Park & Muller (liquidators of LM Investment Management Ltd) v Whyte No 3

This application, as distinct from the previous matter, was brought by the liquidators of LMIM, on the basis that the applicants were entitled to an indemnity from the company being wound up for certain expenses incurred by them. His Honour rejected the view that a trustee’s obligation to make good a default is a condition precedent to the right to an indemnity, although accepted that any counter-liability could be set off against the indemnity. His Honour held that the “clear accounts rule” operated to suspend the claimed right to payment from the assets until the resolution of the proceedings in which breaches of trust or duty were alleged.       

Jackson J

17 October 2017

This matter concerned an application by the liquidators of LM Investment Management Ltd (“LMIM”) in that capacity or LMIM as the responsible entity of the registered management investment scheme, First Mortgage Investment Fund (“FMIF”), to be paid amounts from the property of the FMIF. [1]. The basis of the application was that the applicants were entitled to an indemnity from the FMIF for those amounts as expenses. [2].

Section 72 of the Trusts Act 1973 provides that a trustee’s right of indemnity is to expenses “reasonably incurred” and s 601GA(2) of the Corporations Act 2001 (Cth) provides that a responsible entity’s right to indemnity is available “only in relation to the proper performance” of the responsible entity’s duties. [18].

Jackson J noted that “the starting point under the unwritten law is often stated to be that a liability or expense is properly incurred if it is not improperly incurred” but that does nothing to explain the limits of properly incurred. [20]. However, his Honour said that this formulation “does nothing to explain the limits of what is proper or not improper”. [20]. Similarly, the statement that “properly incurred means reasonably as well as honestly incurred” does not explicate the relevant considerations. [20].

The first category of costs claimed concerned the legal costs of an unsuccessful appeal by LMIM against orders made by another judge of the Court. The applicants submitted that the costs of the appeal were an expense properly incurred. [37]. In opposition it was said that a “trustee acts at its own risk, where it starts or prosecutes a legal proceeding as trustee without an order of the court that the trustee would be justified in doing so, commonly known as a ‘Beddoe order’”. [46].

The applicants sought to rely on r 700 of the Uniform Civil Procedure Rules 1999 which provides that where a party sues or is sued as trustee “[u]nless the court orders otherwise, the party is entitled to have costs of the proceeding … paid out of the fund held by the trustee”. [49]. Jackson J noted first, that r 700 was “a rule of court which has the status of delegated legislation” – it could not, therefore, affect the operation of s 72 of the Trusts Act, nor s 601GA(2) of the Corporations Act. [51]. Secondly, after analysing the history of r 700, his Honour concluded:

“In my view, r 700 operates in relation to legal costs of a proceeding so that a trustee is entitled to those costs from the fund held on trust unless the court otherwise orders. However, the considerations by which the court might otherwise order include those in Beddoe … Rule 700 does not affect the provision in s 72 of the [Trusts Act] that the trustee’s entitlement to an indemnity is limited to expenses reasonably incurred, meaning properly incurred.” [56].

In the result, his Honour was not satisfied that the circumstances “justified bringing an arguable appeal at the likely expense of the trust property, if the appeal were unsuccessful, as an expense properly incurred”. [86]. The circumstances included: (i) the applicants were not required to appeal the primary judge’s orders to protect their own position; (ii) the applicants did not obtain a Beddoe order; and (iii) “the thrust of the appeal consisted of many challenges made by the applicants to findings of the primary Judge that were made adversely to the first applicants’ conduct of the administration” and although the applicants had an interest in the findings, the members of the FMIF did not.

His Honour also found that the second category of expenses (liability insurance premiums), the third category (legal costs related to production of books and records of LMIM), and the fourth and fifth categories (costs of the assessments of the applicants’ legal costs) were properly incurred. [96], [105], [114], [123]. 

The respondent to the application argued that “no order should be made in favour of LMIM’s indemnity claims … because of the operation of the principle described as the ‘clear accounts rule’.” [124]. The respondent argued that LMIM’s right to an indemnity was subject to a “reduction to account for a counter-liability for the amount of loss suffered by reason of breaches of trust or duty”. [125].

Jackson J rejected the view that a trustee’s obligation to make good a default is a condition precedent to the right to an indemnity. [138]–[139]. Rather his Honour approved the view that the counter-liabilities are to be applied (ie set-off) against each other and the trustee is entitled to any excess in its favour. [138]. This may mean, however, that “the net amount of the right to an indemnity will not be capable of ascertainment until the amount of the loss caused by the breach of trust that is the basis of the counter-liability can be established”. [140]. Accordingly, his Honour held that, in the present case, the clear accounts rule operated to “suspend” the claimed right to payment from the assets until the resolution of the proceedings in which breaches of trust or duty were alleged. [143].

As a means of avoiding the operation of the clear accounts rule, the first applicants also claimed an order for direct payment of the expenses incurred by them (“as a mirror of LMIM’s indemnity claims”) from the property of the FMIF. [144]. The basis of the claim was the same as that made in Park & Muller (liquidators of LM Investment Management Ltd) v Whyte No 2, which is summarised above. In the result, Jackson held that there should be an order that the expenses properly incurred were to be paid from the property of the FMIF.

J English