Equititrust Limited v RM Walsh Land Holdings Pty Ltd [2012] NSWSC 427 (4 May 2012)

Last Updated: 23 May 2012

Supreme Court New South Wales

Case Title:	Equititrust Limited v RM Walsh Land Holdings Pty Ltd
Medium Neutral Citation:	[2012] NSWSC 427
Hearing Date(s):	29 March 2012
Decision Date:	04 May 2012
Jurisdiction:
Before:	Harrison AsJ
Decision:	(1) The defendants' notice of motion filed 15 December 2011 is dismissed. (2) The first to fourth defendants are to pay the plaintiff costs as agreed or assessed. (3) The first to fourth defendants are to provide the proposed cross claim to the plaintiff and other cross defendants by 5.00 pm on 21 May 2012. (4) The matter is stood over for a directions hearing at 9.00 am on 28 May 2012 before the Registrar.
Catchwords:	COSTS - security for costs - plaintiff has no valuable assets and is a trustee - whether plaintiff has a right of indemnity - effect of potential class action - extent of trust assets - no indication that recovery of costs will be compromised - application refused.
Legislation Cited:	Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005
Cases Cited:	Equititrust Ltd, Re [2011] QSC 353 KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 Staff Benefits Pty Ltd and the Companies Act, Re [1979] NSWLR 207 Suco Gold Pty Ltd (in Liquidation), In Re (19) (1982) 33 SASR 99 Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806
Texts Cited:	John Heydon et al, Jacobs' Law of Trusts in Australia, 7th ed (2006) LexisNexis Lynton Tucker et al, Lewin on Trusts, 18th ed (2011) Sweet & Maxwell D Williams, "Winding Up Trading Trusts: Rights of Creditors and Beneficiaries" (1983) 57 Australian Law Journal 273
Category:	Procedural and other rulings
Parties:	Equititrust Limited ACN 061 383 944 (Plaintiff) RM Walsh Holdings Pty Ltd ACN 095 225 502) (Receiver and Manager Appointed) (First Defendant) J Delahunty Land Holdings Pty Ltd ACN 106 666 648 (Receivers and Managers Appointed) (Third Defendant) Richard Martin Walsh (Fourth Defendant) Western Land Corporation Pty Ltd ACN 126 173 206 (Receivers and Managers Appointed) (Fifth Defendant) Perivale Capital Pty Ltd ACN 124 259 150 (Receivers and Managers Appointed) (Sixth Defendant)
Representation
- Counsel:	JA Hogan-Doran (Plaintiff) J Svehla (Defendants)
- Solicitors:	Tucker & Cowen (Plaintiff) Cleary Hoare Solicitors (Defendants)
File number(s):	2011/124535
Publication Restriction:

JUDGMENT

1. HER HONOUR: By notice of motion filed 15 December 2011, the first to fourth defendants seek orders, firstly, that the plaintiff's statement of claim be struck out/dismissed for want of a proper plaintiff; secondly, the plaintiff's proceedings be struck out/dismissed for want of retainer of the plaintiff's solicitor; and thirdly, the plaintiff provide security for costs. It is only the security costs application that is being heard today. The balance of the notice of motion is to be dismissed.

2. The plaintiff is Equititrust Limited ACN 061 383 944 ("Equititrust"). The first defendant is RM Walsh Holdings Pty Ltd ACN 095 225 502) (Receiver and Manager Appointed) ("RM Walsh"). The second defendant is J Delahunty Land Holdings Pty Ltd ACN 116 764 502 (Receivers and Managers Appointed) ("Delahunty"). The third defendant is Byron Bay Land Development Pty Ltd ACN 106 666 648 (Receiver and Managers Appointed) ("Byron Bay Land"). The fourth defendant is Richard Martin Walsh ("Richard Walsh"). The fifth defendant is Western Land Corporation Pty Ltd ACN 126 173 206 (Receivers and Managers Appointed) ("Western Land"). The sixth defendant is Perivale Capital Pty Ltd ACN 124 259 150 (Receivers and Managers Appointed) ("Perivale Capital").

3. The plaintiff relied on the affidavit of David Whyte dated 12 March 2012, the affidavit of David Robert Walter Tucker dated 13 March 2012 and the affidavit of Arthur Taylor dated 27 March 2012. The defendants relied on the affidavits of Ian David Stafford Collie dated 2 December 2011 and 14 December 2011 and the affidavit of Benjamin Che Trost dated 20 March 2012.

4. Equititrust has obtained default judgment in these proceedings against the fifth and sixth defendants. Equititrust entered into possession of the land owned by those defendants and is in the process of selling those assets. Equititrust seeks judgment against the first to fourth defendants as debtors and/or guarantors, and possession of two parcels of land under equitable mortgages.

5. Equititrust is the trustee of a series of pooled investment trusts ("the Trusts"), from which it has advanced monies from time to time to borrowers, including the defendants. Some of the Trusts are also registered managed investment schemes. Equititrust is the responsible entity of these trusts, appointed under and having the functions set out in Chapter 5C of the Corporations Act 2001 (Cth).

6. Equititrust is the trustee and responsible entity of Equititrust Income Fund ("EIF"), a registered managed investment scheme, and the trustee and manager of Equititrust Premium Fund ("EPF"), which is an unregistered pooled investment scheme. Equititrust is also the trustee and responsible entity of Equititrust Priority Class Income Funds ("EPCI"), which is another registered managed investment scheme, but it has no bearing on these proceedings.

7. The Trusts receive money from investors, and also borrow further funds from banks in order to leverage the investments made. There are three secured lenders; two in relation to EIF and one in relation to EPF. The National Australia Bank ("NAB") and the Commonwealth Bank of Australia ("CBA") are the secured lenders to EIF. The Bank of Scotland International ("BOSI") is the secured lender to EPF.

8. On 15 February 2011, Equititrust was placed in administration. On 20 April 2012, Equititrust was placed in liquidation. The NAB appointed receivers and managers to Equititrust and the BOSI appointed a receiver to EPCI.

9. In October 2011, the board of Equititrust resolved to wind up EIF. A dispute ensued between the investors and the board of Equititrust as to the control over the winding up of EIF.

10. On 21 November 2011, in Re Equititrust Ltd [2011] QSC 353, Applegarth J of the Supreme Court of Queensland made an order that Mr David Whyte be appointed pursuant to s 601NF(1) of the Corporations Act 2001 (Cth) to take responsibility for ensuring that EIF is wound up in accordance with its constitution, and that EPCI is wound up in accordance with its constitution.

11. On 23 November 2011, Applegarth J made a further order that appointed Mr Whyte as the receiver of the assets of EIF pursuant to s 601ND(1)(a) of the Corporations Act 2001 (Cth) to ensure that it was wound up in accordance with the Constitution of EIF ("the Constitution").

12. On 27 February 2012, Dalton J made an order which authorised Mr Whyte to:

1(b)bring, defend or maintain any proceedings on behalf of the EIF in the name of [Equititrust Limited] as is necessary for the winding up of the EIF in accordance with clause 9 of its constitution, including the execution of any documents as required and providing instructions to solicitors in respect of all matters in relation to the conduct of such proceedings including, if appropriate, instructions in relation to the settlement of those actions.

13. The above order was specifically sought to clarify Mr Whyte's role after the appointment of the insolvency practitioners.

The pleading framework

14. On 15 April 2011, Equititrust filed its statement of claim. It can be summarised as follows.

15. On 7 August 2009, Equititrust and RM Walsh, Delahunty, Byron Bay Land and Richard Walsh entered into a loan agreement by which RM Walsh and Delahunty borrowed moneys. The funds came from two trusts, EIF and EPF. The repayment of those moneys was guaranteed by Byron Bay Land and Richard Walsh. The guarantee was varied seven times, in each case to increase the loan facility limited ("the RM Walsh facility"). (S/C [3]-[41]).

16. On 10 May 2010, Equititrust and Richard Walsh and Western Land entered into a loan agreement by which Equititrust agreed to lend moneys to Western Land. Richard Walsh guaranteed the loan ("the Western Land facility"). (S/C [42]-[61]).

17. Various securities were also provided, including both registered and equitable mortgages and a deed of cross-collateralisation of the securities and guarantees was also given.

18. As to the source of the moneys now being sued for, Equititrust advanced $3,323,493.05 to the first, second and fifth defendants pursuant to the RM Walsh Facility from monies drawn from the EPF; and Equititrust advanced $4,901,100 to the fifth defendant pursuant to the Western Land facility from monies drawn from the EIF and EPF. The EPF portion of the funds advanced under this facility was $26,000. The total amount lent is $8,250,593. These amounts have not been repaid.

19. Equititrust sues on behalf of the EIF and the EPF to recover the monies lent, from borrowers and guarantors (and security providers). The proceedings are conducted by Equititrust on the instructions of Mr Whyte, the receiver and authorised person.

The further amended defence

20. The defendants filed a defence on 19 May 2011, an amended defence on 24 June 2011 and a further amended defence on 25 August 2011.

21. Most of the paragraphs of the further amended defence ("FAD") (filed 25 August 2011) put the plaintiff to proof on formal matters.

22. At [27] of the FDA it is alleged that there were oral representations made by Mr Mark McIvor, at meetings during July, August and October 2009, during which Mr McIvor on behalf of the plaintiff, and RM Walsh on behalf of the first, second and third defendants and himself as fourth defendant, agreed to a joint venture strategy to develop, rezone, subdivide and develop the Walsh Groups Redbank Plains properties. These joint venture allegations relate to both the RM Walsh facility and the Western Lands Facility. It is alleged that the plaintiff engaged in misleading and deceptive conduct as at all times it intended to act contrary to its representations.

23. As to the Western Land facility, sued for by Equititrust on behalf of the EIF, the joint venture allegations are raised by way of defence. It contains allegations by the first and third defendants that the agreements and securities were provided by them as trustees, but in breach of trust (FAD [20]-[22]).

24. There is also an assertion that the deed of cross-collateralisation is invalid or unenforceable because the first and second defendants did not sign the deed in their capacity as trustees (FAD [18]).

25. It is foreshadowed that the first to fourth defendants will file a cross-claim shortly.

Security for costs

26. It is common ground that Equititrust, in its own right, has no valuable assets to meet any costs order and that EPCI cannot provide any valuable indemnity. Any order made for costs in favour of the defendants will be made against Equititrust. However, only EIF has funds.

27. The issues that arise for determination are, firstly, can EIF's right of indemnity be exercised to pay the defendants' costs (should they receive a favourable costs order) and secondly, will the assets be of sufficient value to meet the costs order if and when it is made.

28. The first to fourth defendants seek security for costs of about $97,000. This amount comprises of costs already incurred in the sum of approximately $36,668.97 and future costs in the sum of approximately $60,712, ranging up to $71,658 - using a 60 percent assessment discount on total costs of $99,522 up to $109,468. The plaintiff says that the defendants' assessment of its costs is too high.

29. Equititrust submitted that it is not required to provide security under Uniform Civil Procedure Rules 2005 ("UCPR") r 42.21 or s 1335 of the Corporations Act 2001 (Cth). Equititrust says that it is pursuing the proceedings in the exercise of its functions and powers as trustee of EIF and it (Equititrust) has a right of indemnity against the assets of EIF in those circumstances and that that right extends to the whole of any costs order that may be made against it in these proceedings. Equititrust submitted that the value of that indemnity both now and in the future would far exceed any possible costs order which might be made against it.

The law

30. UCPR 42.21 relevantly provides:

"42.21Security for costs

(1)If, in any proceedings, it appears to the court on the application of a defendant:

(a)that a plaintiff is ordinarily resident outside New South Wales, or

...

(d)that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or

...

the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given.

(2)Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct.

(3)If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed.

(4)This rule does not affect the provisions of any Act under which the court may require security for costs to be given."

31. The plaintiff has its registered office in Brisbane, Queensland. Hence, the provisions of UCPR 42.21 are enlivened.

32. And s 1335 of the Corporations Act 2001 (Cth) relevantly reads:

"1335Costs

(1)Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

..."

33. It is clear that Equititrust, the plaintiff, does not have any assets in its own right but, if its right of indemnity can be exercised, it may be able to pay the defendants' costs.

34. In Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806, Barrett J considered an application for security for costs where the plaintiff sued as trustee. The issue that arose (as it does in these current proceedings) is whether the material before the Court on the application disclosed the existence of a right for the plaintiff to be indemnified out of the trust assets. His Honour stated at [34]-[37]:

"[34]I refer, in this connection, to observations of Smithers J in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584. His Honour said (at p 46,729):

Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability.

[35]Smithers J also said (at p 46,731):

I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs.

[36]This approach was accepted and adopted by Tadgell and Cummins JJ in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; [1995] 1 VR 150. In that case there was evidence that the party against which security was sought in the Court of Appeal (a defendant) was a trustee and that it held, as trustee, substantial real estate assets, some of which were unencumbered. The company's paid up capital was $3.00. In ordering security for costs, Tadgell and Cummins JJ said:

It was contended for the defendants that in order for security for costs of the appeal should be refused because [sic] holds unencumbered real estate the value of which exceeds the likely cost of the appeal and over which it has a right of recourse as trustee by way of indemnity. These facts, however, by themselves seem scarcely to meet the plaintiff's contention. The solicitors for the plaintiff have sought to inspect the trust deed under which Lagarna is constituted trustee but it has not been produced to them and it was not in evidence before us. For all that appears the trustee may, and I am prepared to assume that it would, be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it.

[37]Also instructive is the judgment of Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486. I quote from para [18] of the judgment:

The evidence discloses that each applicant has a paid up capital of $2. It is not disputed that each applicant is a trustee company so that it has no other assets. On this ground alone I consider that there is credible testimony that there is reason to believe that the applicants will be unable to pay the respondents' costs if the respondents are successful. Assuming that the applicants have a right of indemnity out of the relevant trust funds which they administer is it necessary to consider what is the position of those trust funds.

35. And at [39] Barrett J commented:

"...there is a great difference between the plaintiff's own ability to obtain funds if and when it needs them for deployment in its business and the ability of a creditor of the plaintiff to force the plaintiff to obtain and disgorge funds when the creditor seeks to enforce a right to be paid".

36. His Honour in Transocean Capital ordered that the plaintiff provide security for costs in the sum of $50,000.

(i)Can EIF's right of indemnity be exercised by Equititrust to pay the defendants costs? (if there is one made)

37. Counsel for Equititrust submitted that it is pursuing the proceedings in the exercise of its functions and powers as trustee of EIF. It was further submitted that Equititrust has a right of indemnity against the assets of EIF in those circumstances and that that right extends to the whole of any costs order that may be made against it in these proceedings.

38. Equititrust brings the proceedings against the first to fourth defendants in relation to the Western Lands Facility within its powers as Manager of the EIF. Clause 4.1 of the consolidated Constitution of the EIF sets out Equititrust's powers (Whyte, Ex DW1, p 28).

39. Clauses 2.2, 4.1 and 6.1 of the consolidated constitution of EIF provide:

2.2Assets of the Scheme

The Manager declares that it holds and will at all times hold the Assets on trust for Members of the Scheme subject to the provisions of the Constitution and the Law.

4.1 Exercise of powers of the Manager

(a)Subject to the provisions of this Constitution and the Law, the Manager has absolute and uncontrolled discretion as to the exercise of its powers, authorities and duties, in relation to the manner, mode and time of exercise of those powers, authorities and duties.

(b)The Manager has all the powers of a natural person and a body corporate, including the power to invest and to borrow or raise money for the purposes of the Scheme and on security of the relevant Assets.

6.1Indemnity

To the extent permitted by statute the Manager is indemnified out of the Assets for all debts, liabilities, damages, costs, Taxes, charges, expenses and outgoings reasonably and properly incurred by it in the proper performance of its functions and duties and exercising its powers under this Constitution or at law, except in the case of debts, liabilities, damages, costs, Taxes, charges, expenses or outgoings incurred or payable in respect of or as a result of gross neglect, deceit or a material breach of covenant of the Manager.

40. Second, Equititrust is the trustee of the EIF and as such has a right of indemnity against the assets of the EIF. Equititrust's position as trustee is made plain in two ways:

(a)Clause 2.2 of the consolidated Constitution (reproduced above) of the EIF provides for an express trust (Whyte, Ex DW1, p 23); and

(b)as Equititrust is the responsible entity of the EIF, s 601FC(2) of the Corporations Act 2001 (Cth) provides that it is an express trustee, namely a trustee that "holds scheme property on trust for scheme members."

41. Equititrust's right of indemnity is twofold. It has a right of indemnity at general law. As stated by the learned authors of John Heydon et al, Jacobs' Law of Trusts in Australia (7th ed, 2006) at [2104] (citations omitted):

"A trustee has a right to resort to and apply trust funds for the discharge of liabilities incurred in the authorised conduct of the trust."

42. Equititrust has a contractual right of indemnity in accordance with the terms of Clause 6.1 of the Constitution (reproduced to earlier in this judgment). It is my view that Equititrust has a right to be indemnified out of EIF's assets.

43. However, the first to fourth defendants' counsel submitted that, if the plaintiff has conducted itself in a manner that results in a finding of breach of trust, or that it has breached its various common law duties or covenants, as trustee it may only have recourse to a right of indemnity if it makes good any losses suffered by the trust which are occasioned by its breach.

44. The defendants have asserted that there is misleading and deceptive conduct by the plaintiff through its CEO Mark McIvor. Various representations and other types of conduct are pleaded giving rise to the defendants entering into various transaction documents (FAD [27]-[29]). If the defendants are successful in defending the matter, counsel for the defendants asserts there may be findings that the plaintiff has breached the EIF or EPF constitution. If that occurs, according to the defendants, Equititrust has lost the benefit of EIF or EPF indemnity.

45. Counsel for the defendant also referred to a passage from Lynton Tucker et al, Lewin on Trusts, (18th ed, 2011) at 687, where the learned author states:

"... If a defaulting trustee is insolvent, he will not be entitled to his costs properly incurred without making good his default and so only the amount by which his proper costs exceeds the sum for which he is accountable can be recovered by his trustee in bankruptcy, even though the proper costs are incurred after the insolvency. The fact that one trustee is in default does not affect the right of indemnity of his co-trustees who are not in default. However, if two trustees properly incur litigation costs, and one is a defaulter and becomes insolvent, the solvent trustee is entitled to recover from the trust fund, in addition to his own personal costs, only an apportioned part of the costs for which he and his insolvent co-trustee are jointly liable, and not the part of the joint costs apportioned to the insolvent co-trustee. It is thought that a trustee is not deprived of his right of indemnity merely because a claim has been made against him that he is in default; though it is not clear whether the court might in any circumstances grant injunctive relief to restrain a trustee who is alleged to be a defaulter from applying trust assets in payment of his proper costs pending resolution of the proceedings in which the claim is made that he is a defaulter. The principle that a trustee in default is not entitled to indemnity may not apply in a case where the trustee is a corporate trustee which is in default by reason of the acts of its directors who are also beneficiaries and seek as beneficiaries to invoke the principle against the trustee after it has become insolvent."

46. Counsel for the defendant referred to In Re Suco Gold Pty Ltd (in Liquidation) (1983) 33 SASR 99. In Re Suco Gold at 107-108 it was stated:

"The right of indemnity, it is true, exists for the trustee's own benefit and it passes to the trustee in bankruptcy or the liquidator. The proceeds of that right of indemnity are therefore part of the estate divisible among the creditors. It seems to me, however, that the right of indemnity can only produce proceeds for division among the creditors generally if the trustee has discharged the liabilities incurred in the performance of the trust and is therefore entitled to recoup himself out of the trust property. If he has not discharged the liabilities, the right of indemnity entitles him to resort to the trust property only for the purpose of discharging those liabilities. He may apply the trust moneys directly to the payment of the trust creditors or he may take it into his own possession for that purpose. If he takes trust property into his possession to satisfy his right to be indemnified in respect of unpaid trust liabilities, it seems to me that that property retains its character as trust property and may be used only for the purpose of discharging the liabilities incurred in the performance of the trust. The exercise of the right of indemnity is for the benefit of the trustee in that it relieves him of liability for the trust debts. If the trustee is bankrupt, or being a company is in liquidation, the trustee in bankruptcy or liquidator can exercise the right of indemnity which vests in him as part of the property of the bankrupt or insolvent company. If the trust liabilities have been discharged, the trustee in bankruptcy or liquidator is entitled to recoup the bankrupt estate out of the trust property and the proceeds of the right of indemnity become part of the property divisible among the creditors. If the liabilities have not been discharged, the trustee in bankruptcy or liquidator may, by reason of the right of indemnity which vests in him, apply the trust property to the payment of the trust liabilities, thereby exonerating the bankrupt estate to the extent of the value of the available trust assets. In the latter circumstances there cannot be proceeds of the right of indemnity which are available for distribution among the general body of creditors."

47. Counsel for the defendant also referred to an article by Daryl Williams QC (as he then was): D Williams, "Winding Up Trading Trusts: Rights of Creditors and Beneficiaries" (1983) 57 Australian Law Journal 273. The author says at 275:

"... The property therefore has no beneficial interest in trust property used by him in the trust business without proper authority. Where the fact of carrying on business is a breach of trust, the trustee is, in general terms, entitled to no indemnity out of the trust property and would have no proprietary interest in the trust property."

48. Counsel drew attention to footnote 28 of this article, which reads:

"Vacuum Oil case n. 5, ante, at 324-325 per Latham CJ. It is only a breach of trust related to the subject-matter of the indemnity which bars the indemnity (Re Staff Benefits Pty Ltd and the Companies Act [1979] 1 NSWLR 207, at 214 per Needham J."

49. In Re Staff Benefits Pty Ltd and the Companies Act [1979] 1 NSWLR 207, Needham J stated at 214:

"Lewin on Trusts, 15th ed pp 397, 398 states that the indemnity principles is subject to any equities subsisting between the trustee and the beneficiary. Where the trustee is in default, and is not entitled to an indemnity without making good the default, the creditors are in a similar position. In my opinion, it is not every breach of trust which will debar the trustee from indemnity - the breach must be shown to be related to the subject matter of the indemnity..."

50. According to the plaintiff, the question for the Court is whether Equititrust has a right of indemnity for any costs order that might be made in these proceedings, which Equititrust has brought on the instructions of a receiver appointed by the Supreme Court of Queensland. I accept that there is no issue of any untoward conduct relating to Mr McIvor (or anyone else) in bringing the proceedings. The plaintiff's argument continues that since there is no suggestion that the bringing of the proceedings involves any gross neglect, deceit or material breach of covenant on the part of the receiver or Equititrust, the exclusion in clause 6.1 of the constitution of the EIF does not arise.

The potential class action

51. Counsel for the first to fourth defendants referred to a potential class action to be taken against Equititrust. In its letter dated 11 November 2011 (Ex 1), Piper Alderman solicitors claim to act on behalf of members of the EIF holding approximately $9.1M in current holdings, as well as EPF members with some $21.9M in holdings. More specifically, the allegations against Equititrust are founded on:

(a)"Breach of fiduciary duties and the corresponding Corporations Act provisions" (sec 4, page 3): At paragraph 4.1 of the Letter, Piper Alderman state the basis of liability for breach of fiduciary duty by Equititrust as being "equitable principles and s 602FC of the Corporations Act";

(b)"Breaches of trust and the corresponding Corporations Act provisions" (s 5, page 9): At paragraph 5.1, reliance is again placed on s 601FC;

(c)"Breaches of the Corporations Act" (sec. 6, page 13): dealing with breaches of the continuous disclosure obligations under the Act, said also to be a breach of trust (paragraphs 6.4, 6.6);

(d)"Negligence" (s 7, page 14); and

(e)"Misleading and deceptive conduct" (section 8, page 14): alleging breaches by Equititrust of s 12DA of the Australian Securities and Investments Commission Act and/or ss 1041E and 1041H of the Corporations Act. The claims relate to statements about the value of loans made by Equititrust in a PDS and in financial statements.

52. The claims in (d) and (e) are against directors only and are not relevant here.

53. In each relevant section, the complaint closes with a statement to the effect that such breaches caused loss or damage to scheme members (investors) including Piper Alderman's clients. At paragraph 9.1, Piper Alderman demand from Equititrust damages for the losses suffered:

(a)as the difference between the amount that they paid for their units and the current value of the units as caused by the breaches by Equititrust and its directors of their legal duties and obligations;

(b)by diminution in the value of the assets of the Funds as a result of the payments made out of the scheme property to the responsible entity in contravention of s.208 (as modified by s 601LC). These payments consisted of the interest warranty fees for 2005 to 2008 amounting to $51,635,858.00 and the returns on subordinated interests in 2009 and 2010 amounting to $20,445,141.00; and

(c)as a result of the diminution in the assets of the Funds by the making of mortgage investments and imprudent investments in breach of the constitution and/or under the general law.

54. Mr Whyte has indicated that he does not intend to take the action on behalf of the investors in relation to any of the matters outlined above.

55. Counsel for the plaintiff says that the alleged misconduct, if proven, might form part of the cross-claim which, as yet, has not been articulated. If the conduct involves gross neglect, deceit or material breach of covenant, it may mean that Equititrust cannot obtain a right of indemnity against EIF given the exclusion of any right of indemnity for such conduct in clause 6.1 of the Constitution. However, Equititrust says that any costs order that may be made would be on its claim for non-payment of a debt and would not arise out of the course of conduct foreshadowed in the cross-claim, which is not relevant. I do not agree.

56. Relief may be sought in the cross-claim that may result in the amount due under the loans not being repayable. If it were proved that the defendants incurred the debt as a result of the plaintiff's breach of trust (specifically the alleged misrepresentations of Mr McIvor discussed above), Equititrust would not be able to invoke the right of indemnity against EIF unless it made good that breach. As the authors of Jacobs' Law of Trusts in Australia state at [2104]:

"[W]here the trustee is a debtor to the trust (which can occur without any breach of trust), the indemnity cannot be exercised without the debt first being repaid by the trustee (unless the trust instrument provides to the contrary) ..."

57. It is my view that the bringing of proceedings to recover monies advanced by Equititrust as trustee and responsible person of the EIF is a proper performance and exercise of its functions and duties. Hence, Equititrust's powers and the right of indemnity are enlivened in accordance with Clause 6.1 of the Constitution unless the exceptions in Clause 6.1 are made out.

58. As the matter stands, however, the cross-claim has not been articulated, and it is therefore not clear what are defaults of the trustee that would need to be made good before the right of indemnity could be exercised. It would need to be shown, before the right of indemnity against EIF could be suspended, that Mr McIvor's conduct constituting a breach of trust was what led the defendants to enter into the transactions from which the debts arise that is the subject of these proceedings.

(ii)The ability of EIF to meet a costs order

59. The financial position of the EIF can be summarised as follows (Whyte, 12 March 2012, [28]-[31]):

(a)30 June 2010: by its audited accounts of 30 June 2010, its net asset position was $242,756,198;

(b)31 December 2010: its net asset position at 31 December 2010 was $231,520,690;

(c)30 December 2011: by its published half yearly P & L and balance sheet of 31 December 2011, its net assets were between $69M and $93.8M (assets of between $93.3M and $119M), and liabilities of $24.2M including $8.4M owed to the National Australia Bank); and

60. By its most recent Balance Sheet as of 26 March 2012 (Taylor, 27 March 2012, AT-1, 2) its net asset position is $80M (assets of $94M and liabilities before investors of $14M).

61. It is Mr Whyte's opinion that it will take approximately two to three years to completely sell all of the assets of EIF and wind up EIF and make a final distribution to unit holders of EIF. He has undertaken, on behalf of EIF, to maintain at least $200,000 worth of assets of EIF so as to meet any potential adverse costs order in this matter (Whyte, 12 March 2012, [37]).

62. Over the next 12 months, the secured creditors will be paid, the receiver will be paid, there will be properties sold and moneys returned to EIF and some distributions will be made to the investors. Since the receiver has taken over in November 2011 sales in the sum of $3,148,866 have been completed. There are five contracts for sale on foot. The last worth $4,134,820 (due to settle on 23 December 2012) and four other offers have been accepted awaiting executed contracts worth $6,775,140 (Taylor, 27 March 2012, AT-1, 45).

63. Mr Whyte says that while there are sufficient assets available for him to provide security, he had instructed his solicitors to oppose providing security for the defendants' costs because he believes that, firstly, any money paid into court could be better utilized by him on behalf of unit holders to pay down the interest bearing debts of EIF; and secondly, providing a charge over the assets of EIF would prevent him from dealing with the assets and conducting the winding up of EIF (Whyte, 12 March 2012, [38]).

64. The plaintiff has served its evidence. The defendants are yet to put on an amended defence, cross-claim and affidavit evidence. The hearing, on my rough estimate, will take from three to five days. It is likely to be listed for hearing in about 12 months time.

65. The right of indemnity is currently worth approximately $80M, and the EIF will at all times retain sufficient monies to meet any order for costs.

66. In these circumstances, I am satisfied that in 12 months time or even in two years, should there be a costs order made against the plaintiff, EIF has the funds to meet it.

67. I am of the view that at this stage Equititrust has the right of indemnity against the assets of EIF and can be exercised should a costs order be made in favour of the first to fourth defendants. Hence, it is not necessary for me to consider discretionary issues as set out in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 nor is it necessary for me to delve into the question of quantum.

68. Costs are discretionary. Costs usually follow the event. The first to fourth defendants are to pay the plaintiff costs as agreed or assessed.

The Court orders that:

(1)The defendants' notice of motion filed 15 December 2011 is dismissed.

(2)The first to fourth defendants are to pay the plaintiff costs as agreed or assessed.

(3)The first to fourth defendants are to provide the proposed cross claim to the plaintiff and other cross defendants by 5.00 pm on 21 May 2012.

(4)The matter is stood over for a directions hearing at 9.00 am on 28 May 2012 before the Registrar.

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