Reported Decision : (2001) 38 ACSR 57 New South Wales Supreme Court CITATION : Nick Kritharas Holdings Pty Ltd (In Liq) v Gatsios Holdings Pty Ltd [2001] NSWSC 343 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 3132/00 HEARING DATE(S) : 28 August, 2 & 10 November and 1 December 2000 JUDGMENT DATE : 3 May 2001 PARTIES : Nick Kritharas Holdings Pty Ltd (In Liq) (P) Gatsios Holdings Pty Ltd (D) JUDGMENT OF : Hamilton J COUNSEL : M B Evans (P) B A J Coles QC and J T Johnson (D) SOLICITORS : Australian Government Solicitor (P) Conway Leather Shaw (D) CATCHWORDS : CORPORATIONS [118] - Management and administration - Directors and other officers - Liability for officers' acts - Other matters - Whether trustee corporation "at fault" by reason of acts of director and manager for purpose of exercise of right of indemnity against trust fund in respect of tort or contravention of consumer protection provisions of Trade Practices Act 1974 (Cth) - EQUITY [171] - Trusts and trustees - Powers, duties, rights and liabilities of trustees - Indemnity, lien and reimbursement - General principles - Damages awarded against trustee for breach of consumer protection provisions of Trade Practices Act 1974 (Cth) - Trustee claims indemnity - Relevant considerations. LEGISLATION CITED : Trade Practices Act 1974 (Cth) ss 52, 59, 82 Trustee Act 1928 s 59(4) ACCC v Top Snack Foods Pty Ltd [1999] FCA 752 Benett v Wyndham (1862) 4 De G F&J 259; 45 ER 1183 Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 Commissioner for Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 In re Gulbenkian's Settlements [1970] AC 508 In re Raybould. Raybould v Turner [1900] 1 Ch 199 J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 Re UEB Industries Ltd Pension Plan [1992] 1 NZLR 294 CASES CITED : State Bank of New South Wales Ltd v Currabubula Holdings Pty Ltd [2001] NSWCA 47 TPC v Tubemakers of Australia Ltd (1983) 76 FLR 455 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 Universal Telecasters (Qld) Ltd v Guthrie (1978) 32 FLR 360 Walplan Pty Ltd v Wallace (1986) 8 FCR 27 Worrall v Harford (1802) 8 Ves Jun 4; 32 ER 250 H A J Ford, "Trading Trusts and Creditors' Rights" (1981) 13 MULR 1 H A J Ford and W A Lee, Principles of the Law of Trusts (3rd ed 1996) Ch 14 A W Lockhart, "Trading Trusts: An Examination of Trustees Liability and Creditors' Rights (1986) 5 Auckland L Rev 313 The Hon Mr Justice B H McPherson, "The Insolvent Trading Trust", in P D Finn, Essays in Equity (1985) 142 R P Meagher and W M C Gummow, Jacobs' Law of Trusts in Australia (6th ed 1997) [801], [2104] Miller's Annotated Trade Practices Act 2001 (22nd ed) [1.52.5] IIIA Scott on Trusts (4th ed 1988) ss 244 - 247 DECISION : Plaintiff entitled to indemnity out of trust estate. IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J THURSDAY, 3 MAY 2001 3132/00 NICK KRITHARAS HOLDINGS PTY LTD (IN LIQ) v GATSIOS HOLDINGS PTY LTD JUDGMENT 1 These proceedings are to determine whether or not the plaintiff (a company now in liquidation) as trustee of the KN Trust ("the trust") is entitled to be indemnified or exonerated out of the assets of the trust in respect of a judgment obtained against it (amongst others) from Tamberlin J in the Federal Court of Australia. The judgment was in ACCC v Top Snack Foods Pty Ltd [1999] FCA 752 and was for damages for breaches of the consumer protection provisions of the Trade Practices Act 1974 (Cth) ("the TPA"). These proceedings were originally brought by the liquidator of Nick Kritharas Holdings Pty Ltd (in liq) ("NKH") as plaintiff, but subsequently all parties were agreed that the company rather than the liquidator was the appropriate plaintiff and the situation was remedied by the filing of an amended summons on 16 August 2000. Rather curiously, the statement of claim and defence filed subsequently reverted to the incorrect plaintiff and this should now be remedied by amendment. 2 The nature and circumstances of the claim are made plain in the following allegations made in the statement of claim: "3 At all material times until 20 November 1996 NKH was the trustee of the KN Trust and held the property of that trust as trustee for beneficiaries thereof. PARTICULARS (a) KN Deed of Discretionary Trust dated 30 April 1993. 4 On 20 November 1996 NKH was removed as trustee of the KN Trust and GHPL was appointed as trustee of the KN Trust in its place. PARTICULARS (a) Deed of Removal and Appointment of New Trustee, appointing GHPL as trustee, dated 20 November 1996. 5 NKH, as trustee of the KN trust held half of the issued units in the Top Snack Foods Unit Trust and the Top Snack Enterprises Unit Trust, together with Adway Holdings Pty Limited ('Adway') which held the other units in the said unit trusts. The Top Snack Foods Unit Trust and the Top Snack Enterprises Unit Trust carried on a business known and styled as 'Top Snack Foods'. 6 In its capacity as unitholder in the Top Snack Foods Unit Trust and the Top Snack Enterprises Unit Trust, and by virtue of its partnership with Adway in the business known and styled as 'Top Snack Foods' NKH engaged in the activities of the said business in its capacity as trustee of the KN Trust. 7 While engaged in the activities of the Top Snack Foods business NKH engaged in conduct which was misleading and deceptive in breach of s 52 of the Trade Practices Act 1974 (Cth). PARTICULARS (a) See judgment of Tamberlin J of 4 June 1999 in proceedings NG 782 of 1996 in the Federal Court of Australia. 8 On 2 August 1999, a judgment was entered against the NKH [sic] in the Federal Court of Australia in favour of the Australian Competition and Consumer Commission (ACCC) in the sum of $406,129.79. PARTICULARS (a) Order of Tamberlin J of 2 August 1999 9 The judgment debt pleaded in 8 above was incurred by NKH as trustee of the KN Trust and in the course of its activities as trustee of the said trust. 10 On 9 March 2000, a winding up order was made against NKH under the Corporations Law on the application of the ACCC and … John Schmierer was appointed liquidator of the NKH [sic]. …………………… 14 NKH is without assets sufficient to pay its creditors and, in particular, is without assets to pay the judgment debt owing to the ACCC pursuant to the orders made by Tamberlin J in the Federal Court of Australia on 2 August 1999. 15 In respect of the judgment debt incurred by NKH pursuant to the judgment of Tamberlin J of 4 June 1999 in proceedings NG 782 of 1996 in the Federal Court of Australia and the orders made in those proceedings on 2 August 1999, NKH is entitled to be indemnified out of the assets of the KN T rust. And the plaintiff claims: 1 A DECLARATION that Nick Kritharas Holdings Pty Limited (in liquidation) is entitled, as against the defendant and generally, to be indemnified out of the assets of the KN Trust in respect of the judgment debt ordered to be paid by Nick Kritharas Holdings Pty Limited (as it then was) by the Federal Court of Australia on 2 August 1999." 3 By its defence the defendant in terms or in substance admitted the allegations in the statement of claim set out above up to and including paragraph 10, save that as to paragraph 6 it said that the plaintiff's engagement in the activities of the business in its capacity as trustee of the KN Trust was a purported engagement and as to paragraph 9 said that the incurring of the judgment debt was in purported fulfilment of its duties as such trustee (my italics). It did not admit the allegation in paragraph 14 that the plaintiff is without assets sufficient to pay its creditors and it denied the charge in paragraph 15 that the plaintiff is entitled to be indemnified out of the assets of the trust. By way of defence to the whole of the statement of claim the defendant pleaded as follows: "16 For any liability incurred by NKH in the course of its activities as trustee of the KN Trust, including any liability arising from its conduct in the course of the said activities, NKH or any person entitled to claim through it may claim an indemnity from the KN Trust equal to the dollar equivalent of the liability, provided always that the activities and conduct of NKH at the material time were proper, in accordance with its obligations under the trust deed referred to in paragraph 3(b) above, in accordance with its obligations at law, and for the benefit of the beneficiaries of the KN Trust. 17 In respect of the alleged conduct of NKH giving rise to proceedings NG 782 of 1996 in the Federal Court of Australia ………………… (c) To the extent that the Plaintiff is able to establish the alleged conduct in the proceedings before this Honourable Court, such conduct was neither proper, nor in accordance with its obligations under the trust deed referred to in paragraph 3(b) above, nor in accordance with its obligations at law, nor for the benefit of the beneficiaries of the KN Trust. 18 Neither NKH nor any successor to it has a right to an indemnity of the type referred to in paragraph 16 above." 4 It is to be noted that among the admissions made on the pleadings is an admission that the plaintiff engaged in conduct which was misleading and deceptive in breach of s 52 of the TPA as set out in the reasons for judgment of Tamberlin J ("the judgment"). As a result, no doubt, of the admission in these terms the judgment was admitted in evidence before me without objection. As it is necessary to take into account the quality of the conduct found to have been engaged in by the defendant, I turn to the judgment. Tamberlin J found that the plaintiff is a corporation under the direction and control of the Nicholas Kritharas family interests (see the judgment [3]). His Honour found that the relevant actions of the plaintiff were carried out by Nicholas Kritharas as its agent, he being a director and manager of that corporation. He found that Nicholas Kritharas, who was also a respondent in the Federal Court proceedings, was guilty of being involved in the conduct and entered judgment also against him. The proceedings involved the sale by the trustees on behalf of the trust of franchise distribution agreements to five different sets of individuals on behalf of whom the ACCC brought the proceedings. The conduct complained of was summarised by his Honour as follows: " Contravening conduct alleged [11] The contravening conduct claimed by ACCC includes misrepresentations in relation both to existing facts and future matters. It is claimed that these misrepresentations were designed to and did, in fact, induce prospective agents to enter into the agreements with Top Snack, under which they agreed to pay a licence fee of $20,000 per franchise area together with other moneys in respect of set up charges and additional costs. Although the misrepresentations alleged vary to some extent in each individual case, the substance of the major misrepresentations raised are that: • gross profitability would be $300 per day per franchise area; • the distribution of the goods could be performed at a rate of 50 sites per 'short' day namely a day of less than eight hours; • the packing of the confectionery boxes could be performed at a rate of 20 or more per hour; • loss of genuine customers would be no more than 10% in the first few weeks of operation and there would be no difficulty in obtaining new customers; • losses of money through dishonesty of customers at retail sites and other problems would not exceed 6%; • customers and sites made available by Top Snack were genuine; • the franchisees could not lose the moneys paid for the franchises because the return was fully guaranteed by Top Snack; and • the relevant achievable figures set out in a four weekly statement disclosed to the claimants were typical and achievable." Although only s 52 of the TPA is pleaded in the statement of claim in these proceedings, the conduct was also alleged to constitute a contravention of s 59 of the TPA and was found by his Honour to constitute such a contravention. The order of the Federal Court pleaded in the statement of claim and in respect of which indemnification or exoneration is sought is based upon findings under s 59 as well as under s 52. A breach of s 59, unlike a breach of s 52, may attract a criminal penalty: see s 79. But there was no prosecution in this case, and the finding was not made on the criminal onus of proof, so there cannot be taken to be the finding of a criminal offence. 5 I shall not set out the whole of his Honour's findings concerning the conduct, but I shall set out certain representative passages which illustrate the quality and circumstances of the conduct which has led to the liability for which indemnification is sought in these proceedings. to packing time. The packing of the snack food boxes proved to be a very time consuming process, and according to the claimants it required much more time than they had been led to believe. Evidence was led from the claimants and other DAs called by the ACCC, as to the number of boxes which they were in fact able to pack in a one hour period. This is important because it goes to the amount of time that is required to be spent outside the actual delivery process in order to achieve the income level represented. The boxes were required to be packed with the snack foods in a particular way so as to achieve the display called for by the operational guidelines. In addition, it was often necessary to pack the items in a special way according to the needs of a particular site and this led to a substantial increase in the amount of time necessary to pack a box. [30] The amount of time required to be dedicated to the distribution process by agents, including time for packing, reporting and delivery, was an important incentive for a prospective buyer in deciding whether to enter into the franchise. [31] The evidence of the claimants was that the respondents represented that the product could easily be packed at a rate of in excess of 20 boxes per hour. The respondents deny that the alleged representations were made. However, they say that the representation "consistently made" was that Mr Kritharas or Mr Manera or an experienced agent could pack 20 boxes an hour. Furthermore, it was said that because the packing time representation related to a future matter it fell within s51A of the TPA, and in the light of the trials carried out by Top Snack and the experience of Mr Manera in packing, there were reasonable grounds for making the representations. …… [33] I am satisfied on the evidence that the representation made to each of the claimants was that the product could be packed by a DA with some experience at a rate of in the order of 20 boxes per hour. …… [35] The evidence of the claimants had the advantage that they actually performed the work over a continuous period of time and in my view the consistency of their evidence justifies the conclusion that a range of only 10 to 12 boxes per hour could reasonably be anticipated. I am not satisfied that any adequate trial was carried out or that the testimony of Mr Kritharas or Mr Manera should be accepted on this point. A shortfall of at least 8 boxes per hour in relation to a representation as to a rate of 20 boxes an hour is a significant short-fall and indicates that the figure of 20 boxes was not achievable. There is no documented evidence as to the rates of packing which they were able to achieve which gives any context as to the conditions and circumstances in which this was likely to be achieved. I am not satisfied that any evidence has been put before me which persuades me that there was reasonable ground to make any representation that an agent would easily pack in the order of 20 boxes per hour. Accordingly, I consider that this representation was false and that it constituted deceptive and misleading conduct. [36] Insofar as specific allegations are made in the pleadings to the effect of the representations as to packing time, I find that they have been made out. I am satisfied that the representations were made and relied on by the claimants except for Mr and Mrs Besnard in entering into the agreements. In the case of Mr and Mrs Besnard, I am satisfied that this misrepresentation was made to them but I am not satisfied that they relied on the misrepresentation." As to representations as to profitability, his Honour came to the following conclusion: "[57] Having regard to the misleading effect of the limited analysis presented to prospective franchisees, I find that the respondents had no reasonable grounds for making the assertions as to profitability which are agreed to have been made. Accordingly, I am satisfied that the respondents have engaged in misleading and deceptive conduct in relation to these matters in contravention of the Act. I am also satisfied that the representations as to profitability were made to each of the claimants, and that because the represented profitability was central to the attractiveness of the franchises, each of the claimant agents relied on the misleading conduct." As to the ability to service 50 sites per "short" day, his Honour concluded: "[64] The ongoing experience of the six different agents as to the numbers of customer sites which could be serviced in an hour indicates a figure far below the 50 sites per day based on a short day of 7 hours. This experience was of course in a number of different areas and was over a period of up to 12 months. When this experience is considered in the light of the numerous duties required to be performed by the guidelines provided to the DAs in the course of servicing the sites, and the time necessary to park vehicles and carry out administrative functions, it is evident that the figures propounded by the respondents was outside any reasonable range of expectation. No acceptable material has been put before me to establish that such a result could be reasonably anticipated as achievable. I find that there were no reasonable grounds for this misrepresentation and that there was misleading conduct in its making. I also find that this misleading conduct occurred in relation to each of the claimant agents." His Honour's overall conclusion on contravention was as follows: "[73] The documentary evidence furnished by the applicant satisfies me that at all material times Adway and N K Holdings were in partnership for the purpose of undertaking the Top Snack Foods business carried on, on behalf of the partnership, by Top Snack. Adway and N K Holdings each owned equally the units in a unit trust conducted by Top Snack and Enterprises. I am satisfied that the three respondent corporate entities engaged in misleading and deceptive conduct and that Messrs Kritharas and Manera were knowingly involved in such conduct within s75B of the TPA, and that they were the agents through whom the corporate respondents at all times acted." Those findings, combined with appropriate findings on reliance and damage, founded his Honour's order for the payment of $406,179.29 to the ACCC in favour of the claimants. 6 His Honour did make a finding on allegations of fraudulent conduct as follows: " Fraud and system [95] The ACCC pleaded and submitted that a number of the misrepresentations were not only made with knowledge of their falsity but also formed part of a deliberate and systematic course of conduct. The alleged conduct which can be inferred from the evidence, it was submitted, was that prospective purchasers would be deliberately led into entering a losing business. They would then experience considerable disappointment and loss which would cause them to surrender the businesses to the respondents without compensation, or they would be sold back at a greatly reduced price. This would enable the respondents to trade in the franchises by reselling them to other prospective buyers. [96] These allegations are serious and their proof calls for an appropriate level of satisfaction. The evidence placed before me does not satisfy this threshold. Although I have formed the view that many of the many assertions were made by the respondents without reasonable grounds, it does not follow that there was deliberate fraud or that there was any intent to exploit franchisees by a systematic course of conduct of resale of the franchises. The individual respondents were not thorough or painstaking in their preliminary 'trials'. They failed by silence to disclose the true position and indeed expressly misrepresented the profitability of the franchise. This does not amount to fraud. I therefore reject the submission based on fraud or systematic exploitation of franchisees." Thus the ACCC failed to establish fraud, even on the appropriate civil onus . 7 It is of importance, of course, in order to determine the trustee's entitlement to indemnification or exoneration in respect of this particular trust (as with all other aspects of the obligations relating to it), to consider the precise terms of the instrument creating it. This is the KN Deed of Discretionary Trust dated 30 April 1993, as specified in the particulars appended to paragraph 3 of the statement of claim: see [2] above ("the deed"). The deed provides as follows: "7 THE Trustee shall in addition to the powers otherwise confer [sic] upon Trustees by law have the following powers: …… (g) To pay out of the Trust Fund or the income thereof all costs, charges, expenses incidental to the management of the Trust Fund or to the, exercise of any power, authority or discretion herein contained or carrying out or performing the trusts hereof which the Trustee may at any time incur including all income tax or other taxes payable in respect of the Trust Fund costs in any way connected with the preparation and execution of these presents and all stamp duty, settlement duty, gift duty, probate duty, revenue duty or any other impost or moneys of whatever nature payable in respect of these presents or the gift or settlement hereby effected or in respect of any additional moneys or investments paid or transferred to the Trustee upon Trusts hereof and whether under the laws of the Commonwealth of Australia or of any of the States or Territories thereof or any other country. …… 13 THE Trustee shall not be personally liable for the consequences of any error or forgetfulness whether of law or of fact on the part of any of the Trustee or its legal or other advisor [sic] or generally for any breach of duty or trust whatsoever unless it shall be proved to have been committed made or omitted in personal conscious fraudulent bad faith by the Trustee charged to be so liable and accordingly all persons claiming any beneficial interest in over or upon the property subject to this Settlement shall be deemed to take with notice of and subject to the protection hereby conferred on the Trustees. …… 15 SUBJECT always to any express provision to the contrary herein contained every discretion vested in the Trustee shall be absolute and uncontrolled and every power vested in it shall be exercisable at its absolute and uncontrolled discretion and the Trustee shall have the like discretion in deciding whether or not to exercise any such power. No Trustee shall be responsible for any loss or damage occasioned by the exercise of any discretion or power hereby or by law conferred on the Trustee or by failure to exercise any such discretion or power or for any loss or damage accruing as a result of concurring or refusing or failing to concur in any exercise of any power or discretion." 8 As is plain from the deed, the pleadings and the conduct of the case, the trust was intended to be a trading trust. Despite the qualifications made in the defence (as noted in [3] above) there was no issue at the hearing that the trustee was behaving entirely properly in engaging on behalf of the trust in the Top Snacks food business. THE LAW 9 Section 59(4) of the Trustee Act 1925 provides as follows: "(4) A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers." However, the trustee's right of reimbursement and exoneration out of the trust fund long antedates any statutory encapsulation of it. As long ago as Worrall v Harford (1802) 8 Ves Jun 4; 32 ER 250 Lord Eldon C said (Ves Jun at 8; ER at 252): "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 the charges and expenses incurred in the execution of the trust." 10 The application of this principle in the case of a tort for which the trustee is held responsible was discussed in the cases of Benett v Wyndham (1862) 4 De G F&J 259; 45 ER 1183 and In re Raybould. Raybould v Turner [1900] 1 Ch 199; and see R P Meagher and W M C Gummow, Jacobs' Law of Trusts in Australia (6th ed 1997) ("Jacobs") [2104]. The most useful exposition and analysis of the trustee's right of indemnity and its application is contained in IIIA Scott on Trusts (4th ed 1988) ("Scott") as follows: "§244 Expenses Properly Incurred . A trustee can properly incur expenses that are necessary or appropriate for carrying out the purposes of the trust. When such expenses are properly incurred, they should ultimately be borne by the trust estate rather than by the trustee personally. Although in England at common law trustees were not entitled to compensation for their services, they were allowed indemnity for expenses properly incurred by them. Under the English rule 'the trustee, though allowed nothing for his trouble, is allowed everything for necessary expenses in executing the trust. His duties relate to the property and interests of others, and he is to be indemnified for necessary expenses in protecting such trust property, and has an equitable lien upon it for such expenses.' In the United States where trustees are entitled to compensation for their services they are also, of course, entitled to indemnity for expenses properly incurred by them in the administration of the trust. It is obvious that the cost of administering a trust should be borne by the trust estate and not by the trustees personally if those costs are properly incurred… §244.1 Lien for indemnity . A trustee who is entitled to reimbursement or exoneration for expenses properly incurred in the administration of the trust cannot be compelled to surrender the trust property to the beneficiaries until his claim for reimbursement or exoneration has been satisfied ( England: Re The Exhall Coal Co (1866) 35 Beav 449; In re Pumfrey (1882) 22 Ch D 255; Stott v Milne (1884) 25 Ch D 710; Buchan v Ayre [1915] 2 Ch 474). He has in other words a security interest in the trust property. If necessary to indemnify him, the court may authorize a sale or mortgage of the trust property ( England: Tennant v Trenchard (1869) LR 4 Ch App 537; In re Pumfrey supra; Buchan v Ayre supra)… §245 Expenses Not Properly Incurred . Ordinarily the trustee is not entitled to indemnity out of the trust estate for expenses not properly incurred by him in the administration of the trust. If the trustee exceeds his powers in incurring an expense, and no benefit is conferred thereby upon the trust estate, he is not entitled to indemnity for the expense thus incurred. Thus if the trustee, not being authorized to do so, borrows money for the trust and uses the proceeds in a manner that does not benefit the trust estate, or makes an unauthorized contract on behalf of the estate that does not result in a benefit to the estate, he is personally liable to the lender or other contracting party, and he is not entitled to indemnity from the trust estate. Even though the expense is incurred in preserving the trust estate, the trustee is not entitled to indemnity if the incurring of the expense became necessary because of his own fault… §246 Liability upon Contract . The principles stated in the preceding sections are applicable to contractual liabilities incurred by the trustee in the course of the administration of the trust, as well as to liabilities in tort and liabilities to which the trustee is subject as holder of the legal title to the trust property. Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration. Thus where the trustee has properly employed an attorney in litigation affecting the trust estate, he may pay the attorney out of the trust estate, or if he has paid him out of his individual property he is entitled to reimbursement out of the trust estate. If the trustee has acted properly in incurring the expense, he is entitled to indemnity even though it turns out that the trust estate is not benefited thereby. The mere fact that the litigation is unsuccessful does not preclude the trustee from obtaining indemnity out of the trust estate, provided that he was acting within his powers in incurring the expense. The situation is different, however, where the trustee exceeded his powers in incurring the expense or was otherwise at fault. In such a case he is entitled to indemnity only to the extent to which the trust estate is benefited… §247 Liability for Tort . A trustee who has incurred a liability in tort to a third person is entitled to indemnity out of the trust estate if the liability was incurred in the proper administration of the trust and the trustee was not personally at fault in incurring it ( England: Benett v Wyndham (1862) 4 De GF&J 259; In re Raybould [1900] 1 Ch 199). The trustee is personally liable to third persons for torts committed by him or by his agents, although committed in the proper course of the administration of the trust. It does not follow, however, that the loss must ultimately be borne by the trustee. If he was not personally at fault he is entitled to indemnity out of the trust estate. This is the case where the tort is committed by an agent properly employed by the trustee in the administration of the trust. If the trustee of a business employs a person to drive an automobile for the purposes of the business and the driver negligently injures a third person, the trustee is liable to the third person on the general principle of the law of agency that the master is liable for the acts of his servant; and it is no defense that the business was carried on not for his benefit but for the benefit of others. The trustee nevertheless is entitled to reimbursement out of the trust estate for what he is compelled to pay to the third person; and if he has not yet paid the third person he is entitled to exoneration out of the trust property. Although the doctrine of respondeat superior makes him liable to third persons as though he were the beneficial owner of the business, nevertheless as between him and the beneficiaries it is clear that the loss should be borne by the trust estate. The same principle is applicable where the trustee himself does the act that is a tort to a third person and the act is one not involving negligence or intentional injury but where an absolute liability is imposed upon the actor. The policy that subjects him to a liability in spite of his absence of fault does not preclude him from shifting the liability to the trust estate. In Benett v Wyndham a trustee in the proper administration of the trust directed the bailiff employed on the estate to fell certain trees. The bailiff sent the woodcutters who were usually employed upon the estate. One of the trees in falling injured a passerby who sued and recovered judgment for £ 1200 against the trustee. The trustee paid the judgment and brought a proceeding to obtain reimbursement out of the estate. It was held by the Court of Appeal in Chancery that since the trustee was not personally at fault he was entitled to reimbursement out of the trust estate. Knight Bruce, LJ, said that the liability ought, as between the trustee and the estate, to be borne by the estate. In In re Raybould a testator devised certain collieries to his executor in trust. In working one of the collieries the trustee let down the surface of the land and injured the buildings and machinery of an adjoining owner. The adjoining owner recovered judgment against the trustee, and then brought a proceeding in equity to collect the amount of his claim out of the trust estate. The court held that he was entitled to the relief asked. It was found as a fact that the working had been reasonable and not improper and that the trustee was not at fault. The trustee was therefore entitled to indemnity for his liability to the adjoining owner, and the latter was permitted to avail himself of the trustee's right of indemnity. In Matter of Lathers (137 Misc 226, 243 NYS 366 (1930)) a testator devised and bequeathed all his property in trust. Included in the trust estate was an apartment house that the trustees managed through an agent. A fire occurred and two persons were injured. They obtained a judgment against the trustees individually for a large sum, which the trustees paid. Upon a proceeding for the judicial settlement of the trustees' accounts it was held that they were entitled to reimbursement out of the trust estate. It appeared that the injuries to the third persons resulted from the negligence of the agent employed by the trustees in failing to see that fire escapes were accessible. The court held, however, that the trustees were not personally at fault. Although they were personally liable to the injured persons as a result of the negligence of the agent employed by them in the administration of the trust, they were not precluded from obtaining indemnity out of the trust estate. In Smith v Rizzuto (133 Neb 655, 276 NW 406 (1937)) where a person was injured by falling on a sidewalk in front of an apartment house that was held in trust, the court said that although the trustee was personally liable to the injured person, he had a right of indemnity out of the trust estate since he was not personally at fault. On the other hand, it is ordinarily true that where the trustee is personally at fault in committing a tort he cannot throw the loss on the trust estate. Thus if the trustee negligently fails to provide a building held by him in trust with proper fire escapes and he is liable to tenants who are injured in consequence, he cannot shift the loss to the trust estate; he is personally liable to the injured persons and is not entitled to indemnity out of the trust property." 11 As to the application of these principles to the bankrupt trustee of a trading trust the position has been stated in the High Court in Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 per Stephen, Mason, Aickin and Wilson JJ as follows: "We do not understand the general principles concerning the bankruptcy of a trading trustee to be in dispute. It is common ground that a trustee who in discharge of his trust enters into business transactions is personally liable for any debts that are incurred in the course of those transactions: Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319. However, he is entitled to be indemnified against those liabilities from the trust assets held by him and for the purpose of enforcing the indemnity the trustee possesses a charge or right of lien over those assets: Vacuum Oil Co Pty Ltd v Wiltshire . The charge is not capable of differential application to certain only of such assets. It applies to the whole range of trust assets in the trustee's possession except for those assets, if any, which under the terms of the trust deed the trustee is not authorized to use for the purposes of carrying on the business: Dowse v Gorton [1891] AC 190. In such a case there are then two classes of persons having a beneficial interest in the trust assets: first, the cestuis que trust, those for whose benefit the business was being carried on; and secondly, the trustee in respect of his right to be indemnified out of the trust assets against personal liabilities incurred in the performance of the trust. The latter interest will be preferred to the former, so that the cestuis que trust are not entitled to call for a distribution of trust assets which are subject to a charge in favour of the trustee until the charge has been satisfied: Vacuum Oil Co Pty Ltd v Wiltshire . The creditors of the trustee have limited rights with respect to the trust assets. The assets may not be taken in execution ( Savage v Union Bank of Australia Ltd (1906) 3 CLR 1170, at p 1186; In re Morgan; Pillgrem v Pillgrem (1881) 18 Ch D 93) but in the event of the trustee's bankruptcy the creditors will be subrogated to the beneficial interest enjoyed by the trustee: Vacuum Oil Co Pty Ltd v Wiltshire; Ex parte Garland (1804) 10 Ves Jun 110, at p 120; [32 ER 786, at p 789]." And see the useful exposition by Santow J in J A Pty Ltd v Jonco Holdings Pty Ltd (2000) 33 ACSR 691 at [50]. In Commissioner for Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 245 the High Court expressly approved portion of s 246 of Scott quoted above. 12 The principle to be derived from the authorities cited, including the analysis in Professor Scott's work, is that the criterion as to whether or not a trustee may exercise the right of indemnity or exoneration for the reimbursement of an expense is whether or not it is properly incurred; and in the case of tort the question is whether or not the trustee is personally at fault. There has been criticism of this result by learned writers on the basis that in the case of trading trusts this gives a protection against creditors to the fund for the benefit of which the activity is carried on at the expense of creditors who deal with a trustee (whom they may not even know to be a trustee): see H A J Ford, "Trading Trusts and Creditors' Rights" (1981) 13 MULR 1; see now H A J Ford and W A Lee, Principles of the Law of Trusts (3rd ed 1996) Ch 14; and see the Hon Mr Justice B H McPherson, "The Insolvent Trading Trust" in P D Finn, Essays in Equity (1985) 142; A W Lockhart, "Trading Trusts: An Examination of Trustees Liability and Creditors' Rights (1986) 5 Auckland L Rev 313. Whatever the substance of this criticism from a policy point of view, it is nonetheless in my view the result that is produced by the application of the existing rules of law at the present time. 13 This is not a case of tort; the liability is liability under the consumer protection provisions of the TPA. That liability, it is plain from authority, is liability sui generis. It has, however, been said that known concepts in the law of tort may be helpful in deciding a case under s 52 of the TPA: Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at 348; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 93; Miller's Annotated Trade Practices Act 2001 (22nd ed) [1.52.5]. In my view, it is appropriate that the same rule applies in respect of the trustee's right of indemnity and exoneration in the case of liability under the consumer protection provisions of the TPA as in the case of tort. Thus, if there is conduct which falls within those provisions in respect of which the trustee could not be regarded as being personally at fault, then he may be indemnified out of the trust fund against the consequences; but if the trustee is properly to be regarded as being personally at fault then indemnity will be refused. 14 The remaining area of law which requires examination in the context of these proceedings is the basis on which the trustee may be adjudged to be or not to be personally at fault in the circumstances of this case, bearing in mind that the trustee is a corporation. On the one hand, it was argued that the corporate trustee, being a separate legal person, cannot be regarded as being at fault by reason of the fault of the servants or agents (even managers or directors) through whom it acts, unless the conduct is engaged in specifically as a result of a formal act of the corporation, eg, a resolution of the directors or of the company in general meeting. The contrary argument put was that the trustee at all times acted by its director and manager, who had the state of mind relied on as constituting the conduct complained of, and that that rendered the company personally at fault within the relevant principle. 15 The law relating to the mental state of a company, an abstract entity, is not easy. And it must be remembered that the general law rule as to what constitutes or is contained in the corporate mind varies in different circumstances: Walplan Pty Ltd v Wallace (1986) 8 FCR 27 at 38 per Lockhart J. So far as responsibility for liability under the TPA is concerned, as in the proceedings before Tamberlin J, the problem is solved by s 84 of the TPA, which in effect deems the conduct of any servant or agent the conduct of the company for the purposes of the Act (as to the relation between s 84 and the general law, see TPC v Tubemakers of Australia Ltd (1983) 76 FLR 455). But the determination of the ambit of the trustee's right of indemnity is not within the purposes of the TPA. On the question of whether a corporation had knowledge of or reason to suspect certain matters, to be determined under the general law, the House of Lords in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 adopted the "organic" test. This was explained by Bowen CJ in the Full Court of the Federal Court in Universal Telecasters (Qld) Ltd v Guthrie (1978) 32 FLR 360 (a case which was outside the provisions of s 84, as it stood before 1986). His Honour said at 365: "In dealing with a related problem under the Trade Description Act 1968 (U.K.), the House of Lords in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 adopted a different approach. Their Lordships applied the 'organic' theory (see Gower, The Principles of Modern Company Law, 3rd ed (1969) Ch 8). The view was taken that what natural persons were to be treated in law as being the corporation were to be found by identifying those natural persons who, by the memorandum and articles of association or as a result of action taken by the directors or by the corporation in general meeting pursuant to its articles, were entrusted with the exercise of the powers of the corporation ( Tesco 's case per Lord Diplock at pp 199-200; cf per Lord Reid at pp 170-171. and Lord Dilhorne at p 187). In that case, the principle was applied in determining whether the company had taken 'all reasonable precautions' and exercised 'all due diligence'. It would seem that the principle would apply equally in determining whether, under our corresponding legislation, a corporation had knowledge of or reason to suspect something (see generally Halsbury's Laws of England, 4th ed vol 7 p 451 par 757)." As to the application of these principles in the case of receipt by operatives of a company of material defamatory of the company, see the decision of the Court of Appeal in State Bank of New South Wales Ltd v Currabubula Holdings Pty Ltd [2001] NSWCA 47. 16 The application of this test would lead to much the same result as application of the rules relating to the right of indemnity out of trust funds in the case of corporate trustees as is produced in the case of trustees who are natural persons, as discussed above. Thus, the vicarious liability of a corporate trustee for the negligent driving of a motor car in the course of trust business would still attract indemnity, whilst deliberate conduct vis-a-vis third parties by the managing director on behalf of a corporation might deprive a corporate trustee of indemnity. The Construction of the Trust Deed 17 As already indicated, the first question that falls to be determined is that of the construction of the trust deed. A trustee may be obliged to make payment from his own resources in relation to his acts as a trustee in two ways. First, he may be sued by beneficiaries in respect of losses occasioned to the trust fund as a result of acts on his part that are breaches of trust. Secondly, he may be sued by third parties for, say, acts which are tortious, albeit done on behalf of the trust, and then be refused exoneration or indemnity in respect of that liability to third parties, leaving him personally liable without redress. The defendant concedes that the provisions of the trust deed set out in [7] clearly absolve the trustee from liability to the beneficiaries in proceedings brought on their behalf. But it has argued that a trustee will not lightly be absolved from responsibility for wrongful acts and that those provisions should not be construed as extending the right of indemnity to acts which would not, on the ordinary principles stated above, fall within the ambit of the indemnity. The deed should be construed as limited to absolution from actions on behalf of the beneficiaries and not to relief from personal liability by an extension of the right of exoneration or indemnity. 18 With that submission I do not agree. In construing a trust deed one must turn to the deed itself, examining carefully the words construed and giving them their natural and ordinary meaning in the context of the whole deed. The task is to ascertain the intention of the settlor. It was characterised as follows by Lord Upjohn in In re Gulbenkian's Settlements [1970] AC 508 at 522: "Counsel for the appellants argued that you must give the words used their literal meaning and then apply the test to see whether you can predicate with certainty whether a given individual is or is not within the class and no modification of the literal language is permissible to make sense of it. This argument is based on a fallacy. There is no doubt that the first task is to try to ascertain the settlor's intention, so to speak, without regard to the consequences, and then, having construed the document, apply the test. The court, whose task it is to discover that intention, starts by applying the usual canons of construction; words must be given their usual meaning, the clause should be read literally and in accordance with the ordinary rules of grammar. But very frequently, whether it be in wills, settlements or commercial agreements, the application of such fundamental canons leads nowhere, the draftsman has used words wrongly, his sentences border on the illiterate and his grammar may be appalling. It is then the duty of the court by the exercise of its judicial knowledge and experience in the relevant matter, innate common sense and desire to make sense of the settlor's or parties' expressed intentions, however obscure and ambiguous the language that may have been used, to give a reasonable meaning to that language if it can do so without doing complete violence to it. The fact that the court has to see whether the clause is 'certain' for a particular purpose does not disentitle the court from doing otherwise than, in the first place, try to make sense of it." This passage was cited in part by Warner J in Mettoy Pension Trustees Ltd v Evans [1990] 1 WLR 1587 at 1611, where (at 1610) his Lordship said (in the context of a pension scheme deed) that the Court's approach to construction "should be practical and purposive rather detached and literal". This dictum was approved by Waddell CJ in Eq in Lock v Westpac Banking Corporation (1991) 25 NSWLR 593 at 602 and in the New Zealand Court of Appeal in Re UEB Industries Ltd Pension Plan [1992] 1 NZLR 294 at 297 - 298; and see generally Jacobs [801]. 19 In my view, the dictate of practical and purposive interpretation should be applied as much in the case of an instrument creating a trading trust as one creating a pension plan. And the Court is equally entitled to consider in such a case "the matrix of facts" surrounding the creation of the trust, at least where, as here, the language of the instrument is lacking in clarity. It is my view that, upon its proper construction, the trust deed should be taken to absolve the trustee from the obligation to meet out of its own resources liability to the beneficiaries and liability to third parties, save in the case of a class of fraud, which is rather particularly and somewhat curiously defined. In coming to this conclusion I take into account the language used. The deed provides in quite general terms for the recoupment of expenses and grants the trustee full discretion as to its actions in pursuing the trading activities of the trust. It gives absolution in general terms from liability arising out of negligence, etc. The absolution is to extend to all types of conduct including those involving fault on the part of the trustee, save for the exception concerning fraud. The purpose of the absolution is to encourage the trustee to engage in trading activities in which it must necessarily in the first instance be itself under liability, as the party which takes on legal liabilities to be assumed in the trading operation, and to do so without being in fear that its own assets will be at risk, which might inhibit it in the conduct of the trading operation, from which it will itself derive no benefit out of the profits. Whilst, as I say, the language is not of the clearest, it seems to me that on a fair reading the true meaning of the provisions is that the trustee should be absolved of liability in the sense of being freed from actions brought by or on behalf of the beneficiaries and also by having its right of exoneration and indemnification extended to all circumstances arising out of its conduct of the trading operation, save only in the case of fraud of the specified kind. 20 This view of the correct construction of the deed disposes of the subject matter of these proceedings. In view of the specific finding of Tamberlin J that there was no case of fraud made out against the company or Nick Kritharas, and on a consideration of the quality of the conduct found by his Honour, there is no case that the damages and costs awarded by Tamberlin J fall within the fraud exception in the deed, and the indemnity in my view extends to those damages and costs. It is therefore not necessary for me to determine whether the trustee could be said to be at fault in the conduct that led to the entry of his Honour's judgment. If I had to determine it, I should certainly be inclined to the view that the conduct which led to the judgment was conduct which involved fault in Nick Kritharas; furthermore it seems to me that Nick Kritharas in doing what he did was acting as the controlling mind of the trustee company, which ought therefore be regarded as being at fault. However, I do not need to come formally to those conclusions. 21 Short minutes may be brought in to give effect to the conclusions expressed in these reasons. The question of costs may be agitated at that time. …oOo… Last Modified: 05/04/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.