FEDERAL COURT OF AUSTRALIA Weston v Hacker [2014] FCA 86 Citation: Weston v Hacker [2014] FCA 86 Parties: PAUL GERARD WESTON v SUSANNE HACKER (AKA SUSANNAH HACKER, SUSIE HACKER, SUSIE SHOSHANNA GISELA AND SUSANNAH SHOSHANNA GISELLA HACKER) File number: NSD 750 of 2013 Judge: COWDROY J Date of judgment: 18 February 2014 Catchwords: EQUITY – claim by bankrupt in devastavit against trustee in bankruptcy in the Supreme Court of New South Wales – whether direction under s 134(4) of the Bankruptcy Act 1966 (Cth) should be made justifying the use of trust funds by the trustee to defend the devastavit claim Legislation: Bankruptcy Act 1966 (Cth) ss 134, s 153A, 183, Trustee Act 1925 (NSW) s 63 Cases cited: Adsett v Berlouis (1992) 37 FCR 201 Alsop Wilkinson (a firm) v Neary [1995] 1 All ER 431 Bovaird v Trustee of the Bankrupt Estate of Frost (2010) 118 ALD 263 Donnelly (Trustee), Re Hancock v Porteous [2002] FCA 607 Drummond v Drummond [1999] NSWSC 923 Frost v Bovaird (2012) 203 FCR 95 Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 McDonald v Horn [1995] 1 All ER 961 Miller v Cameron (1936) 54 CLR 572 Re Ladyman (1981) 38 ALR 631 Re Lofthouse (2001) 107 FCR 151 Re Weber (2006) 154 FCR 80 Sutherland (In the Matter of Scutts) [1999] FCA 147 Date of hearing: 25 November 2013 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 23 Counsel for the Applicant: Mr J Baird Solicitor for the Applicant: Goldrick Farrell Mullan Counsel for the Respondent: Mr M Sneddon Solicitor for the Respondent: Carrolls Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 750 of 2013 BETWEEN: PAUL GERARD WESTON Applicant AND: SUSANNE HACKER (AKA SUSANNAH HACKER, SUSIE HACKER, SUSIE SHOSHANNA GISELA AND SUSANNAH SHOSHANNA GISELLA HACKER) Respondent JUDGE: COWDROY J DATE OF ORDER: 18 FEBRUARY 2014 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The interlocutory application filed 14 November 2013 ('the interlocutory application') be dismissed. 2. The Applicant pay the costs of the Respondent in respect of the interlocutory application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 750 of 2013 BETWEEN: PAUL GERARD WESTON Applicant AND: SUSANNE HACKER (AKA SUSANNAH HACKER, SUSIE HACKER, SUSIE SHOSHANNA GISELA AND SUSANNAH SHOSHANNA GISELLA HACKER) Respondent JUDGE: COWDROY J DATE: 18 FEBRUARY 2014 PLACE: SYDNEY REASONS FOR JUDGMENT 1 Before the Court is an interlocutory application ('the interlocutory application') filed on 14 November 2013 by a trustee in bankruptcy for directions that he would be justified in using the funds of the estate of which he is the trustee to defend a claim in devastavit made against him in his capacity as trustee. BACKGROUND 2 On 5 December 2008 the applicant ('the trustee') was appointed as the trustee of the bankrupt estate ('the estate') of the respondent ('Ms Hacker'). Ms Hacker was discharged from bankruptcy on 9 April 2012 following the sale of certain real estate and the payment in full of all creditors to the estate. Substantial assets remain to the estate's credit. 3 On or about 2 July 2012, solicitors for the trustee sent a deed of release to the solicitors for Ms Hacker. Such deed, if executed, would have released the trustee from all claims in respect of his administration of the estate, including the sale of Ms Hacker's real estate. After some delay in responding, Ms Hacker opposed the release and alleged that the trustee had been guilty of waste in the administration of the estate. 4 By an application filed on 6 May 2013, the trustee applied for an order under s 183 of the Bankruptcy Act 1966 (Cth) ('the Act') that he be released from his trusteeship of the estate, and that his costs be paid out of the estate ('the release application'). Ms Hacker opposed the application. 5 The proceedings were adjourned on 12 August 2013. Such adjournment was granted conditional upon Ms Hacker commencing proceedings against the trustee in relation to her claims against him, including a claim in devastavit, within 14 days. Ms Hacker duly commenced proceedings on 29 August 2013 in the Supreme Court of New South Wales ('the Supreme Court'): proceedings number 2013/262627 ('the devastavit proceedings'). The release application in this Court now remains adjourned pending the determination of the devastavit proceedings. 6 By his interlocutory application, the trustee seeks a direction pursuant to s 134(4) of the Act that he would be justified in using the funds in the estate to meet the legal costs on an ongoing basis of properly defending the devastavit proceeding. He also seeks an order that the costs of the interlocutory application be paid out of the estate. CONSIDERATION 7 Section 134(4) of the Act provides that a 'trustee may at any time apply to the Court for directions in respect of a matter arising in connexion with the administration of the estate'. Such provision is of a similar nature to that contained in s 479(3) of the Corporations Act 2001 (Cth), which authorises a liquidator to 'apply to the Court for directions in relation to any particular matter arising under the winding up': Sutherland (In the Matter of Scutts) [1999] FCA 147 at [14]. Whilst there is no question that the trustee was entitled to make the interlocutory application in view of the devastavit proceeding against him, Ms Hacker correctly observes that the trustee has not sought judicial advice as to whether it is appropriate for him to defend the devastavit proceedings. This may be due to the principle that the Court will not give an advisory opinion in the form of a direction: Donnelly (Trustee), Re Hancock v Porteous [2002] FCA 607 at [17]. 8 The purpose of the direction sought is only to protect the trustee from liability to Ms Hacker for using the funds of the estate to defend the devastavit proceedings. Should the direction be given, it will operate as an indemnity to the benefit of the trustee. However, the procedure under s 134(4) is not an appropriate method to determine the substance of Ms Hacker's claim in devastavit: Re Weber (2006) 154 FCR 80 at [2]; Re Lofthouse (2001) 107 FCR 151 at [9]. 9 In Alsop Wilkinson (a firm) v Neary [1995] 1 All ER 431 ('Alsop Wilkinson') at 434–435, Lightman J considered three kinds of disputes in which trustees might become involved. The second such category concerned a 'beneficiaries dispute' in which beneficiaries challenge the present or future conduct of the trustee. The devastavit proceeding falls squarely within this category. Lightman J noted at 435 that such disputes are generally 'regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate': see also McDonald v Horn [1995] 1 All ER 961 at 971. 10 A similar direction to that sought in the present case was applied for in Frost v Bovaird (2012) 203 FCR 95 ('Frost'). That case in part concerned a devastavit proceeding in the Supreme Court commenced against executors of a bankrupt deceased estate by two beneficiaries of that estate. The executors sought their legal costs in defending the devastavit proceeding from the trustee in bankruptcy. In turn, the trustee sought a direction from this Court under s 134(4) of the Act that he was justified in indemnifying the executors' legal costs of, inter alia, the devastavit proceeding out of the funds of the bankrupt estate. 11 Having found at [68] that the devastavit proceeding in Frost should be treated as falling within the second category of trustee disputes identified by Lightman J in Alsop Wilkinson, Jacobson, Siopis and Nicholas JJ stated at [70] the general rule that 'a trustee will not be able to rely upon the right of indemnity in respect of legal costs incurred in protecting only his or her personal interests': see also Miller v Cameron (1936) 54 CLR 572 at 578–579; Drummond v Drummond [1999] NSWSC 923 at [47]. 12 There are two relevant exceptions to that general rule. First, a trustee against whom misconduct is alleged may be entitled to have his or her legal costs paid from the estate where a court finds at the trial of the action, or afterwards, that the trustee acted properly in defending the action against him or her, or where the trustee is absolved of any wrongdoing: Frost at [71]. Such exception is not yet relevant to the present application, but may arise in the course of the devastavit proceeding or after it concludes. 13 The second exception arises where, prior to trial of the action against the trustee, that trustee obtains judicial advice authorising the use of trust funds to pay legal costs incurred in defending the action, pending determination of the action itself: Frost at [74]. This follows from the fact that a trustee, confronted with an allegation of misconduct by a beneficiary, may apply to the Supreme Court for judicial advice under s 63 of the Trustee Act 1925 (NSW) ('the Trustee Act'): Frost at [75], citing Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. Whether a trustee will succeed in obtaining such advice will depend upon the circumstances of the case: Frost at [76]. 14 Jacobson, Siopis and Nicholas JJ in Frost dismissed an appeal against the primary judge's decision to refuse an indemnity to the trustee. Their Honours decision was based on a number of factors, relevantly including that: a) There was no evidence that the executors had sought or obtained judicial advice under the Trustee Act in relation to the conduct of their defence of the devastavit proceeding: at [81]; and b) There was no attempt by the executors to address the allegations of misconduct in the devastavit proceeding to show that there were strong prospects of either the devastavit claim being dismissed or an order being made recognising the entitlement of the executors to use the trust funds to pay their legal costs in defending the claim: at [83]. 15 The consideration of these factors is not necessarily determinative in the exercise of the Court's discretion to give a direction to indemnify the legal costs of a trustee. However, they are relevant to the present application for the follow reasons. 16 First, the trustee has not sought judicial advice from the Supreme Court under the Trustee Act when the issue of whether he ought to defend the devastavit proceedings tends against the exercise of the Court's discretion in the trustee's favour. 17 Secondly, and in the Court's opinion of greater weight in the present circumstances, is the nature of the allegations of misconduct made against the trustee in the devastavit proceeding. Ms Hacker alleges that the trustee caused waste, default or neglect in his control of several properties owned by her which formed part of the estate when the sequestration order was made. Such conduct is said to constitute a breach of the obligations of the trustee at general law by reason of him being a trustee. Ms Hacker also alleges that the trustee contravened s 153A of the Act by failing to apply for a statutory annulment of her bankruptcy at an earlier time. As a result, Ms Hacker seeks damages, equitable compensation and an inquiry into the conduct of the trustee. 18 The trustee submitted before this Court that such allegations are misconceived for two reasons. First, a devastavit claim cannot be brought against a trustee in bankruptcy. Secondly, the trustee was subject to statutory duties under the Act, but not duties under general law. The trustee foreshadows an application to the Supreme Court pending the resolution of the present application to have the devastavit claim struck out as disclosing no reasonable cause of action. 19 Ms Hacker's claim is unusual in that it is made against a trustee in bankruptcy. The Court is not aware of, and was not referred to, any prior decisions considering such a claim. That is not to say that such a devastavit claim cannot be successful; indeed the Court has not had the benefit of argument on that point. Traditionally however, devastavit suits are brought against the executor of an estate: see Bovaird v Trustee of the Bankrupt Estate of Frost (2010) 118 ALD 263 at [19]–[20]. 20 It is less clear why the trustee submits that he was not under any duties at general law. In Adsett v Berlouis (1992) 37 FCR 201, Northrop, Wilcox and Cooper JJ observed at 209 that a trustee in bankruptcy is governed by the general law relating to trustees save for where the position of the trustee is modified by the Act or the subordinate rules: see also Re Ladyman (1981) 38 ALR 631 at 643. Again however, the Court has not had the benefit of argument on this issue. 21 In these circumstances, the Court considers that it is premature to direct that the trustee may use the funds of the estate to pay for his ongoing legal costs in defending the action in devastavit against him. The information before the Court is insufficient to displace the usual rule that the trustee cannot rely upon the right of indemnity in respect of legal costs incurred in protecting his or her personal interests. Although the nature of the devastavit proceeding is unusual, the issues should be ventilated at the hearing in the Supreme Court or on the foreshadowed application of the trustee to have the devastavit proceeding struck out. This is especially so in circumstances where the trustee has not sought or received judicial advice under the Trustee Act as to whether it is proper for him to defend Ms Hacker's statement of claim. 22 A further question is whether the trustee in the present case is entitled to seek to rely on the second exception outlined at [13] above given that he has not sought judicial advice from the Supreme Court under the Trustee Act. Ms Hacker did not raise this issue, but rather explicitly accepted that the trustee may have sought judicial advice as to whether he ought to defend the devastavit proceedings under s 134(4) of the Act. The Court is not persuaded that this is necessarily so, especially in light of the authorities that the Court will not give an advisory opinion in the form of a direction: see [7] above. As the Court has declined to exercise its discretion to give the direction sought by the trustee, it is not necessary to further consider or resolve this question. 23 It follows that the trustee's application is dismissed with costs. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cowdroy. Associate: Dated: 18 February 2014