Wales v Wales (No 3)
[2015] VSC 151
•8 May 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROBATE LIST
S CI 2012 01849
| IN THE MATTER of the HN Wales 1954 Trust, the HN WALES 1963 Trust, the MEM Wales Trust and the BMR Hutchinson Trust 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 Hutchinson Trust) | Plaintiffs |
| v | |
| PERSEPHONE WALES (as the representative of the Estate of MURRAY WRIGHT WALES, deceased) | First Defendant |
| ROHAN WALES | Second Defendant |
| JULIAN WALES | Third Defendant |
| ASHLEY WALES | Fourth Defendant |
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JUDGE: | McMillan J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 14 November 2014 |
DATE OF JUDGMENT: | 8 May 2015 |
CASE MAY BE CITED AS: | Wales v Wales (No 3) |
MEDIUM NEUTRAL CITATION: | [2015] VSC 151 |
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COSTS — TRUSTEES —Where dispute between capital beneficiaries and trustees of four trusts concerning financial records and accounts of the trusts — Application made by trustees to Court to pass accounts and wind up trusts — Further dispute as to whether unpaid income to income beneficiary was a liability of the trusts — Where plaintiffs replaced as trustees after removal application made by some capital beneficiaries — Where proceeding dismissed by consent save for costs —Whether former trustees entitled to costs of the proceeding from the trusts other than costs of removal application — Whether costs of the income beneficiaries should be paid by the trustees personally
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C Archibald | HWL Ebsworth |
| For the first and second defendants | Mr R C Wells | Tolhurst Druce and Emmerson |
| Third defendant in person | ||
| For the fourth defendant | Dr J Glover | LAC Lawyers |
HER HONOUR:
Introduction
Until their removal by orders made on 27 November 2013, the plaintiffs were the trustees of four trusts: the HN Wales 1954 Trust, the HN Wales 1963 Trust, the BMR Hutchison Trust and the MEM Wales Trust (‘the trusts’).
The income beneficiary of the trusts died on 3 September 2010. Upon the death of the income beneficiary, the remainder interests of the capital beneficiaries in the trusts vested in possession. The second and third plaintiffs and the first to fourth defendants are the capital beneficiaries of the trusts, with differing shares between the second and third plaintiffs and the first to fourth defendants.[1]
[1]Pursuant to the HN Wales 1954 Trust the distribution was, in fact, to be divided between the first defendant as to half and the two children of his brother, Geoffrey Wales, as to the remaining half. With the death of the first defendant on 2 April 2013, his children being the second, third and fourth defendants, became entitled to his half share of the HN Wales 1954 Trust. As to the other three trusts, the capital is to be distributed in equal shares between the second and third plaintiffs and the second, third and fourth defendants.
Under the will of income beneficiary, the first plaintiff was appointed as the executrix and trustee of her estate and the second and third plaintiffs are the beneficiaries of her estate.
After the death of the income beneficiary, the trustees intended to wind up the trusts as soon as practicable and distribute the funds of the trusts to the capital beneficiaries.
What then emerged were certain issues and differences between the trustees and the defendant capital beneficiaries over the provision of the financial documentation of the trusts with the result that, on 30 March 2012, the trustees issued this proceeding seeking directions for the winding up of the trusts, settlement of the accounts of the trusts and an order discharging them as the trustees of the trusts. During the course of the proceeding, the relief sought by the plaintiffs was amended to confine the passing of the accounts for the period commencing from the financial year 30 June 2004.
In November 2012, the first and second defendant sought orders for the removal of the plaintiffs as trustees of the trusts. The issue concerning the actions of the trustees in their management of the trusts did not form part of the application for removal of the trustees.
The removal application was successful, with judgment delivered on 24 October 2013.[2] Mr Petr Vrsecky of the firm, Lawler Draper Dillon, was appointed the trustee of the trusts in place of the plaintiffs.
[2]Wales v Wales [2013] VSC 569 (24 October 2013).
Judgment as to the costs of the removal application was delivered on 27 November 2013, with those costs to be paid by the plaintiffs personally. [3] On appeal, the plaintiffs were allowed to recover fifty per cent of their costs of the removal application, as well as fifty per cent of the costs of the defendants, from the trusts.[4]
[3]Wales v Wales (No 2) [2014] VSC 33 (14 February 2014).
[4]Wales v Wales [2014] VSCA 101 (27 May 2014) (Ashley JA, with whom Almond AJA agreed).
As the new trustee of the trusts, Mr Vrsecky has declined to continue with this proceeding. The plaintiffs acknowledge the effect of their removal as trustees of the trusts has the effect of them no longer being entitled to seek orders for the passing of accounts and winding up of the trusts. As a result, on 7 October 2014 these proceedings were dismissed by consent, save for the issue of the parties’ costs of the proceeding, other than the costs of the removal application. A summons filed by the third defendant on 22 March 2013 was also dismissed by consent on 7 October 2014, save for the issue of the costs of that summons.
Costs orders sought by each of the parties
With the dismissal of the proceeding, the plaintiffs concede that they should be ordered to pay the defendants’ costs of the proceeding. However, they seek orders under s 36(2) of the Trustee Act 1958 (Vic) (‘the Act’) that they be indemnified as to these costs out of the trusts. The plaintiffs seek 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.
The defendants oppose these orders, some on the same grounds and others on different grounds.
The first to third defendants seek orders that the plaintiffs pay costs in this proceeding personally, and reimburse the trusts for any expenses taken out of trust funds for the purposes of this proceeding. They seek the following orders:
(a) the plaintiffs bear personally their own legal costs and disbursements of and incidental to this proceeding, including all reserved costs;
(b) the plaintiffs refund to the trusts all amounts expended or paid out of the trusts in relation to the plaintiffs’ legal costs and disbursements of an incidental to this proceeding;
(c) the plaintiffs pay personally the first and second defendants costs of an incidental to this proceeding, including all reserved costs, on a solicitor-client basis to 31 March 2013 and on the standard basis thereafter.
The third defendant also seeks orders that all parties should bear their own costs of the summons issued by him on 22 March 2013.
The fourth defendant seeks his costs be paid by the first and second defendants personally, on an indemnity basis. He also seeks an order that any costs in the proceeding that are to be paid out of the trusts be quarantined from his share of the trusts, so that his share is not reduced by the costs. The reason for this is because he says that he attempted to avoid and terminate the proceeding on a number of occasions. In effect, the fourth defendant seeks orders that the costs of any or all of the plaintiffs and the first, second and third defendants not affect his share from the trusts.
Background
In February 2011, the first to third defendants sought access to and inspection of the financial records of the trusts. In March 2011, the solicitors for the trustees provided limited financial records for the trusts to the defendants at the offices of the accountants for the trusts.
In April 2011, the third defendant made a further request for inspection of the records of the trusts dating back to their inception. In June 2011, the second defendant made ‘general allegations’ in relation to the conduct of the plaintiffs to the then accountants for the trusts.
In July 2011, the trustees informed the defendants of their intention to wind up the trusts and enclosed income and expenditure and balance sheets for the trusts for the financial years commencing 2005 until 31 March 2010. The trustees inquired of each of the capital beneficiaries as to whether they would execute a deed of release and indemnity in their favour as trustees of the trusts. The defendants claim that the accounts provided were not in a form that could be passed by a Court and no form of deed was given to the defendants at that time. The third defendant informed the plaintiffs that he would not sign any proposed release and indemnity until ‘verification of the proposed distribution is permitted’ and ‘any matters arising from that process are resolved’.
On 17 October 2011, the trustees provided deeds of release and indemnity to be executed by the defendants for the trusts with basic balance sheets and summaries of the financial position of each of the trusts for the period 30 June 2005 onwards. The trustees informed the defendants that it was their intention to distribute the income and capital of the trusts after receiving the signed deeds. The deeds of release and indemnity provided for distribution of the trusts equally between the capital beneficiaries, that is, each of them was to receive a twenty per cent share of the trusts.
The indemnities sought to protect the trustees from any action that could be taken against them in respect of their management of the trusts:
2. No admissions
This Deed is entered into without any admission of liability, or admissions of any facts or allegations.
…
5. Release
Upon execution of this Deed:
(a) the Beneficiaries, jointly and severally, release and forever discharge the Trustee, and their servants, agents, successors and assigns from all Claims arising directly or indirectly out of or in connection with the Trust.
(b) This Deed may be pleaded as a full and complete defence by the Trustee in respect of all Claims arising directly or indirectly out of or in connection with the Trust.
6. Indemnity
The Beneficiaries indemnify jointly and severally the Trustee, their servants, agents, successors and assigns and agrees to keep the Trustee indemnified against all Claims, demands, actions, proceedings, costs, expenses and liabilities (including without limitation, legal costs and disbursements, on a solicitor and own client basis) suffered or incurred by the Trustee directly or indirectly as a result of any Claim whether successful or not by any person or entity relating to or arising directly or indirectly from their actions as trustee of the Trust.
In response to this request, the fourth defendant executed the deeds of release and indemnity and was the only capital beneficiary to do so. The first, second and third defendants refused to sign the deeds as they considered the financial disclosure by the trustees to be inadequate. They continued with their requests for inspection of the financial records of the trusts and demanded access to further documentation before signing the deeds.
The third defendant made many requests for financial records and, after receiving the requested documents, suggested that the trustees had acted contrary to their fiduciary duties. In addition, he also sent communications requesting information as to how the residential unit for the income beneficiary had been accounted for in the trusts.
Further correspondence continued between the parties as to the inspection of the financial documents and records pertaining to the trusts. The plaintiffs’ solicitors insisted on certain protocols and procedures as a condition of any inspection of documents and, by February 2012, offered inspection of trust documents to the first to third defendants on the basis of these protocols and procedures. The trustees maintained these protocols and procedures were needed because there had been intermingling of the records of the trusts. The first to third defendants did not sign the deeds containing the protocols and inspection of the documents pertaining to the trusts did not occur.
At the end of February 2012, the fourth defendant made a demand upon the plaintiffs for payment of his entitlements from the trusts. The plaintiffs indicated to the other defendants that they were considering the demand of the fourth defendant and inquired of the other defendants what concerns, if any, they had about the demand from the fourth defendant.
On 8 March 2012, the first and second defendants informed the plaintiffs that having regard to the impending inspection of the financial records and proceedings concerning the estate of the income beneficiary that were then on foot, no distributions should occur without agreement of all capital beneficiaries or by Court order.
On 9 March 2012, the plaintiffs informed the fourth defendant of that position and stated that:
… it is inappropriate for the trustees to make a final distribution until such time as final accounts have been agreed upon between the parties. In the absence of such an agreement the trustees have no alternative but to apply to the Court to settle the accounts and wind up the trusts.
On 13 March 2012, the fourth defendant reiterated that he intended to take action to enforce distribution of his share of the trusts to him.
The first and second defendants continued to refuse to sign the deeds of indemnity and release on the basis that, as outlined in an email from their lawyers dated 27 March 2012:
…the documentation is unacceptable in the form submitted in that it is excessive [sic] prescriptive…In particular they object to the requirement for releases and indemnities when it is a fundamental duty of a trustee to keep proper accounts and our clients’ right to inspect the financial records of the trusts in this instance is, in our opinion, unfettered…
In a further letter of the same date, the first, second and third defendants also raised issues with the proportion of the distributions and appeared to question the income beneficiary’s ability to dispose of the remainder of her estate in the manner that she did:
Apropos the HN Wales 1954 Trust we note repeated reference in Deeds supplemental to the initial Deed of Settlement dated 11 October 1954 that if [the income beneficiary’s] share in the capital of the trust fund shall not vest…then after [the income beneficiary’s] death her share shall be held in trust for such of her statutory next of kin as are living at the date of failure of [the income beneficiary’s] trusts as if [she] had died a spinster without leaving a parent and intestate and such share had formed part of her estate.
As a result of the trustees not obtaining consensus with the defendants in relation to winding up the trusts, on 30 March 2012, the plaintiffs, in their capacity as trustees of the trusts, commenced this proceeding.
On 13 April 2012, orders were made providing for the inspection of the records of the trusts, with inspection provided in May 2012, and a timetable for the filing of affidavits by the parties.
On 27 July 2012, the first and second defendants, supported by the third defendant, made an application for formal discovery of all records relating to the trusts. This application was determined on 24 August 2012 and the orders provided for the plaintiffs to make discovery for a certain specific classes of documents, and certain other matters.
On 4 September 2012, an appeal by the third defendant, supported by the first and second defendant, was allowed in part, providing for limited additional specific discovery and inspection.
New accountants were retained for the settling of the accounts for the trusts for the period 2004 to 2012 and it was at this stage the new accountants raised a new issue of an entitlement to unpaid distributions to the income beneficiary during her lifetime. The unpaid distributions were conceded by the plaintiffs to have been in breach of trust with payments to the income beneficiary having been regularly underpaid and mixed with the capital of the trusts, probably since the inception of each of the trusts. It was only with the retainer of the new accountants and during the course of their preparation of accounts for the trusts that this discrepancy was discovered. It was thought by the plaintiffs that this discrepancy might give rise to a liability to the estate of the income beneficiary.
In October 2012, the plaintiffs issued a summons seeking to amend the originating motion by restricting the number of years for which the accounts of the trusts were to be settled by the Court and sought directions for the basis of the preparation of the accounts. The amended summons restricted the number of financial years from between 30 June 2004 to 30 June 2012 or any later financial year. The directions sought made reference to the unpaid distributions to the income beneficiary. This issue became an important issue in the application for the removal of the plaintiffs as the trustees of the trusts made on 30 November 2012, particularly when it was discovered that the unpaid entitlements to the income beneficiary over the unspecified period meant that it was difficult or impossible to ascertain the amount that had been unpaid over the lifetime of the trusts with any precision.
When the application for the removal of the trustees was made, the plaintiffs agreed to the defendants’ request to stop the preparation of the accounts by the new accountants pending the determination of the application.
Plaintiffs’ submissions
The plaintiffs rely on the terms of the trust deeds for the trusts, which provide that the trustees shall not be liable for any loss not attributable to dishonesty or wilful commission of an act known to be in breach of trust. The plaintiffs rely on the proposition that seeking the advice of the Court under r 54 of the Supreme Court (General Civil Procedure) Rules 2005 (‘Rules’) prior to instituting or defending proceedings is intended to prevent improper costs from being incurred.[5]
[5]Macedonian Orthodox Community Church St Petka Inc v His Emminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 83 at [36] (Gummow ACJ, Kirby, Hayne and Heydon JJ).
The plaintiffs submit that the costs in the proceeding were properly incurred as they were making application for advice and directions in the winding up of the trusts in light of the disagreement and allegations made by the capital beneficiaries of the trusts. In particular, the plaintiffs submit that the factual circumstances leading to the issuing of proceedings were such that the trustees were left with no choice but to seek the advice and directions of the Court. When presented with the financial records and indemnities, they allege that the first, second and third defendants continually demanded access to further financial documents and refused to sign the indemnities, and made allegations of misconduct by the trustees. On the other hand, the fourth defendant immediately signed the indemnity and demanded payment of his share of the trusts. The plaintiffs claim that the fourth defendant threatened legal action if his capital share was not paid to him and that, in these circumstances, the present proceedings were properly instituted in the circumstances. They contend that the steps taken in the proceeding were properly taken and were not converted into impropriety because the proceeding was not pursued after their removal.
The plaintiffs submit that given that they have now been removed as trustees of the trusts, they have no function to bring or continue the proceeding under r 54 for advice and directions to them in their capacity as former trustees. In these circumstances, there is no reason to deny the plaintiffs the costs incurred in bringing the proceeding for advice and directions and the appropriate order is that all parties are entitled to have their costs paid out of the trusts.
First and second defendant’s submissions
The first and second defendants submit that there are two grounds upon which the plaintiffs should be denied indemnity from the trusts for their costs incurred in bringing these proceedings:
(a) first, the plaintiffs have effectively discontinued the proceedings, and the ordinary rules relating to discontinuance of a proceeding should apply (‘the discontinuance ground’); and/or
(b) secondly, the proceeding was unnecessary or, at the very least, premature (‘the premature ground’).
The discontinuance ground
The first and second defendants dispute the plaintiffs’ claim that the purpose of these proceedings was to seek the advice and direction of the Court. Rather, they submit the true purpose of the proceedings was to seek a discharge and release from liability in circumstances in which three of the capital beneficiaries refused to agree to such a release. As there were no other issues in relation to which the advice and directions of the Court was sought, they submit that the proceeding was effectively instituted for the plaintiffs’ personal gain. They dispute the plaintiffs’ claim that their removal as the trustees of the trusts meant there was no useful purpose in deciding not to continue with the proceeding.
They submit that because the plaintiffs could not achieve a release from them, they had to have the accounts of the trusts passed by the Court. It was the passing of the accounts by the Court that would entitle them to a discharge and release from liability to the capital beneficiaries. There were no other issues upon which directions of the Court were required. Their removal as trustees does not operate as a release for them from any conduct during the time they acted as trustees of the trusts or for any liabilities to the beneficiaries arising from that conduct. Rather, they continue to be liable for their conduct as trustees until the date of their removal. From that date onwards, Mr Vrsecky would be liable for any breach of trust.
On this basis, the first and second defendants submit that the plaintiffs continued to have standing to pursue these proceedings, even after their removal as trustees of the trusts, and they have elected instead to discontinue the proceeding in spite of this fact. They submit that it was open to the plaintiffs to continue with the present proceedings and seek the passing of the accounts for the trusts during the period from 2004 until Mr Vrsecky’s appointment as trustee, and thereby obtain the release and discharge originally sought from the beneficiaries. Their position is now that they no longer want such a release.
The first and second defendants submit, in light of the plaintiffs’ election to discontinue proceedings that were instituted for their personal gain and could have been pursued to finality, they have incurred substantial legal costs and the usual rule as to costs on the discontinuance of a proceeding ought be applied, that is, the plaintiffs should be ordered to pay personally the costs of the first and second defendants.
The premature ground
The first and second defendants submit that the plaintiffs acted improperly by commencing the proceeding before any accounts were prepared, and that there may have been no need to commence proceedings if accounts had been properly prepared before indemnities had been sought from the beneficiaries. In this respect the first and second defendants rely on the following:
(a) no formal accounts for the trust were provided to the beneficiaries on any of the occasions on which the trustees sought indemnities from them;
(b) on no other occasion did the trustees attempt to provide the beneficiaries with formal accounts in order to proceed with the winding up of the trusts;
(c) at the time of commencing the winding up application, the plaintiffs did not provide any formal accounts to the Court, meaning that the application for settlement of the accounts by the Court lacked a proper basis; and
(d) formal accounts relating to the trusts have still not been prepared.
As a result, the first and second defendants submit that the winding up proceedings would only have been properly instituted in the event that formal accounts had been presented to the beneficiaries along with indemnities and the supporting financial documentation, and the beneficiaries had nevertheless refused to approve the accounts. In circumstances where the beneficiaries had never been able to see the final accounts in order to approve them, they submit there were many more steps to be taken by the trustees before an application under r 54 would have been warranted.
Third defendant’s submissions
In his submissions, the third defendant alleges that the winding up application was improper for a number of reasons, as set out below.
Improper conduct prior to proceedings
The third defendant submits that, had full financial disclosure been provided by the plaintiffs at the time of seeking the indemnities, there would have been no need to institute the proceedings. He therefore submits that the proceedings were not warranted due to the prior improper conduct of the plaintiffs. In particular, the third defendant contends that the following conduct, amongst other matters, by the plaintiffs prior to the commencement of these proceedings amounts to misconduct by them as trustees:
(a) failure to account for the management of assets of the trusts;
(b) refusal to co-operate with reasonable requests for access to financial records of the trusts;
(c) misrepresentations to the beneficiaries in relation to the trusts;
(d) improper restriction of the circumstances in which beneficiary entitlements would be paid; and
(e) failure to treat the beneficiaries equally.
Application was futile and premature
The third defendant submits the application was futile and premature. In this respect, the third defendant further submits that the failure to provide the accounts that were sought to be passed with the application was a breach of rr 52.03 and 52.04 of Supreme Court (General Civil Procedure) Rules 2005 (‘the Rules’). The initial application sought for the accounts to be settled was for the entire lifetime of the trusts, for which adequate financial disclosure had not – and could not have – been made. As such, there was no way that the accounts sought to be passed in the initial application could have been approved by the Court.
In respect of the amended application, by which the plaintiffs sought the passing of the accounts of the Wales Trusts only during the period from 2004 to the date of winding up, the third defendant submits that this application was also premature. Specifically, he argues that proper accounts for this period were not provided to the beneficiaries for approval and that, if this had been done, they likely would have been approved. The third defendant submits that given the retainer of Bell Potter in 2004, proper financial records existed for the Wales Trusts from this time onwards. Thus, in accordance with Chadwick v Heatley,[6] he submits that it was improper for the plaintiffs to proceed to apply to the Court to settle the accounts in circumstances where the beneficiaries had not been given an opportunity to do so.
[6](1845) 63 ER 671.
The conflict of interest ground
The third defendant submits the plaintiffs should not have commenced the proceeding or continued with the amended proceeding once the issue of the unpaid entitlement of the income beneficiary came to light. Given that the plaintiffs were removed as trustees of the trusts, the third defendant submits the proceeding ought to have been discontinued at the latest in August 2012, when the issue of the unpaid entitlement was raised by the plaintiffs. Thus, the third defendant submits the plaintiffs should not be entitled to an indemnity from the trusts.
Summons of 22 March 2013
In respect of his summons filed 22 March 2013, the third defendant submits that each of the parties to the summons should bear their own costs. The third defendant conceded that the costs incurred in respect of the summons have been minimal, as it was put to one side pending determination of the removal application and was abandoned once Mr Vrsecky replaced the plaintiffs as trustees of the trusts.
Fourth defendant’s submissions
In contrast to the first, second and third defendants, the fourth defendant submits that his costs should be paid by the first and second defendants personally, arguing that it was their actions that necessitated the commencement of the winding up application. In particular, the fourth defendant seeks payment of his costs from the first and second defendant, taxed on an indemnity basis.
Importantly, the fourth defendant also submits that if any costs are to be paid out of the trusts, they ought be ordered to be quarantined from his share of the capital, that is, the fourth defendant seeks to be paid his share of the trusts as calculated prior to the deduction of any amount in payment of the costs of any of the parties to the winding up application. In this respect, the fourth defendant relies on the following contentions:
(a) the winding up application would have been unnecessary had the first, second and third defendants simply executed the indemnities when asked to do so by the plaintiffs;
(b) the first, second and third defendants refused to sign consent orders removing him as the fourth defendant to the winding up application, thereby saving him the cost of appearing in the proceedings;
(c) he has hardly participated in the proceedings and maintained his position as seeking payment of his share in the capital of the trusts as soon as possible; and
(d) the costs sought by the first and second defendants are grossly excessive, in contravention of s 24 of the Civil Procedure Act 2010.
Applicable principles
Trustees are entitled to indemnification from trust funds for expenses incurred in the authorised conduct and management of the trust.[7] 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.
[7]Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, 371.
As well, r 63.26 of the Rules 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.
The general rule is that a trustee will be justified in seeking the advice and directions of the Court at first instance, and is entitled to be indemnified out of the trust funds for their costs incurred in seeking such advice. [8]
[8]Australian Incentive Plan Pty Ltd v Attorney-General for Victoria (No 2) [2012] VSCA 251 (28 September 2012) [8] (Nettle JA, with whom Tate JA and Davies AJA agreed).
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.[9] Indemnity is confined to expenses that are properly incurred.[10] On the other hand, it is well-established at common law that a trustee cannot indemnify himself or herself out of the trust funds for expenses that are improperly incurred in the administration of the trust, such as acting beyond power, in bad faith or exercised power ‘with an absence of care and diligence that a person or ordinary prudence should exercise’.[11] As Ormiston JA (Batt and Vincent JJA agreeing) stated in Nolan v Collie:
It would follow that the test of "reasonableness" is primarily concerned with the standard of ordinary diligence and care required in the management of trust affairs which might be expected of a trustee as objectively but not overzealously enforced. That is why Bowen, L.J. insisted that in matters of management and the like "mere errors of judgment" should not deny the right to indemnification but, with the greatest of respect, his insistence on a test of unreasonableness goes beyond what equity would demand. [12]
[9]Turner v Hancock (1882) 20 Ch D 303.
[10]Nolan v Collie (2003) 7 VR 287, 308.
[11]Ibid.
[12]Ibid.
The onus to prove that the trustees should not be indemnified rests with the party seeking to deny the right of indemnity to demonstrate that costs have been improperly incurred.[13]
[13]Ibid, 306.
Consideration
There are three separate questions to be determined: first, the question of what costs orders are to be made; secondly, whether the plaintiffs are entitled to an indemnity out of the funds of the trusts for costs incurred by them in bringing the proceeding and thirdly, whether the fourth defendant’s share in the capital of the trusts should be quarantined so as not to be reduced by any indemnity from the trusts.
Costs orders against the plaintiffs
Unlike a typical costs application, the plaintiffs do not dispute that they should be liable to pay the defendants’ costs in the winding up application now that it has been dismissed. They admit that they are liable to pay the costs of all defendants. This is sufficient to resolve the matter with respect to the first, second and third defendants.
The fourth defendant, on the other hand, does not seek a costs order against the plaintiffs but seeks an order that his costs be paid personally by the first and second defendants. The fourth defendant disagreed with the first, second and third defendants as to the manner in which the trusts were to be wound up. Counsel for the fourth defendant readily conceded that there were no authorities on point and relied generally on the Court’s discretion under the Supreme Court Act 1986 and the Court’s inherent jurisdiction over trusts ‘to bridge the gap’. Counsel also readily conceded that the costs of the fourth defendant were negligible, with the fourth defendant having retained legal representation only once at the beginning of the proceeding and on this application for costs.
In my view, it is undesirable to look at the circumstances of only one of the defendants in a proceeding intended to be for the purpose of the winding up of the trusts for all of the capital beneficiaries. Disagreement between the beneficiaries would generally not be a reason for costs orders being made against some of them. From the perspective of the first, second and third defendants, the proceeding could be said, in part, a result of the fourth defendant insisting that his share of the trusts be paid to him immediately and without the production of any formal accounts.
Where trustees approach the Court seeking advice and direction in the administration of trusts, it is appropriate in a proceeding such as this one to include each of the capital beneficiaries as defendants. This is simply a matter of procedural fairness as their interests may be affected. A defendant can then choose whether or not he or she wishes to take part in the proceeding or simply abide by the decision of the Court. Accordingly, I reject the submissions of the fourth defendant that the first and second defendants ought personally pay his costs.
Given that this proceeding was commenced – and subsequently dismissed – by the plaintiffs, there is no reason to depart from the usual rule that the plaintiffs should be liable for the costs incurred by all defendants to the proceeding.
Plaintiffs’ right to indemnity from the trusts
As noted above at [58], the onus rests on the party seeking to deny a trustee’s right of indemnity to demonstrate that costs have been improperly incurred, thereby precluding them from being indemnified for their loss.[14]
[14]Ibid.
In this application for costs, the first, second and third defendants do not rely on any impropriety or misconduct of the trustees. Having considered their submissions, in my view, the costs incurred by the plaintiffs in the winding up application were properly incurred in the circumstances and I consider they should be indemnified for the costs from the trusts for the reasons now set out.
Costs of the summons of 22 March 2013
This ground can be dealt with easily as in his oral submissions, the third defendant accepted that he should pay the costs of this summons.
The discontinuance ground
The first and second defendants submit that the trustees’ personal interest in the litigation was such as to disentitle them from their right of indemnity out of the funds of the Wales Trusts. No authority was cited in support of this proposition; however, there are a number of cases that support the conclusion that the submission ought be rejected. The first case is that of Walters v Woodbridge, in which Jessel MR (with whom James and Thesiger LJJ agreed) stated as follows:
[W]here an action is brought against a trustee in respect of the trust estate … and is defended by the trustee, not for his own benefit, but for the benefit of the trust estate, he is entitled to indemnity. Here the defence by the trustee was for the benefit of the trust estate; it is true that at the same time he defended his own character, but that was merely an incident. If he had died, and his co-trustees had defended the action, they must at the same time have defended him. The defence of his character, therefore, does not make the defence less a defence on behalf of the trust estate, and there is no reason why he should be left to bear his own costs.[15]
[15]Walters v Woodbridge (1878) 7 Ch D 504, 509–10.
This case was applied in the context of an administrator of a company in liquidation by the New South Wales Court of Appeal in the matter of Kirwan, in which Giles JA (with whom Meagher JA agreed) stated as follows:
On the view I have come to, it was reasonable for Mr Gould actively to defend the proceedings brought against Securities and against himself as administrator. He was entitled to indemnity for costs reasonably and honestly incurred. It does not matter that at the same time Mr Gould was “defending his own character”. Whether particular costs were reasonably incurred may arise, but there was not impropriety in the administration amounting to misconduct whereby, because defending his own misconduct, Mr Gould did not incur the costs reasonably and honestly.[16]
[16]Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21, 84 at [259].
In that case, Young CJ in Eq went on to say that:
it is well recognised in the authorities that the trustee or a person in the role of a trustee is still entitled to be paid his costs out of the estate in a proper case where he has defended the suit for the benefit of the estate though at the same time, defended his own character.[17]
[17]Ibid, 109 at [430].
Although both cases involved indemnity in relation to costs incurred in successfully defending proceedings, in my view, there is no reason why the same principle should not apply equally to trustees who pursue proceedings in the interests of the trust, even in circumstances where they may benefit personally from the proceedings, as might occur in this proceeding. Whilst it is true that the orders sought by the plaintiffs would have discharged them of liability for any improper conduct during their time as trustees, once significant disputes arose between the parties over the state of the accounts and financial records of the trusts, as well as the disagreements between the capital beneficiaries, this proceeding was a necessary step in seeking to wind up the trusts with the trustees having no option but to seek the advice of and directions from the Court.
In my view, the discharge of the plaintiffs’ liability for any alleged wrongdoing during their time as trustees was merely incidental to the primary purpose of the winding up application, which was to settle the accounts and distribute the capital of the trusts in the most appropriate manner, as determined by the Court. This is supported by the fact that, after their removal as trustees, the plaintiffs no longer sought to pursue the proceedings. If their primary interest had been in obtaining a discharge of their own liability, they would surely have continued to pursue such an outcome. As such, I consider that any personal interest of the plaintiffs in the proceeding is not sufficient to disentitle them from being indemnified out of the trusts.
The conflict of interest ground
The conflict of interest ground advanced by the third defendant deals only with the costs incurred in the proceeding following the time at which the third defendant claims the plaintiffs should have ceased acting and discontinued the proceedings; that is, at the latest, August 2012. This submission can be dealt with briefly, as it has already been concluded in the removal application. The plaintiffs have been ordered to pay personally fifty per cent of the costs of all parties to the removal application, on the basis that it would have been proper for them to seek the guidance of the Court prior to defending the application. At the time the removal issue was raised, the application to wind up the trusts had effectively ceased pending the determination of that issue. As such, minimal (if any) costs have been incurred in relation to the winding up application since then.
On the basis of the above, I consider that if there were a conflict of interest, such conflict did not amount to misconduct such that the trustees would be disentitled of their indemnification.
The premature and improper conduct grounds
The following three grounds raised by the first, second and third defendants overlap:
(a) the application was premature (first and second defendants);
(b) the application was premature and futile (third defendant); and
(c) the plaintiffs’ costs were incurred due to their improper conduct prior to proceedings (third defendant).
In my view, these grounds, when taken together, do not support the conclusion that the plaintiffs’ costs incurred as a result of the winding up application were incurred improperly or that the trustees are disentitled from recourse to the trusts for their costs of the proceeding.
Once the disputes arose between the parties as to the financial records and the financial accounting for the trusts, the trustees have taken the only proper and reasonable course to resolve the disputes in applying to the Court for direction under r 54 of the Rules. This is the case whether the application under r 54 be taken from the inception of the trusts or, as later amended, for the financial years since 2004 onwards as the disagreements could not be resolved without an order of the Court. The proceeding has now been dismissed. It never went beyond the stage of the ongoing disputes and there has been no finding of misconduct, impropriety or breach of duty on the part of the plaintiffs and, as stated, the defendants do not make any submissions to that effect.
The submissions that the first to third defendants rely on under their premature ground are not such that it can be said that it has been established that the trustees have, in the context of the test to be applied as set out in Nolan v Collie, acted beyond power, in bad faith or exercised power in the absence of care and diligence that a person of ordinary prudence should exercise.
The third defendant’s relied on the decision of Chadwick v Heatley[18] in support of his submission that it was improper for the plaintiffs to apply to the Court to settle the accounts when the defendants had not been given an opportunity to settle the accounts beforehand. This, in turn, was said to make the application to seek the passing of accounts only from 2004 onwards premature.
[18](1845) 63 ER 671.
In Chadwick v Heatley, the trustees had demanded that the residuary beneficiaries execute a release by deed prior to the winding up of the trusts and payment of their share of the capital. One of the residuary beneficiaries refused to execute such a deed, and brought a suit for payment of his share of the capital. In his judgment, the Vice-Chancellor of the Court of Chancery stated as follows:
… I should say that in strictness a release by deed could not be demanded, yet there was nothing out of the ordinary course of business—nothing unreasonable in asking it. But what is the course taken on the other side? There is not only a refusal to execute the deed, which in my opinion was justifiable, but a statement that the Plaintiff will execute no release, express or implied, and give nothing but a receipt for a particular sum. I think that was positively unreasonable. If he was satisfied upon the account as sent in, that nothing more was coming to him, he should have expressed his willingness to close the accounts; on the other hand, if he was dissatisfied with it, he should have asked to have the accounts taken. I cannot, however, say that the defendant, against the wish of the plaintiff, is entitled to force this sum upon him. The accounts have never been taken—they have never been acceded to.[19]
[19]Ibid, 674 (Sir JL Knight Bruce).
As a result, the Vice-Chancellor ordered a general administration of the real and personal property of the testator. However, the plaintiff elected to receive his share of the capital and to settle the accounts.
In my view, the factual circumstances of that case are quite different to this proceeding. It will be recalled that it was in October 2012 that the application to amend the proceeding was made and was made to restrict the number of years to the financial years ended 30 June 2004 to 30 June 2012 or any later financial year for which the accounts of the trusts were to be settled by the Court. The plaintiffs also sought directions for the basis of the preparation of the accounts as a result of the issues arising from the discovery by the trustees of the unpaid distributions to the income beneficiary. In my view, where there are disputes between trustees and beneficiaries that cannot easily be resolved, the appropriate course for the trustees to take in these circumstances is to seek the Court’s direction. In this respect, this is reinforced in Macedonian[20] as it is authority for the proposition that, when a trustee is in doubt as to the best course to take, it is appropriate to seek the directions of the Court. In that case, it was said that:
The legislative scheme, then, is that it is desirable that trustees in doubt as to a course of action should not proceed with it and seek relief under s 85 afterwards, but rather seek s 63 advice first. That is because one of the things which a trustee invoking s 85 requires to be excused from is failure to seek s 63 advice.[21]
[20]Macedonian Orthodox Community Church St Petka Inc v His Emminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66.
[21]Ibid, 83 at [36] (Gummow ACJ, Kirby, Hayne and Heydon JJ).
Accordingly, in my view, the trustees are entitled to an indemnity out of the trusts for the costs incurred by them in the winding up application.
Indemnity out of the fourth defendant’s share from the trusts
Given my conclusions, there is no need to consider whether the fourth defendant’s share in the trusts should be quarantined from the plaintiffs’ right of indemnity regarding their costs in this proceeding.
Orders
Accordingly, I will make the following orders on the basis that the costs be taxed in default of agreement:
(a) The plaintiffs pay the defendants’ costs of the proceeding;
(b) The plaintiffs be indemnified as to these costs from the trusts; and
(c) 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.
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