appears to be Letterstedt v. Broers (1884) 9 AC
371. At p 386 of the report of that case Lord Blackburn, in delivering judgment, said that even though charges of misconduct against a trustee were not made out or were greatly exaggerated, so that the trustee was justified in resisting the charges, yet if the court was 'satisfied that the continuation of the trustee would prevent the trust being properly executed, the trustee might be removed. It must always be borne in mind that trustees exist for the benefit of those to whom the creator of trust has given the trust estate'. At p 387 he continued: ' In exercising so delicate a jurisdiction as that of removing trustees, their Lordships do not venture to lay down any general rule beyond the very broad principle above enunciated, that their main guide must be the welfare of the beneficiaries. Probably it is not possible to lay down any more definite rule in a matter so essentially dependent on details of great nicety. ' Dixon J (as he then was) in Miller v. Cameron (1936) 54 CLR 572, at p 580, stated as follows:
' The jurisdiction to remove a trustee is exercised with a view to the interests of the beneficiaries, to the security of the trust property and to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. In deciding to remove a trustee the court forms a judgment based upon considerations, possibly large in number and varied in character, which combine to show that the welfare of the beneficiaries is opposed to his continued occupation of the office. Such a judgment must be largely discretionary. A trustee is not to be removed unless circumstances exist which afford ground upon which the jurisdiction may be exercised. '
There are cases which suggest that bankruptcy of a trustee per se is sufficient ground to show, prima facie, that a trustee is "unfit to act" as a trustee for the purposes of s. 12 of the Trusts Act, (see Chambers v. Jones (1902) SR NSW 177.
A. H. Simpson CJ in Eq. at 182 said:
" ...I think the principles deducible from the above cases are the following:- Bankruptcy prima facie renders a trustee unfit to act for two reasons - first, because the fact of bankruptcy is prima facie evidence that the bankrupt is a person who has been improvident or unwise in the management of his own affairs, and he is therefore a person unfit to act in the management of other people's business; and secondly, because it shows that the person who is bankrupt is now a person of small or no means, 'and a necessitous man is more likely to be tempted to misappropriate trust funds than one who is wealthy.' Per Jessel, MR, In re Barker's Trusts (1 Ch D 43).
This is, of course, only prima facie evidence, and the bankrupt may be able to rebut both presumptions: ..."
In the circumstances of Miller v. Cameron, the High Court found that it was appropriate for a bankrupt trustee to be removed as trustee at the request of the settlors and beneficiaries of the trust. Miller v. Cameron did not, however, lay down any strict rule that a bankrupt trustee must be removed from office. Rather, in my view, that case made it clear that it is necessary to consider the circumstances of each case.
A corollary of the removal of a sole trustee is the requirement for the appointment of a new trustee. Here again, the interest of the trust must be considered: Re Tempest (1866) LR 1 Ch App 485. Indeed it is clear from Miller v. Cameron that the future of the trust under any new trustee may be factor considered in the exercise of the Court's discretion to remove a trustee in the first place.
Applying these principles to this case, I have formed the view that I ought not exercise my discretion to remove Mr Matheson as trustee of the family trust. The reason is simply that there has been no material put before me directed to the issue of Mr Matheson's fitness to continue as trustee. Indeed, no material was put before me as to how the family trust would be managed in Mr Matheson's absence, nor indeed was any detailed information put before me as to the state of the family trust's trading activities. The attitude of the sole beneficiary is unknown. In these circumstances, no satisfactory basis has been shown for the exercise of the Court's discretion to remove Mr Matheson as trustee. The question of whether it was "impractical" for someone other than the Court to appoint a new trustee in place of Mr Matheson in the circumstances of his bankruptcy is not able to be answered. No relevant material is before the court, including the terms of the trust as to appointment and removal of a trustee.
It is strictly unnecessary, in the light of my conclusion on the first matter, to consider the second prayer for relief. However, it does raise an issue which is of considerable importance. That issue is whether trust funds appropriated by the trustee pursuant to the trustee's right to indemnity from the trust for debts incurred to the benefit of the trust can be utilised other than for the discharge of trust debts.
Although this issue will obviously be important to both trust creditors and 'normal' creditors of the bankrupt trustee, it will also affect the Trustee's right to claim "fees, remuneration and costs" because the incurring of these costs by the Trustee in the administration of the trust does not make the Trustee a trust creditor. I respectfully agree with the view of Needham J in Re Byrne Australia Pty Ltd and the Companies Act (No. 2) (1981) 2 NSWLR 364 at 366 where his Honour said:
" It was submitted that a person realizing trust assets to pay the debts of the trust was administering the trust, even though, by the very nature of the activity, the vesting day never arrives.
I think that these submissions fail. The liquidator is not, in my opinion, administering the trust; he is winding up the company which, as trustee, has a liability towards the persons with claims against the trust property. The company is entitled to use the trust property to meet those claims because of its right to an indemnity. It could not be said, on this analysis, that the liquidator, in winding up the company, is administering the trusts of the settlement. "
The authorities do not speak with one voice as to the use which may be made of trust funds appropriated by a trustee. The conflict in authorities is considered by the Full Court of the Supreme Court of South Australia in In Re Suco Gold Pty Ltd (1983) 33 SASR 99 at pp 103-4:
" The question whether the trustee's right of indemnity enables the liquidator of a trustee company to be paid his costs, expenses and remuneration out of the trust funds, has arisen in two Australian cases since the High Court's decision in Octavo Investments Pty ltd v. Knight (1979) 54 ALJR 87. The first such case was Re Byrne Australia Pty Ltd and the Company Act (1981) 1 NSWLR 394. The company in that case was the trustee of a single trading trust. It had no assets of its own, nor any liabilities other than those incurred in carrying out the trust. The trust assets were insufficient to meet the trust debts. Needham J considered that the existence of a trustee's right of indemnity which vests in the liquidator does not have the effect that the whole of the trust fund is property divisible amongst all the company's creditors whether trust creditors or not. The trust fund is only available to meet the claims of trust creditors. Section 292 of the Companies Act has no operation on trust assets. The liquidator, so Needham J held, could have his costs and expenses met out of the trust fund if he could be shown to be a trust creditor. In Re Byrne Australia Pty Ltd and the Company Act (No. 2)
(1981) 2 NSWLR 364 Needham J held that the liquidator was not a trust creditor and that his costs and expenses therefore could not be paid out of the trust fund. The second case was Re Enhill Pty Ltd (1982) 7 ACLR 8 and was decided by the Full Supreme Court of Victoria. The company in that case was also trustee of a single trading trust. It had no assets of its own, nor any liabilities other than those incurred in carrying out the trust. The trust assets were insufficient to meet the company's liabilities incurred in carrying out the trust and an order was made for the winding up of the company. The Court held that the liquidator of the company was entitled to apply the moneys resulting from the sale by him of assets held by the company as trustee in payment of his own costs and expenses in priority to any other claims. The three members of the Court took the view that the Octavo case (1979) 54 ALJR 87 is authority for the proposition that the trustee company's right of indemnity forms part of the assets of the company in a winding up and is property under the control of the liquidator. They considered that proposition led to the conclusion that the trust assets were divisible among the company's creditors generally and not merely among the trust creditors and that those assets were available to meet the liquidator's costs and expenses by virtue of s. 292 of the Companies Act. "
King CJ then considered the argument put to the Court in the case before it which was based on the reasoning of the Court in Re Enhill Pty Ltd (supra):
" The primary argument put by counsel for the liquidator was based upon the reasoning in Re Enhill Pty Ltd (1982) 7 ACLR 8. The argument is that as the right of indemnity does not depend upon payment of the debts by the trustee, but is effective to protect him against debts which he has incurred but not paid, he is entitled to transfer trust property sufficient to meet the unpaid debts to himself notwithstanding that he has not paid them. That property, so the argument runs, then ceases to be trust property and, if bankruptcy, or, in the case of a company, liquidation, supervenes before payment of the debts, the transferred property is property of the bankrupt divisible amongst the general body of creditors,(including the liquidator or Trustee) not merely among those whose debts were incurred in the performance of the trust, notwithstanding that those liabilities have not been paid, and that that property is divisible among the general body of creditors. "
King CJ continued:
" I am bound to say that, with the greatest respect to those who have found this argument persuasive, it seems to me to be in conflict with fundamental principles of the law of trusts. I appreciate that there is some conflict of judicial opinion as to the legal position as to the enforceability of an indemnity before payment of the debt where the indemnity arises under contract: In Re Richardson
(1911) 2 KB 705, per Cozens-Hardy MR at p 709, per Fletcher Moulton LJ at p 712; In re Law Guarantee Trust and Accident Society ltd.: Liverpool Mortgage Insurance company's case (1914) 2 Ch 617, per Scrutton J at p 651 and cases there cited; Official Assignee v. Jarvis (1923) NZLR 1009, per Salmond J at p 1021. A trustee, however, has no legal right to use or apply the trust property other than for the authorised purposes of the trust. In particular he has no legal right to apply the trust property for his own benefit or for the benefit of third parties: Keech v. Sandford (1726) 2 Eq Cas Abr 741. I cannot escape the conviction that if a trustee, or his trustee in bankruptcy, or liquidator in the case of a trustee company, is permitted to use trust property, not for the discharge exclusively of liabilities incurred in the performance of the trust, but in the discharge of other liabilities as well, the money is being used for an unauthorized purpose and is being used, moreover, for the benefit of the trustee, and of third parties, namely the non-trust creditors.
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It was argued, following the reasoning in Re Enhill Pty Ltd
(supra), that the proposition affirmed by the High Court in Octavo's case (1979) 54 ALJR 87 that the trustee's right of indemnity is a beneficial interest in the trust property which passes to the trustee in bankruptcy or liquidator, leads to the conclusion that the trust assets, to the extent of the trust liabilities, pass to the trustee in bankruptcy or liquidator for the benefit of the general body of creditors. I do not think that Octavo's case (supra) leads to that conclusion. The right of indemnity, it is true exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator. The proceeds of that right of indemnity are therefore part of the estate divisible among the creditors. It seems to me, however, that the right of indemnity can only produce proceeds for division among the creditors generally if the trustee has discharged the liabilities incurred in the performance of the trust and is therefore entitled to recoup himself out of the trust property. If he has not discharged the liabilities, the right of indemnity entitles him to resort to the trust property only for the purpose of discharging those liabilities. He may apply the trust moneys directly to the payment of the trust creditors or he may take it into his own possession for that purpose. If he takes trust property into his possession to satisfy his right to be indemnified in respect of unpaid trust liabilities, it seems to me that that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust. The exercise of the right of indemnity is for the benefit of the trustee in that it relieves him of liability for the trust debts. If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. In the latter circumstances, there cannot be proceeds of the right of indemnity which are available for distribution among the general body of creditors.
I agree with Needham J who said in Re Byrne Australia Pty Ltd (1981) 1 NSWLR 394 that Octavo's case is not authority for the proposition that, where a trustee company carries on business with a trust fund and incurs liabilities and then is wound up, the whole of the trust fund is property divisible amongst all the company's creditors, whether trust creditors or not". In my opinion, the right of indemnity can only produce proceeds divisible among the general body of creditors if the insolvent trustee company has paid the trust creditors and is entitled to recoup itself out of the trust property. "
I respectfully agree with King CJ. In my opinion, the mere act of appropriation of trust property by the Trustee pursuant to the Trustee's right to indemnity from the trust does not strip from such funds their nature as funds impressed with trust obligations.
I now turn to the third ground contained in the application in which the Trustee is seeking an order that the family trust pay $35,000.00 to the Trustee. As is explained above, Mr Matheson's right to indemnity is property of Mr Matheson which passed to the Trustee upon Mr Matheson's bankruptcy pursuant to s.116 of the Act. It would be appropriate to order Mr Matheson to pay from family trust funds an amount equal to the trust debts for which the estate of Mr Matheson is liable, if the amount of $22,010.00 presently held in a joint account pending this application are insufficient to discharge the trust debts as at the date of bankruptcy.
Given the importance of establishing the amount of trust debts owing, it is unfortunate that the application seeks $35,000.00 to be paid from trust funds. I am unable to determine from the material read in support of the application the basis for calculation of this amount. The affidavit of the Trustee, which is based on the s. 77C examination of Mr Matheson, indicates that the total trust liabilities are $26,373.00; with an additional amount of approximately $5,000.00 owed to Sanford Hill Pty Ltd. Although it is not clearly stated, I surmise that these are all trust debts of the bankrupt estate. What was the precise position as at the date of Mr Matheson's bankruptcy will require further investigation.
It is obvious from these reasons that the funds paid to, or available to, the trustee from the family trust property are to be used to pay trust creditors only.
I recognise that difficulties may arise from Mr Matheson's continued operation of the family trust business. However, any application to seek the removal of Mr Matheson as trustee should be made on a proper basis and with sufficient material. There may be a question of whether the Trustee has standing to bring such an application.
In the circumstances that the Trustee's application was both ambiguous and based on insufficient material, I do not propose to make any order as to costs.
I will hear the parties as to what orders I should make, after there has been an opportunity to consider these reasons.
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