Nolan v Collie & Anor [2004] HCATrans 22 (13 February 2004)

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Nolan v Collie & Anor [2004] HCATrans 22 (13 February 2004)

Last Updated: 23 February 2004

[2004] HCATrans 022

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M153 of 2003

B e t w e e n -

DAMIEN JOHN NOLAN

Applicant

and

GEOFFREY MALCOLM COLLIE

First Respondent

MERLAW NOMINEES PTY LTD (IN LIQUIDATION)

Second Respondent

Application for special leave to appeal

GUMMOW J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 13 FEBRUARY 2004, AT 11.55 AM

Copyright in the High Court of Australia

MR A.C. ARCHIBALD, QC: May it please the Court, I appear with my learned friend, MR P. ZAPPIA, for the applicant. (instructed by Voitin Walker Davis)

MR C.M. MAXWELL, QC: May it please the Court, I appear with my learned friend, MR D.T. MURPHY, for the first respondent. (instructed by Howie and Maher)

MR R.S. RANDALL: May it please the Court, I appear for the second respondent. (instructed by D.E. Phillips)

GUMMOW J: Yes, Mr Archibald.

MR ARCHIBALD: On the vital question concerning the limits of a trustee’s right of indemnity, the Court of Appeal expressly acknowledged that the then current state of the law involved confusion and doubt. In our submission, what the court then proceeded to do was to exacerbate and fail to resolve that doubt and confusion.

First, the court disagreed with and, in our submission, significantly misunderstood what the New South Wales Court of Appeal had articulated in its reasons in the Gatsios decision. Secondly, we say that the court declined to endorse the statement of principle on the topic in one of the leading Australian texts, Ford and Lee. Thirdly, we say that evident in the court’s reasoning was the casting of aspersions on the reason of Lord Justice Bowen in Beddoe which had stood in effect for more than a century without such aspersions having hitherto been cast upon it. Fourthly, we say that the Court of Appeal essayed an explanation of the analysis of Justice Brooking in the R.W.G Management Case, which is really not consonant with his Honour’s analysis.

GUMMOW J: Can I just say this to you, Mr Archibald. Granted all of that, my apprehension is that (1) you might not be any better off under any of these competing theories, and (2) if we took the case on we would become enmeshed in what may not be fully thrashed out factual matters as to these rather complicated transactions that these parties undertook over some period.

MR ARCHIBALD: Well, as to the first, we say in accordance with the true principle and, indeed, in accordance with the principles enunciated in Gatsios, this case would have had to have been decided - - -

GUMMOW J: Well, there is a division in Gatsios.

MR ARCHIBALD: No, it does not matter because what the Chief Justice articulated as principle there was that indemnity was lost in the event that there was a breach of duty by the trustee including a - - -

GUMMOW J: Just look at the passage.

MR ARCHIBALD: Yes, it is paragraph 14, at the foot of the page in the print we have. His Honour said:

It is clear that the right of indemnity cannot be availed of if expense was incurred by conduct outside the scope of the trust or in excess of the powers conferred by the trust.

We call that authority, want of authority –

The same result should ensure when a trustee incurs expenses as a result of conduct in breach of a duty which the trustee owed to the trust, including the duty to execute the trust with reasonable diligence and care.

Here, on the finding of the Court of Appeal there was a failure by the trustee to execute the prudent trust with reasonable diligence and care but the reason we lost before the Court of Appeal was that the court impermissibly added as an integer of the test of loss of the right of indemnity a requirement of moral turpitude. “Insufficiently heinous” was the concept adopted by the court.

GUMMOW J: Where can we see that?

MR ARCHIBALD: We see that in the reasons of Justice Ormiston in which the other members of the court acceded – one finds it at a few points – at page 132 line 24 his Honour said:

Of course it could be said that the trustee acted negligently in the sense that it did not ensure that the mortgagee’s rights were not confined –

et cetera. At 133 line 4:

in my opinion this was not the type of case where the degree of want of prudence was such as to deprive the trustee Merlaw of the right to look to the trust estate to satisfy a liability –

and at 134, line 8, speaking of Merlaw his Honour referred to:

Its careless expansion of the liabilities –

It is against that background of findings that one understands, at line 24 on page 134, that his Honour concluded that there was no loss of indemnity because although there was want of prudence ie, breach of duty owed by the trustee to the trust, that breach was not “sufficiently heinous to deny it the right to indemnification from the Prudent Trust”.

So what the court has done has wrongly, in our submission, construed the expression improperly as requiring more than breach of trust and as requiring a degree of moral turpitude in addition to, or perhaps in substitution for, breach of trust before the right of indemnity is lost. We say such a proposition is not countenanced by any of the authorities, whether it be the Chancery cases of Beddoe, Raybould, of Bennett and like, whether one looks to Vacuum Oil or any of the other Australian decisions.

GUMMOW J: His Honour seemed to have had a particular view about liabilities arising out of tort. It appears at the top of 135.

MR ARCHIBALD: Yes.

GUMMOW J: Raybould was a tort case, though - - -

MR ARCHIBALD: Yes, it was. It is unexceptional to observe that the mere commission of a tort as against a third party by a trustee in the execution of the trust may not deprive the trustee of a right of indemnity over trading trust. I have trucks on the road. A driver hits another truck. The driver has been negligent, I am vicariously responsible. Of course, I am still entitled to indemnity from the trust, but the breach of duty that causes the trustee to lose the right of indemnity is not a breach of a duty owed to a third party, a tort against the third party. It is a breach of duty owed to the beneficiaries.

That is the kind of activity which causes the loss of the right of indemnity, and it is that very type of want of prudence which was found by his Honour in the passages that we have referred to. That is why, on Justice Spigelman’s reasoning, this case would have been decided otherwise. Likewise, on Justice Meagher’s analysis, paragraph 47. What his Honour there said was, in raising questions as to the limits of the right of indemnification, he observed:

This is a matter which has rarely engaged the attention of either the Australian or the English Courts.

Then in the third sentence his Honour said:

Presumably if the activity which generated the liability in question were a breach of trust –

ie, a breach of duty owed by the trustee to the beneficiaries –

the right to an indemnity under the general law would no longer exist –

Then his Honour added, and this may be controversial –

similarly if it were criminal in nature –

and then again, in a further sentence added, perhaps again controversially –

one must in principle incline to the view that if the activity in question had been fraudulent the law would withhold the right to indemnification –

They are three disjunctive criteria. On the first of those we would succeed. Inexplicably in the Victorian Court of Appeal the passage referred to in Justice Meagher’s reasons picked up only the third of those elements, the candidate fraud criterion, and entirely neglected to address, or even it seems appreciate, the first two limbs of what his Honour has said, and one sees that at page 125 of the application book line 3. The reference to Justice Meagher’s reasons and the extract from paragraph 47 cuts in only in relation to the fraudulent concept.

What was then said at application book page 126, line 5 about the Gatsios decision leaving “this important area of trust law rudderless” seems to be an observation predicated upon the passage set out at 125 which picks up only the, we would accept, somewhat controversial criterion of fraudulent conduct but entirely ignores the reference to breach of trust, which is in entire accord with the Chancery cases.

So a full understanding of what Justice Meagher said would not attract the stigmatisation of leaving this area of trust law rudderless. Rather, one might be tempted to observe that if the new criterion is whether the conduct is sufficiently heinous, that test would afford little assistance to the helmsman. There would not be a responsive touch to the tiller with that kind of criterion, yet it seems to assume there can be degrees of heinousness. Now, this is why we submit these reasons exacerbate the problem, and it does command the attention of the Court.

GUMMOW J: Well, before we get to any factual bramble bush it might involve, at 166 of the application book it is put against you, in paragraph 23 that it is significant that there was a manifest benefit.

MR ARCHIBALD: Yes. We say two things. One, the topic of benefit and whether that preserved the right of indemnity was not part of the controversy agitated between the parties at any level, was not explored or examined in the evidence, as it would need to have been if it were in controversy. There were no findings whatsoever by the primary judge on that topic and the matter was not developed or addressed in submissions before the Court of Appeal.

HEYDON J: That point is not taken in your notice of appeal. Your draft notice of appeal seems to want to fight on the question of whether there was a benefit or not.

GUMMOW J: Yes.

MR ARCHIBALD: Well, if we have to we will. We say it really was not open to be dealt with. But we do say it is not a finding available on the material before the Court in any event. That finding is predicated on the assumption of the court that Merlaw’s activities, the trustee’s activities, were exclusively confined to acting as trustee of the Prudent Trust – that is the name given to the trust. We say first that does not sit in harmony in any event with Justice Ormiston’s own conclusions at page 104 of the application book, line 26 that, “The precise activities of Merlaw” – the trustee – “are not known”. It is inconsistent with findings of Justice Byrne at page 27 of the application book that:

Mr Nolan, too, carried on business through a number of companies including Merlaw. Merlaw was also the trustee of the Prudent Trust –

and it is inconsistent with a further finding of Justice Byrne, which is in application book page 33, lines 9 to 10, that Merlaw the trustee was liable to the ANZ not only for the bill facility obligations but “for other debts of the Nolan group”. So we say that at the factual level that finding was not open.

Even if one could have said that the liabilities had been incurred by the trustee acting as trustee of the Prudent Trust there would still be the inevitable need to inquire whether it, the trustee, was entitled to be indemnified for those liabilities, for the propriety of those liabilities would need to be examined and considered.

So in a chain of issues that arise we say any finding as to benefit would not be sustained in any event. The old cases on benefit also make plain that the extent to which the right of indemnity is available or preserved in those circumstances is commensurate with the extent of the benefit derived by the trust. So in order to reach this conclusion one would need to quantify the extent of the benefit and measure it against the extent of the liability. That issue plainly was not addressed at first instance. It is not addressed and could not be addressed by the Court of Appeal.

GUMMOW J: Going back to page 104, Mr Archibald, that sentence at the bottom of the page, paragraph 6:

The precise activities of Merlaw are not known . . . a two-storey property of 32 Jolimont Terrace (“Jolimont”) and another at 16 Walmer Street, Kew.

Is the latter one the one that is still there?

MR ARCHIBALD: The latter one, I think the best I can say, is not the one that was sold by the bank. So “Jolimont” was sold by the bank.

GUMMOW J: Yes.

MR ARCHIBALD: Walmer Street is either there or – I think the proceeds of a sale of it are still there.

GUMMOW J: I was looking at the order made by Justice Warren on page 100. There seemed to be a declaration that Merlaw had an equitable charge over the Kew property. I am anxious to know what we are being asked to achieve by way of an end result.

MR ARCHIBALD: I think there were some restraining mechanisms that protected either the property or the proceeds of the property. The objective of the plaintiff in this proceeding seemed to be to get direct access to other assets of the Prudent Trust and perhaps including, or in particular, proceeds of that property. That is another of our complaints.

If the position is, as Justice Ormiston said, that the orders of the primary judge do not really dictate an outcome, but simply leave the liquidator to control the assets of the trust, then the whole purpose and objective of the proceedings seems to have been misconceived for it would leave entirely unresolved whether the liquidator has access to those proceeds and can distribute them generally to the creditors of the company in liquidation or whether they are earmarked “for and available only” to the plaintiff in this proceeding. We say that her Honour was wrong - - -

GUMMOW J: Now, what you would be seeking – I am looking at page 148 which is the order sought. They do not appear entirely adequately. You would seek that the appeal to the Court of Appeal be allowed and what, the action dismissed?

MR ARCHIBALD: Action dismissed.

GUMMOW J: Yes.

MR ARCHIBALD: Any action sought to capture the proceeds of the trust - that could only be achieved if there was a right of indemnity.

GUMMOW J: Yes.

MR ARCHIBALD: So there is not a need to go into the facts, in our submission. What one can see from the findings in the Court of Appeal are that the criterion that is decisive for our purposes as to whether the right of indemnity persisted or not are there reposing in the court’s conclusions, and one takes that and says that on the basis of those findings, conformably with principle, the right of indemnity was lost. If the Court pleases.

GUMMOW J: Thank you. Yes, Mr Maxwell.

MR MAXWELL: If the Court pleases. With great respect to our learned friend, he mischaracterises what the Court of Appeal said in Victoria and misreads the decision of the Court of Appeal in New South Wales. Your Honours, this is a case not about the availability of an indemnity but about whether an indemnity plainly available is the subject of a disqualifying event. His Honour, that is - - -

GUMMOW J: Qualifying event being?

MR MAXWELL: Well, the conduct of the – was the conduct of the trustee in the incurring of the liability such as, in its capacity as trustee – it plainly was in that capacity, it was dealing with the trust property by way of mortgage. The question was, was there a character of impropriety in its dealing with the trust property such as to disentitle it to the benefit of the indemnity.

HEYDON J: And, in a sense, was there any impropriety in Mr Nolan’s conduct. Mr Nolan was the one who executed a document without observing that it was all - - -

MR MAXWELL: Indeed. Your Honour is exactly right. We really want to make this essential point. I will come back to the issue of principle. We say that the very bits of Gatsios that our learned friend refers to are the principles this court applied, that is to say the Court of Appeal. Was the liability improperly incurred, that is to say was there a breach of trust? No. Was there a breach of duty to beneficiaries held? On the facts, no there was not. This is a question of fact. His Honour Justice Ormiston goes into the facts at some length to conclude that this was “a mere error of judgment”. That is a conclusion of fact. His Honour deals with it at application book 132 to 134. It is a patient and careful analysis of the conduct. His Honour begins at paragraph 54, line 20:

The trustee’s error was, as was clearly found in the earlier case by Byrne, J., a mere slip which came about because of the speed . . . It is arguable that the transaction was not carried out with the degree of care and diligence that a person of ordinary prudence would exercise . . . but I think, nevertheless, that such an analysis cannot here determine whether a trustee can fairly seek indemnification –

Paragraph 55, second line –

in my opinion this was not the type of case where the degree of want of prudence was such as to deprive the trustee –

of the right of indemnity. It has not been shown that the trustee acted improperly. Line 11:

The only error seems to have a “mere error of judgment” –

and his Honour says the same at 134, paragraph 56, line 13:

it is hard to characterise the oversight relating to the extent of liabilities secured as being more than a mere error of judgment –

Now, in any case where there is a question raised of whether impropriety disentitles a trustee to an indemnity otherwise available, an examination of the conduct is necessary and what is the conclusion to be reached about the degree of heinousness of the conduct.

Your Honours will see, if there is time, in the Court of Appeal of New South Wales the learned President uses exactly that phrase. What is to be said about the heinousness of the conduct? It has nothing to do with moral opprobrium. It has everything to do with gravity. Hence, we say a heinous crime means a very grave or serious crime. What his Honour was doing was an orthodox application of principle. What is the degree of misconduct, lack of care, impropriety – reached a conclusion applying a settled principle to these very unusual facts, inadvertence on Christmas Eve and reached a conclusion which, in our respectful submission, would not warrant this Court’s attention.

As to the question of benefit there are really two answers to that, both of which sound against a grant of special leave. The first is that Justice Byrne clearly found that there was a benefit to Merlaw, and your Honour Justice Heydon will be alive to this having examined – both of your Honours will appreciate it. The “all moneys” mortgage secured liabilities of Merlaw which had nothing to do with the transaction, and when the property was sold Merlaw got a very substantial benefit in the reduction of its debt....enough benefit, we would say, no real room for argument, certainly not warranting this Court’s attention; or if we are wrong about that, we are in a bramble bush of inadequate facts because it is true that the questions of propriety and benefit were evidently not – at least not determined by Justice Warren – and one is therefore reliant on the remarks made by his Honour in the first case about there being a benefit.

Just so your Honours know where that is, that is at application book 47, paragraph 77, and his Honour said at line 23:

Put another way, Merlaw cannot, as between itself and Terramont –

the purchaser –

enjoy the benefit of its breach. In this case, the benefit is that, upon sale by the Bank it obtained the discharge of part of its debt to the bank which debt was not related to the Jolimont property.

That, in our respectful submission, is a very clear unambiguous finding of benefit, though in a particular context.

The relevance of benefit is also recognised in Gatsios - I will perhaps take your Honours to that now – in the reasons of the Court of Appeal of New South Wales. First of all in the judgment of the Chief Justice at paragraph 33, having concluded in paragraph 32 – and I draw your Honours’ attention to this – that there was nothing in the conduct of the trustee which was:

of the requisite character to disentitle the trustee to its right of indemnity -

It is exactly a conclusion of the same kind as the Court of Appeal reached in this case in relation to different facts; his Honour went on in 33 to say, “That means I don’t need to address the advantages derived by the beneficiaries as a result of the conduct which is under attack”.

President Mason, at paragraph 41, also - in the last sentence - refers to “burden of the consequences of the respondent’s conduct” on the one hand and benefit on the other, referring to Balkin v Peck. While I have your Honours at paragraph 41 would your Honours see the third sentence in that paragraph where the learned President says:

The conduct that attracted the award of damages in the Federal Court was hardly commendable, but unremarkable in its heinousness –

suggesting that there is a common conception, rightly we would respectfully submit, that one is assessing the gravity, the culpability of the trustee’s conduct in order to decide in the given case whether the conduct disentitles the trustee to indemnity.

Returning then to the issue of the test which was applied here, your Honours have been taken in Gatsios, if I might stay with it, to paragraph 14. Now, paragraph 14 is, in fact, almost a verbatim quote from what Justice Brooking said in R.W.G., almost word for word. That is the authority from which Mr Justice Ormiston started, if your Honours would go to paragraph 44 of the reasons of the Court of Appeal. This is the principle which his Honour, and therefore the unanimous court, applied. Paragraph 44, 124 of the application book:

The assumed legal premise . . . was that the trustee’s right of indemnification against the trust estate is confined to liabilities and expenses which have been properly incurred in the carrying out of the trust.

That, as his Honour points out, is a test which has stood through many decisions in this country and in this Court, going back as far as Re Beddoe, 19^th century - - -

GUMMOW J: The problem is the content of the phrase “properly incurred”, as we all know.

MR MAXWELL: It is, your Honour, yes, but the application of that test is a matter for – let me start that again. Questions of propriety of conduct in relation to trustees are not new. Courts of equity have for a very long time had to decide what is and is not proper conduct by a trustee. The test, “Was it properly incurred” or, as his Honour prefers, the negative formulation, “Has it been shown to have been improperly incurred” is so well embedded in the law of Australia as to be properly applied. As your Honour pointed out to my learned friend, if the suggestions in Gatsios – I think it is Justice Meagher who says, “Well, that’s not the law of Australia properly incurred”, if that is right one moves to a narrower exception.

The Court of Appeal of New South Wales would prefer a test which limited the disqualifying conduct to a much smaller category evidently, and as your Honour said and as we said in our outline, that could not help Merlaw because its conduct at worst was a mere error of judgment. It is not going to come anywhere near the formulations in Gatsios, and just to remind your Honours, Chief Justice Spigelman speaks of violation or
culpable neglect. President Mason uses the phrase “grossly improper” and Justice Meagher speaks of fraud, breach of trust or crime.

So his Honour in the Court of Appeal was, in our respectful submission, perfectly correct to say that the views expressed in the Court of Appeal of New South Wales were too narrow, the impropriety exception, to broaden, as it were, the availability of the indemnity which could only help Mr Collie. The worst that you can say about Mr Nolan is that he rushed; he acted inadvertently in signing too quickly. It has never been suggested that there was impropriety or deceitfulness, an attempt to mislead anybody. It was just done too quickly.

Whether another court might think that was improper is a question of fact for that court. It is not a question of law. The issue of law was what was the test to be applied? At best for Mr Nolan it was a broad test of impropriety; far worse for him if it had to be fraud or gross violation or gross impropriety. In our respectful submission there would be – special leave requires that there be a question of law of general importance. Whether this conduct was improper is not a question of law, it is a question of fact. In our respectful submission, this application does not get to the threshold for special leave.

To repeat, the parts of Gatsios that our learned friends want to refer to are the very central concepts in what the Court of Appeal understands to be the accepted rule of “improperly incurred” and on the facts decided that those disqualifying epithets were not attracted, and this Court should not, in our respectful submission, grant leave so that there can be a debate before your Honours about whether that was a correct finding of fact. May it please the Court.

GUMMOW J: Yes, Mr Archibald.

MR ARCHIBALD: In Gatsios the learned President said at paragraph 36 that he agreed with the reasons of Justice Meagher, and in 37 that the remarks he then addressed did not qualify his concurrence, “save in the final paragraph”. The final paragraph was 42. The reference to “heinousness” was in 41. Nothing that the President said should be regarded, in our submission, as in any way detracting from the statement of principle advanced by Justice Meagher.

GUMMOW J: What do you say about Mr Maxwell’s point that, at the end of the day, there would have to be a decision to the effect that this carelessness or oversight, however you like to put it, was a sufficient disqualifying event?

MR ARCHIBALD: We say one does not need to investigate that because of the conclusion of want of prudence. My friend said, “There’s reference to a mere slip” but as every professional person knows mere slips can be said to give rise to liability for negligence. The very circumstance that Justice Ormiston addressed, the question of the degree of want of prudence, necessarily entails the conclusion of a finding of want of prudence. A want of prudence necessarily entails a breach of the duty which the trustee owes to act with prudence and care towards - - -

GUMMOW J: But do you say any breach of trust is - - -

MR ARCHIBALD: Yes. That is what – you find that in all the old Chancery cases. Beddoe was a case where the trustee had taken the advice of solicitors and counsel about a particular course. It failed and the trustee was held to be deprived of the right of indemnity that would otherwise be available.

GUMMOW J: But what about a breach of trust that involved a trustee acting fairly and reasonably so that the trustee ought to be excused? How does that fit in? That is statutory dispensation if you like. How would that fit in with the general law principles of the indemnity?

MR ARCHIBALD: Well, nothing in this case suggests that the jurisdiction under section 62 of the Victorian Act would apply. Nothing in the conduct here was of a kind that would attract that somewhat sparing jurisdiction; simply not addressed. What was addressed was the character of the trustee’s conduct and whether it involved, on the part of Mr Nolan acting for Merlaw, conduct that involved want of prudence on his part. Once there was want of prudence it is a breach of that duty, and that is where the matter rested. Certainly the way the parties treated the case, the issues before the parties. So we submit that the observations, and we accept there are some peregrinations in Justice Ormiston’s reasons speaking of errors of judgments, slips and so on, but the burden of his conclusions, to which we drew the Court’s attention, involved a clear finding of want of prudence, that is breach of the duty which the trustee owed to the trust.

So far as benefit is concerned, my learned friend did not gainsay our proposition, as we understood him, that that was not a matter in controversy between the parties. One reason why there is a paucity of evidence that might be said to bear upon that issue is that it simply was not canvassed by the party. But in any event the conclusion that Merlaw got an advantage by reducing its debt does not meet in any respect the question whether, in respect of those liabilities, Merlaw was in turn entitled to an indemnity from the Prudent Trust. That question is entirely bereft of any material to allow the issue to be a test.

GUMMOW J: The problem is if we granted special leave, Mr Maxwell is then going to contend, I suppose, the point about benefit.

MR ARCHIBALD: Well, we should not be deprived of the grant of special leave to which we are otherwise entitled because of the way in which the respondent might seek to defeat an appeal, particularly where one of the prime sources of our contentions about benefit is that it simply was not agitated between the parties; it has popped out in the Court of Appeal reasons. If the Court pleases.

GUMMOW J: Thank you. Is there anything you want to say, Mr Randall?

MR RANDALL: Not at this point, your Honours.

GUMMOW J: Thank you. We will take a short adjournment.

AT 12.32 PM SHORT ADJOURNMENT

UPON RESUMING AT 12.40 PM:

GUMMOW J: If special leave were granted, the applicant would seek from this Court a precise and exhaustive statement of the test for the loss by a trustee of the right of indemnity from the trust assets. The circumstances of the case reveal conduct by the trustee of a character unlikely to satisfy any test so formulated for the loss of the right of indemnity. We do not read what was said by Justice Meagher in Gatsios Holdings v Kritharas Holdings (in Liquidation) [2002] NSWCA 29 at paragraph 47 as supporting a proposition that any breach of trust will suffice for loss of the indemnity.

In the result then, the application for special leave is refused and refused with costs.

AT 12.41 PM THE MATTER WAS CONCLUDED