Park v Whyte[2015] QSC 287

SUPREME COURT OF QUEENSLAND

1. JACKSON J: This is an unusual application in an unusually constituted proceeding.

The application

2. The parties to the application are the applicant/seventh defendant and the respondent/eighth defendant.

3. On 12 April 2013, under an order of the Court, the applicant was removed as the trustee of a trust scheme known as “the LM Managed Performance Fund” (“MPF”). On the same day, the respondent was appointed as the trustee.

4. As former trustee, the applicant applies for orders that would indemnify the applicant for its costs of defending the plaintiff's claim from the property of the MPF, to be paid from time to time as the proceeding continues and those costs are incurred. I will refer to that aspect of the application as “the application for indemnity for costs”. The applicant also applies for a particular order that the indemnity extend to the applicant’s liquidators professional fees, (which are not legal costs) for their time and actions while engaged in the defence of the proceeding.

5. The application raises questions of some complexity. For the reasons that follow, in my view, it must be dismissed.

The proceeding

6. The applicant is the responsible entity and trustee of a managed investment scheme that is a registered scheme known as “the LM First Mortgage Income Fund” (“FMIF”).

7. On 21 August 2013, the Court made an order under s 601ND(1) of the Corporations Act 2001 (Cth) (“CA”) directing the applicant to wind up the FMIF.  By another order made at the same time Mr Whyte was appointed under s 601NF(1) as a person to take responsibility for ensuring that the FMIF is wound up in accordance with its constitution and any orders made under s 601NF(2) of the CA.  He was also appointed receiver of the property of the FMIF under s 601NF(2). 

8. As the appointed person and receiver, and under the powers given to him by the Court’s order, Mr Whyte started the originating proceeding in the name of the applicant against the applicant’s former directors, the applicant and the respondent. In doing so, he represents the interests of the members of the FMIF. The proceeding is thus brought by him as plaintiff in the applicant’s name against the applicant, among others, as a defendant. For convenience, it may be described as a proceeding brought against the applicant in its personal capacity. An order has been made under s 59 of the Trusts Act 1973 (Qld) authorising the receiver to continue the proceeding so constituted in the applicant’s name.  For simplicity, I will describe the plaintiff as “the receiver”.

9. The receiver also brings the proceeding against the respondent as a defendant, as the current trustee of the MPF. Broadly speaking, that claim is based on the rights of a creditor of a former trustee (the applicant) to be subrogated to the right of indemnity of the former trustee from trust property and to pursue the trust property through a claim against the current trustee (the respondent).

10. The explanation for the application for indemnity for costs lies in the nature of the claim brought by the receiver against the applicant. It stems from transactions that were made by the applicant with third parties when it was both the responsible entity of the FMIF and trustee of the MPF. Simplifying, the applicant had lent moneys from the property it held as trustee of the FMIF and from the property it held as trustee of the MPF to the third parties. It sought to recover the loans. It started litigation against some of the third parties.

11. A compromise of the litigation between the applicant and the third parties was reached ("the settlement transaction"). So far as the third parties were concerned, a single settlement sum was paid to the applicant. So far as the applicant was concerned, the settlement sum had to be divided between or allocated to the interests of the FMIF and MPF respectively.

12. The relevant legal relationship of the FMIF and the MPF prior to the settlement transaction was that the applicant held a first ranking security or securities from some of the third parties for the funds advanced from the property of the FMIF. It held a second ranking security or securities for the funds advanced from the property of the MPF.

13. The receiver alleges, in effect, that the directors of the applicant were in a position of conflict in making the allocation of the settlement sum as between the FMIF and MPF and that the MPF was treated more favourably than it would have been treated as second ranking secured creditor upon a realisation of the secured property.

14. The applicant responds, in effect, that the proceeding started against the third parties resulted in the successful settlement transaction that was, overall, favourable to both the FMIF and MPF. Nearly all of the funds used to start the proceeding and put at risk thereby had come from the MPF in circumstances where the FMIF had been unable to fund the litigation. It was appropriate that the allocation reflect that, as if the MPF were a litigation funder.

15. Specifically, the receiver alleges that in allocating the proportions of the settlement sum as between the FMIF and the MPF, the applicant’s directors breached their duties as officers of the applicant as a corporation and as responsible entity of the FMIF under relevant provisions of the CA and that the applicant breached its duties as responsible entity of the FMIF, or was a person involved in those contraventions by the directors, with the consequences that the former directors and the applicant are liable to compensate the scheme or the receiver (who would hold the recovery on trust for the members as beneficiaries of the FMIF).

16. Although it is not necessary to identify all of the receiver’s causes of action, it is critical to identify that they are not all brought against the applicant as acting in the same capacity. The distinction to be made turns on the facts that at the time of the settlement transaction the applicant was both responsible entity of the FMIF and trustee of the MPF. Some of the causes of action alleged by the receiver against the applicant are for compensation or damages for breach of its duties as responsible entity of the FMIF. On those causes of action the applicant is alleged to be liable to the scheme members. No question is raised on those causes of action that the applicant has any right of indemnity against the scheme property of the FMIF. Nor could there be. The receiver’s claim upon those causes of action is not based on the applicant’s liability as trustee of the MPF.

17. On the other hand, some of the causes of action alleged by the receiver are brought against the applicant for its role in the transaction as trustee of the MPF.

18. First, par 41 of the further amended statement of claim (“FASOC”) alleges knowledge by the applicant “as trustee of the MPF” of the facts relating to the transaction, with the consequences alleged in par 42 that the applicant “as trustee of the MPF” was involved in its directors’ alleged contraventions of s 182(1) of the CA and thereby itself contravened s 182(2) of the CA and in par 43 that the applicant “as trustee of the MPF” is liable to pay to the plaintiff the alleged amount of the loss to the FMIF under s 1317H of the CA.

19. Second, par 47 of the FASOC alleges knowledge of similar facts relating to knowledge by the applicant of the transaction “as trustee of the MPF”, with the consequences alleged in par 48 that the applicant was involved in its directors’ alleged contraventions of s 601FD(1) of the CA and in par 49 that the applicant “as trustee of the MPF” is liable to pay to the plaintiff the alleged amount of the loss to the FMIF under s 1317H of the CA.

20. It is important to note that under s 1317H of the CA, the Court’s power to order compensation only arises: “if the person has contravened a corporation/scheme civil penalty provision”. Liability under s 1317H does not attach to “a person involved in a contravention”, as such.

21. In the case of s 182 of the CA, s 182(1) provides that directors (inter alia) must not improperly use their position and s 182(2) expressly provides that a person involved in a contravention of s 182(1) is a contravenor. Accordingly, the definition of “corporation/scheme civil penalty provision” in s 1317DA of the CA refers to s 182(1) and s 182(2).

22. In the case of s 601FD of the CA, s 601FD(3) of the CA provides both that a person who contravenes and a person involved in a contravention of s 601FD(1) are contravenors. Accordingly, the definition of “corporation/scheme civil penalty provision” in s 1317DA of the CA only refers to s 601FD(3).

23. Thus, the liabilities of the applicant alleged in paras 43 and 49 of the FASOC depend upon the applicant being a “person involved in a contravention” by the directors of the applicant of either s 182(1) or s 601FD(1).

24. Section 79 of the CA defines when “a person is involved in a contravention”. The definition is framed in the same language as was s 75B of the Trade Practice Act 1974 (Cth).  That section was considered by the High Court in Yorke v Lucas.^[1]  The plurality judgment included the following:

“Turning first to par (a), the appellants immediately encounter the difficulty that the words used, ‘aided, abetted, counselled or procured’, are taken from the criminal law where they are used to designate participation in a crime as a principal in the second degree or as an accessory before the fact. Both in the case of felonies where the principal offender and the secondary participant commit separate offences, and in the case of misdemeanours where no distinction is drawn between the two, a person will be guilty of the offences of aiding and abetting or counselling and procuring the commission of an offence only if he intentionally participates in it. To form the requisite intent he must have knowledge of the essential matters which go to make up the offence whether or not he knows that those matters amount to a crime.

…In our view, the proper construction of par (c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.”^[2]

25. The point for present purposes is that the applicant’s liabilities to the receiver’s causes of action as alleged in paras 43 and 49 require a finding or findings of knowledge of the essential matters or elements that go to make up the relevant contravention. The liabilities postulated are not, by way of contrast, the vicarious liability of a person otherwise not at fault.

26. I will call these causes of action “the liabilities as former trustee of the MPF”. It should be recognised, however, that this is only a convenient label. There is in law and equity no such thing as a liability as a former trustee.

27. The applicant defends the receiver’s claim against it, including the liabilities as former trustee of the MPF, on the bases that the decision it made as to the allocation of the settlement amount was not a breach of any obligation or that it should be excused for any breach.^[3]

Provisions of the trust deed

28. The MPF is constituted as a trust by deed. Until it was removed, the applicant was trustee under the deed. In effect, the deed provides, in part:

1. by clause 17.6 that the trustee (described as the manager) shall be indemnified out of the scheme property for liabilities or expenses incurred in relation to the performance of its duties, including legal fees and outgoings, barristers, Queens Counsel or legal counsel’s fees, all costs arising from the proper performance of its duties in connection with the scheme performed by the trustee or by any agent appointed and costs and disbursements incurred in the conduct and settlement of any court proceedings;

2. by clause 17.8 that in the event regarding the payment of expenses the trustee shall be paid such expenses until the dispute is fully determined.  Any overpayment shall be repaid forthwith upon the identification of the overpayment;

3. by clause 18.1(c) that in addition to any indemnity under any Law the trustee has a right of indemnity out of the scheme property on a full indemnity basis in respect of a matter unless, in respect of that matter, the trustee has acted negligently, fraudulently or in breach of trust.

29. The applicant did not identify whether its reliance on these provisions of the trust deed was a claim of contractual rights as a party to the deed or based on some other equitable jurisdiction. A proceeding based upon a contractual right of indemnity would ordinarily be brought by claim, whereas this application is brought in the proceeding brought by the receiver against the applicant and others.

30. The applicant relied on these provisions as if they applied regardless of its removal as trustee.

31. In my view, that is unlikely to be their proper construction. To take cl 17.8 first, in its context within cl 17 as a whole, there is a clear assumption that the applicant as trustee is in possession of the scheme property. That is not the case and has not been so from the point in time when it was removed as trustee.

32. As to cl 18.1(c), that there is a right of indemnity on a full indemnity basis in respect of a matter unless the applicant acted negligently, fraudulently or in breach of trust, in my view, there is question whether that provision extends to an indemnity for the costs of a proceeding brought against the applicant after its removal as trustee. The exclusion of the right to indemnity under the clause for a breach of trust in respect of the relevant matter assumes that the applicant is the trustee in respect of the matter. If the relevant matter is made up of the liabilities as former trustee of the MPF, the applicant was the trustee at the time when the relevant liability arose. But if the matter is the liability or expense of the applicant for the costs of the law practice acting for it in the proceeding, the applicant is not now trustee.

33. However, it may be that cls 17.6 and 18.1(c) of the trust deed, properly construed, could operate in relation to a liability or expense incurred while trustee notwithstanding that the trustee is removed after that. The respondent did not make any detailed submissions as to the operation of these clauses after removal of the applicant as trustee.

34. Accordingly, it is appropriate to proceed on the footing that the applicant may be entitled to an indemnity under cls 17.6 or 18.1(c) of the trust deed for a liability for costs incurred in defending the receiver’s claim to the extent of the liabilities as former trustee of the MPF, without deciding that question.

35. The consequence is that in the discussion that follows it must be kept in mind that under cl 17.6 any right to an indemnity might extend to legal fees and disbursements incurred in relation to the proper performance of the applicant’s duties as trustee. And under cl 18.1(c) any right to indemnity might extend unless the applicant has acted negligently, fraudulently or in breach of trust.

36. However, the applicant did not confine the application for indemnity for costs to the contractual or other rights under the trust deed. It relied on broader principles and rights operating under the law of trusts in equity.

Some background principles and facts

37. In that way, the application for indemnity for costs is based on five inter-related principles of the law of trusts that were largely uncontentious between the parties and accordingly may be briefly summarised at the expense of some precision, at least to start with:

1. first, where a trustee incurs a liability as trustee, “properly”^[4] or “reasonably”,^[5] the trustee is entitled to an indemnity from the trust property either by way of exoneration or by way of recoupment for the expenditure required to discharge the liability;

2. second, a trustee who seeks indemnity for the costs of defending litigation may obtain protection against the risk that it will be found later that the costs of the litigation are not a proper or reasonable expense of office by seeking an order of the court in the form of judicial advice that the trustee is justified in defending the proceeding (and is at some risk of being denied an indemnity if it does not do so);

3. third, where a trustee is sued by a third party, and is justified in defending the proceeding, the trustee’s entitlement to an indemnity for the costs incurred properly or reasonably in doing so is not lost because the trustee is defending a personal liability (and the propriety of their action or omission) as well as protecting the trust property;

4. fourth, where the trustee is justified in defending the proceeding, the trustee may have resort to the trust property directly by way of recoupment or exoneration for the costs incurred properly or reasonably in doing so; and

5. fifth, where a trustee has an accrued right to an indemnity, removal of the trustee does not affect the right, except that a former trustee may not have possession of the trust property to exercise its right of indemnity directly from the trust property by way of exoneration or recoupment.

38. It will be necessary to discuss the operation of some of these principles in greater detail. However, it is important at the outset to note four features of the present case that distinguish it factually from some other cases where a trustee’s indemnity was in question.

39. First, the applicant is not now a trustee of the MPF. It is the former trustee. It must rely on the fifth principle.

40. Second, the applicant does not have the benefit of judicial advice that it is justified in defending the proceeding. It is not suggested that it could have applied for such advice. At this stage, it is not known whether the applicant will succeed in its defence of the receiver’s claim upon the liabilities as former trustee of the MPF. It cannot be said with any certainty that the expenses of defending the claim would be classified as incurred properly or reasonably in the sense that they would be allowed as proper expenses of a trustee of a trust in protecting the trust property. However, even if the applicant is unsuccessful in defending the proceeding, it contends that it may still be entitled to an indemnity for its costs as “reasonably and properly incurred”.

41. Third, the particular orders sought are for costs incurred to date and to be incurred in the future in the applicant’s defence of the receiver’s claim. As to the costs already incurred, the applicant has not sought to establish either their quantum or that they are proper expenses in the sense that the amounts were reasonably incurred. No attempt has been made to distinguish between any costs incurred in defending the liabilities as a former trustee from the balance of the receiver’s claim.

42. Fourth, the respondent as trustee of the MPF has brought other separate claims against the applicant that it alleges will have to be set-off before the applicant’s entitlement to any sum by way of indemnity would be payable.

43. Fifth, if the applicant is entitled to succeed on the question of an indemnity from the property of the MPF, but cannot recover on the indemnity until the end of the proceeding, there is a risk of insolvency affecting recovery. If the applicant is not able to obtain indemnity for its costs from the property of the MPF progressively, there is a risk that at the end of the day that property may not be sufficient to meet the applicant’s entitlement to an indemnity, because of other competing claims against those.

44. Sixth, as a countervailing factor, if the applicant is able to obtain progressive payment from the property of the MPF, there is a risk of insolvency affecting any recovery by the respondent of any overpayment, if it is ultimately determined that the applicant is not entitled to the indemnity it claims. The applicant is a company being wound up in insolvency.

45. I also note that if the applicant is successful in defending the receiver's claim, it will also have a right to apply for an order that the receiver pay its costs of the proceeding to be funded from the property of the FMIF.

The nature of the application for the indemnity sought

46. A starting point for discussion of the application for indemnity for costs is that the respondent submits that it is brought prematurely.

47. The right of indemnity, called a right of exoneration or a right of recoupment,^[6] is one that a trustee has against the trust property for a liability or expense properly incurred as trustee. It is a personal right that is supported by a proprietary right in the form of lien or charge over the trust property to the extent of the right of indemnity.^[7]

48. Oftentimes, when a trustee is sued in relation to a trust, it is appropriate for the trustee to apply for judicial advice as to whether the trustee is justified to defend the proceeding, so as to obtain the protection of the court’s order against any subsequent question as to whether the trustee has discharged the trustee’s duty.^[8]  The High Court has said of a provision equivalent to s 96 of the Trust Act 1973 (Qld) (“TA”) that:

“A necessary consequence of the provisions … 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. In deciding that question a judge must determine whether, on the material then available, it would be proper for the trustee to defend the proceedings.”^[9]

49. The respondent has obtained such an order for its defence of the receiver’s claim.

50. But this application by the applicant is not brought for judicial advice. The applicant is not the trustee of the MPF. That is the respondent. The applicant does not seek the Court’s advice as to whether to defend the proceeding on behalf of the MPF. It is doing so irrespective of the Court’s view.

51. Instead, the application is brought to establish the claimed right to indemnity for the applicant’s costs payable to the law practice acting for it to defend the receiver’s claim. The applicant is not the trustee defending the trust property, as such. The respondent is defendant to the receiver’s claim as the current trustee of the MPF.

52. The application is for quia timet relief, to a significant extent. It is brought on the footing that both the costs incurred to date and the costs to be incurred in the future are costs for which the applicant is entitled to indemnity before the proceeding is resolved.

53. Neither of the parties came to grips with this point fully in the context of an application by a former trustee.

54. The applicant relied on cases that support the fifth principle stated above that the right of indemnity that arises when a liability is properly incurred as trustee while holding the office is not lost because the trustee ceases to hold the office.^[10]  The respondent, likewise, relied on cases referring to the effect of loss of office upon an accrued liability for which there is a right of indemnity.^[11]  However, in each of the cases referred to, the right to indemnity had arisen while the trustee held office.

55. It assists analysis to first consider whether as a former trustee the applicant’s costs would be recoverable after the event on the assumption that the applicant is successful in its defence of the proceeding? If there is such a right of indemnity, the second question is whether a former trustee is entitled to the right of indemnity before the claim in the proceeding is decided?

Indemnity of a former trustee

56. The applicant relied upon s 72 of the TA.  It provides that:

“A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.”

57. Section 72 is derived from s 31 of the Law of Property Trustees Relief Amendment Act 1859 (Imp). 

58. However, the applicant is no longer a trustee and was not a trustee when any of the expenses of the costs of defending the proceeding were incurred.^[12]  The definition of “trustee” in s 5 of the TA is inclusive, but does not provide or indicate that a former trustee is a trustee within the meaning of that Act.  That construction is supported by the context that s 80(3) of the TA specifically refers to a “former… trustee” and more generally that, in some provisions of the Act, it would be inappropriate for the term “trustee” to include a former trustee.

59. In the particular context of s 72, in my view, the word “trustee” should not be construed to include a former trustee. Section 72 assumes that the trustee is in possession of the trust property. It permits and protects the trustee in reimbursing himself or herself or in paying or discharging out of the trust property. The applicant is not seeking a declaration that it is entitled to reimburse itself out of the trust property or to make a payment out of the trust property or make a discharge out of the trust property. It is seeking an order that the respondent as trustee indemnify the applicant out of the trust property.

60. Apart from s 72, in equity, a trustee’s right of indemnification from trust property “against all his proper costs charges and expenses incident to the execution of the trust… includes costs, charges and expenses properly incurred in litigation relating to the trust estate.”^[13]

61. Historically, discussion of that right often begins with Worrall v Harford,^[14] where Lord Eldon said:

“It is in the nature of the office of a trustee, whether expressed in the instrument, or not, that the trust property shall reimburse him all charges and expenses incurred in the execution of the trust.”^[15]

62. But the question here, so far as the applicant is concerned, is whether a former trustee who is sued personally by a third party for their liability in connection with a transaction effected when the former trustee was acting as trustee on behalf of the trust estate, is entitled to an indemnity from the trust property, in particular for their costs of defending the suit.

63. The right to indemnity by way of reimbursement stated by Lord Eldon and considered and restated on so many occasions in subsequent cases is one implied or imposed by equity. The parties did not make any detailed submissions as to the principles that inform its availability in the case of a former trustee, beyond reference to the cases previously noted.

64. The leading statement in this Court relied upon was that made in Belar Pty Ltd (in liq) v Mahaffey,^[16] that:

“The trustee’s right of indemnity out of the trust assets is in the nature of a charge or lien in favour of the trustee and as such takes preference or priority over claims by the cestuis que trust. But of course when the assets have passed out of a trustee’s possession the necessary claim for a trustee’s indemnity should be made against the new trustee. An unco-operative new trustee who declined to exercise the powers to recover trust property in the hands of the beneficiaries could be made a defendant, and orders could be made which would in effect permit the former trustee to exercise such powers by subrogation.”^[17]

65. An important consideration is that a trustee’s right to an indemnity can extend to the liability of a trustee to pay damages to a third party. In Bennet v Wyndham,^[18] trustees were liable to pay damages and costs to a third party for what might be recognised now as the vicarious liability of an employer for the negligence of an employee.  Although the employee had acted negligently, the trustees had acted without any personal fault.  The trustees were held to be entitled to an indemnity from the trust property for the liability to the third party and their costs of the proceeding.

66. It is trite that the vicarious liability of a principal or employer for the tort of an agent or employee accrues when the third party is injured or suffers loss or damage. If the principal or employer is a trustee, the relevant trustee is the trustee at that time. In principle, a trustee’s vicarious liability at law to a third party for damages in tort, incurred without fault on the part of the trustee, is supported from that time by the trustee’s right of indemnity from the trust estate.

67. Where a third party brings a claim for damages in tort against a trustee (before removal), at least from the time of Lord St Leonard’s Act,^[19] in the ordinary course, the trustee would seek judicial advice as to whether it would be justified in defending the proceeding and, with the benefit of that advice exercise the right to an indemnity against the trust property for its costs, either under a statutory equivalent of s 72 of the TA or in equity.^[20]  It must be remembered that the right of exoneration or recoupment so exercised is to discharge an existing liability for costs as an expense incurred or paid properly as trustee in defending the trust property.

68. Still, if that analysis is right, the principle that the right to indemnity is not lost by the removal of the trustee should lead to the result that it is immaterial that the trustee is a former trustee when the relevant proceeding is started against it. The former trustee’s liability to a third party upon a cause of action in tort is not transferred to a new trustee. The former trustee remains liable to the third party at law. In principle, the implied right to an indemnity should still support the former trustee’s liability to the third party.

69. On that basis, the trustee is entitled to an indemnity against that liability either from the time when the liability accrues or at least the time when judgment is given against them. In Coates v McInerney,^[21] Anderson J put it thus:

“Any right of indemnity would arise upon the liability arising and the question is whether that right of indemnity, arising at that time, that is to say, during the holding of the office by the trustee at the time when the liability was incurred, is then lost by subsequent loss of office.”^[22]

70. A trustee’s liability for costs of defending a proceeding is treated differently from the liability for damages to the third party for some purposes. But none of the cases suggests that a former trustee entitled to an indemnity against the third party’s claim as a liability arising during the office of trustee is not entitled, as well, to an indemnity for the costs of reasonably defending the third party’s claim, simply because the liability for costs arises after the time of loss of the office.

71. In other words, in principle, the extent of the right of indemnity should not depend on whether the trustee at the time when the third party’s cause of action accrues is still the trustee when the third party brings a claim against it for damages in tort.

72. Of course, in the present case the receiver’s claim against the applicant upon the liabilities as former trustee of the MPF is not based on an alleged liability of a former trustee for damages in tort. It is for an order for compensation made under s 1317H of the CA. Each of the alleged causes of action against the applicant for a liability incurred “as trustee of the MPF” is for the “damage” suffered “by” the corporation or scheme. Each of them arose when the damage was “suffered”. In my view, the analogy between a trustee’s right of indemnity for any liability under s 1317H and a trustee’s right of indemnity for a liability for damages in tort is strong.

73. That conclusion is supported by the judgment of the Court of Appeal of NSW in Gatsios Holdings v Kritharas Holdings Pty Ltd (in liq).^[23]  It was held in that case that the liability of a trustee to a third party for damages for misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) was analogous to a liability in tort.^[24]

74. In my view, that reasoning leads to the conclusion that if the applicant had remained as trustee of the MPF and if the applicant as trustee would have had a right to an indemnity for the costs of defending the receiver’s claim based on the alleged liabilities as former trustee of the MPF, that right to indemnity was not lost upon the applicant being removed as trustee and the respondent being appointed as trustee in its place.

Power to order indemnity before the proceeding is decided

75. The next question is whether there is power to order that the respondent as trustee of the MPF indemnify the applicant upon its claim for an indemnity for the costs of the receiver’s claim before the issues in the proceeding are decided.

76. The applicant relied upon Frost v Bovaird.^[25]  Simplifying somewhat, in one of the proceedings dealt with in that case, the executors of a will successfully defended a family provision claim against the estate of the testator but were unsuccessful in defending other proceedings brought against the estate by creditors. The claimants appealed in each case. Because of the result of the proceeding brought by the creditors, the estate became insolvent.  A trustee in bankruptcy was appointed.  In advance of the hearing of the appeals, the executors sought an indemnity from the trustee in bankruptcy for their costs of responding to the appeals.  The trustee in bankruptcy sought judicial advice as to whether he was justified in paying the executors’ costs of defending the appeals as proper expenses. On appeal, it was held that it was proper to give the trustee in bankruptcy judicial advice that he was justified in paying the executors’ costs of the appeals.

77. Frost v Bovaird does not answer the question posed by the present case.   The respondent has not applied for judicial advice that it would be justified in paying the applicant’s costs.  In fact, the respondent denies the receiver’s allegation that the applicant is entitled to an indemnity from the trust property of the MPF for the applicant’s liability on the receiver’s claim for conduct “as trustee of the MPF”.   The issue is not raised as between the applicant and the respondent on the pleadings, but the respondent opposes any indemnity.

78. Nevertheless, one obvious assumption underlying Frost v Bovaird is that it may be appropriate for a trustee to obtain an indemnity for costs of defending the trust property against a claim by a third party, notwithstanding that the trustee may be unsuccessful, as were the executors in that case on the creditors’ claims.

79. That assumption is confirmed by other cases. Lightman J summarised the position of a trustee facing a claim by a third party in Alsop Wilkinson (a firm) v Neary.^[26]  Philip McMurdo J referred to Lightman J’s analysis recently in Stephens v Chee:^[27]

“The third [category], which [Lightman J] described as a “third party dispute“, is a dispute with persons, other than in the capacity of beneficiaries, in respect of rights and liabilities assumed by the trustees as such in the course of administration of the trust. In that third category, Lightman J said, trustees are entitled to an indemnity against all costs, expenses and liabilities properly incurred in administering the trust.”^[28]

80. The basis for that statement was explained by Lightman J thus:

“Trustees have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and accordingly to represent the trust in a third party dispute.”^[29]

81. That must mean that the costs of defending to protect the trust estate may be expenses incurred properly by a trustee even though the expenditure is ultimately wasted, if the defence was reasonably made and the expenses were, therefore, incurred properly. Not only that, the trustee may have a right of indemnity for such costs as expenses incurred properly even though the trustee is also defending its personal liability, and even on a question whether the trustee’s actions the subject of the proceeding were proper.^[30]

82. But there is no absolute right to an indemnity. In my view, it is sufficient for this case to recognise that where the indemnity is sought to reimburse the costs of defence, in particular, the expenses will not be expenses incurred properly or reasonably where the defence is not reasonable. Although there may be debate about the threshold of what is reasonable and the onus of proof when a trustee defends a proceeding without the benefit of first obtaining judicial advice in the nature of a Beddoe^[31] order, there is no question that a trustee’s right to indemnity for the costs of defending a proceeding is not absolute.

83. As a tool for analysis, let it be assumed that the applicant was still the trustee of the MPF and that it sought judicial advice as to whether it would be justified to indemnify itself from the property of the MPF for its costs of defending the receiver’s claim. The decided cases clearly show that whether there should be an indemnity before the issues raised against the trustee are resolved, depends on the nature of the case that is made against the trustee.

84. So, in Armitage v Nurse,^[32] it was held that where a beneficiary alleged fraud against a trustee, the right of the trustee to recoup themselves out of the trust fund should await until the action against them was discontinued or dismissed.^[33]  Similarly, in Walters v Woodbridge,^[34] where a beneficiary alleged that a trustee had acted in fraud of the beneficiaries in obtaining the Court’s approval of a compromise by the trustees, it was held that, because of the allegation of misconduct, no order could be made as to the costs of the trustee until the result of the proceeding was known.^[35]

85. In this context, it must be remembered that the informing principle is that the scope of the indemnity is for “charges and expenses are properly incurred by the trustee as an incident of [the] administration of the [trust] estate.”^[36]

86. In Frost v Bovaird,^[37] the Full Court of the Federal Court of Australia referred to the mechanism of judicial advice under the equivalent of s 96 of the TA as a “means whereby a trustee against whom misconduct is alleged may be able to have resort to the trust funds, pending the determination of that claim”, because where advice is given that the trustee would be justified in paying the costs as a properly incurred expense they would be protected later from being found liable for breach of trust.^[38]  Provided it is remembered that the protective effect of the judicial advice taken depends upon and is limited by the statement of facts on which it is based and that it does not bind a person who is not a party to the application, that may be accepted.  But, in any event, that mechanism is not available in this case.  The applicant is not a trustee applying for judicial advice.

87. For that reason, it is of no direct assistance to analyse Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand ^[39] for the purposes of this case.  It too was concerned with an application for judicial advice as to whether a trustee should be able to have resort to the trust funds pending determination of the case.

88. Notwithstanding the difficulties previously identified, I consider that the better view is that in some circumstances it may be possible for the Court to order an indemnity from the trust property before a proceeding to which the former trustee is a defendant is decided.

89. In my view, an analogous order that shows the width of the court’s power is an “advance costs order”. In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand, it was argued that the order of Megarry V-C in Re Dallaway (dec’d)^[40] was an “advance costs order”.^[41]   There can be a distinction between the usual form of a Beddoe order as to judicial advice and an order specifically authorising a trustee defendant to have resort to the trust property to discharge its costs of litigation from time to time.

90. In Re Dallaway (dec’d) the Vice-Chancellor analysed the nature of a Beddoe order for the costs of a trustee in defending a claim made by a third party to all of the trust property.^[42] An example is a claim to set aside a settlement. If the claim succeeds, there will be no trust property out of which the trustees could take their costs.  The court nevertheless has a discretion to take the costs out of the fund before handing it over to the successful litigants.^[43]  See also Evans v Evans,^[44] and Alsop Wilkinson (a firm) v Neary.^[45]

91. The analogy in the present case is that because there are questions of solvency of both the applicant and the respondent, an advance costs order would operate to permit the applicant to take its costs out of the fund, irrespective that it might subsequently be found that they are not expenses incurred properly or reasonably.

92. But given that the applicant is no longer the trustee of the MPF, there is no basis I can see by which the order sought by the applicant can be treated as some interlocutory order that may be reversed or treated as one made on account pending some further order. In any event, even where an “advance costs order” is made, the cases recognise a revocation of the order by further order might operate from the time of the further order for future costs not so as to retroactively invalidate the advance costs order.^[46]

93. As previously stated, the applicant, as a former trustee, cannot be seen to be seeking to preserve the property of the MPF as trustee in its defence of the receiver’s claim. It may be of assistance to consider the nature of the equitable right to an indemnity more broadly by reference to cognate principles in other legal contexts.

94. For example, it is not just a trustee who has an equitable right to an indemnity for expenses properly incurred. An agent has a similar right,^[47] as does an office holder of a corporation,^[48] including in some circumstances the expenses of running litigation.^[49]  The scope of the equitable principle is subject in the agency context to the contractual obligation and rights as agreed.^[50]  Even so, there is no suggestion of a quia timet right, arising before some of the relevant expenses are paid.

95. There is a recognised quia timet right in the context of the equitable doctrine of contribution as between co-sureties.  A co-surety who discharges more than their share of the obligation to the creditor may obtain an indemnity from a co-surety who has not done so.  The right to indemnity may include a share of the costs of successfully defending a proceeding brought by the creditor against the joint obligees.

96. In that context, at common law, a joint debtor and surety is obliged to discharge more than their proportion of the joint debt before they can bring a claim for contribution. Equity is more flexible, as was said by Starke J in McLean v Discount & Finance Ltd:^[51]

“At common law, no doubt, a surety could not maintain an action for contribution or money paid until he had actually paid more than his just proportion of the principal debt. But the authorities support the view that in equity the right to contribution can be declared before actual payment is made or loss sustained provided that such payment or loss is imminent. A judgment against a surety for the whole amount of the principal debt justifies such a declaration, as does the allowance of a claim by the principal creditor against the estate of a deceased surety. The apprehended loss or over-payment thus appears sufficiently imminent, and the court acts quia timet…” (citations omitted)^[52]

97. The form of order so made is derived from Wolmerhausen v Gullick.^[53] It was expressed in the following passage from the reasons in that case:

“I therefore declare the plaintiff's right to contribution, and direct that, upon the plaintiff paying her own share, the defendant … is to indemnify her against further payment or liability, and is, by payment to her or to the principal creditor or otherwise, to exonerate the Plaintiff from liability beyond the extent of her own share.”

98. This equity of exoneration obliges the defendant to discharge the plaintiff’s liability to the creditor either by indemnity to her or payment to the creditor.

99. But in such a case, the decision as to the plaintiff’s right to an indemnity is finally made. The declaration is based upon the facts as finally determined as between the plaintiff and the defendant as to the defendant’s obligation to exonerate the plaintiff. The only fact preventing judgment for a money sum is that the plaintiff has not yet paid more than her share.

100. In the present case, there has been no final determination of the applicant’s right to an indemnity from the property of the MPF as against the respondent as trustee representing the beneficiaries of the MPF. The question is only raised by this application.

Unresolved questions about expenses properly incurred

101. The respondent as trustee of the MPF disputes (as against the receiver) the entitlement of the applicant to any indemnity against the receiver’s claim. However, the parties did not seek to argue or to have found as a fact whether or not there was disentitling conduct by the applicant that might repel any right to indemnity.

102. Perhaps that is as well, because there may be some difficulty associated with establishing the legal requirements for a final determination of that question. The questions are illustrated by reference to two cases.

103. Up to this point, I have used the conventional expression that in equity a trustee is entitled to indemnity for legal costs in defence of a claim brought against the trustee where they are expenses incurred properly or reasonably. Where there is a Beddoe application and judicial advice is given that the trustee would be justified in defending the proceeding, the costs in a reasonable amount will be treated as paid incurred properly or reasonably, assuming the factual basis of the advice holds good.

104. But the related question whether there is an indemnity for the liability for tortious conduct as expenses incurred properly is not so easily answered. The question becomes what is the meaning of incurred “properly” or “reasonably”?

105. It will be recalled that in Gatsios the liability was for damages for misleading or deceptive conduct by the trustee and the costs of the proceeding brought against it by a third party.  The Court of Appeal was unable to agree upon what was an expense incurred properly in this context.  Two of the three Judges rejected that the requirement necessarily excluded a liability for misleading or deceptive conduct, and rejected the requirement that the liability must have been “properly incurred” as a test of exclusion of the right to indemnity.  Spigelman CJ said:

“‘The only question, therefore, is whether the executors’ conduct in this case has been such as to amount to a violation or culpable neglect of their duty.’

 I find this general approach more helpful than the use of conclusory terminology of whether or not conduct was ‘proper’ or ‘reasonable’ as if it were a test.”^[54]

106. Meagher JA said:

“Presumably if the activity which generated the liability in question were a breach of trust, the right to an indemnity under the general law would no longer exist; similarly if it were criminal in nature, but no criminal offences were charged against NKH, its associates or officers. Again, one must in principle incline to the view that if the activity in question had been fraudulent the law would withhold the right to indemnification; but in the present case Tamberlin J expressly negatived fraud. I find it difficult to formulate any other limitations.”^[55]

107. However, in Gatsios, the question was decided after the conclusion of the litigation brought against the trustee and upon the trustee’s right to an indemnity under the terms of the trust deed.

108. In the present case, that approach would require the determination of the application of and scope of cls 17.6 and 18.1(c) of the trust deed.

109. On the other hand, in Nolan v Collie,^[56] the Court of Appeal in Victoria virtually rejected the approach in Gatsios, in favour of the traditional formulation that indemnity extends to expenses “properly incurred”.  Ormiston JA, with whom the other members of the Court agreed, said:

“With the greatest of respect, it is by no means clear why a majority of their Honours in Gatsios Holdings seemed to sanction so significant a departure from accepted principle as to leave the trustee’s right largely unconstrained. It is possible that their views were prompted by the fact that the claim there in question resulted from a judgment obtained in an action in tort, which has always posed problems in relation to questions of indemnification. The form of their Honours’ discussion tends to make it unlikely that their intention was so limited, nor does it seem that the case depended, as it might have, on the terms of the trust deed, which appear to have been expressed benevolently towards the trustees. Again with respect, the majority’s views would appear to leave this important area of trust law rudderless and in a state where mischievous trustees might seize upon an almost unfettered right to indemnity as justifying improper depredations of trust funds, contrary to their obligation not to abuse their position by making it “a means of profit or benefit” to themselves.”^[57] (footnotes omitted)

110. This difference of opinion was referred to by the High Court in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand,^[58] but was not resolved then.   Nor has it been resolved since.

111. The parties made no submissions either recognising or as to the resolution of this uncertainty. The applicant submitted that whether it was entitled to an indemnity upon the application for indemnity for costs turns on whether its defence of the proceeding is expenditure that is reasonably as well as honestly incurred. The applicant also referred to the recent statement by Basten J in Warton v Yeo,^[59] referring to a passage from Ipp JA’s reasons in Macedonian Orthodox Church:

“Ipp JA… accepted that the general discretion should be subject to the approach adopted by Bowen LJ in In re Beddoe: Downes v Cottam that ‘trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness.’ Ipp JA noted that a similar approach had been adopted by the Full Court of the Federal Court in Adsett v Berlouis, identifying as the critical question ‘whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred.’”^[60]

112. But these statements all relate to a defence or proceeding by a trustee still charged with the responsibility of protecting the trust property. They were not about the extent of the right of indemnity of a former trustee defending a claim in the nature of tortious liability involving a fault element. In my view, it is unrealistic in the context of the present case to suggest that the question of any indemnity for costs can be separated from the indemnity for the underlying liability.

113. It seems to me that whatever be the correct approach, the resolution of the entitlement to the indemnity on the application for indemnity for costs in the present case requires a finding of fact on a final basis as to any conduct that might disqualify the applicant from an entitlement to that indemnity.

114. The applicant seeks to address this by submitting that the receiver does not allege fraud, negligence or breach of trust against the applicant. But, as against the receiver’s claim to subrogation to the applicant’s right of indemnity from the trust property, the respondent alleges that the applicant is not entitled to indemnity because if the applicant was a person involved in the contraventions by the directors, as alleged by the receiver:

1. the expenses (the liabilities alleged) were not reasonably incurred;

2. the applicant was not acting properly;

3. the applicant’s conduct was negligent or fraudulent.

115. The application for indemnity for costs is made on the basis that the applicant should be entitled to an order for indemnity without these questions being resolved. In my view, the application for indemnity for costs should not be decided in that way. The question of disentitling conduct affects both the applicant’s right to any indemnity for the receiver’s claim and the applicant’s right to an indemnity for costs.

Where an impugned act benefits the trust

116. I also observe that in Gatsios and Nolan reference is made to an alternative basis for a trustee’s right of indemnity to a finding that the relevant expense had been incurred not improperly or that otherwise there is no disentitling conduct, namely because the impugned act benefited the trust estate in any event.^[61]  Curiously, the respondent (not the applicant) relied on the reference to that principle in Nolan.  I will call it “the benefit principle”.

117. It is necessary to distinguish between the application for indemnity for costs and any indemnity for the liabilities as former trustee for the MPF. Within the meaning of the benefit principle, a claim by the applicant for indemnity against a liability for damages on the receiver’s claim might raise a question whether the impugned acts leading to that liability benefited the trust estate in any event. However, the applicant does not apply for an indemnity against that liability by the present application.

118. The applicant submitted that a reason why it should be granted the indemnity for costs is that it advances an additional defence or defences against the receiver’s claim for liabilities as former trustee for the MPF to that that raised by the respondent. My provisional view is that whether or not the applicant’s additional ground or grounds of defence are well taken does not make the act of raising those grounds an impugned act which has benefited the trust estate for the purposes of the benefit principle. However, since the contrary was not expressly argued, I will not consider it further.

Other grounds of opposition

119. It is strictly unnecessary to decide other questions raised by the respondent in opposition to the application in order to decide it. Having regard to the essentially interlocutory stage of the principal proceeding at which the application has been brought, it is not appropriate to consider them further.

Conclusion

120. In my view, for those reasons, and having regard to the nature of the receiver’s claim against the applicant for the liabilities as former trustee for the MPF, as previously discussed, the present case is not one in which an order of the kind sought by the applicant should be made, even if in other circumstances such an order could be made in favour of a former trustee.

121. Because of that conclusion, in my view, the application should be dismissed.