New South Wales Supreme Court CITATION : Avanteos Investments Ltd [2008] NSWSC 370 HEARING DATE(S) : 18/04/08 JUDGMENT DATE : 24 April 2008 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Judicial advice to be given CATCHWORDS : TRUSTS AND TRUSTEES - Judicial advice - three classes of beneficiaries with potentially different interests - another party proposes litigation to establish rights of the respective classes - trustee proposes to consent to be representative defendant for one class only LEGISLATION CITED : Trustee Act 1925, s 63 CATEGORY : Principal judgment Arakella Pty Ltd v Paton [2004] NSWSC 13; (2004) 60 NSWLR 334 CASES CITED : His Eminence Metropolitan Petar v The Macedonian Community Church St Petka Inc [2007] NSWCA 150 Re Charteris [1917] 2 Ch 379 TEXTS CITED : Jacobs' Laws of Trusts in Australia, seventh edition (2006) PARTIES : Avanteos Investments Limited - Plaintiff FILE NUMBER(S) : SC 2177/08 COUNSEL : Mr A G Bell SC/Mr T M Thawley - Plaintiff SOLICITORS : Henry Davis York - Plaintiff IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIOINS LIST BARRETT J THURSDAY, 24 APRIL 2008 2177/08 AVANTEOS INVESTMENTS LIMITED JUDGMENT 1 This is an application under s 63 of the Trustee Act 1925 for the opinion, advice or direction of the court. The applicant is Avanteos Investments Limited (which I shall call "Avanteos"), the trustee of several superannuation, retirement and other investment funds. 2 The assets of these funds administered by Avanteos are under the immediate control of a custodian, Australian Market Automated Quotation (AUSMAQ) System Limited. That company, in turn, has appointed Permanent Trustee Australia Limited ("Permanent") its sub-custodian, so that fund assets such as shares, debentures and units of managed investment schemes held on registers are registered in the name of Permanent. 3 Among the assets held in this way are units of managed investment schemes known as the Basis Yield Fund and the Basis Aust-Rim Fund. I shall call these the "Basis funds". These units are held by Avanteos for the benefit of various investors, even though registered in the name of Permanent. The responsible entity and trustee of the two managed investment schemes is Basis Capital Funds Management Limited ("BCFM"). 4 On 16 July 2007, BCFM notified unitholders of the Basis funds that it had suspended applications and redemptions in respect of both funds because it was unable to make a fair calculation of the net asset value of the funds. According to BCFM, it was not until 28 September 2007 that it could calculate net asset value as at 30 June 2007. That calculation was relevant to unsatisfied applications for units received in June 2007. Some of the persons by whom those applications were made ("Applicants") have sought to withdraw the applications. 5 The funds work on a quarterly redemption cycle. A redemption date occurred on 2 July 2007 and a number of unitholders ("Redeemers") applied to redeem or withdraw as at that date. None of those persons has been paid. 6 BCFM has stated that if the Applicants are not entitled to withdraw their applications, the Basis funds will have enough assets to satisfy the Redeemers. But if the Applicants are entitled to withdraw their applications and to receive a refund of their application moneys, the Basis funds will not have enough assets to satisfy the Redeemers immediately and will have to extend the period for payments. 7 BCFM has commenced separate proceedings in which it seeks declarations to the effect that (a) BCFM is entitled to retain application moneys from Applicants as assets of the Basis funds; and (b) Redeemers are creditors and BCFM is required to calculate their redemption proceeds based on net asset values at 30 June 2007. 8 There are three classes of investors in the Basis funds interested in those proceedings: Applicants, Redeemers and investors who are neither Applicants or Redeemers. 9 In the BCFM proceedings, BCFM has applied for orders appointing certain persons as representatives of these three classes, so that those persons may be defendants. The choice of potential representative defendants has been made in consultation with a working group of members of the Investments and Financial Services Association which is seeking to assist resolution of the issues concerning the Basis funds. 10 It is proposed that Permanent, as the sub-custodian of Avanteos, be the representative defendant on behalf of Redeemers. Avanteos wishes to procure Permanent to undertake that role. 11 Beneficiaries of the trusts of which Avanteos is trustee include not only Redeemers but also Applicants and beneficiaries who are neither Redeemers nor Applicants. Avanteos apprehends that, if it procures Permanent to act in the way proposed, it might be thought to be acting in a manner which prefers beneficiaries in the first class (Redeemers) over those in the other two classes. This is because Avanteos would be presenting to the court in the BCFM proceedings the best case for the Redeemers, which would not be (or, at least, might not be) in the interests of the beneficiaries of the other two classes. It is for this reason that Avanteos has sought judicial advice. 12 It may be said at the outset that this is a proper case for resort to s 63 of the Trustee Act. In His Eminence Metropolitan Petar v The Macedonian Community Church St Petka Inc [2007] NSWCA 150, the Court of Appeal (Ipp JA; Giles JA and Hodgson JA concurring) endorsed the following propositions concerning the s 63 jurisdiction: " · The proper province of judicial advice is guidance for the future. · A paradigm example of circumstances where judicial advice will be given is where a trustee is in genuine doubt about the propriety of any contemplated course of action in the exercise of his or her fiduciary duties and discretions. · Advice will ordinarily be given as to how trustees should proceed in a contemplated situation when the facts are clear and no breach of trust is alleged. · ·Section 63 is intended to empower advice to be given to those who have the stewardship of property for the benefit of others. As the section provides, the court is concerned with "the management or administration of the trust property" and "the interpretation of the trust instrument". · If a trustee wishes to seek judicial advice on a question related to the bringing or defending of legal proceedings, the trustee may properly do so only if the legal proceedings are themselves concerned with the management or administration of the trust property or the interpretation of the trust instrument and if those proceedings are being undertaken for the benefit of the trust and the beneficiaries. · Section 63 does not empower advice in connection with litigation that concerns merely whether the trustee has, in the past, committed breaches of trust (even if the litigation – to establish the alleged breach of trust – necessarily involves the proper construction of the trust instrument). · Section 63 does not empower advice in connection with litigation that involves merely allegations of past misconduct on the part of the trustee that, if established, will entail personal liability for breach of trust or statutory wrongdoing (and where the trust property will, in no way, be protected or enhanced by defence of the claim). · Section 63 assumes that the matter on which judicial advice is sought will be one that involves some aspect of "the trustee's duty as trustee" as it relates to future conduct of the trustee. A trustee who is alleged by a beneficiary to have committed a breach of trust or statutory wrong and who defends legal proceedings in which that allegation is advanced does not, thereby, perform any "duty as trustee". A decision by a trustee accused of breach of trust whether to contest the allegation is unrelated to any aspect of "the trustee's duty as trustee". The matter, then, at stake is the personal liability of the individual; and the course the individual follows will be dictated by a personal decision regarding the individual's own interests – not by considerations of stewardship. · Ordinarily, the provision to a trustee of an indemnity from trust assets must be determined on the final adjudication of the litigation. An indemnity should not be provided in advance under colour of private judicial advice." 13 The present case satisfies these criteria. 14 As to the duty of a trustee in such circumstances, I quote from paragraph [1711] of J D Heydon and M J Leeming, "Jacobs' Laws of Trusts in Australia", seventh edition (2006): "It is the duty of trustees to act fairly by all the beneficiaries. Their primary duty is to the beneficiaries as a whole, even where fulfilment of a duty disadvantages one beneficiary and favours another, for example, where the exercise of a power to postpone a sale of trust property on the ground that prices are low reduces the income of the tenant for life." 15 This example is drawn from Re Charteris [1917] 2 Ch 379. 16 But, as the learned authors point out, that duty is subject to another fiduciary duty, that is, the duty to act fairly and impartially between beneficiaries and to avoid favouring one class of beneficiaries at the expense of another. These questions most often arise where a life tenant has an interest in immediate income and a remainderman has an interest in capital accretion. 17 It is submitted on behalf of Avanteos that the efficient resolution of the BCFM proceedings is in the interests of all its beneficiaries. Without that resolution, the respective rights of Applicants and Redeemers are unclear and neither class stands to receive any form of satisfaction, while the investors who are neither Applicants nor Redeemers are beset by uncertainty about the value of their investments. I accept that submission. Resolution of the litigation will be to the advantage of Avanteos's beneficiaries as a whole. 18 There is then the question whether participation as the principal of the representative defendant on behalf of the Redeemers alone will entail improper favouring of that class of beneficiaries by Avanteos. One potential concern can immediately be put to one side. Avanteos has indicated that, whatever may be the outcome of the BCFM litigation and whatever costs orders may be made, Avanteos will not resort to the assets of the relevant trusts to reimburse itself for sums expended in connection with the litigation. Avanteos will absorb those expenses itself and pay them out of its own separate funds, to the extent that they are not recovered pursuant to costs orders in the BCFM proceedings. There is therefore no prospect that trust assets will be expended in promoting the cause of one class of beneficiaries only. 19 Avanteos has also made it clear that it will not be remunerated for playing the representative role. 20 Beyond that, the question is one of divided loyalty and potentially compromised fidelity. The duty of a representative party to litigation was described by Austin J in Arakella Pty Ltd v Paton [2004] NSWSC 13; (2004) 60 NSWLR 334 at [61] as follows: " The Court places particular reliance, in representative proceedings, upon the lawyers who act for the representative. It has been observed that, in proceedings under Pt IVA of the Federal Court of Australia Act 1976 (Cth), the lawyers acting for the representative have an obligation 'to conduct the proceedings on behalf of [the representative] in a way consistent with the interests of members of the representative group' ( King v AG Australia Holdings Ltd (2002) 121 FCR 480 at 489 [27], per Moore J), and that where the interests of the representative do not coincide with the interests of the members of the group, it is incumbent on the lawyers for the representative to put before the Court all relevant matters ( Lopez v Star World Enterprises Pty Ltd (1999) ATPR ¶41-678 at 42,670, per Finkelstein J). Those propositions are applicable, in my view, to representative proceedings under Pt 8, r 14." 21 It may therefore be that Avanteos, as the representative party (or, rather, as the principal of Permanent as the representative party), would find it necessary to advance in the interests of the Redeemers propositions that were not in the interests of the Applicants or the investors who are neither Redeemers or Applicants. 22 The answer to this lies, in practical terms, in the fact that BCFM intends to constitute the proceedings in such a way that other financial institutions act as representative defendants for the other two classes of interested persons. I would have a serious reservation about Permanent (for Avanteos) being the sole representative defendant and arguing for the interests of the Redeemers alone. But that reservation would disappear if institutions of substance, with appropriate legal resources, were seen to have taken on the task of arguing the cases of the other two groups of interested persons. The position would then be that, even if there were some theoretical failure by Avanteos to act impartially, the consequences would be negated and the conduct would not be, in realistic terms, untoward. 23 I was informed that, at this point, final arrangements for representation of one of the other groups by an institution of substance, properly resourced, have not been made. That is something that Avanteos would have to see firmly and clearly in place before it could safely proceed. 24 I have been informed of steps taken to bring this application to the notice of all of its investors, that is, the persons to whom its duties as trustee are owed. One objection was received. It was from an Avanteos beneficiary who made the valid point that Avanteos should be acting in the interests of all beneficiaries. The concern will be adequately addressed by a condition that Avanteos be satisfied as to appropriate representation of the other classes in the way I have described. The particular beneficiary assumed that Avanteos would be paid a fee for acting as representative. I have already mentioned that matter. 25 Avanteos has not been able to bring this application to the attention of all other Redeemers, that is, Redeemers who are not Avanteos beneficiaries. But that is really beside the point in relation to the matter of judicial advice with which I am here concerned. 26 The court will give its opinion, advice and direction generally in the form sought by Avanteos but with provisos or conditions to the effect outlined, that is, first, that Avanteos will not be remunerated for its services as principal of Permanent or a representative defendant; second; that all costs and expenses of Avanteos's participation as the principal of Permanent as a representative defendant shall be met by Avanteos otherwise than out of trust moneys; and, third, that Avanteos will not participate as principal of the representative defendant unless it is satisfied that the interests of its beneficiaries other than Redeemers are separately represented in the proceedings by respectable, responsible and adequately resourced financial institutions as representative defendants. 27 I shall leave it to Avanteos's legal advisers to formulate a draft direction giving effect to this judgment. The direction will be made in chambers after receipt of that draft. ********** 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.