New South Wales Supreme Court CITATION : ANZ Banking Group Ltd v Intagro Projects Pty Ltd & Ors [2004] NSWSC 1054 HEARING DATE(S) : 29/10/04 JUDGMENT DATE : 11 November 2004 JUDGMENT OF : White J DECISION : Refuse leave to the cross-claimant to file an amended cross-claim which includes paragraph 18 of the proposed amended cross-claim; Grant leave to the cross-claimant to file an amended cross-claim in terms of paragraphs 19 to 21 of the proposed amended cross-claim with the insertion of the words "of care and diligence" after the word "obligations" in paragraph 1; Costs of the application for leave to amend should be costs in the cause. CATCHWORDS : PLEADING - Leave to amend - Proposed claim against directors of trustee company under Corporations Act, s 197 - Whether arguable that trust deed limited the trust assets to which trustee could have recourse to satisfy right of indemnity - Whether arguable that trustee not entitled to be fully indemnified out of trust assets if it acted in breach of trust - Construction of express indemnity of trustee acting in good faith - Court not to resolve arguable questions on application for leave to amend. LEGISLATION CITED : Corporations Act 2001 (Cth) Hanel v O'Neill (2003) 48 ACSR 378 Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 Commonwealth of Australia v Verwayen (1990) 170 CLR 394 RWG Management Limited v Commissioner for Corporate Affairs [1985] VR 385 CASES CITED : Ecclesiastical Commissioners v Pinney [1900] 2 Ch 736 Gatsios Holdings Pty Ltd v Nick Kritharas Holdings (in Liq) (2002) ATPR 41-864 Nolan v Collie (2003) 7 VR 287 McLean v Burns Philp Trustee Co Ltd (1985) 2 NSWLR 623 Armitage v Nurse [1998] Ch 241 Walker v Stones [2001] QB 902 Darlington Futures v Delco Australia Pty Ltd (1986) 161 CLR 500 Australia & New Zealand Banking Group Limited PARTIES : v Intagro Projects Pty Limited & Ors FILE NUMBER(S) : SC 50165/03 COUNSEL : Applicant: Mr S Rares SC Respondent: Mr D Hammerschlag SC & Mr L Gyles SOLICITORS : Applicant: Minter Ellison Lawyers Respondent: Holding Redlich IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST WHITE J Thursday, 11 November 2004 50165/03 AUSTRALIA & NEW ZEALAND BANKING GROUP LIMITED v INTAGRO PROJECTS PTY LIMITED & ORS JUDGMENT 1 HIS HONOUR: This is an application by Australia New Zealand Banking Group Limited ("the Bank") to file an amended cross-claim against Intagro Projects Pty Limited ("Intagro") and its directors, Andrew George Robinson and Dominique Francoise Robinson ("the directors"). The proposed amendments concern the directors. 2 Intagro is the plaintiff in the proceedings. It seeks a declaration that it is not indebted to the Bank in an amount totalling $48,612,054.68, or at all. It contends that on or about 10 August 2001 it entered into a guarantee ("the first guarantee") of the performance by TJF/EBC Pty Ltd ("TJF") of that company's obligations to the Bank. The Bank had agreed to lend money to TJF. Intagro also contends that on or about 17 January 2003 it entered into a further guarantee ("the second guarantee") of TJF's obligations to the Bank. One of Intagro's contentions in the proceedings is that the first and second guarantees were entered into by it in its own capacity and not in its capacity as trustee of any trust. 3 The Bank has filed a cross-claim against Intagro claiming payment of $37,234,456.38 pursuant to the guarantees and indemnities dated 10 August 2001 and 17 January 2003. 4 On 29 July 2004 McDougall J granted leave to the Bank to file an amended cross-claim joining the directors as cross-defendants. The Bank alleges that Intagro was and is the trustee of three trusts and that it incurred liability for the debt owed to the Bank when it was acting or purporting to act as trustee. The Bank asserts that the directors are personally liable to discharge Intagro's alleged liability pursuant to s 197 of the Corporations Act 2001 (Cth) (The Act). 5 Section 197 of the Act provides: " CORPORATIONS ACT 2001 - SECT 197 Directors liable for debts and other obligations incurred by corporation as trustee (1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation: (a) has not, and cannot, discharge the liability or that part of it; and (b) is not entitled to be fully indemnified against the liability out of trust assets. This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. (2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred." 6 By the amendment which his Honour allowed, the Bank pleaded in substance that the directors were liable to discharge the liability of Intagro to the Bank because Intagro could not discharge that liability, and it was not entitled to be fully indemnified against the liability out of trust assets because the assets were insufficient. His Honour held that if the majority view in Hanel v O'Neill (2003) 48 ACSR 378 were correct, then the Bank's claim against the directors was fairly arguable. Although his Honour disagreed with the majority view in Hanel v O'Neill, he was not satisfied that the majority view was plainly wrong. Hence his Honour allowed the amendment. 7 The Bank seeks to further amend its cross-claim by adding the following paragraphs: "18. Further or in the alternative, the combined effect of clauses 17.4 and 19.2 of each of the Trust Deeds is that the indemnity granted to the trustee, namely, to the first cross defendant: (a) is limited to the certain assets of the Trust Fund (as that expression is defined in the Trust Deeds); and (b) expressly excludes any right of indemnity against or recovery from any beneficiary, unitholder in, or other person beneficially entitled to any units in, any of the Trusts, for the purpose of satisfying any liability which the trustee, namely, the first cross defendant, has for or in respect of the Debt. 19. If (which is denied), the first cross defendant did not intend to act as trustee when it entered into the First and/or Second Guarantees, but if it be found that it did so enter into the First and/or Second Guarantee, then the first cross defendant in so acting breached its obligations [of care and diligence] as trustee by exposing the Trusts to liability for the Debt. 20. Further or in the alternative, if (which is not admitted) it be found that the first cross defendant deferred its monitoring and/or reporting requirements of TJF to the cross claimant as alleged in the summons, such deference was a breach of the first cross defendant's obligations as trustee of each of the Trusts in that the first cross defendant failed to take proper care of or to have proper regard to the assets of and/or the administration of the Trusts. PARTICULARS Paragraphs A19(b), C26, C28, C30(c) and C39 (b) particular (c) of the Summons. 21. In the premises: (a) the first cross defendant is not entitled to be fully indemnified against the Debt out of the Trust assets; and (b) each of the second and third cross defendants is liable to discharge the first cross defendant's liability for the Debt by reason of section 197(1) of the Act." 8 The words "of care and diligence" were added to paragraph 19 of the proposed pleading by counsel during the course of submissions. 9 Clauses 17.4 and 19.2 of the Trust Deeds provide as follows: " 17.4 Indemnity The Trustee acting in good faith is entitled to be indemnified out of the Trust Fund in respect of all liabilities: 17.4.1 incurred by the Trustee relating to the execution of any powers, duties, authorities or discretions vested in it by virtue of this Deed; 17.4.2 arising in or about the investment and administration of the Trust Fund; 17.4.3 incurred in the conduct and management of any business forming part of the Trust Fund; 17.4.4 arising from the acquisition of any authorised investment under any contract entered into by the Trustee; and 17.4.5 all actions, proceedings, costs, claims and demands in relation to any matter or thing done or omitted to be done concerning the Trust. The right of the Trustee to be indemnified in respect of any such liability incurred by the Trustee is limited to the assets of the Trust Fund in the hands of or under the control of the Trustee and does not extend to enable the Trustee to recover any loss or obtain reimbursement for any liability incurred from any Unitholder or other Person beneficially entitled to any Unit. 19.2 No Indemnity from Unitholders 19.2.1 Notwithstanding any other provision of this Deed or any rule of law to the contrary, no Unitholder by reason of holding Units or of the relationship created by this Deed is under any obligation personally to indemnify the Trustee or any creditor of the Trustee in the event of there being any deficiency of the assets of the Trust Fund as compared with the liabilities of the Trustee in relation to the Trust Fund. 19.2.2 The rights of indemnity of the Trustee or of such creditor are limited to recourse to the assets of the Trust Fund. 19.2.3 A Unitholder is not liable for any loss or damage howsoever incurred or suffered by the Trustee in acting as Trustee of the Trust or otherwise in connection with the Trust to the extent to which the loss or damage exceeds so much of the consideration (if any) payable for issue of the Units held by the Unitholder as may be unpaid and outstanding. 19.2.4 The Trustee expressly waives, releases, forfeits and abandons all rights and remedies which it otherwise might have at law or in equity to recover from a Unitholder moneys by reason of any right of indemnity or subrogation notwithstanding that any such right may not be able to be satisfied or discharged in whole or in part out of the assets comprising the Trust Fund." 10 The "Trust Fund" includes all money and property which becomes subject to the trust of the Trust Deed. 11 The Bank submitted that Intagro was not entitled to be fully indemnified against its liability to the Bank out of trust assets because: (a) the trustee's right of indemnity was limited to assets in the hands of or under the control of the trustee and did not extend to a right to be indemnified out of trust assets which could be traced into the hands of a beneficiary or any third party; (b) the trust deed excluded the trustee's right to be indemnified personally by a beneficiary; and (c) the trustee had breached its duty as trustee. 12 The first two grounds were said to be encompassed in paragraph 18 of the proposed pleading. The third ground is encompassed in paragraphs 19 and 20. Paragraph 18 13 Paragraph 18(a) does not plead with any precision what assets of the Trust Fund are not available to be used to satisfy the trustee's right to indemnity. I shall deal with the application, however, on the basis that the sub-paragraph would be amended to reflect counsel's submission, referred to in paragraph 11(a) above. 14 A trustee's right of indemnity in respect of liabilities incurred in execution of the trusts is a right either to be reimbursed from the trust estate if the trustee has discharged the liability out of its own property, or, if it has not, to apply the trust property in discharging the liability. (Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 245-246). In Chief Commissioner of Stamp Duties (NSW) v Buckle the High Court said that a Court of Equity may authorise a sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration, (at 247). In Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367, the trustee's right of indemnity was described by Stephen, Mason, Aickin and Wilson JJ as follows: "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 authorised to use for the purposes of carrying on the business: Dowse v Gorton [1891] AC 190; [1891–4] All ER Rep 1230." 15 It seems to me, on the basis of these authorities and as a matter of common sense, that before a trustee can enforce a right of reimbursement or exoneration he must have trust assets in his possession or under his control from which to satisfy the right. If trust assets are held by third parties the trustee must obtain control of them, if necessary by invoking the assistance of the Court. 16 There is nothing in clause 17.4 or clause 19.2 which would preclude the trustee from tracing trust assets into the hands of any third party, including any beneficiary, so as to bring any trust assets held by a third party into the hands of, and under the control of, the trustee. 17 The words in the last sentence of paragraph 17.4, that the right of the trustee to be indemnified is limited to the assets of the trust fund in the hands of or under the control of the trustee, do not impose any limitation on the right of the trustee to have recourse to trust assets to satisfy that right. Those words serve only to emphasise the exclusion of the trustee's right to a personal indemnity from any beneficiary. 18 The Bank did not submit that the trustee's right of personal indemnity from beneficiaries is itself a trust asset. Clearly it is not. The exclusion of the right of personal indemnity is irrelevant to whether the trustee is entitled to be fully indemnified out of trust assets against a liability incurred whilst acting as trustee, or purporting so to act. Clauses 17.4 and 19.2 exclude the right of personal indemnity. They do not affect the right of the trustee to be indemnified out of trust assets. 19 Paragraph 18 of the proposed pleading relies solely upon the combined effect of clauses 17.4 and 19.2 of the Trust Deed. It raises no question of fact. In my view, the proposed amendment is futile because it is obviously bad in law. (Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 456.) It is not fairly arguable. Paragraph 19 20 Two issues arise in relation to paragraph 19. The first is whether the alleged breach of trust is adequately pleaded. The second is whether the trustee would be disentitled from claiming indemnity by reason of the alleged breach of trust. 21 In paragraph 44 of its summons, Intagro contends that if the Court finds the first and second guarantees to be binding on the plaintiff, which it denies, then, it says that it is the fact that it did not enter into the guarantees as a trustee of any trust. 22 The Bank submitted that it should be inferred from this pleading that Intagro contends that it did not intend to act as trustee when it entered into the first or second guarantees. The Bank says that if the Court nonetheless holds that Intagro did do so, whilst not intending to do so, it inadvertently but negligently exposed the trust to a substantial liability and thereby breached its duty of care and diligence. 23 I think that paragraph 19 as amended during argument sufficiently pleads the facts giving rise to the alleged breach of duty. The facts relied upon are very simple and unless leave were given to amend the Bank would be precluded from relying on any additional matters as constituting the alleged breach. It is not possible to say on a pleading application whether the facts asserted would be sufficient to establish the breach. I do not think leave should be refused on the ground that the paragraph does not sufficiently plead the matters alleged to give rise to a breach. 24 Mr Rares SC, who appeared for the Bank, submitted that if Intagro acted in breach of its duties as trustee it was not entitled to be indemnified and there was therefore an arguable case which should go to trial that Intagro was not entitled to be fully indemnified against its liability under the guarantees out of the trust assets and hence the directors were personally liable. He cited RWG Management Limited v Commissioner for Corporate Affairs [1985] VR 385 where Booking J said at 396: "A trustee's right to be indemnified out of the Trust property is limited to liabilities or expenses that have been properly incurred in the execution of the trust: Stott v Milne (1884) 25 Ch D 710, p. 715; re Beddoe [1893] 1 Ch 547 at p. 588. If, for example, a trustee incurs some liability by an act in relation to the trust property which is in excess of his powers, he has no right of indemnity: Leedham v Chawner (1858) 70 ER 191. The result is the same where a liability is incurred as the result of conduct on the part of the trustee which is in breach of his duty, not as being in excess of power, but as being in breach of his duty to execute the trust with reasonable diligence and care: Ecclesiastical Commissioners v Pinney [1900] 2 Ch 736 at pp742-3, per Rigby LJ, a case of contract; Benett v Wyndham (1862) 4 De GF and J 259; 45 ER 1183 and re Raybould [1900] 1 Ch 199, cases of tort. …… The whole question of the limits of a trustee's right to indemnity and the corresponding limits of the creditors power to reach trust property is elaborately discussed in Scott on Trusts , 3 ed, vol III, paras 224-248 and 268." 25 Mr Hammerschlag SC, who appeared with Mr Gyles for the directors, submitted that irrespective of whether the trustee's right of indemnity at general law was lost, it was entitled to be indemnified in respect of any liability in which it incurred by the express provision in clause 17.4 provided it acted in good faith. That was so whether or not the liability was incurred when acting in breach of trust. They submitted that as bad faith was not alleged the pleading disclosed no facts on the basis of which it was arguable that the trustee was not entitled to be fully indemnified out of the trust assets. 26 I accept that it is at least arguable that Intagro would lose its right at general law to be indemnified out of the trust assets for its liability in entering into the guarantee if in doing so it breached its duty of care and diligence. (Ecclesiastical Commissioners v Pinney [1900] 2 Ch 736 at 743; RWG Management Limited v Commissioner for Corporate Affairs at 396; Gatsios Holdings Pty Ltd v Nick Kritharas Holdings (in Liq) (2002) ATPR 41-864; [2002] NSWCA 29 at para 14 (per Spigelman CJ); Nolan v Collie (2003) 7 VR 287 at 303, 305-308). 27 The question then is whether the trustee's right of indemnity is extended by clause 17.4 of the Trust Deed. 28 There is no reason to doubt the validity of the express indemnity in clause 17.4. It only applies where the trustee acts in good faith. (McLean v Burns Philp Trustee Co Ltd (1985) 2 NSWLR 623 at 641; Armitage v Nurse [1998] Ch 241 at 252, 253-4). 29 Paragraph 19 does not allege any fact which could establish that Intagro was not acting in good faith. Indeed the paragraph proceeds on the basis that Intagro did not intend to act as trustee when entering into the guarantees. There is therefore no allegation that Intagro deliberately breached its trust or acted dishonestly towards the beneficiaries, or was recklessly indifferent as to whether the step taken was in accordance with the terms of the Trust Deed or was in the interest of beneficiaries. As Millett LJ said in Armitage v Nurse (at 253): "… there is an irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust. If the beneficiaries have no rights enforceable against the trustees there are no trusts. But I do not accept the further submission that these core obligations include the duties of skill and care, prudence and diligence. The duty of the trustees to perform the trusts honestly and in good faith for the benefit of the beneficiaries is the minimum necessary to give substance to the trusts, but in my opinion it is sufficient. … a trustee who relied on the presence of a trustee exemption clause to justify what he proposed to do would thereby lose its protection: he would be acting recklessly in the proper sense of the term." 30 In a claim by the beneficiaries against Intagro for breach of trust, the onus would be on Intagro to plead the indemnity clause and to prove that it was acting in good faith. However, as here the Bank must establish that the trustee was not entitled to its indemnity, the Bank must plead facts which would take the case outside the scope of the indemnity. Thus the question becomes one of construction of clause 17.4. 31 In McLean v Burns Philp Trustee Co Limited Young J (as his Honour then was) said that Courts will be very careful in construing clauses which exclude liabilities for breaches of trust and will read such clauses as strictly as possible. A similar but perhaps less stringent approach is that the clause should be read no more widely than its language requires on a fair reading. (Walker v Stones [2001] QB 902). This is consistent with the principle that an exclusion clause is to be given its natural and ordinary meaning in the light of the contract as a whole, giving due weight to the context in which the clause appears including the nature and object of the contract; (Darlington Futures v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510). 32 Mr Rares SC submitted that clause 17.4 should not be construed as extending an indemnity where the trustee acted in breach of trust. There was no express provision extending the indemnity to things done in good faith but in breach of trust. He submitted that the clause restated but did not extend the right to indemnity which a trustee enjoys at general law. 33 The indemnity in the present case can be compared with that considered by Brooking J in RWG Management Pty Ltd v Commissioner for Corporate Affairs which provided: " In addition to the right of indemnity given by law to trustees the Trustee is and shall be entitled to be immediately indemnified out of the Trust Fund in respect of all liabilities and expenses incurred in the execution or purported execution of the powers, authorities and discretions conferred on it by or pursuant to this Deed and against all action (sic) proceedings, costs, claims and demands in respect of any matter or thing relating to the Trust or the activities of the Trustee in its capacity of Trustee of the Trust. " Brooking J noted that counsel had not submitted that the rights conferred by the deed were wider than the general law rights so as to embrace liabilities incurred by the trustee while acting in breach of its duty of care and diligence, or whilst acting in excess of its powers. His Honour appeared to concur. His Honour doubted whether the deed would be held to give the trustee a right of indemnity while acting without due care and diligence or if acting in excess of its powers, (at 399-400). 34 Mr Hammerschlag SC submitted, however, that the words "acting in good faith", whilst on their face words of limitation, operated as words of extension by indicating that provided the trustee acted in good faith it was entitled to be indemnified in respect of all liabilities in relation to any matter or thing done or omitted to be done concerning the trust (clause 17.4.5), whether in breach of trust or not. He submitted that the clause extended and did not merely restate the position at general law. 35 It is unnecessary to decide this question. As Dawson J said in the Commonwealth v Verwayen (1990) 170 CLR 394 at 456: " Of course, an amendment which is futile because it is obviously bad in law will not be allowed. But it is no ground for refusing an amendment that it raises a claim or defence which ought not to succeed. That will be an issue upon trial. " 36 The question of whether clause 17.4 of the Trust Deed provides indemnity to the trustee acting in good faith but in breach of trust is fairly arguable. Being fairly arguable there should be leave to amend. 37 No discretionary reasons were advanced for disallowing the proposed amendments. The case is at an early stage of preparation. Mr Hammerschlag submitted that leave should not be too readily given to the Bank to raise an arguable claim that turned upon a pure question of construction because of the burden which would be imposed on the directors if they were joined as parties to the proceedings. That is not a consideration which warrants applying a heterodox test to an application for leave to amend. If the claim against the directors were confined to the allegations in paragraphs 19 to 21, it appears to me, as presently advised, that the issue of the proper construction of clause 17.4 of the Trust Deed may raise a discrete question of law, which, if determined one way, would resolve the claim against the directors. It may be appropriate to consider determining the question of the scope of the indemnity in clause 17.4 as a separate issue. However, no submissions were made about that. In any event, unless the directors are successful in their application for leave to appeal from the orders of McDougall J, the determination of a separate question would not resolve the case against them, no matter how it was decided. Paragraph 20 38 The second alleged breach of trust was that Intagro deferred its monitoring and reporting requirements of the principal debtor TJF to the Bank and thereby breached its duties as trustee. No submission was made that the pleading did not sufficiently particularise the alleged breach of trust. Again the directors submitted that even if Intagro was in breach of trust, that did not affect its indemnity because there was no allegation that Intagro failed to act in good faith. For the same reasons as I gave in respect to paragraph 19, I am of the view that the issue raised is fairly arguable. 39 Paragraph 21 is consequential on paragraphs 19 and 20. Conclusion 40 The result is that I refuse leave to the cross-claimant to file an amended cross-claim which includes paragraph 18 of the proposed amended cross-claim. I grant leave to the cross-claimant to file an amended cross-claim in terms of paragraphs 19 to 21 of the proposed amended cross-claim with the insertion of the words "of care and diligence" after the word "obligations" in paragraph 19. 41 As each party was partially successful on the application I direct that costs of the application for leave to amend should be costs in the cause. ***** Last Modified: 11/17/2004 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. 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