One Managed Investment Fund Limited [2013] NSWSC 582

Supreme Court New South Wales

Medium Neutral Citation: One Managed Investment Fund Limited [2013] NSWSC 582 Hearing dates: 16/05/13 Decision date: 16 May 2013 Jurisdiction: Equity Division Before: Young AJ Decision: Judicial advice provided to Trustee Catchwords: TRUSTS - Judicial advice - Commercial Trusts - Prime consideration is the protection of the trust assets - Advice given Legislation Cited: Trustee Act 1925 Cases Cited: Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 Category: Procedural and other rulings Parties: One Managed Investment Funds Limited as trustee of the Everest Global Growth Fund and the Everest Absolute Return Fund (Plaintiff) Representation: Counsel: A S Bell SC / S M Nixon (Plaintiff) Solicitors: King & Wood Mallesons (Plaintiff) File Number(s): 2013/71422

Judgment (ex tempore - revised 16 may 2013) 1HIS HONOUR: This is an application under s. 63 of the Trustee Act 1925. The trust concerned is what I can call an unregistered management investment scheme whereby "investors" contribute money to a common fund which is invested in the way set out in the relevant constitutional trust documents, hopefully for the benefit of the investors. 2In previous years the company, which I will just call "Redleaf", was a trustee and manager of the fund. It was sued in the Federal Court by people, who can be collectively called Strang, on a number of counts, including that it or its directors had made representations which were false or misleading in trade and commerce as well as breaches of trust obligations. Those proceedings were settled for a global sum, and of that global sum, all but about $400,000, was paid by an insurer. 3The present plaintiff became the manager and trustee of the fund in succession to Redleaf, and, when it took up office, it did so pursuant to a deed of retirement, appointment and access of 9 May 2011. The vital part of that deed is clause 4 .2 which provides that the present plaintiff, as trustee of the trusts, indemnifies Redleaf out of the assets of the trust for any liabilities properly incurred by Redleaf while it was trustee, to the extent Red Leaf would have been entitled to indemnify out of the trust if it had not retired. 4The trust deed or constitution (There was a trust deed governing one fund and a constitution governing the other but they are substantially identical) provided for an indemnity against the then current trustee, and clause 24.1.19 of one of the trust deeds provides that the trustee had power to give whatever indemnities it thought appropriate. 5The claim that is currently made by Redleaf against the plaintiff is for about $1.4 million. That is made up of the difference between what was recovered from the insurer and what Redleaf had to pay out, or is liable to pay out on the Strang claim of $400,000, plus costs of $800,000, to which has been added interest. 6The amended statement of claim in the proceedings brought by Redleaf is, with respect to whoever drafted it, a document that is not particularly satisfactory. It hints, it does not give all the relevant facts as to why the trust fund is said to be liable to Redleaf, rather than merely the present plaintiff in its personal capacity. It would appear that unless further amended there would be a lot to be said for considering an application to strike out part of it and also an application for further particulars. 7The evidence shows that there has been attempts by the solicitors for the plaintiff to gain vital particulars, but this has been made with what I can rarely call "solicitors' games", whereby each solicitor has said, "Now you tell me this first and then I might tell you that". So that all that has happened is that costs have been incurred without the interests of the beneficiaries or Redleaf getting anywhere. Accordingly it would seem that the only way in which the litigation can get back on to the "straight and narrow" is satellite litigation at extra cost. 8The best estimate I can make, taking into account the evidence behind Tab 52 of the Court book, (this is my estimate rather than anybody else's), but based on those figures, the probabilities are that if this case goes to finality in the courts there will be about a quarter of a million worth of costs involved. Now the Funds concerned are relatively small. I think the total investment is about $10 million, and if Redleaf succeeds, and the present plaintiff has to pay in full plus Redleaf's costs, and its own costs, we are looking at something like $2 million. In other words, somewhere about 20% of the funds. That is the background of the present application. 9The plaintiff says that it is a trustee of the fund, and following what the High Court said in Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; 237 CLR 66, it is almost the duty of the trustee before it defends litigation to seek a judicial advice of the court. The corollary of that is that, although in former times courts were tempted to say to professional trustees and trustees who were charging money, either because of their trust duties or managerial duties, for operating commercial funds, "You are getting paid you must take risks", the court now is almost obliged to give proper judicial advice if it can. On the insolvent case, the risk that if there is no defence the case will be found against the fund, and the fund will have to be reduced by 20%, is one that cannot be allowed to exist. 10In the present case there is an opinion by eminent senior and junior counsel that there is a good and reasonable defence to the claim. In former days it was customary for courts, on these sorts of applications, merely to say, "Well, you have got competent advice and you would be justified in following it". However, where there is a trust fund that is at such risk, as it is in the current case, the court needs to go a little further and make sure that it just does not tick the boxes that actually make what orders are necessary to be made in order to protect the fund. The prime consideration in the protection of the Trust Fund. 11As I have said, it seems to me that there are defects in the statement of claim and those defects should be clarified. It may be that the representative of Redleaf, who is in court, will hear what I say and apply to amend the statement of claim in any event. If not, then it seems to me that I should make some suggestions to the trustee. 12However, the really important point in deciding whether the case can be settled, or if it cannot be settled how far it should be defended, is to try and work out what part of Redleaf's claim is attributable to its proper actions as trustee, or its actions as manager, or the actions of its directors or Redleaf itself because of contractual obligations which they personally incurred. 13It is credible that the lump sum settlements covered all three. The trust fund could not possibly be liable for all three. The plaintiff has asked Redleaf's solicitors to apportion the claims which they have, to date, refused to do. One can understand that reluctance because it may be a very difficult exercise, but eventually in the litigation that apportionment will have to be the subject of evidence, because it is only if Redleaf proved its case within clause 4 .2 of the Deed of Retirement, etc, that it will be able to succeed. If Redleaf will not voluntarily give details as to the apportionment of its claim, then particulars must be sought. 14Accordingly it seems to me that the proper advice I give the trustee is as follows. I will outline this, but if counsel for the trustee wish me to modify it, please feel free to do so after I have uttered it. 15The court by order advises the plaintiff that it would be justified in defending the proceedings brought against it by Redleaf Capital Ltd, proceedings 2012/349843, on the grounds referred to in the advice of senior and junior counsel, or on such other grounds that those counsel may from time to time advise. However, this advice is given on condition that the trustee will make any necessary application to strike out parts of the statement of claim, and to seek an order for particulars as to the apportionment of Redleaf's claim, which Redleaf says is apportioned to breach of duty of the trustee and breach of duty as a manager, and should also seek an early mediation after the pleadings are closed and those details are provided. A further condition is that the case is not to proceed to hearing until the plaintiff returns to the court in these present proceedings to seek further advice after the matters have been clarified, when the pleadings are in proper form, proper particulars have been given and there has been a chance of mediation to resolve the matter. 16The reason I do this is that it does seem to me that there is a realistic possibility that the present plaintiff will be made liable for a small sum, not anywhere near $1.5 million, and if that happens, unless there is some payment into court, that may carry adverse costs consequences. Accordingly, in my view, the trustee should approach the court when things become clearer for a further warrant to continue with the litigation. The costs of the present proceedings to date may be paid out of the trust fund. Further costs are reserved. 17After giving my reasons, Mr Bell SC, who appeared with Mr Nixon for the plaintiff, put that I should also give some advice re the proposed security for costs application. Although I generally do not like satellite litigation, it does seem to me in the present case it would be prudent, unless proper security for costs is offered, for the trustee to seek security for costs. Accordingly the order I make will include an order that the trustee will be justified in seeking security for costs unless proper security is voluntarily offered. 18The other matter is that the court book must be returned. I will direct that the plaintiff bring in short minutes which can be presented in chambers within the next seven days. 19I understand that offers of compromise have been made. In my view no further costs should be incurred in the proceedings until those offers have been accepted or refused. I would think that is a very sensible matter for both parties to compromise these proceedings at an early date before costs get out of hand. I would hope that both sides would agree to put the case on hold until that happened.