Park & anor v Whyte

This matter concerned an application by the liquidator of the responsible entity for a managed investment scheme for indemnity from the property of the fund for legal costs incurred in defending a third party proceeding. Jackson J was required to determine whether a “balance amount order” should be made, which would have resulted in the liquidator only being able to recoup any balance unpaid in respect of the legal costs incurred after recovering any amount recoverable under a costs order made in its favour against the third party. Jackson J concluded that there was no principle or rule that required the making of a “balance amount order”.

Jackson J

28 February 2020

LM Investment Management Ltd (“LMIM”) was the responsible entity for several registered managed investment schemes, including the LM First Mortgage Income Fund (“FMIF”). It went into liquidation. [1]. The first applicant, Mr Park, is the liquidator of LMIM while the first respondent, Mr Whyte, is the person appointed to supervise the winding up of FMIF. [2]. EY, which had been auditor of FMIF, made claims in the winding up of LMIM. [1]. In this application, Mr Park and LMIM sought orders that Mr Whyte pay two sums from the property of the FMIF to indemnify both applicants against legal expenses incurred in connection with claims made by EY. These amounted to:

(1)  $9,971.06 for the liquidators’ legal costs of assessing a proof of debt by EY to LMIM for audit of the FMIF; and

(2) $88,676.21 for legal costs incurred by LMIM in defending a third party proceeding brought by EY against LMIM (as to which see [2018] QSC 226; [2018] 42 QLR, 13–14; [2019] QSC 246; [2019] 42 QLR, 5–6). [1]

There was no dispute about whether the expenses were properly and reasonably incurred. [3]. However, LMIM had a costs order in its favour against EY in respect of the second sum ([4]; see [2019] QSC 258) and, because of it, Mr Whyte submitted that the Court should make a “balance amount order” in relation to the second sum. This would have the effect that the applicants could only recoup any balance unpaid in respect of the second sum after Mr Park had recovered any amount recoverable under the EY costs order. [5].

After reviewing the orders previously made in respect of indemnity from the property of FMIF ([6]–[7]), Justice Jackson held that the first sum came within those orders, but that the second sum did not. [8]. Despite this, it was accepted by Mr Whyte that LMIM was entitled to an indemnity for the second sum ([9]) on the basis that it was an amount properly the subject of either a trustee’s right of indemnity for expenses properly incurred or the personal right of a liquidator of a corporate trustee to be indemnified for expenses incurred in preserving the trust property. [11].

Justice Jackson turned to consider whether the “balance amount order” sought by Mr Whyte should be made. His Honour referred to several authorities that impliedly had this effect. [15]–[17]. It was submitted that these were informed by the principle in Cherry v Boultbee (1839) 4 My & Cr 442; 41 ELR 171; (1838) 2 Keen 318; 48 ER 651 – that where a party that is entitled to payment from a fund is required to contribute any amount owed to the fund before it is paid from the fund, the right to payment is only for the net amount. [19].

According to Jackson J, there was a “plain difficulty” in applying that principle to this case. Although any amount paid by EY under the costs order would reduce the indemnity LMIM was entitled to from the property of FMIF, that did not make it an amount LMIM was obliged to contribute to the property of FMIF. [19]–[20]. LMIM would hold the benefit of the costs order on trust for FMIF if it was exonerated for the second sum from the property of FMIF and, once this was accepted, there was no reason in principle to make a “balance amount order”. [24]. Even if indemnified, LMIM would still have an obligation to recover the benefit of the cost order as trust property and, if it did not, Mr Whyte as receiver of the assets of FMIF could sue to recover the costs from EY in LMIM’s name. [22]–[23].

Justice Jackson opined that if the “balance amount order” was made, LMIM would bear at least the financing risk of paying for its legal costs and seeking payment under the costs order before it received indemnity. [25].

Finally, upon reviewing the authorities in which “balance amount orders” had been made, Jackson J noted that although a trustee is required to credit the trust property for any benefit received under a costs order against a third party where the trustee has exonerated itself for those costs from the trust property ([32]), there was no “general rule” or “identifiable principle” that required the entitlement to indemnity in this case to be subject to a “balance amount order”. [31]–[36]. This was consistent with the underlying purposes of the principle in Cherry v Boultbee. [37]–[38].

In the result, Jackson J ordered that the sums be paid to the applicant from the property of FMIF, with the costs of both the applicants and respondent also paid from the property of FMIF.

S Walpole