Wales v Wales [No 2]

[2014] VSC 33

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 1849 of 2012

GLADYS WALES, ROSLYN MATEAR and SUZANNE CASE (as Trustees for the HN Wales 1954 Trust, the HN WALES 1963 Trust, the MEM Wales Trust and the BMR Hutchison Trust)	Plaintiffs
V
MURRAY WRIGHT WALES	First Defendant
- and -
ROHAN WALES	Second Defendant
- and -
JULIAN WALES	Third Defendant
- and -
ASHLEY WALES	Fourth Defendant

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JUDGE:	McMillan J
WHERE HELD:	Melbourne
DATE OF HEARING:	27 November 2013
DATE OF JUDGMENT:	14 February 2014
CASE MAY BE CITED AS:	Wales v Wales [No 2]
MEDIUM NEUTRAL CITATION:	[2014] VSC 33

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COSTS — TRUSTEES — EXECUTORS AND ADMINISTRATORS — Application to remove trustees — Conflict of interest and duty — Whether trustees entitled to indemnity for costs of failed defence of application for removal

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P Murdoch QC and Mr C Archibald	HWL Ebsworth Lawyers
For the First and Second Defendants	Mr R C Wells	Tolhurst Druce and Emmerson
The Third and Fourth Defendants in Person

HER HONOUR:

1. I handed down judgment in this proceeding on 24 October 2013.[1]  That was an application for the removal of the trustees of the four Trusts on the grounds of conflict of interest and duty.  I ordered that the plaintiffs be removed as trustees of the Trusts and replaced by an independent trustee.

   [1]Wales v Wales [2013] VSC 569 (24 October 2013).

1. The first and second defendants seek orders that the plaintiffs pay the costs of the first and second defendants of the summons personally, on an indemnity basis; that the plaintiffs be denied indemnity from the Trusts for their own costs; and that the plaintiffs reimburse any payment out of the Trusts that has already been made.  The third and fourth defendants support the first and second defendants in seeking an order that the plaintiffs be refused an indemnity from the Trusts.  The plaintiffs resist such orders and seek an order that the parties’ costs of the summons be paid out of the Trusts.

Applicable Principles

1. Trustees are entitled to indemnification from trust funds for expenses incurred by authorised conduct of the trust.[2] Section 36(2) of the Trustee Act 1958 provides that:

A trustee may reimburse himself or pay or discharge out of the trust premises all expenses incurred in or about the execution of the trusts or powers.

[2]Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 371.

1. Indemnity is confined to expenses that are properly incurred.[3]  Trustees are ordinarily entitled to costs out of the estate in litigation relating to the administration of the trust estate, unless they have been guilty of misconduct.[4] Besides the right at general law, r 63.26 of the Supreme Court (General Civil Procedure) Rules 2005 provides as follows:

Unless the Court otherwise orders, a party who sues or is sued as trustee or mortgagee shall be entitled to the costs of the proceeding out of the fund held by the trustee or out of the mortgaged property in so far as the costs are not paid by any other person.

[3]Nolan v Collie (2003) 7 VR 287, 308.

[4]Turner v Hancock (1882) 20 Ch D 303.

The First and Second Defendants’ Submissions

1. The plaintiffs should be ordered to pay the costs of the first and second defendants, because they succeeded in their application and costs usually follow the event.  The plaintiffs should not have resisted the application for their removal as trustees;  rather they should have either agreed to the appointment of the independent trustee or forgone the claimed unpaid income entitlement.

1. The plaintiffs had notice of the first, second and third defendants’ view that there was a conflict of interest arising from the issue of the unpaid income entitlement, which issue was the result of breaches of trust by the plaintiffs that were admitted and that occurred over a long period of time.

1. Even if the plaintiffs’ belief that the conflict could be remedied by seeking directions from the Court had been genuine and reasonable, which is not admitted, the hostility between the parties, in conjunction with the unpaid income entitlement issue, should have impelled them to agree to the appointment of a new trustee.

1. Given that the past conduct of the plaintiffs was central to the resolution of the unpaid income entitlement issue, no reasonable trustee could hold the view that the assessment of that conduct should not be undertaken by an independent trustee.

1. The plaintiffs should not be permitted the usual right of indemnity from the Trusts for their own costs given the above matters and the circumstances that gave rise to the conflict of interest.

1. In bringing the application for the removal of the trustees on the basis of a conflict of interest the first and second defendants have in effect acted as protectors of the Trusts.  Given that trustees are usually entitled to properly incurred costs on an indemnity basis, the first and second defendants should be allowed their costs of bringing the application on an indemnity basis.

1. Counsel referred to MacBean v The Trustees Executor and Agency Company Ltd, in which the beneficiaries of a trust brought an action against the trustee, a company, for a reduction of the commission claimed by that company as trustee.[5]  Hood and Cussen JJ (A’Beckett J dissenting) dismissed an appeal from the decision of Madden CJ at first instance to reduce the commission.  Hood J also upheld the decision of the trial judge not to allow the trustee company the usual indemnity from the trust.  His Honour said:

in such a proceeding I consider that, however bona fide the action of the company may be, there is power to award costs against it, in the same way as they would be dealt with in any other litigation respecting a disputed claim.  The conduct of the trustee which is impeached has nothing to do with the performance of the trust.  These proceedings are in no way directed to the benefit of the estate.  The beneficiaries, having successfully applied to the Court for an order reducing the rate of commission claimed by the trustee, are entitled to the costs of so doing.[6]

[5][1916] VLR 425. Counsel for the first and second defendants also referred to Perpetual Executors and Trustees Association v Simpson (1906) 12 ALR 95 and Re Buckton [1907] 2 Ch 406. In my opinion, these cases do not assist the defendants, as they involve originating summonses for questions arising upon the construction of the will.

[6]Ibid 440.

The Plaintiffs’ Submissions

1. A trustee will be allowed indemnification for costs that have not been shown to have been improperly incurred.[7]  To be improper, an act may be outside the trustee’s power, done in bad faith, or exercised with an absence of the care and diligence that a person of ordinary diligence should exercise.[8]  The success of the defendants’ application does not entail the denial of the plaintiffs’ right of indemnity.

   [7]Nolan v Collie (2003) 7 VR 287, 308.

   [8]Ibid.

1. It was not unreasonable for the plaintiffs to oppose the application; the plaintiffs reasonably believed that the course of action they proposed — to seek directions from the Court on the unpaid income entitlement question — was the best way to resolve the unpaid income entitlement issue.

1. The Court’s finding of a conflict between interest and duty does not support the denial of a trustee’s right of indemnity.  While the Court found that the presence of a conflict of interest warranted the trustees’ removal in case that conflict should result in the improper use of trustees’ powers, there was no finding of past conduct that justified a denial of indemnity.

1. The plaintiffs did not resist the application in order to avoid exposure of a breach of trust or to protect their own position; nor did they mount inappropriate defences.[9]

   [9]Pope v Pope [2001] SASC 26, [26], [42].

1. Each of the trust deeds provided that the trustees were not to be liable for any loss not attributable to dishonesty or the wilful commission of an act known to be in breach of trust.

Conclusions

1. Trustees are entitled as of right to indemnity out of the trust for expenses properly incurred.[10]  In litigation the general rule is that trustees are entitled to their costs out of the estate unless they have been guilty of some misconduct.[11]  Mere obstinacy in pursuing a claim, even though the trustee may lack bona fides, may amount to misconduct on the part of the trustee.[12]

   [10]Re Beddoe [1893] 1 Ch 547, 558.

   [11]Turner v Hancock (1882) 20 Ch D 303; McGregor v McGregor [No 2] [1919] NZLR 286.

   [12]Re Knox’s Trusts [1895] 2 Ch 483; McGregor v McGregor [No 2] [1919] NZLR 286.

1. In the context of defending litigation, in Re Beddoe a trustee was not allowed indemnity out of the trust where the defence was unreasonable and the trustee had not sought leave from the Court to defend it.[13]

   [13][1893] 1 Ch 547, 558 (Lindley LJ), 562 (Bowen LJ).

1. In Re Beddoe, Lindley LJ said:

a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel's opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances.  If, indeed, the Judge comes to the conclusion that he would have authorized the action or defence had he been applied to, he might, in the exercise of his discretion, allow the costs incurred by the trustee out of the estate; but I cannot imagine any other circumstances under which the costs of an unauthorized and unsuccessful action brought or defended by a trustee could be properly thrown on the estate.[14]

[14]Ibid 557 (Lindley LJ).

1. In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand, the High Court approved of the principles in Re Beddoe, stating:

That warning that trustees who become involved, or wish to become involved, in litigation should seek the court’s sanction is the significant, and in later years influential, aspect of In re Beddoe.[15]

Considering the operation of s 63 of the Trustee Act1925 (NSW),[16] the High Court went on to say:

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;

…

A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings.[17]

[15](2008) 237 CLR 66, 87.

[16]This section is directed toward the same ends as Supreme Court (General Civil Procedure) Rules 2005, r 54.02: ibid 82–3 n 48, 85–6.

[17]Ibid 93–4 (emphasis in original).

1. In Dimos v Skaftouros, Dodds-Streeton JA referred to the decision of the High Court in National Trustees Executors & Agency Company of Australasia Ltd v Barnes[18] and affirmed that a trustee is entitled to indemnity out of the trust for all proper expenses, which may include the defence of an application to remove the trustee.[19]  But although a trustee who fails in litigation might be indemnified for costs, the question is whether the expenses were properly incurred.  Hence a trustee may not be entitled to indemnity where resistance to removal was unjustified.  Dodds-Streeton JA accordingly found that, in the circumstances, the trial judge’s order that the trustee pay the costs of the proceeding personally was consistent with a proper exercise of discretion.[20]

   [18](1941) 64 CLR 268.

   [19](2004) 9 VR 584, 617.

   [20]Ibid 618–19.

1. The central question, then, is whether the costs expended by the plaintiffs in defending the application for their removal were improperly incurred.  Relevant to the determination of that question is whether it was reasonable to defend the application.

1. I made no finding in the main judgment that the plaintiffs did not have a bona fide belief that the best course of action was to seek directions from the Court, as opposed to installing an independent trustee.  I do not accept the submission of the first and second defendants that no prudent trustee could have considered that an independent trustee should not have been appointed.

1. I accept the plaintiffs’ submission that they formed a bona fide view that their proposal was the best course of action, and I also accept that that view was not unreasonable.  It does not follow from these premises, however, that it was reasonable for the plaintiffs to oppose the application for their removal, without seeking direction from the Court on whether to defend the application.  This is all the more so when it transpired that the unpaid income entitlement issue was vehemently opposed and that certain beneficiaries had formed the view that the trustees were in a position of conflict of interest.  In those circumstances, it was unreasonable to defend the application without the Court’s approval.

1. I accept the plaintiffs’ submission that the finding of a conflict of interest does not of itself warrant the denial of indemnity.  I made no finding that the plaintiffs defended the application to avoid the exposure of a breach of trust or to protect their own position.[21]

   [21]As in Pope v Pope [2001] SASC 26.

1. In the main judgment I found that the plaintiffs were cognizant of the circumstances that gave rise to their conflict of interest; the view of the first, second and third defendants that there was a conflict of interest; and the fact that the unpaid income entitlement issue was contested.  Nonetheless they chose to defend the proceedings and I concluded that the trustees should be removed.  The question that arises is whether the trust should be made to bear the burden of that unsuccessful defence.

1. In my view, the plaintiffs’ costs of defending the application for their removal as trustees were not properly incurred and should be borne by them personally.  When the application for removal was made, the trustees were confronted with the decision to contest the application; to accede to it and allow an independent trustee to be appointed; or to seek advice from the Court whether to contest it.  The decision to defend the proceeding was not reasonable and should not be borne by the Trusts.  Whatever the merits of the plaintiffs’ initial proposal, I consider that the plaintiffs’ resistance to the application for their removal, without seeking direction from the Court, was not justified in the circumstances.  I do not consider the costs expended thereon to have been properly incurred.

1. In my view, there is no occasion to depart from the usual taxation of costs on a solicitor and client basis.

1. Consistently with the foregoing, I order that:

a)the plaintiffs pay the costs of the application of the first and second defendants personally on a solicitor and client basis;

b)the plaintiffs bear their own costs of the application, without being permitted an indemnity for their costs from the Trusts; and

c)the plaintiffs refund to the Trusts any amount expended therefrom in defending the application.