Wales v Wales
[2015] VSCA 345
•16 December 2015
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2015 0047
| PERSEPHONE WALES (as the representative of the Estate of MURRAY WRIGHT WALES, deceased) | First Applicant |
| and | |
| ROHAN WRIGHT WALES | Second Applicant |
| v | |
| GLADYS WALES | First Respondent |
| and | |
| ROSLYN MATEAR | Second Respondent |
| and | |
| SUZANNE MARIE CASE | Third Respondent |
| S APCI 2015 0066 | |
| JULIAN WALES | Applicant |
| v | |
| GLADYS WALES | First Respondent |
| and | |
| ROSLYN MATEAR | Second Respondent |
| and | |
| SUZANNE MARIE CASE | Third Respondent |
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| JUDGES: | KYROU and McLEISH JJA and GINNANE AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 4 November 2015 |
| DATE OF JUDGMENT: | 16 December 2015 |
| MEDIUM NEUTRAL CITATION: | [2015] VSCA 345 |
| JUDGMENT APPEALED FROM: | [2015] VSC 151 (McMillan J) |
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COSTS – Trustees – Applications for leave to appeal – Dispute between capital beneficiaries and trustees – Failure by trustees to maintain and provide full accounts – Trustees commenced proceeding to pass accounts and wind up trusts – Removal of trustees – Proceeding dismissed by consent save as to costs – Whether trustees entitled to costs of proceeding to be paid out of trusts – Whether proceeding commenced for proper purpose – Whether trustees failed to perform duties with reasonable diligence and care – Applications for leave to appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants in S APCI 2015 0047 | Mr R Wells with Mr J Rizzi | Tolhurst Druce & Emmerson |
| For the Applicant in S APCI 2015 0066 | In person | |
For the Respondents | Mr P B Murdoch QC with Mr C M Archibald | HWL Ebsworth Lawyers |
KYROU JA
McLEISH JA
GINNANE AJA:
These two applications for leave to appeal are brought in relation to orders as to costs in respect of a proceeding commenced and discontinued in the Trial Division. The proceeding concerned a series of family trusts. The issue in dispute is whether the costs of the proceeding should be paid out of the trust estates, as the trial judge ordered, or should be paid by the trustees personally. For the reasons that follow, leave to appeal should be refused.
The income beneficiary under each of the trusts, Beverley Hutchison, died on 3 September 2010. By her will, the first respondent, Gladys Wales, was appointed executrix and trustee of her estate and Mrs Wales’ daughters, Roslyn Matear and Suzanne Case, the second and third respondents, were the beneficiaries.
The three respondents were, at relevant times, the trustees of each of the trusts. The capital beneficiaries of the trusts, in varying proportions, are Mrs Wales’ nephews Rohan Wales, Julian Wales and Ashley Wales, and her daughters already mentioned. The nephews are beneficiaries, both in their own right and, in the case of one trust, through their interest as beneficiaries under the will of their late father Murray Wales. Persephone Wales, daughter of Rohan Wales, is the representative of the estate of Murray Wales in the present proceeding. Together with Rohan Wales, she brings the first application for leave to appeal.
The second application is brought by Julian Wales. The remaining beneficiaries, being Ashley Wales, Roslyn Matear and Suzanne Case, do not seek to disturb the trial judge’s orders for costs. Ms Matear and Ms Case, of course, were trustees and remain beneficiaries, and seek to defend the orders.
By the present proceeding, the trustees sought the following relief by way of originating motion:
(a) the giving of such directions for the winding up of the trusts as the Court deems appropriate;
(b) the settling by the Court of the accounts of the trusts; and
(c) the discharge by the Court of the trustees of the trusts.
Such relief is available pursuant to r 54.02 of the Supreme Court (General Civil Procedure) Rules 2005.[1] The trustees relied on an affidavit of Gladys Wales affirmed on 29 March 2012. For present purposes, it suffices to say that the applicants for leave to appeal sought to impugn the propriety of the trustees’ actions in connection with the bringing of the proceeding. The proceeding having been discontinued, the factual matters in contention have not been the subject of any adjudication. However, that does not mean that the question of propriety cannot be determined, as it must be, in order to resolve the costs dispute.
[1]See now Supreme Court (General Civil Procedure) Rules 2015, which commenced operation on 23 November 2015.
At the hearing of the applications for leave to appeal, the applicants applied for leave to file amended written cases and supporting documents directed to the factual matters in dispute. Counsel for the trustees indicated that, while contesting the relevance or accuracy of the material, the trustees did not wish to respond specifically to it, beyond having taken issue in writing to aspects of the additional submissions of the first and second applicants. The Court reserved its decision on these applications.
Factual background
It is now convenient to set out the salient background events which led to the commencement of the proceeding. In doing so, we will indicate areas of dispute but will not seek to set out exhaustively all the matters relied upon by the parties. In the end, the areas of dispute are clear. First, did the trustees commence the proceeding for the proper purpose of settling the accounts of the trusts and winding them up, or for the improper purpose of securing for themselves a discharge from liability in respect of the performance of their duties as trustees? Secondly, were the costs of the proceeding incurred only because the trustees had failed to perform their duties as trustees with reasonable diligence and care?
As already noted, Beverley Hutchison, the income beneficiary under each of the trusts, died on 3 September 2010. The remainder interests in the trusts then vested in possession.
On 16 February 2011, Murray Wales wrote to the trustees’ lawyers requesting that the financial records of the trusts be produced for inspection by the beneficiaries. Rohan and Julian Wales made a similar request of the trustees on the same day.
From this point, there is considerable dispute between the parties as to the events that happened. It is convenient to begin by setting out the facts identified by the trial judge. It will then be necessary to refer to additional facts upon which the applicants seek to rely.
The trial judge had before her, not only the affidavit of Gladys Wales which was served with the originating motion, but a number of affidavits served by the respective parties. It is not necessary to refer specifically to each of those affidavits. The following is a summary of the facts upon which the trial judge proceeded.
Following the request for access to the financial records of the trusts, in March 2011 the accountants for the trusts provided limited financial records to the applicants at their offices. In April 2011, Julian Wales made a further request for inspection of the records, dating back to the inception of the trusts. In June 2011, Rohan Wales made allegations to the accountants for the trusts in relation to the conduct of the trustees.
The trustees informed the applicants in July 2011 that they intended to wind up the trusts. They provided summary income and expenditure and balance sheets for the trusts for the financial years between 2005 and 31 March 2010. The trustees asked each of the capital beneficiaries (i.e. including the applicants) whether they were prepared to execute a deed of release and indemnity in favour of the trustees. The applicants claim that the accounts which were provided were not in a form that could be passed by the Court and that no form of deed of release and indemnity was given to them at this time. Julian Wales informed the trustees that he would not sign any release and indemnity until the trustees permitted verification of the proposed distribution and any matters arising from that process were resolved.
On 17 October 2011, the trustees provided the applicants with deeds of release and indemnity along with basic balance sheets and summaries of the financial position of each of the trusts for the period since 30 June 2005. The trustees informed the applicants that it was their intention to distribute the income and capital of the trusts once they had received the signed deeds. The deeds provided for distribution of the trust assets between the capital beneficiaries. The appropriate manner of distribution is not in issue.
Following this request, Ashley Wales executed the deeds of release and indemnity. Murray Wales, along with his sons, Rohan and Julian Wales, refused to do so. They considered that the financial disclosure that the trustees had provided was inadequate. They continued to request an inspection of the financial records of the trusts and demanded access to further documents. Julian Wales, in particular, made repeated requests for financial records. He also sent communications to the trustees requesting information as to how the unit in which Beverley Hutchison had resided had been accounted for by the trusts.
Correspondence regarding inspection of the financial documents and records of the trusts continued for several months. The solicitors for the trustees insisted on the observing of certain protocols and procedures as a condition of inspection of documents, in part because the records of each of the trusts were intermingled and the beneficiaries were not the same in every case. In February 2012, the trustees offered inspection of trust documents to the applicants on the basis of these protocols and procedures. The applicants declined to sign deeds containing the protocols, as a result of which the inspection did not occur.
At the end of February 2012, Ashley Wales made a demand upon the trustees for payment of his entitlements from the trusts, failing which he would commence proceedings against the trustees. The trustees indicated to the applicants that they were considering this demand and asked them what concerns, if any, they had about it. Murray and Rohan Wales informed the trustees on 8 March 2012 that, because of the impending inspection of the financial records, and proceedings concerning the estate of Beverley Hutchison that were then on foot, no distribution should occur without the agreement of all the capital beneficiaries or by order of the Court.
The trustees informed Ashley Wales of that position the following day and stated that it was inappropriate for them to make a distribution until such time as final accounts had been agreed upon between the parties. The trustees further advised that in the absence of such an agreement they would have no alternative but to apply to the Court to settle the accounts and wind up the trusts. In response, Ashley Wales reiterated on 13 March 2012 that he intended to take action to enforce distribution of his share of the trusts.
Murray and Rohan Wales continued to refuse to sign the deeds of indemnity and release. They did so on the basis that the beneficiaries had an unfettered right to inspect the financial records of the trusts and that they objected to the requirement for releases and indemnities. They noted that it was a fundamental duty of the trustees to keep proper accounts. In a letter dated 27 March 2012, the applicants raised issues regarding the proportion of the distributions and appeared to question, by reference to the terms of one of the trusts, Beverley Hutchison’s ability to dispose of the remainder of her assets in the manner that she did.
The trial judge held that, as a result of the trustees not reaching consensus with the applicants in relation to the winding up of the trusts, they commenced the present proceeding. The proceeding was commenced on 30 March 2012. The defendants were named as Murray Wales, Rohan Wales, Julian Wales and Ashley Wales. Ashley Wales has not sought to appeal against the trial judge’s orders, and took no part in the present applications.
On 13 April 2012, orders were made providing for the inspection of the records of the trusts to take place in May 2012. Murray and Rohan Wales made an application for discovery of all records relating to the trusts. On 24 August 2012, orders were made for the trustees to make discovery of certain specific classes of documents.
The trustees engaged new accountants for the settling of the accounts of the trusts. These accountants identified an issue concerning an apparent entitlement of Beverley Hutchison to distributions which had not been paid to her during her lifetime. The payments in question had been mixed with the capital of the trusts, probably since their inception. The trustees had previously been aware that these payments had not been made, but had not appreciated the legal implications. After taking the advice of senior and junior counsel, they considered that the treatment of these distributions, which they acknowledged would constitute a breach of trust, might give rise to a liability to Beverley Hutchison’s estate.
In October 2012, the trustees issued a summons seeking to amend the originating motion by restricting the years for which the accounts of the trusts were to be settled by the Court and seeking directions for the basis of the preparation of those accounts, in particular in relation to the unpaid entitlements of Beverley Hutchison. The amended summons confined the period for which the trustees sought to have accounts passed to the financial years between 30 June 2004 to 30 June 2012 or any later financial year. During this period the trustees had retained the services of Bell Potter in the administration of the trusts.
In November 2012, Murray and Rohan Wales sought orders for the removal of the trustees. The trustees agreed to the applicants’ request that they stop preparation of the accounts by the new accountants pending the determination of that application. The application was successful and judgment was delivered on 24 October 2013.[2] It is not necessary to canvas the grounds of the application, or the reasons for judgment. However, while judgment was pending, the trustees made interim distributions out of the trusts to all beneficiaries, in the total amount of approximately $13 million, leaving about $3.5 million in the trusts.
[2]Wales v Wales [2013] VSC 569.
The new trustee of the trusts, Mr Petr Vrsecky, declined to continue with the present proceeding. The former trustees considered that their removal from office meant that they were no longer entitled to seek orders for the passing of accounts and the winding up of the trusts. Accordingly, on 7 October 2014 the proceeding was dismissed by consent, save for the issue of costs. The costs of the removal application were dealt with separately and are not relevant for present purposes.
Primary decision as to costs
It was accepted before the trial judge that the trustees should pay the costs of the proceeding. They had commenced and discontinued it. Murray Wales and Rohan Wales submitted that, as a result, the ordinary rules relating to discontinuance should apply. They contended that the true purpose of the proceeding was to obtain a discharge and release for the trustees. No advice had been sought and there was no issue upon which the directions of the Court were needed other than as to the passing of the accounts which would form the basis for that discharge and release. They submitted that the trustees had chosen to discontinue the proceeding after their removal, but that they would have had standing to continue it to finality. This meant that the ordinary rules following discontinuance of a proceeding brought for personal gain ought to apply.
Murray and Rohan Wales also submitted that the proceeding had been commenced improperly because no accounts had been prepared before indemnities and releases were sought from the beneficiaries or before the proceeding itself was commenced. In that sense, it was contended that the proceeding was brought prematurely.
Julian Wales submitted that, had there been proper disclosure of the financial affairs of the trusts, the proceeding would have been unnecessary. He contended that the trustees’ failure to account for the management of the trusts and their refusal to cooperate with reasonable requests for access to trust records had given rise to the situation in which the trustees, through their own misconduct, had been the cause of the proceeding. He further submitted that the proceeding had been brought prematurely, and that it was futile in respect of the period before 2004 because there was no way that accounts could have been passed for that period. Bell Potter had acted for the period in respect of which accounts were ultimately sought to be passed, and it was improper to have commenced the proceeding without first submitting accounts to the beneficiaries.
The trial judge held that the proceeding was properly commenced and that the discharge of the trustees’ liability for any alleged wrongdoing during their time as trustees was merely incidental to the primary purpose of settling the accounts and distributing the capital in the most appropriate manner as determined by the Court.[3] She held that the discontinuance of the proceeding after the trustees’ removal supported the conclusion that this was their purpose.
[3]Wales v Wales (No 3) [2015] VSC 151 [72].
The judge further held that the trustees took the only proper and reasonable course to resolve the disputes regarding the financial records and accounting of the trusts, by applying to the Court for directions under O 54 of the Supreme Court (General Civil Procedure) Rules 2005. She stated that no party had made allegations of misconduct, impropriety or breach of duty on the part of the trustees.[4] She noted, in particular, that in October 2012 the trustees had confined the number of years in respect of which accounts were sought to be settled, and sought directions as a result of the issues arising from the discovery of the unpaid distributions to Beverley Hutchison.
[4]Julian Wales takes issue with the judge’s statement about misconduct. In context, the judge was referring to misconduct in commencing the proceeding. It was apparent that Julian Wales was asserting prior misconduct which, he contended, had led to the proceeding being commenced. In any event, we deal in these reasons with the arguments Julian Wales raises in respect of alleged misconduct.
As a result, the judge ordered that the trustees pay the defendants’ costs of the proceeding, and that they be indemnified as to those costs from the trusts. For reasons not now relevant, she further ordered that all parties be entitled to their costs, to be paid out of the trusts on a solicitor-client basis to 31 March 2013 and on the standard basis thereafter.
Applications for leave to appeal
There are two applications for leave before the Court. The first is brought by Persephone Wales (representing the estate of her grandfather Murray Wales, who died on 2 April 2013) and Rohan Wales. The second application is brought by Julian Wales. Each of the applicants relies on material additional to that which was set out in the reasons of the trial judge. The applicants sought the leave of the Court to augment the application book and to file written cases longer than those ordinarily permitted. These applications did not seek to amend the proposed grounds of appeal, nor, as far as we have ascertained, did they seek to put before the Court material that was not before the trial judge.
Persephone Wales and Rohan Wales relied in particular upon the following additional assertions:
(d) when the trustees advised the beneficiaries of their entitlements on 22 October 2010, they provided a schedule of trust assets which omitted the apartment in which Beverley Hutchison resided and did not provide any annual financial statements;
(e) before the inspection of trust financial records on 31 March 2011, the trustees had advised the beneficiaries that all the records in their possession were being collated in preparation for that inspection;
(f) at that inspection, tax returns for 1997 onwards were presented, along with bank statements and about half of the cheque books for the period 2004 to March 2011 during Bell Potter’s management. For the period before 2004, three small cheque book butts and one small deposit book butt were presented. No bank statements, ledgers, inventories, cashbooks or any other financial ledgers were presented;
(g) in August and September 2011, the trustees received the opinion of counsel that they were entitled to have the accounts examined and settled by the beneficiaries and a formal discharge given on the basis of settled accounts, and that if the beneficiaries would not provide such a discharge, the trustees were entitled to have an account taken by the Court. The opinion further advised that the trustees had an obligation to allow the beneficiaries to inspect the financial records of the trusts;
(h) on 10 October 2011, the trustees advised the beneficiaries that they were only entitled to access documents relevant to specific enquiries and that, by virtue of the Limitation of Actions Act 1958, this right was limited to a period of six years. Accounts for the previous seven years were provided;
(i) the deeds of release and indemnity which the trustees supplied on 17 October 2011, it was submitted, effectively released the trustees from all liabilities other than fraud relating to their management of the trusts over the lifetime of the trusts;
(j) on 20 October 2011, Julian Wales received accounting advice that the summary accounts were inadequate and in disparity with the corresponding tax returns;
(k) after Ashley Wales signed the deeds of release and indemnity, the trustees acknowledged that the financial summaries they had provided were in error and would need to be corrected and reissued. They stated that the summaries were not designed for an accounting review and were not in a form that could be passed by the Court;
(l) on 6 December 2011, the trustees denied that they had undertaken before the 31 March 2011 inspection to give access to the complete financial records of the trusts;
(m) on 29 February 2012, Julian Wales informed the trustees that he was not prepared to sign the inspection deed;
(n) on 27 March 2012, Murray and Rohan Wales informed the trustees that they regarded the terms of the inspection deed as excessively prescriptive, given that it was their right to inspect the financial records of the trusts unfettered;
(o) after the proceeding commenced and limited inspection of documents had taken place, Murray and Rohan Wales sought general discovery of the financial records of the trusts on the basis that there had been a shortfall between the records which the trustees had said were in their possession and those which were actually produced for inspection. In particular, records existed in relation to the financial affairs of the trusts that had not been produced in response to orders made at the initial hearing of the trustees’ application;
(p) on 24 August 2012, at the hearing of the discovery application, the trustees acknowledged that accounts appropriate for the Court to settle had not been prepared. Directions were then given for the appointment of an accountant to prepare and file the necessary accounts;
(q) once inspection was given, it revealed that no formal annual financial statements or cash books had ever been compiled for the trusts. In addition, the only records of the payees for the numerous cheques written by the trustees were cheque book stubs. For the period before 25 March 2004, only 21 per cent of the cheque stubs were provided. As a result, it was submitted, sufficient records existed to compile accounts for the period of Bell Potter’s management but insufficient records existed to compile accounts for the period of the trustees’ own management. It was said that this was later confirmed in correspondence from the trustees’ accountants;
(r) on 16 November 2012, the trustees filed an affidavit in which they acknowledged that the income retained in the trusts could not be ascertained before 1 July 2004 due to the paucity of records. They estimated that the retained income and capital growth for the period following 1 July 1998 totalled about $2 million. They said that they intended to request the Court’s approval for that amount to be paid from the trusts to the estate of Beverley Hutchison (the beneficiaries of that estate being the trustees Roslyn Matear and Suzanne Case);
(s) at the hearing of the ensuing application for the removal of the trustees, counsel for the trustees stated that nothing remained to be done by the trustees except to produce the accounts which they sought to have passed, and then to make payments in accordance with the directions of the Court; and
(t) the interim distributions made by the trustees were authorised without the trustees obtaining any of the relief sought in their application for settled accounts, directions in relation to the distributions, or a discharge.
Julian Wales, who represented himself, relied on the matters set out above, and a number of additional matters. He submitted that the proceeding was the culmination of numerous acts of misconduct on the part of the trustees. However, the primary events upon which he relies are those already referred to above. His further complaints concerned the reasonableness of the actions of the trustees in responding to the requests of the beneficiaries, the adequacy of their record-keeping (in particular in connection with the apartment in which Beverley Hutchison had resided) and the inadequacy of the financial statements which were provided.
Julian Wales said that, after Ashley Wales demanded payment of his entitlements in February 2012, Julian Wales had told the trustees that he supported that demand, on condition that any distributions to himself would be accepted without prejudice to his legal rights and entitlements. Murray and Rohan Wales advised through their solicitors that they preferred that distributions be withheld until a proceeding Murray Wales had brought challenging the grant of probate of the estate of Beverley Hutchison had been resolved. (That proceeding was settled in June 2012.) In response, the trustees advised on 23 March 2012 that Julian Wales’ condition was an impediment to winding up the trusts, since the trustees had a right of indemnity.
Proposed grounds of appeal
In support of the proposed appeal, Persephone and Rohan Wales advanced two main arguments. The first was that the proceeding should never have been brought, as its sole purpose was to obtain a discharge for the trustees. It was submitted that it was improper to commence a proceeding for the settling of accounts without having prepared any such accounts. When the proceeding was commenced, there was no doubt about the amount to be distributed, or to whom it was to be paid. No advice about such matters was sought. The only reason for commencing the proceeding was that Murray, Rohan and Julian Wales had refused to provide releases.
Secondly, it was argued that the trustees could have continued the proceeding even after their removal. If, contrary to the first argument, the proceeding had been properly commenced, then its discontinuance should attract the ordinary rule as to costs and no indemnity should be afforded to the trustees.
Julian Wales relied principally on allegations of prior misconduct on the part of the trustees. He submitted that the trustees’ failure to provide financial records when they ought to have was critical to the proceeding being commenced. Had proper access to those records been provided, the accounts could have been resolved without going to court. Moreover, the proceeding was, by virtue of the absence of records, futile in respect of the period before 2004 and, by virtue of the absence of any accounts, premature in any event.
General principles
At the heart of the dispute between the parties is the question whether the trustees commenced the present proceeding for an improper purpose or incurred the costs of the proceeding other than in the execution of the trusts with reasonable diligence and care. The governing principles are not in doubt.
In general, a trustee is justified in seeking advice and directions from the Court, and will be indemnified out of the trust fund for his or her costs incurred in doing so. That is confirmed by statute, rules of court, and authority.[5] However, the right of indemnity is confined to expenses properly incurred. That means that a trustee is not indemnified for expenses incurred when acting beyond power, in bad faith or without the care and diligence of a person of ordinary prudence.[6] Similarly, a trustee is not indemnified where a liability is incurred as a result of conduct on the part of the trustee in breach of his or her duty to execute the trust with reasonable diligence and care.[7] However, the standard of care is that ‘which might be expected of a trustee as objectively but not over-zealously enforced’.[8] What is ‘proper’ or ‘improper’ for this purpose is to be answered by reference to the duty with which the trustee was required to comply or the power the trustee was intending to exercise.[9]
[5]Trustee Act 1958 s 36(2); Supreme Court (General Civil Procedure) Rules 2015 r 63.26; Australian Incentive Plan Pty Ltd v A-G (Vic) (No 2) [2012] VSCA 251 [8].
[6]Nolan v Collie (2003) 7 VR 287, 308 [53].
[7]RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385, 396.
[8]Nolan v Collie (2003) 7 VR 287, 308 [53].
[9]Ibid 306 [51].
In deciding this question, the onus rests on the party seeking to deny the right to indemnity to show that the costs were improperly incurred.[10]
[10]Ibid 306 [50].
It is not in doubt that the trial judge applied these principles. The applicants challenge the manner in which she did so. The decision as to costs being a discretionary one, the applicants need to establish error of the kind described in House v The King:[11]
The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so.
[11](1936) 55 CLR 499, 504–5. See also, as to the need for appellate restraint in disturbing the orders of trial judges in judicial advice proceedings, Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 125 [190] (‘Macedonian Church v Eminence Petar’).
Factual conclusions
A number of matters emerge from the material before the Court which can be stated, at a certain level of generality, without controversy. First, when the proceeding was commenced, there was ongoing debate between the trustees and the applicants about access to the financial records of the trust. An impasse had been reached in which incomplete access had been provided. Such information as was provided had raised concern among the applicants, in particular in relation to the unit in which Beverley Hutchison had resided. Further inspection had not taken place, as a result of disagreement about the terms on which it would occur.
Secondly, there was a related dispute concerning the trustees’ request for releases before distributing the assets of the trusts. The beneficiaries had taken different approaches to that request. Ashley Wales had signed the deed of release and indemnity and was threatening to commence proceedings unless his share was distributed. Julian Wales refused to sign and said that he would receive any distribution subject to his proper entitlements. Murray and Rohan Wales also refused to sign and wished any distribution to await the resolution of probate proceedings concerning the estate of Beverley Hutchison.
Thirdly, when the trustees commenced the proceeding, they did not have accounts in a form that could be submitted to the Court to be settled. Further, it was apparent from the state of the records that it would not be possible to prepare such accounts for the period prior to 2004.
Fourthly, after the proceeding was commenced, an issue was identified regarding entitlements of income not paid to Beverley Hutchison during her lifetime. Whether or not the trustees were previously aware of breaches of trust in that regard, this matter seems to have formed no part of their basis for commencing the proceeding.
Fifthly, before the proceeding was commenced, questions had been raised about the financial arrangements under which the unit in which Beverley Hutchison had resided was purchased, which were not disclosed in the trust records.
Were the costs improperly incurred?
Persephone and Rohan Wales concentrated their challenge to the reasons of the trial judge on her finding that the trustees had no option but to seek advice and directions from the Court, once significant disputes arose about the financial records of the trusts and disagreements as to distribution existed between the beneficiaries.[12] It was pointed out that the originating motion sought no such advice or directions. To the extent that advice was to be sought as to the settling of the accounts, there was insufficient basis for doing so when no accounts existed in the form necessary for the purpose. Although issues ultimately arose regarding the unpaid entitlements of Beverley Hutchison, this was not foreseen when the proceeding was commenced. Persephone and Rohan Wales submitted that it could be inferred that the sole purpose of commencing the proceeding was for the trustees to obtain the releases which the beneficiaries (other than Ashley Wales) had quite properly declined to provide.
[12]Wales v Wales (No 3) [2015] VSC 151 [71].
There is some force in these contentions. However, they fail to address the fundamental state of affairs which existed when the proceeding was commenced. The trustees wished to distribute the assets of the trusts. One beneficiary was pressing for distribution and threatening litigation if it did not proceed. Other beneficiaries wished to be satisfied as to the financial affairs of the trusts, in one case since inception, or to await resolution of the probate of Beverley Hutchison’s estate. These differing positions clearly pointed to the potential for disagreement as to the amounts to be distributed. In the circumstances, the trustees wanted to be discharged from liability before proceeding to distribution but for various reasons, including the absence of full accounts, this was unacceptable to several other beneficiaries. The potential for disagreement about the financial position of the trusts had already been realised in relation to the unit in which Beverley Hutchison had resided. As it later transpired, the unpaid entitlements issue also arose, with further substantial financial ramifications.[13]
[13]Julian Wales contended that the trustees had been aware of this issue before the proceeding was commenced. If so, it would have been an added justification for approaching the Court.
The commencement of the proceeding facilitated the bringing of all these matters to a head. The income beneficiary had died 18 months earlier. About a year had been spent in negotiations regarding the financial records of the trusts, with no resolution in sight. In the circumstances, there was obvious good sense in approaching the Court. Inspection of documents and the preparation of accounts were then able to occur under the auspices of the Court.
The absence of full accounts upon which the Court could act, at the time when the proceeding was commenced, did not disentitle the trustees from approaching the Court at that point. If anything, the need for directions as to the preparation of such accounts was part of the basis for commencing the proceeding. That course effectively took the matter out of the trustees’ hands, moving the forum for the dispute to the Court.
The applicants contended that it was improper for a proceeding for settling accounts to be commenced before draft accounts were prepared. No authority was cited for this proposition. In written submissions filed after the hearing by leave of the Court, Persephone and Rohan Wales drew attention to O 10 of the Supreme Court (Administration and Probate) Rules 2014 which requires an application by an executor, administrator or trustee for commission to be made only after the filing of accounts under r 6.03 of those rules. They submitted that the same requirement was previously reflected in O 55 r 3(c) of the Rules of the Supreme Court 1884, which is now found in r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015. But the argument by analogy fails, because the specific stipulation which O 10 makes with respect to claims for commission is absent from the general rule in r 54.02 which enables the settling of accounts for any other purpose. Nothing can be drawn from the express requirement now found in O 10.
The decision in Chadwick v Heatley,[14] on which the applicants relied, does not stand for the proposition that trust accounts must be examined by the beneficiaries, and a discharge of the trustee refused, before a trustee may approach the Court for the passing of accounts. Instead, Knight Bruce V-C ordered a taking of accounts following what he held to have been an unreasonable refusal of a beneficiary to provide a release upon receipt of a final distribution by the trustee. It was not held that such a refusal, or the provision of accounts, was a precondition of approaching the Court.
[14](1845) 2 Coll 137; 63 ER 671.
Julian Wales made reference, among other things, to the obligation of a party to exhaust other avenues before proceeding to litigation. However, a proceeding by a trustee under r 54.02 is not ordinary adversarial litigation. It is commenced so that the trustee can be sure that the course proposed to be taken is a proper one. Far from being necessary for the trustee to exhaust all other avenues before commencing a proceeding, it is very often appropriate to approach the Court in cases of doubt rather than expend trust money in ways which might later prove to have been inappropriate. Even where proceedings are commenced alleging a breach of trust, it is appropriate for the trustee to take no step to defend the impugned conduct without first obtaining judicial advice as to the propriety of doing so.[15] Approaching the Court in this way is calculated to avoid later incurring unnecessary costs. A trustee can ordinarily expect to be indemnified for its costs in doing so.
[15]Macedonian Church v Eminence Petar (2008) 237 CLR 66, 94 [74].
The applicants submitted that the true purpose of bringing proceedings was for the trustees to obtain a discharge. Plainly that was one purpose, at least. The trial judge held that it was only an incidental purpose. The applicants’ challenge to her finding must fail in light of the conclusions reached above. In that context, it is necessary to recall the nature of a proceeding under r 54.02. The following observations of the High Court in Macedonian Church v Eminence Petar are applicable:[16]
In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee’s duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee's fear of personal liability for costs.
It is, therefore, not right to see a trustee's application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust.
[16]Ibid 93–4 [71]–[72] (emphasis in original).
Julian Wales advanced specific arguments regarding the conduct of the trustees prior to commencing the proceeding. It was submitted, in short, that the proceeding would never have been necessary had the trustees properly discharged their duties, both by keeping proper records and enabling their inspection by the beneficiaries.[17] As a result, the costs of the proceeding were incurred other than as a result of the execution of the trusts with reasonable diligence and care.
[17]Yates v Halliday [2006] NSWSC 1346. This was a successful action by beneficiaries for the filing of accounts and the production of documents. The question of costs was reserved.
It is, of course, the duty of trustees to keep proper accounts and to produce them when asked to do so by a beneficiary.[18] It is also true that a trustee should gain no advantage by failure to keep proper records, and that the Court will resolve doubts against a trustee who fails to do so.[19] Failure to provide proper accounts may vitiate a release given by a beneficiary without knowledge of the true state of the trust.[20] It is therefore prudent, both for trustees and beneficiaries, that accounts be prepared and provided before a release is executed. These things did not happen in the present case. Even had accounts been provided, there was no entitlement on the part of the trustees to a release (as distinct from a receipt).[21]
[18]Byrnes v Kendle (2011) 243 CLR 253, 270 [42]; Re Whitehouse [1982] Qd R 196, 201; Waterhouse v Waterhouse (1998) 46 NSWLR 449, 494; Avanes v Marshall (2007) 68 NSWLR 595, 599 [15]; Hancock v Rinehart (2015) 106 ACSR 207, 291 [339].
[19]Byrnes v Kendle (2011) 243 CLR 253, 270–1 [43].
[20]Farrant v Blanchford (1863) 1 De G J & S 107, 119–21; 46 ER 42, 46–7; Ibid 294 [136].
[21]Moody v Simpson (1895) 21 VLR 244, 248–9.
Had the proceeding been commenced primarily in order to attempt to shield the trustees from the consequences of not having maintained or provided to the beneficiaries adequate accounts for the trusts, the argument that the costs of the proceeding were incurred other than in the execution of the trusts with reasonable diligence and care would have been a strong one. But this was not the present case. Irrespective of any failings of the trustees with regard to keeping or providing accounts, there was an impasse among the beneficiaries as to the course that should be taken and litigation was imminently threatened by one beneficiary entitled to his capital share of the trusts. The different positions of the beneficiaries were not all attributable to the suggested failings of the trustees. Moreover, the trustees were in a position to fulfil their duty to account, with respect to the period since 2004, and recognised the need to do so. In respect of the prior period, it was open to the trustees to approach the Court for advice but equally open to resolve, upon further consideration, that this was not required. In these circumstances, it was not improper for the trustees to bring matters to a head by commencing proceedings, and to incur costs as a result of conducting those proceedings.
In our opinion, it cannot be said that the failings of the trustees to which Julian Wales points were the cause of the proceeding. The trustees were entitled to consider that, assuming accounts were prepared, disagreements were distinctly possible which would occasion further delay in finalising the trusts, and that the most effective way of winding up the trusts was to approach the Court.
Julian Wales also submitted that, in any event, the trustees should not have continued with the proceeding once the unpaid entitlements question regarding Beverley Hutchison had been fully exposed.
The identification of this issue was a catalyst for the removal application, given the potential conflict of interest of the trustees who were also beneficiaries of Beverley Hutchison’s estate. The trustees had, as Julian Wales contended, for some time been aware of the underpayment of income to Beverley Hutchison, but they did not appreciate until August or September 2012 that the trusts may, as a result of the underpayments, have a liability to her estate. The trustees received an opinion from senior and junior counsel on the issue, dated 22 October 2012. The summons seeking removal was dated 30 November 2012.[22] The O 54 proceeding did not otherwise proceed pending resolution of the summons for removal. The costs of the removal summons were dealt with as a separate issue.[23]
[22]Wales v Wales [2014] VSCA 101 [21]–[23]
[23]Wales v Wales [2014] VSCA 101.
Upon the legal issue regarding the unpaid entitlements being properly identified, the conflict of interest issue was addressed in the removal application, and costs in relation to that matter have been determined. In the circumstances, the conduct of the proceeding by the trustees in respect of this issue was appropriate. This issue therefore has no bearing on the present question of costs.
In summary, none of the matters relied on by the applicants establishes error in the trial judge’s conclusion that it was necessary, or proper, for the trustees to commence the proceeding, or shows that the costs incurred by the trustees were not incurred in the execution of their duties with reasonable diligence and care.
Persephone and Rohan Wales argued in the alternative that, even if the purpose of commencing the litigation was a proper one, it had been discontinued without valid reason and this of itself amounted to impropriety. This argument should be rejected. Once the trustees no longer held office, the settling of the accounts became the concern of the new trustee, who did not wish to pursue the proceeding. The accounts were no longer their responsibility. The accounts of past years could not be settled until the unpaid entitlements issue had been resolved, which was a matter for the new trustee. The former trustees could only have had a personal interest in seeking to pursue the proceeding in those circumstances. For the trustees to have sought, at the expense of the trusts, to have the accounts settled over the objection of the new trustee, would therefore have exposed them to accusations of impropriety. It cannot be said that to discontinue the proceeding was improper in these circumstances.
It follows that the applicants have not made out their challenges to the decision of the trial judge. In the circumstances, we will grant the applicants’ applications to augment the application book and rely on amended written cases, but will refuse their applications for leave to appeal.
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Key Legal Topics
Areas of Law
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Trusts & Equity
Legal Concepts
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Trustee Duties
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Costs
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Appeal
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