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Park v Whyte

 

[2020] QSC 18

SUPREME COURT OF QUEENSLAND

CITATION:

Park & anor v Whyte [2020] QSC 18

PARTIES:

JOHN RICHARD PARK AND GINETTE DAWN MULLER AS LIQUIDATORS OF LM INVESTMENT MANAGEMENT LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 208 461 THE RESPONSIBLE ENTITY OF THE LM FIRST MORTAGE INCOME FUND ARSN 089 343 288

(First Applicant)

AND

LM INVESTMENT MANAGEMENT LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 208 461 THE RESPONSIBLE ENTITY OF THE LM FIRST MORTAGE INCOME FUND ARSN 089 343 288

(Second Applicant)

v

DAVID WHYTE AS THE PERSON APPOINTED TO SUPERVISE THE WINDING UP OF THE LM FIRST MORTGAGE INCOME FUND ARSN 089 343 288 PURSUANT TO SECTION 601NF OF THE CORPORATIONS ACT 2001

(First Respondent)

AND

SAID JAHANI IN HIS CAPACITY AS RECEIVER AND MANAGER OF THE ASSETS, UNDERTAKINGS, RIGHTS AND INTERESTS OF LM INVESTMENT MANAGEMENT LIMITED (IN LIQUIEDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 208 461 AS THE RESPONSIBLE ENTITY OF THE LM CURRENCY PROTECTED AUSTRLAIAN INCOME FUND ARSN 110 247 875 AND THE LM INSTITUTIONAL CURRENCY PROTECTED AUSTRALIAN INCOME FUND ARSN 122 052 868

(Second Respondent)

FILE NO/S:

BS No 3508 of 2015

DIVISION:

Trial Division

PROCEEDING:

Application filed 20 January 2020

ORIGINATING COURT:

Supreme Court at Brisbane

DELIVERED ON:

28 February 2020

DELIVERED AT:

Brisbane

HEARING DATE:

30 January 2020

JUDGE:

Jackson J

ORDER:

The order of the court is that:

  1. The respondent pay the first applicant the amount of $98, 647.27 from the property of the LM First Mortgage Income Fund.
  2. The applicants’ costs of the application as agreed or assessed on the indemnity basis be paid from the property of the FMIF.
  3. The respondent’s costs of the application be paid from the property of the FMIF.

CATCHWORDS:

CORPORATIONSWINDING UP LIQUIDATORS – EXPENSESIN VOLUNTARY WINDING UPwhere the first applicant liquidator incurred legal costs in the winding up of LMIM in insolvencywhere the first applicants firm is personally liable for the legal costs payable as fees to LMIM’s and his solicitorswhere the legal costs were properly incurred by the first applicant as liquidatorwhere the legal costs were properly incurred by the second applicant as responsible entity and trustee by reason of its conduct in that officewhere the first and second applicants applied for an order that the first respondent pay two sums from the property of the FMIF to indemnify the applicants against legal expenseswhere the court held that the respondent pay the first applicant from the property of the FMIF.

Corporations Act 2011 (Cth)

Trusts Act 1973 (Qld), s 72

Uniform Civil Procedure Rules 1999 (Qld), r 700(2)

Alsop Wilkinson (a firm) v Neary (1996) 1 WLR 1220, discussed

Armitage v Nurse [1998] Ch 242, discussed

Bruce v LM Investment Management Limited (2013) 94 ACSR 684, cited

Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 368 ALR 390, cited

Cherry v Boultbee (1839) 4 My & Cr 442, discussed

Fearns v Young (1804) 10 Ves Jun 185, cited

Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v Bishop Irinej Dobijevic (No 3) [2017] NSWCA 109, cited

Lane v Deputy Commissioner of Taxation [2017] 253 FCR 46, cited

LM Investment Management Ltd v Ernst & Young [2017] QSC 073, cited

LM Investment Management Ltd (in liquidation) v EY (No 2) [2018] QSC 226, cited

LM Investment Management Pty Ltd (in liquidation) v EY (aka Ernst & Young) [2019] QSC 246, cited

LM Investment Management Pty Ltd (in liquidation) v EY (aka Ernst & Young) [2019] QSC 258, cited

Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, discussed

National Trustees Executors and Agency Company of Australasia Ltd v Barnes (1941) 64 CLR 268, discussed

Nissen v Grunden (1912) 14 CLR 297, discussed

Park & Muller (Liquidators of LM Investment Management Ltd) v Whyte No 2 [2018] 2 Qd R 413, cited

Park & Muller (liquidators of LM Investment Management Limited) v Whyte (receiver of LM First Mortgage Investment Fund) [2015] QSC 283, cited

Park v Whyte (No 3) [2018] 2 Qd R 475, cited

Price v Saunders [2019] EWCA Civ 2261, cited

Ramsden v Langley (1705) 2 Vern 536, cited

re Pumfrey (1882) 22 Ch D 255, cited

COUNSEL:

J Peden for the Applicants

D Ananian-Cooper for the Respondents

SOLICITORS:

Russells for the Applicants

Tucker & Cowen for the Respondents

Jackson J:

  1. [1]
    Both the first and second applicants apply for an order that the first respondent pay two sums from the property of the LM First Mortgage Income Fund (“FMIF”) to indemnify the applicants against legal expenses incurred in connection with claims made by EY (also known as Ernst & Young) in the winding up of LM Investment Management Limited (in liquidation) (receivers appointed) (“LMIM”).  The two relevant sums are:
  1. (a)
    $9,971.06 for the liquidators’ legal costs of assessing a proof of debt lodged by EY for professional fees for services rendered by EY to LMIM for the audit of the FMIF (“first sum”);
  2. (b)
    $88,676.21 for legal costs incurred by LMIM in defending a third party proceeding brought by EY against LMIM in proceeding BS 2166 of 2015 (“second sum”).
  1. [2]
    Both of the relevant sums were incurred by the first applicant liquidator of LMIM, John Park, in the winding up of LMIM in insolvency.  It may be assumed that his firm is personally liable for the legal costs payable as fees to LMIM’s and his solicitors.
  2. [3]
    Although it will be necessary to refer briefly to the circumstances relating to the two claims by EY, the parties are not in dispute about whether either of the sums constitutes expenses properly incurred by Mr Park as liquidator and by LMIM  as responsible entity and trustee or by reason of its conduct in that office.  The respondent agrees that all of the costs were reasonably (also meaning properly) incurred.
  3. [4]
    As to the second sum, LMIM has the benefit of an order that EY pay its costs of the third party proceeding brought against it by EY in proceeding BS 2166 of 2015. (“EY costs order”).
  4. [5]
    The first respondent submits that it should be ordered that Mr Park and LMIM may only recoup any balance unpaid in respect of the second sum after Mr Park have recovered any amount they can under the EY costs order. I will call this the “balance amount order”.

Bases of the right to indemnity

  1. [6]
    In late 2015, following a dispute between Mr Park and his then joint liquidator, on the one hand, and the first respondent, on the other hand, as to their respective responsibilities in the winding up of the FMIF, the court decided a number of questions.[1] The decision resulted in an order of 17 December 2015. The order provided, inter alia, for a multi-step regime for indemnity from the property of the FMIF.  First, the liquidators were directed to call for proofs of debt in accordance with their responsibilities under the Corporations Act 2001 (Cth) (“CA”). Second, inter alia, the liquidators were to identify any claims for indemnity from the property of the FMIF in respect of any expense or liability incurred by the liquidators in acting as liquidators.  Third, the liquidators were to notify the first respondent in writing of such claims.  Fourth, the first respondent was to notify the liquidators that he accepted or rejected such claims.  Fifth, there was a procedure for the court to resolve any dispute as to claims for indemnity from the property of the FMIF.
  2. [7]
    On 18 July 2018, the court made a further order, deleting the provision of the 17 December 2015 order for the first respondent to accept or reject any claims for indemnity from the property of the FMIF and providing that the liquidators were entitled to claim their reasonable costs and expenses of carrying out the work they or LMIM were required to do by and under the 17 December 2015 order in connection with the FMIF, not being the subject of a claim then already made.  Provision was also made for payment to be made out of the assets of the FMIF in such amounts as approved by the court from time to time.
  3. [8]
    The applicants purport to bring the present claims in accordance with those orders.  Whilst the first sum fits within their scope, I do not consider that the liquidator’s entitlement to indemnity in respect of the second sum falls within the 17 December 2015 and 18 July 2018 orders.  In defending proceeding BS 2166 of 2015 the liquidator and LMIM did not incur the expenses of legal costs in doing work he was required to do by and under the 17 December 2015 order.  Nothing under that order required the liquidator and LMIM to defend the third party proceeding, although it was perfectly proper for them to do so.  Accordingly, in my view, the 18 July 2018 order does not give the liquidator or LMIM any entitlement to those costs from the property of the FMIF.
  4. [9]
    Once it is accepted that the 17 December 2015 and 18 July 2018 orders do not provide for the liquidator or LMIM to be indemnified from the property of the FMIF for the second sum, the jumping off point for the resolution of the present dispute is that it is accepted by the first respondent, in any event, that LMIM is entitled to an indemnity for the expenses incurred by the liquidators and LMIM for their legal costs of defending the third party proceeding. 
  5. [10]
    That proceeding was brought against LMIM, inter alia, for alleged breaches of duties to EY or statutory obligations owed in the execution of its function as responsible entity and trustee of the FMIF as a registered managed investment scheme.  Earlier judgments of the court set out the nature of the claim brought by the first respondent in LMIM’s name against EY,[2] and EY’s third party proceeding against LMIM[3] and the circumstances in which the EY Costs Order was made.[4]
  6. [11]
    Simply stated, the accepted entitlement of the applicants to an indemnity in respect of the second sum is based on the characterisation of that amount as properly the subject of either a trustee’s indemnity for expenses “reasonably”[5] (meaning properly) incurred or the personal right of a liquidator of a company trustee to be indemnified for expenses incurred in preserving the trust property.[6]  The first respondent did not contend that the applicants’ entitlement to any order for indemnity was suspended in this instance by the operation of what is sometimes described as the “clear accounts” rule.[7]

Trustee’s indemnity for legal costs

  1. [12]
    In the often cited judgment in Alsop Wilkinson (a firm) v Neary,[8] Lightman J categorised the cases in which a trustee may be entitled to an indemnity for the costs of litigation by way of exoneration or recoupment from the trust assets into three kinds of dispute.  The third kind is a dispute between the trustee and the persons otherwise than in the capacity of beneficiaries in respect of rights and liabilities, e.g. in contract or tort assumed by the trustees as such in the course of administration of the trust.[9]  That is the category relevant to the third party proceeding brought by EY against LMIM.
  2. [13]
    In Park v Whyte (No 3),[10] I referred to the subject of a trustee’s costs of legal proceedings between the trustee and a third party, including the discussion of it in Lewin of Trusts,[11] but since the respondent accepts the applicants’ entitlement to an indemnity subject to the balance amount order, it is unnecessary to discuss that question further.
  3. [14]
    Because the amount of the second sum has not been paid to the applicants’ solicitors the indemnity sought from the property of the FMIF is one of exoneration rather than recoupment,[12] but neither of the parties suggested that the answer to the question whether the right of indemnity for the second sum is subject to a reduction for the amount of the benefit of the EY costs order turns on whether the solicitors’ costs have been paid already.  It may also be accepted that:

“… the value of the power of exoneration, like the value of the power of reimbursement, may decrease by ‘netting-off reciprocal monetary obligations’.”[13]

Balance amount orders

  1. [15]
    In support of the balance amount order, the respondent relied principally on three cases:  Nissen v Grunden,[14] National Trustees Executors and Agency Company of Australasia Ltd v Barnes[15] and Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Bishop of Macedonian Orthodox Diocese of Australia and New Zealand.[16]
  2. [16]
    The circumstances in each of these cases differed.  But the form of order in each case provided for a trustee to recover legal costs incurred from a trust fund as follows:
  1. (a)
    “… Respondent’s next friend to pay costs of the appeal.  Appellants to have [their costs] out of the estate so far as not recoverable from him.”[17]
  1. (b)
    “… order that the costs… so far as they are not recoverable from the plaintiffs may be retained out of the estate…”;[18] and
  2. (c)
    “… order that the appellant be entitled to be reimbursed out of the [trust property] for the balance of its costs… incurred in conducting the proceeding… to the extent to which they are not paid by the respondents”;[19]

(emphases added)

  1. [17]
    According to their ordinary meaning, each of these orders implied that the trustee’s exoneration or recoupment was to occur after any amount was recovered from the other party to the litigation who was ordered to pay the trustee’s costs (“outside party”).

Cherry v Boultbee

  1. [18]
    Second, the respondent submits that the principle that informs these orders is the principle of Cherry v Boultbee.[20]  The analogy between the principle of Cherry v Boultbee and what is sometimes called the “clear accounts” rule that may apply to a trustee’s indemnity for expenses has been referred to in recent case law.[21]
  2. [19]
    Where the principle of Cherry v Boultbee applies, a party entitled to payment from a fund is required to contribute any amount owed to the fund before payment from the fund, so that the right to payment is only for the net amount.  There is a plain difficulty in the application of that principle in the present case.  Although any amount paid by EY to the liquidator and LMIM under the EY costs order would go in reduction of the indemnity to which LMIM as trustee is entitled from the property of the FMIF, that does not make it an amount that LMIM is obliged to contribute to the property of the FMIF. 
  3. [20]
    It may be accepted that if LMIM were first indemnified for its legal costs from the property of the FMIF and subsequently received payment of an amount from EY payable under the EY costs order, LMIM would hold the amount paid by EY on trust for the FMIF.  That possible outcome, however, does not make LMIM liable to contribute to the fund of the property of the FMIF before payment from that fund within the meaning of the principle of Cherry v Boultbee.
  4. [21]
    Underlying the respondent’s submissions seems to be a concern that if the liquidator and LMIM are first indemnified from the trust property of the FMIF they will not pursue LMIM’s rights under the EY costs order. It seems to me that there are two answers or possible answers to that concern.
  5. [22]
      First, LMIM remains the responsible entity and trustee of the property of the FMIF (subject to the role of the custodian as trustee under the Constitution of the FMIF), notwithstanding the order of the court made on 8 August 2013 appointing the respondent as the receiver of the property of the FMIF.[22]  As such, if the benefit of the EY costs order is held by LMIM on trust for the beneficiaries of the FMIF, LMIM remains subject to the obligation of a trustee to recover that trust property. 
  6. [23]
    Second, if on payment to the liquidator and LMIM of the second sum the EY costs order becomes an asset of the FMIF held by LMIM on trust for the FMIF, the respondent may be entitled to sue to recover it in LMIM’s name, by reason of the order appointing him as receiver of the assets of the FMIF.
  7. [24]
    In my view, once it is accepted that LMIM will hold the benefit of the costs order on trust for the FMIF, if it is exonerated for the second sum from the property of the FMIF, there is no reason in principle that appears why the amount of LMIM’s entitlement to indemnity for those costs from the property of the FMIF should be subject to the balance amount order.
  8. [25]
    The contrary conclusion involves accepting that LMIM bears at least the financing risk of incurring and paying for its legal costs and any other expenses of pursuing payment under the EY costs order before it receives any indemnity on account of the second sum, even if is accepted that the liquidator and LMIM do not bear the ultimate risk that EY will not pay or will not pay all of the amount of the EY costs order.

An unusual case

  1. [26]
    To some extent, the problem in the present case is caused by the unusual division of responsibility between LMIM by its liquidators and the respondent in the winding up of the FMIF.[23] 
  2. [27]
    In this country, very many ordinary commercial trading businesses are carried on by a company on trust for a family discretionary or unit trust structure. Ordinarily, a trustee has possession of the trust assets and is entitled to an equity of exoneration from those assets for expenses properly incurred.  The trustee does not need an order of a court for their payment, including in many cases expenses incurred for legal costs in litigation with an outside party.
  3. [28]
    This practical legal reality is reflected in the operation of both s 72 of the Trusts Act 1973 (Qld) for a trustee’s entitlement to an indemnity for expenses “reasonably” (meaning properly) incurred and r 700(2) of the Uniform Civil Procedure Rules 1999 (Qld) which preserves the entitlement of a trustee who is sued to have the costs of the proceeding that are not paid by someone else paid out of the fund held by the trustee, unless the court orders otherwise.[24]
  4. [29]
    In litigation between a trustee in respect of the trust’s business and an outside party, say in contract or tort, a question of the timing of the exoneration of expenses for the trustee’s legal costs from the trust fund, on the one hand, and any recovery from the outside party under an order for costs in the trustee’s favour will not usually arise.  The trustee’s costs are paid to its solicitors as and when they are payable, and from the trust property.  The recovery of an amount under a costs order intended to indemnify or compensate the trustee for the legal costs incurred in the proceeding will often occur after that.  That is to say, there is no general rule of civil litigation practice or trust law that a trustee must always personally finance expenses properly incurred by way of legal costs and only recoup on its indemnity for those expenses after any amount is ultimately recovered from the outside party under any order for costs made against that party.
  5. [30]
    In this case, however, the respondent has possession of the property of the FMIF as receiver, under the orders that were made when the FMIF was ordered to be wound up.  Under the orders that have been made since, the applicants are required to apply for an order that the respondent pay them upon their entitlement to any indemnity from the property of the FMIF.

No general rule for a balance amount order

  1. [31]
    What, then, accounts for the orders made in Nissen, National Trustees and Macedonian Orthodox Community Church previously referred to?  For that matter, additional reference could be made to other cases, such as Armitage v Nurse.[25]  In my view, four observations may be made. 
  2. [32]
    First, it is undoubtedly true to say that the trustee’s duty to account requires a trustee to credit the trust property for any benefit received under a costs order from an outside party ordered to pay the trustee’s costs where the trustee has exonerated itself for those costs from the trust property.  Otherwise, the trustee would make a profit from its office at the expense of the beneficiaries. 
  3. [33]
    Second, none of the balance amount order cases contains an explanation why the trustee must or should wait until receipt of payment from the outside party ordered to pay the trustee’s costs before being indemnified and therefore must personally finance the trustee’s costs until reimbursement from either the outside party is ended before exonerating itself from the trust property. 
  4. [34]
    Third, in other contexts, it is accepted that a trustee is not expected to absorb the financing costs of paying expenses properly incurred from personal property.[26] 
  5. [35]
    Fourth, Macedonian Orthodox Community Church and Armitage, in particular, were cases of incomplete litigation.
  6. [36]
    I conclude that, notwithstanding the balance amount orders made in the cases referred to, there is no general rule and no identifiable principle that operates to require that the liquidator and LMIM’s entitlement to indemnity for the second sum by order for payment from the property of the FMIF should be subject to a balance amount order in the present case.
  7. [37]
    I am fortified in that conclusion by what I consider to be the underlying purposes of the principle in Cherry v Boultbee, which are, first, to protect a trust fund from having to meet a claim in full, leaving the trustee and beneficiaries of the fund at risk of not being able to recover the contribution due to the fund from the claimant and, second, in particular, to protect an insolvent fund from being required to pay a rateable share of a claim against it without first reducing the amount of the claim by the amount the claimant is obliged to contribute to the fund. 
  8. [38]
    Those purposes are not undermined by an order in the present case that the applicants are to be paid the second sum from the property of the FMIF without making the balance amount order.  In particular, in my view, ordinarily the risk of non-collection of the amount of the EY costs order is one that as between LMIM and the beneficiaries of the fund constituted by the trust property of the FMIF is the risk of the beneficiaries, at least absent default by LMIM as trustee in attempting to collect the benefit of the order.

Footnotes

[1]Park & Muller (liquidators of LM Investment Management Limited) v Whyte (receiver of LM First Mortgage Investment Fund) [2015] QSC 283.

[2]LM Investment Management Ltd v Ernst & Young [2017] QSC 073; LM Investment Management Ltd (in liquidation) v EY (No 2)  [2018] QSC 226;

[3]LM Investment Management Pty Ltd (in liquidation) v EY (aka Ernst & Young) [2019] QSC 246.

[4]LM Investment Management Pty Ltd (in liquidation) v EY (aka Ernst & Young) [2019] QSC 258.

[5]Trust Act 1973 (Qld), s 72.

[6]Park & Muller (Liquidators of LM Investment Management Ltd) v Whyte No 2 [2018] 2 Qd R 413, 428-432 [77]-[93].

[7]Cf. Park & Muller (Liquidators of LM Investment Management Ltd) v Whyte No 2 [2018] 2 Qd R 413, 456-458 [186]-[196].

[8](1996) 1 WLR 1220.

[9](1996) 1 WLR 1220, 1224C.

[10][2018] 2 Qd R 475, 498.

[11]Tucker, Poidevan and Brightwell, Lewin on Trusts, 19th ed, [27 –110].  See now also Price v Saunders [2019] EWCA Civ 2261, 5-12.

[12]Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 368 ALR 390, 403 [31].

[13]Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 368 ALR 390, 403 [31].

[14](1912) 14 CLR 297.

[15](1941) 64 CLR 268.

[16](2008) 237 CLR 66.

[17]Nissen v Grunden (1912) 14 CLR 297, 321.

[18]National Trustees Executors and Agency Company of Australasia Ltd v Barnes (1941) 64 CLR 268, 281.

[19]Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66, 129.

[20](1839) 4 My & Cr 442; 41 ER 171; (1838) 2 Keen 318; 48 ER 651).

[21]Compare Park v Whyte (No 3) [2018] 2 Qd R 475, [137] and Lane v Deputy Commissioner of Taxation [2017] 253 FCR 46, [54] - [59].

[22]Bruce v LM Investment Management Limited (2013) 94 ACSR 684, 715.

[23]See Park & Muller (liquidators of LM Investment Management Limited) v Whyte (receiver of LM First Mortgage Investment Fund) [2015] QSC 283.

[24]See Park v Whyte (No 3) [2018] 2 Qd R 475, 490-492 [49]-[59] and Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v Bishop Irinej Dobijevic (No 3) [2017] NSWCA 109, [28]-[42].

[25][1998] Ch 242, 264.

[26]See re Pumfrey (1882) 22 Ch D 255, 261-262 and Ramsden v Langley (1705) 2 Vern 536; 23 ER 947; Fearns v Young (1804) 10 Ves Jun 185; 32 ER 815.

Close

Editorial Notes

  • Published Case Name:

    Park & anor v Whyte

  • Shortened Case Name:

    Park v Whyte

  • MNC:

    [2020] QSC 18

  • Court:

    QSC

  • Judge(s):

    Jackson J

  • Date:

    28 Feb 2020

  • Selected for Reporting:

    Editor's Note

Litigation History

Event Citation or File Date Notes
Primary Judgment [2020] QSC 18 28 Feb 2020 Application for an order that the respondent pay the applicant amounts incurred in engaging legal representation as liquidator of a company that acted as the responsible entity of a managed investment scheme (where the respondent is the Court appointed supervisor of the winding-up the managed investment scheme) in circumstances where the applicant has the benefit of a costs order for those legal costs; order made: Jackson J.

Appeal Status

No Status