New South Wales Supreme Court CITATION : Trim Perfect Australia v Albrook Constructions [2006] NSWSC 153 HEARING DATE(S) : 7 March 2006 JUDGMENT DATE : 7 March 2006 JURISDICTION : Equity JUDGMENT OF : Austin J EX TEMPORE JUDGMENT DATE : 03/07/2006 DECISION : Plaintiff's sale of property at Booma North on 2 December 2005 approved, nunc pro tunc. CATCHWORDS : EQUITY & TRUSTS - trustee's right of exoneration out of trust assets - nature and enforcement of right of exoneration after removal of trustee PRACTICE & PROCEDURE - court's power to approve, nunc pro tunc, sale of trust property by former trustee to enforce right of exoneration ANZ Banking Group Limited v Intagro Projects Pty Limited [2004] NSWSC 1054 Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 Coates v McInerney (1992) 7 WAR 537 Davies v Littlejohn (1923) 34 CLR 174 Hartley Poynton Limited v Ali [2005] VSCA 53 Hewett v Court (1983) 149 CLR 639 CASES CITED : Octavo Investments Pty Limited v Knight (1979) 144 CLR 360 Re Pumfrey (deceased); The Worcester City and County Banking Company Limited v Blick (1883) 22 ChD 255 Re Stucley; Stucley v Kekewich [1905] 1 ChD 67 Southern Wine Corporation (in liq) v Frankland River Olive Co Limited [2005] WASCA 236 Tennant v Trenchard (1869) LR 4 Eq 537 The Melbourne Tramways Trust v The Melbourne Tramway and Omnibus Co Limited (1887) 13 VLR 487 Vacuum Oil Co Pty Limited v Wiltshire (1945) 72 CLR 319 Xebec Pty Limited (in liq) v Enthe Pty Limited (1987) 18 ATR 893 Trim Perfect Australia Pty Ltd (In liq) ACN 075 768 633 (P) Albrook Constructions Pty Ltd ACN 054 223 531 (D1) PARTIES : Bruce Fergus Grant (D2) Leonne May Grant (D3) Registrar-General, Department of Lands (D4) FILE NUMBER(S) : SC 1213/06 J Stevenson SC with J White (P) COUNSEL : G A Sirtes (D1) J A Darvall (D2, D3) Dibbs Abbott Stillman (P) SOLICITORS : Richard Hill & Associates (D1) Cassidy Morrison & Teare (D2, D3) L D Ryan, Solicitor for the Registrar-General (D4) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J TUESDAY 7 MARCH 2006 1213/06 TRIM PERFECT AUSTRALIA PTY LTD (IN LIQ) V ALBROOK CONSTRUCTIONS PTY LTD & 3 ORS JUDGMENT (Ex tempore; revised on 13 March 2006) 1 HIS HONOUR: By a summons filed on 27 January 2006, and amended by amended summons filed in court today, the plaintiff ("Trim Perfect") seeks declarations as to its entitlements to sell the property contained in folio identifier 13332/92 and known as "Booma North" as an asset of the Philaine Farming Trust, and to discharge its liabilities as trustee pursuant to its entitlement to be exonerated out of trust assets. 2 The plaintiff also seeks an injunction restraining the fourth defendant, the Registrar General, from recording the first defendant as being the registered proprietor of the property, and from accepting any dealing for lodgement in respect of the property by the first defendant or any other party purporting to be trustee of the trust. Facts 3 Trim Perfect was the trustee of the Philaine Farming Trust ("Trust"), pursuant to a trust deed dated 27 November 1997. The units in the Philaine Farming Trust are held for the benefit of the Philaine Family Trust. 4 The primary asset of the Farming Trust is the property at Booma North. The property was purchased as freehold land and was an authorised investment for the purposes of the trust instrument. Under cl 10 of the Trust Deed for the Farming Trust Trim Perfect was entitled to act as the absolute owner of the trust property and do all such things that it could lawfully do as the beneficial owner. Trim Perfect was specifically authorised by the trust instrument to acquire real property, to borrow and to mortgage or hold the whole of the trust property and assets, and to "sell trust assets". Trim Perfect was authorised as trustee to carry on business of "dairyman" and do things incidental to the carrying on of such business (cl 12(e)). 5 Clause 16 of the trust instrument for the Farming Trust was in the following terms: "16. Extent of Personal Liability: 16.1 The Trust Property shall be directly available for the payment or satisfaction of all obligations and liabilities incurred by the Trustee, officers and agents of this Trust within the scope of their authority. Although the Trustee, as Trustee, may be made party to any suit or proceeding to enforce any such obligation or liability, it, he or she shall not on account thereof be held to any personal liability, but shall be party only insofar as is necessary to enable such obligation or liability to enforced against the Trust Property. No Unit Holder, Trustee, officer or agent of this Trust shall be held to any personal liability whatsoever in tort, contract or otherwise, in connection with the affairs of the Trust and all persons shall look solely to Trust Property for satisfaction of claims of any other nature arising in connection with the affairs of this Trust. Under and in respect of all agreements, obligation, instruments and action in regard to the affairs of this Trust, this Trust and not the Unit Holders, Trustee, officer or agent of this Trust shall be the principal and entitled as such to enforce the same, collect damages and take all other action. 16.2 No Unit Holder, Trustee, officer or agent of this Trust shall be liable to this Trust or to any Unit Holder, Trustee, officer or agent of this Trust, except for his own gross negligence or for such of his own acts, neglects and defaults as constitute a breach of trust committed in bad faith. Except as specified above, each Trustee, officer and agent shall be entitled to indemnity out of the Trust Property for reasonable expenses and outlays and to be exonerated and indemnified to his reasonable satisfaction, from time to time, for or against any and all loss, expense and liability incurred or to be incurred by him in good faith in the execution of this Trust. And no Trustee shall, as such, be obliged to give any bond or surety or other security for the performance of any of his duties. 16.3 Without limiting the generality of the foregoing it is expressly provided that the Trustee shall have no rights of indemnity against Unit Holders or the Settlor." 6 Clause 26 of the trust instrument provided for the appointment and removal of trustees, saying that the persons listed in the third schedule had the power to remove and appoint, and to remove or appoint a new trustee jointly. The third schedule nominated, relevantly to the present facts, Philip Bruce Martin. 7 It appears that Trim Perfect's assets were assets held by it as trustee of the Farming Trust and, as I have said, the primary asset of the trust was the property at Booma North. 8 Trim Perfect, as the registered proprietor of the property at Booma North, granted a mortgage over the property to the National Australia Bank Limited. There is fairly extensive evidence provided by the plaintiff of the financial transactions between Trim Perfect and the Bank. The bottom line is as of 24 January 2006 the total amount owing by Trim Perfect under various loans and facilities was $3,537,227.81. 9 On 28 September 2005 Trim Perfect was placed into liquidation on the application of the Bank. On 30 November 2005 Mr Martin signed a notice purporting to remove Trim Perfect as trustee of the Farming Trust, and also a notice appointing the first defendant, Albrook Constructions, as the new trustee. Those two documents were registered with the Registrar­General in the General Register of Deeds on 21 September 2005. The case before me today proceeded on the assumption that they were effective under the trust instrument to replace Trim Perfect with Albrook Constructions as trustee of the Farming Trust. 10 On the same day Mr Phillip Sim, writing as a director of Albrook Constructions, sent a letter to the liquidator of Trim Perfect advising that Trim Perfect had been removed as trustee of the trust and that Albrook Constructions had been appointed in its place. In Mr Sim's letter there is an assertion that Trim Perfect no longer had any authority as trustee to deal with the property of the trust and specifically that Trim Perfect was not to proceed to sell the property at auction. A similar letter was written by the solicitors of Albrook Constructions on the same day. 11 There is evidence that Albrook Constructions lodged a caveat to protect its interest as new trustee of the Farming Trust and the caveat eventually lapsed. More germane now is the fact that on 21 December 2005 Albrook Constructions lodged an application with the LPI to be recorded as the only registered proprietor of the Booma North property pursuant to s 24 of the Trustee Act 1975 (NSW). That application remains outstanding. 12 The evidence shows that on 12 January 2006 the Registrar-General advised Trim Perfect's solicitors that the application was an unregistered dealing that would eventually lapse if it were not acted upon, but it had not been acted on because the Registrar-General had required the production of the Certificate of Title. The Certificate of Title is held by the Bank and presumably will not be released until the issues before the Court have been resolved and settlement of the sale of the property takes place. Although the application is unregistered, it remains an obstacle to settlement. 13 As to the disposal of the property, notwithstanding the warning it had received Trim Perfect did enter into a contract for the sale of the Booma North property on 2 December 2005 for a purchase price of $1,250,000, and completion was originally scheduled to take place on 13 January 2006. The liquidator had obtained a valuation report prior to the sale which had valued the Booma North property at $1,220,000, so the sale was in excess of the valuer's opinion. The completion date was extended by Trim Perfect exercising its right to extend under the contract and currently the completion date is 13 April 2006. 14 Trim Perfect's solicitor, acting on the sale of the Booma North property, has given evidence of a conversation he had with the solicitor for the purchasers in which the solicitor told him that he would not settle the sale while an unregistered dealing remained in place on the title. The solicitor has given opinion evidence as an expert in conveyancing to the effect that a prudent purchaser would not complete a purchase whilst an unregistered dealing was shown on a search of the title. Therefore the position is somewhat at a stalemate. 15 The purchasers, who were represented in court today, and who did not oppose and do not support the position of the plaintiff, have confirmed that they will not complete the contract of sale dated 2 December 2005 whilst an application remains an unregistered dealing. The position of the first defendant, also represented today, is that it neither consents to nor opposes the relief that the plaintiff now seeks. 16 The position seems a little puzzling because, according to the evidence, the Bank's security is well in excess of the total proceeds of sale of the Booma North property. What is at stake between the parties is therefore not any of the sale proceeds, in any direct sense, but rather an issue as to the position of Trim Perfect (in liquidation) on the one hand and Albrook Constructions on the other as to matters of liability. By the present proceeding Trim Perfect wishes to establish that the proceeds of sale of the Booma North property will serve to partially exonerate it in respect of liability it has undertaken as trustee of the Farming Trust, vis-à-vis the Bank. 17 The position initially asserted by Albrook Constructions immediately before the contract was entered into was that Trim Perfect was not entitled to make that contract. 18 By the filing of its application with the LPI, Albrook Constructions asserted in effect the priority of its rights over any claim by Trim Perfect in respect of the proceeds of sale of the property. It may be that the motive for doing so, since it was not directly a matter of asserting a claim to money, was for Mr Martin to gain some leverage in negotiations with the Bank. There is some evidence of this in the affidavits read before me. According to Mr Honner of the liquidator's office, Mr Martin said to him, when he delivered the notice of removal of the trustee, that he was "trying to get the Bank back to the table". 19 Be that as it may, what is presented to me now is essentially a question of law, namely whether Trim Perfect is entitled to the declaratory and injunctive relief that had been asserted by it in the amended summons. Analysis 20 The following propositions seem to me to be established by the case law: (1) A trustee is personally liable for the debts it incurs as trustee, notwithstanding any such provision as cl 16 of the present trust instrument purporting to relieve it of that liability: Vacuum Oil Co Pty Limited v Wiltshire (1945) 72 CLR 319; Octavo Investments Pty Limited v Knight (1979) 144 CLR 360 at 367. (2) Where a trustee incurs expenses or becomes subject to liability in the course of performing the duties of the trust, it has a right of indemnity out of assets of the trust in respect of those expenses or that liability, the right of indemnity taking the form of a right of recoupment of expenditure made by the trustee and a right of exoneration from the liability to make expenditure which has not yet been expended: Octavo Investments at 367; Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 245. (3) The right of indemnity, recoupment and exoneration is supported by security in favour of the trustee over the trust assets in the form of an equitable lien (sometimes referred to as an equitable charge, though it arises as a matter of law rather than by agreement inter parties): Octavo Investments at 367; Buckle at 246. (4) The trustee's equitable lien confers on it a proprietary interest in the trust property, which can be asserted in priority to the claims of the cestuis que trust: Octavo Investments at 370. (5) The trustee's proprietary interest is enforceable by judicial sale or the appointment of a receiver, and ancillary orders such as an order to recover possession of trust property to permit these primary remedies to take effect, but foreclosure is not available: Tennant v Trenchard (1869) LR 4 Eq 537; Seton's Judgments and Orders, 7th ed, 1912, vol 3 pp 2220 to 2225; see also Ashburner's Principles of Equity, 2nd ed, 1983, p 248; EL Sykes and S Walker, The Law of Securities, 5th ed, 1993, p 198; Fisher and Lightwood's Law of Mortgages, Australian ed, 1995 by E L G Tyler, P W Young and C W Croft, p 44; ANZ Banking Group Limited v Intagro Projects Pty Limited [2004] NSWSC 1054 [at 14]. (6) The trustee's proprietary interest may only be enforced by judicial sale or the appointment of a receiver (and ancillary orders) and not merely by sale without curial intervention: The Melbourne Tramways Trust v The Melbourne Tramway and Omnibus Co Limited (1887) 13 VLR 487 at 490; Re Pumfrey (deceased); The Worcester City and County Banking Company Limited v Blick (1883) 22 ChD 255 at 265; Re Stucley; Stucley v Kekewich [1905] 1 ChD 67; Davies v Littlejohn (1923) 34 CLR 174 at 184; Hewett v Court (1983) 149 CLR 639 at 663. (7) The right of indemnity accrues at the time the obligation is incurred, although it may subsequently become either a right of recoupment or a right of exoneration, depending on how the trustee responds: Xebec Pty Limited (in liq) v Enthe Pty Limited (1987) 18 ATR 893; Southern Wine Corporation (in liq) v Frankland River Olive Co Limited [2005] WASCA 236 at [30]. (8) Loss of office by the trustee (whether by retirement or removal) does not deprive the trustee of an accrued right of indemnity, recoupment or exoneration: Coates v McInerney (1992) 7 WAR 537; Xebec v Enthe [at 898]; Southern Wines [at 30]. 21 In the light of these propositions of law, the position in the present case seems to be as follows. First, when Trim Perfect became trustee of the Farming Trust it acquired in that capacity the powers conferred on the trustee by the trust instrument of 27 November 1997, including the powers of acquisition and sale of trust assets and the power to borrow on the security of trust assets. It granted security over the Booma North property in the exercise of its power as trustee, in transactions which have not been challenged before me. It thereby raised funds from the Bank and incurred personal liability as trustee to repay those funds. It has not been suggested that Trim Perfect acted ultra vires the trust or improperly in its dealings with the Bank. Consequently, Trim Perfect became entitled to a right of indemnity out of the trust assets for the liability it had incurred to the Bank. That right of indemnity took the form of a right of exoneration because Trim Perfect had not advanced any of its own funds to meet that liability. In due course, the liability to the Bank substantially exceeded the value of the trust assets. 22 If Trim Perfect had acted, whilst remaining trustee, to sell the Booma North property, it would have had the power to do so. The sale that was in fact made on 2 December 2005 was in excess of the valuation obtained by the liquidator and has not been challenged on any equitable ground. The problem is that two days before executing the contract for sale Trim Perfect had been purportedly removed as trustee, although it remained the registered proprietor of the Booma North property. It has not been submitted today that there was any defect in the document executed by Mr Martin by which he purported to replace Trim Perfect with Albrook Constructions as trustee. 23 What is the significance of the fact that Trim Perfect was removed as trustee shortly before executing the contract of sale? It was submitted that the trust instrument, as a matter of construction, conferred upon Trim Perfect as former trustee the power to execute a contract of sale for the purpose of exercising its right of indemnity. Reliance was placed on cl 16.1 which says that the trust property is to be directly available for satisfaction of liabilities incurred by the trustee. The submission was that the liabilities in question, owed by Trim Perfect personally to the Bank, were undoubtedly liabilities incurred by the trustee as and when it was trustee, and therefore it had a power of sale notwithstanding the termination of its office. 24 It seems to me that this submission is incorrect. The heading of cl 16 is "Liability". There is a separate part of the trust instrument dealing with the powers of the trustee. It is clear from cl 13 that the powers conferred by the trust instrument, including a power of sale and a power to borrow, are conferred on the entity which is the trustee for the time being and not on any former trustee. I do not agree that cl 16.1 adds another power of sale that can be relied upon in the present case. 25 It seems to me to follow that on 2 December 2005 Trim Perfect did not have express or implied actual authority to sign the contract for sale. At that time the trustee was Albrook Constructions, which had not conferred any such authority on Trim Perfect, even if as trustee it had the power to delegate (a matter I do not pause to investigate). Albrook Constructions had done nothing, so far as the evidence goes, to hold out Trim Perfect as having an authority that the latter did not in fact possess. 26 However, the lack of authority of Trim Perfect to enter into the contract for sale and subsequently to complete it can in my view be overcome by relying on the following reasoning, which I accept. 27 As I have said, the former trustee has a right of indemnity which is reflected in a right of exoneration of a liability or part of a liability that it has incurred as trustee. That right was possessed by Trim Perfect with respect to the liability it had entered into vis-à-vis the Bank. It existed on 2 December 2005. It was secured by an equitable lien. Under the equitable lien Trim Perfect was entitled to apply to the Court for an order for judicial sale. If, hypothetically, an application had been made to the court for an order for judicial sale on 2 December 2005 the court would have been influenced by a number of matters which, in my view, would have led it to make the order. 28 First, it would have been relevant that the proposed sale was in excess of the valuation. Second, it would have been relevant that there was a process of auctioning. Although evidence on that subject is thin there is no suggestion there was some impropriety or inadequacy in that procedure. 29 Third, the Court would have taken into account the fact that the proceeds of sale would inevitably be applied by the trustee, presumably at the point of sale, to reduce the debt. I assume the Bank would not have released the certificate of title for the property without receiving the balance of the proceeds of sale. There were therefore no funds available to the new trustee for the benefit of the beneficiaries. The only available funds were properly to be applied against the former trustee's right of exoneration in absolute priority to any claim of the cestuis que trust. Only by doing that could the legitimate claims of the former trustee as well as the Bank be implemented. 30 I think all those circumstances would have led the court to think it was appropriate, in considering the matter on 2 December 2005, to make an order for the judicial sale of the property on the substantial terms of the contract in fact entered into on that day. 31 It is also relevant that there seems to have been some confusion as to the precise position of the former trustee and the new trustee, in correspondence between the solicitors. Nonetheless, the solicitors for Trim Perfect were concerned in that correspondence to assert, and they did so clearly, that they were seeking to protect the right of indemnity of their client. An order for judicial sale would have achieved that objective. 32 The question then becomes whether, no such order having been applied for or made on 2 December 2005, anything can be done now to address the problem. 33 I have been referred to a decision of the Court of Appeal of the Supreme Court of Victoria in Hartley Poynton Limited v Ali [2005] VSCA 53, a judgment of Ormiston JA which extensively analyses the court's power both inherently and under the rules of the court to make orders nunc pro tunc. 34 Ormiston JA noted [at 73] that with a few minor exceptions, nunc pro tunc judgments and orders have not been granted to alter the substantive rights of the parties, only to overcome procedural irregularities and difficulties. He expressed the conclusion [at 76] that the power of the Court to ante-date orders and judgments was derived from the common law and that in making an order nunc pro tunc "it is only for a delay of the court in doing justice that the judgment can be so entered". 35 In my view the problem that I currently confront is to be characterised as a procedural problem rather than a problem affecting substantive rights. The substantive rights of the parties are that the former trustee, Trim Perfect, has an entitlement to exoneration out of the proceeds of sale if the sale has been properly made. It has an entitlement to apply to the Court for an order for judicial sale and if an application were made in a procedurally correct fashion before the sale, the Court would have authorised such a sale as this, at a price exceeding valuation. 36 The new trustee, Albrook Constructions, and the purchasers under the contract of sale, are both before the Court today and have both been given the opportunity to respond to the submission made on behalf of Trim Perfect that the Court should exercise its power nunc pro tunc under its inherent jurisdiction or under the Uniform Civil Procedure Rules. Neither of them has sought an adjournment or has sought to oppose that course being followed. 37 In my view it is procedurally appropriate to make the order. The order gives effect to the substantive rights to the parties, does not cause prejudice and does not seek to adjust the substance of those rights. I have therefore decided to make an order for judicial sale in substantially the terms of the contract of sale made on 2 December 2005, relying both on the Court's inherent power to do so and on the rules of Court, i.e. r 36.4 of the Uniform Civil Procedure Rules, that order to take effect as from 2 December 2005. 38 I intend also to make ancillary orders and the injunctive orders sought in the amended summons. 39 On the question of costs, it does seem to me that the proper outcome was affected by the way the matter developed today. The first defendant proceeded on a basis that was, in one respect, incorrect prior to today. It may be seen at p 169 of Ex P1 that the first defendant asserted that any right that the purchasers might have acquired in the property would be subject to the first defendant's prior equity. It seems to me that that assertion rested on a foundation that cannot be justified. To that extent the approach that was taken by the first defendant to this matter, including the filing of the application which caused difficulty for completion of the purchase, was misconceived. 40 On the other hand, the first defendant did say from the outset that by virtue of the replacement of Trim Perfect as trustee, Trim Perfect had no authority to enter into the purchase, and that was something I have found to be correct, subject to the orders I have made nunc pro tunc granting permission to sell. Subject to those orders, there was a problem with Trim Perfect's authority because of its replacement as trustee, a matter not conceded by Trim Perfect. 41 So in summary it seems to me there was a degree of mistaken analysis on both sides, as it has turned out – though I note that the issues were not easy ones. I do not quite agree with the submission that the proceeding would in substance have had to occur anyway, had a proper application been made for judicial sale, because it seems to me that that application may well have been more direct and simple than what we had today. 42 Nor do I quite agree with the submission that the cause of the difficulty was the first defendant's mistaken analysis. It seems to me the difficulty could have been overcome by an appropriate application for judicial sale, but Trim Perfect did not make such an application until today. The question of identifying which of those factors should be regarded as the primary cause is a difficult matter suitable for the High Court, and I need not determine it beyond saying that mistakes on both sides contributed to the outcome. 43 My conclusion is that the proper approach to costs as between the plaintiff and the first defendant is that there be no order as to costs between them, with the intention that each of them bears their own costs of the proceedings. 44 As regards the second and third defendants, once the contract for sale was entered into by Trim Perfect, any subsequent proceeding would necessarily have involved them, even if there had been an application made shortly after 2 December that nunc pro tunc approval of the sale be granted at that stage. If that had occurred I believe the Court would have made an order that the plaintiff pay the second and third defendant's costs, assuming that they adopted the attitude in such hypothetical circumstances that they have in fact adopted (that is to say, the reasonable approach of not being prepared to settle in the presence of an unregistered dealing, not seeking to oppose the relief that the plaintiff sought but appearing so as to ensure that their interests were protected by the outcome). I see no basis for making any order that would transfer the liability to pay the second and the third defendants' costs wholly or party to the first defendant. 45 I will stand the matter over to 10am tomorrow for the parties to bring in short minutes. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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