Trustee Removed and Replaced in Estate Proceedings

The court removed the current trustee and appointed a new trustee, with specific orders regarding costs and indemnity. The court ruled that the trustee could not obtain an indemnity from the estate for costs incurred in litigation without seeking judicial advice.

Supreme Court New South Wales

Medium Neutral Citation: [NAME] v [NAME] (No 2) [2022] NSWSC 944 Hearing dates: 7 June 2022 Date of orders: 15 July 2022 Decision date: 15 July 2022 Jurisdiction: Equity Before: Parker J Decision: See [90] Catchwords: COSTS – estate proceedings – discontinued family provision claim – executor entitled to costs against plaintiff and indemnity out of the estate – successful application for appointment of new trustee of testamentary trust for benefit of plaintiff – plaintiff entitled to costs – trustee's right of indemnity out of the estate – failure to obtain judicial advice – indemnity refused Legislation Cited: Civil Procedure Act 2005, s 76 Trustee Act 1925, ss 6, 59, 63, 70, 85, 93 Uniform Civil Procedure Rules 2005, rr 20.26, 42.25, Pt 54 Cases Cited: [NAME] v Frost [2009] NSWSC 917 [NAME] v [NAME] [2022] NSWSC 721 [NAME] v [COMPANY] [2010] NSWSC 725 Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v [NAME] (No 3) [2017] NSWCA 109 Gatsios Holdings Pty Ltd v Kritharas Holdings Pty Ltd [2002] NSWCA 29 Grizonic v Suttor [2011] NSWSC 471 In re [NAME] [1893] 1 Ch 547 [NAME] v [NAME] (No 4) [2021] NSWCA 256 [NAME] [COMPANY] v [NAME] of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 Miller v Cameron (1936) 54 CLR 572 Olsen v James [2020] NSWSC 1015 Wales v Wales [2014] VSCA 101 Category: Principal judgment Parties: [NAME] (Plaintiff) [NAME] (First Defendant) [NAME] (Second Defendant) Representation: Counsel: [redacted] [NAME] (Defendants)

Solicitors: [redacted] [NAME] (Defendants) File Number(s): 2020/359326 Publication restriction: Nil

Judgment 1. These are estate proceedings in which I delivered judgment on 1 June: [NAME] v [NAME] [2022] NSWSC 721. I found that the trustee of the testamentary trust established for the benefit of the plaintiff should be removed and replaced by the plaintiff's brother (who is her tutor in the proceedings). I adjourned the proceedings for the parties to agree on orders giving effect to my conclusions and dealing with costs.

2. The parties have agreed on the form of the removal order, and I will make an order in that form in due course. Costs remain in dispute.

3. This judgment assumes familiarity with my earlier judgment ("J1"). It also uses abbreviations used in that judgment.

Background and procedural history 1. The background to the proceedings is set out at J1 [3]-[7]. The deceased and his wife, who predeceased him, had four children, two daughters and two sons. The plaintiff ("[NAME]") is the older daughter. She is disabled and in these proceedings her older brother ("[NAME]") is her tutor. The younger son ("[NAME]"), who is the first defendant, is the deceased's executor.

2. The deceased divided his estate into four shares, one for each of his children. The plaintiff's share was made the subject of a trust of which the deceased's younger daughter ("[NAME]"), was to be the trustee. [NAME] is the second defendant in the proceedings. [NAME]' share was to be held in trust for her lifetime, and after her death for the benefit of the Uniting Church. [NAME]' lifetime the trustee was to pay her the income from her share of the estate. There was also a power to appoint capital. The other children received direct gifts of their shares. Each share is worth approximately $290,000.

3. Since 2015, a rift has emerged in the family. On the one side are [NAME] and [NAME]. [NAME] are on the other side.

4. The deceased died in March 2020. Probate of his will was granted to [NAME] in August of that year. For this purpose, [NAME] retained [NAME], a solicitor, to act for him as executor. [NAME]'s firm is known as "[NAME]".

5. By September, solicitors had been retained to act for [NAME] in connection with her rights under the will. Those solicitors were [NAME] and [NAME] of [NAME].

6. On 2 September, [NAME] wrote to [NAME]. He stated that he acted for [NAME] and [NAME]. He recited the conflict between the parties, making the point that [NAME] wanted to have nothing to do with [NAME], and in fact had obtained a consent order preventing [NAME] from having any contact with her (see J1 [12]-[13]). He stated that, whatever [NAME] might think about the wisdom or fairness of [NAME]' wishes, those wishes should be respected. In those circumstances it was untenable for [NAME] to act as trustee. 7. [NAME] proposed two ways in which the problem could be resolved. The first option was for [NAME] to remain as trustee but to pay the trust fund over to a solicitor's account on the understanding that the money would be managed by [NAME] on [NAME]' behalf. In effect, [NAME] was asked to exercise the power of advancement for the whole of the trust fund. The other option was to use the power available under the Trustee Act 1925, s 6, to make an out of court appointment replacing [NAME] with [NAME].

8. The letter ended by stating that [NAME] had instructions to commence proceedings if agreement could not be reached. [NAME] warned [NAME] that if that happened, costs would be incurred which would reduce the amount of her legacy under her father's will. A copy of the letter was sent to [NAME].

9. On 1 October, [NAME] replied. He confirmed that he had instructions to act for [NAME]. He stated that the allegations against [NAME] were "a figment of someone's fertile imagination". [NAME] had only ever sought to act in [NAME]' best interest. [NAME] stated that the proposals in [NAME]'s letter were contrary to what the deceased had wanted. It was also untenable for [NAME] to act as trustee. [NAME] stated that "if" [NAME] was conflicted, she would retire in favour of a trustee "such as" the [NAME], which was independent and had no conflict.

10. The reason given by [NAME] for [NAME]'s unsuitability focused on the trustee's power to appoint the capital of the trust in [NAME]' favour during her lifetime. [NAME] suggested [NAME] would have a conflict of interest. He was likely to be a beneficiary of any will which [NAME] might make (assuming that she had capacity; the letter raised a question about that, but noted that no challenge had been made to the enduring guardianship in favour of [NAME] and [NAME]' cousin, [NAME]: see J1 [21]). If [NAME] failed to make a will then [NAME] would benefit on intestacy.

11. There followed a period of more than two months before these proceedings were commenced in [NAME]' name on 18 December. The summons sought the following orders:

1. An order that provision be made for the plaintiff's proper maintenance and advancement in life pursuant to s59 of the Succession Act 2006 (NSW) out of the estate and/or notional estate of [the deceased].

2. Additionally, or in the alternative, an order pursuant to section 70 of the Trustee Act 1925 (NSW) that [NAME] be appointed trustee of the trust in favour of [NAME] created by Clause 3 (d) of the Will of the [deceased] dated 13 November 2015, in place of [NAME].

1. The summons was entered into the Family Provision List and was accompanied by affidavits prescribed by the Family Provision Practice Note (SC Eq 7). In particular, there was a lengthy affidavit of [NAME] addressing the topics referred to in the Practice Note. These included [NAME]' relationship with her father. There was also evidence of the rift which had developed with [NAME]. The summons named [NAME] as the defendant in the proceedings. [NAME] was not a party.

2. In February, [NAME] filed a notice of appearance for [NAME] as the defendant. An executor's affidavit from [NAME], in accordance with the Practice Note, was also filed.

3. In mid-March, there was a mediation between the parties conducted by Colin Hodgson, barrister. No settlement was reached on the day. But discussions between the parties continued.

4. On 26 April, counsel for [NAME] sent counsel for [NAME] an email setting out the terms of an offer. The proposed orders and notations were: 1. an order under s 70 of the Trustee Act 1925 ("TA") appointing the Public Trustee for Queensland as trustee of [NAME]' trust in place of [NAME]; 2. a notation that [NAME] as trustee consented to this order; 3. an order under the Civil Procedure Act 2005, s 76 (which applies in the case of disability) for the Court to approve the dismissal of the balance of the proceedings, including the family provision claim; 4. an order that [NAME]' costs be paid out of the estate on the ordinary basis; 5. an order that [NAME]' costs be paid out of the estate on the indemnity basis.

1. On 21 [NAME] of [NAME] wrote to [NAME] responding to counsel's offer. She stated that the offer was accepted, subject to the [NAME] agreeing to act as trustee, and approval from the Court. Nevertheless, the settlement did not proceed. A new solicitor was appointed to act for [NAME] in the proceedings. This was [NAME], whose firm is called "[NAME]". He filed a notice of appearance on 28 June.

2. On 12 [NAME] emailed [NAME]. [NAME] referred to emails from [NAME] (which are not apparently in evidence) and observed that the centre of the dispute was who was to be appointed as trustee of the trust. [NAME] stated: On the basis that your client's position is that the trustee of the funds is to be [NAME] and our client's position is that any trustee other than [NAME] must be an independent trustee, there would seem to [be] no point in mediating at further cost to the parties.

1. On 3 August, an affidavit was filed in the proceedings from [NAME]. The affidavit addressed the application to remove her as trustee. [NAME] stated that, while she was happy to act as the trustee, she would consent to be replaced as trustee by an independent trustee such as the [NAME] or the [NAME]. She disputed, on a factual level, the allegations made against her in [NAME]' affidavit (see J1 [15]-[17]), suggesting that [NAME] was being manipulated.

2. On 13 August, [NAME] wrote to [NAME] enclosing what purported to be a formal offer of compromise in the proceedings. The offer provided for substantially the same orders as had been offered by counsel and accepted by [NAME], except that the proposed s 70 order was not limited to the [NAME] and included the [NAME] "or some other independent trustee".

3. The offer was not accepted. On 27 August affidavits were filed in [NAME]' case from [NAME] and his wife, [NAME], concerning [NAME]'s fitness as trustee (see J1 [25(2)]).

4. On 31 August, [NAME] sent [NAME] a letter enclosing what purported to be a formal offer of compromise. The offer was expressed to be open for acceptance until 30 September. It proposed: 1. an order under TA s 70 appointing [NAME] as trustee, with no order as to costs; 2. an order that the family provision claim be dismissed.

1. In his covering letter, [NAME] stated that it was impossible for [NAME] to act as trustee. [NAME] was the best alternative. There was no conflict because the will gave any "left over money" to the Uniting Church. The public trustees proposed by [NAME] would be unsatisfactory because of the cost, especially given [NAME]' level of disability. [NAME]'s formal offer of compromise of 13 August was invalid under Uniform Civil Procedure Rules 2005, r 20.26(2)(c) (see below). 2. [NAME] added: We note that the offer that is put in this letter and the attached Offer of Compromise, is to also dismiss the claim for family provision under the Succession Act 2006 (NSW). That is, if you accept for [NAME] to be trustee, [NAME] will withdraw her claim for family provision and her claim to a greater share of the Estate of the late [NAME] than was given in the will. If you do not accept this offer of compromise and we proceed to hearing, then our instructions are to proceed with the application for family provision. In those circumstances, your clients [NAME] will have to provide full financial disclosure in a contest for family provision as to who is in greater need.

1. Following these exchanges the parties remained at loggerheads. The hearing date was fixed for two days beginning on 31 May this year. It was allocated to me, and I convened a pre-trial directions hearing for 23 March.

2. In reviewing the file before the pre-trial directions hearing, it seemed to me that the application for a s 70 order required the joinder of [NAME] as the respondent party. I also thought that the s 70 application could, and should, be dealt with separately from, and in advance of, the family provision application. When I put this view to counsel at the directions hearing neither of them disagreed. Directions were made to facilitate this.

3. Following the making of those directions, [NAME]' family provision application was abandoned (at J1 [10] I stated incorrectly that the abandonment came later; the error made no difference to my decision). An amended summons was filed on 1 April retaining the application for a s 70 order and deleting the application for a family provision order. The parties agreed that as the family provision claim had been abandoned, the hearing date which had been retained for it should be vacated. The s 70 application then proceeded on the papers, resulting in my judgment of 1 June. Costs were argued orally on 7 June.

Costs 1. Counsel for [NAME] contended she had been successful in the proceedings. Counsel sought orders that both defendants ([NAME]) pay her costs. Counsel also sought a special costs order based on the offer of compromise made in August 2021 (see [24]-[26] above). Counsel submitted that the costs order should be on an indemnity basis after 30 September, the date of expiry of the offer. But, acknowledging the reconstitution of the proceedings with the filing of the amended summons on 1 April this year, costs after that date were to revert to being assessed on an ordinary basis. Finally, counsel submitted that [NAME] should be deprived of recourse to the estate, so that the burden of the costs would fall on them personally.

2. Counsel for [NAME] sought a quite different approach. Counsel submitted that: 1. [NAME] should pay [NAME]' costs with respect to the family provision claim; 2. [NAME]' costs, to the extent not recovered from [NAME], should be paid out of the estate on an indemnity basis; 3. acknowledging [NAME]' success in obtaining a s 70 order, her costs of the application for that order should be paid out of the estate on an ordinary basis; and 4. [NAME]' and [NAME]'s costs of the s 70 application should be paid out of the estate on an indemnity basis.

1. As will be seen, different costs have been incurred by [NAME] and [NAME], and the considerations which apply to them so far as costs orders are concerned are different.

Accordingly, I will deal with each of their positions separately.

Costs as between [NAME] and [NAME]

1. On the face of it, [NAME]' entitlement to an order for costs in his favour is clear. No relief was obtained against him. He was successful in defending the family provision application, which was effectively withdrawn as a result of the amendments to the summons on 1 April. He did not thereafter participate in the determination of the s 70 application.

2. It will be recalled that the letter sent to [NAME] about her position as trustee of [NAME]' trust in September 2020, before the institution of the proceedings, was sent to [NAME] and copied to [NAME]. [NAME] responded on [NAME]'s behalf. But I was informed that [NAME]'s costs of responding to the letter were kept separate and were billed to [NAME]. Those costs did not form part of [NAME]' costs of the proceedings. When I raised the matter in argument, counsel for [NAME] also accepted that the costs of the s 70 application on the papers were [NAME]'s costs and would be billed to her.

3. When I asked counsel for [NAME] how an order for costs against [NAME] was justified when no relief had been obtained against him, counsel replied that [NAME] had been actively involved in defending the proceedings. According to counsel, she attended the mediation and appeared to play an active role in it; indeed the compromise which was accepted, or purportedly accepted, by [NAME], but was never put into effect, centred on [NAME] agreeing to give up her role as trustee. Counsel submitted that at least by that point it was the s 70 application which was the heart of the dispute between the parties.

4. One difficulty with this argument is that there was little actual evidence before me as to the conduct of the negotiations between the parties, and none at all about the course of the mediation (which was of course privileged). When I put this to counsel for [NAME], however, he submitted that I could infer from the correspondence that [NAME] was really calling the shots behind the scenes of the defence.

5. This submission pays insufficient attention to the role of the family provision application in the proceedings. As executor, [NAME] was the appropriate (and indeed necessary) respondent to that application. He was obliged to defend the application on the estate's behalf. And, while it may have been indicated on [NAME]' behalf that she was prepared to abandon the family provision claim if [NAME] would resign as trustee, no final settlement to that effect was ever reached. As late as 23 March this year, at the pre-trial directions hearing, I was told by counsel for [NAME] that the family provision claim was still being pursued and [NAME] would be seeking up to fifty per cent of her siblings' share of the estate. 6. [NAME] was the sole defendant up until the amendment of the summons. The costs incurred in defending the proceedings up to that date are, on the face of it, his costs. I find it impossible to infer just from [NAME]'s involvement in settlement negotiations that the defence was somehow being conducted in her interests behind the scenes.

7. Counsel for [NAME] noted that under the proposed settlement [NAME] was to provide her consent to being replaced as trustee of [NAME]' trust. Counsel submitted that this illustrated the integral role she played in the defence of the proceedings. I cannot agree. To my mind, what it reflects is that compromising the s 70 application was a matter for [NAME], and for her alone. As executor, [NAME]' responsibilities were limited to realising the assets of the estate and handing over the share which was the subject of [NAME]' trust to [NAME] as the trustee appointed by the will. [NAME] could not have consented to a s 70 order on [NAME]'s behalf.

8. It is true that the affidavit of [NAME] which was filed in the proceedings canvassed the merits of the s 70 application. But it was also relevant to the family provision application. It would have been proper to file such an affidavit even if there had been no s 70 application in the summons.

9. It is also true that part of [NAME]' costs would have included work on the proposed settlement whereby [NAME] was to resign as trustee. In particular, there was correspondence with the public trustees to see whether they would accept appointment in the manner proposed in the settlement. It might be argued that, strictly speaking, these costs were [NAME]'s costs as trustee. But a settlement on the terms proposed would have advantaged the estate by resulting in the withdrawal of the family provision application. [NAME] had not been joined as a party. The costs are unlikely to have been substantial and in the circumstances I do not think it was unreasonable for [NAME] to have incurred them.

10. What has emerged with the benefit of hindsight is that the s 70 application should have been brought by way of separate proceedings, or at least [NAME] should have been joined as a separate defendant, so that the burden of responsibility for responding to that application fell upon her. Had this been done, it might even have been possible to insist on separate representation for [NAME]. It is true that this point was not taken by [NAME]' and [NAME]'s legal representatives. But the constitution of the proceedings was the responsibility of [NAME]' legal representatives.

11. The offer of compromise of 31 August last year does not assist counsel's argument. That offer plainly did not comply with the requirements of UCPR r 20.26. It provided for costs, contrary to subr 20.26(2)(c). Counsel referred to subr 20.26(3)(a)(i), but that applies only to defendants' offers. More importantly, while the offer proposed the abandonment of the family provision claim, it did so on the basis that [NAME] would have no liability for the costs of that claim. That is less favourable to [NAME] on costs than the result to which he is prima facie entitled.

12.

For these reasons, I conclude that there should be an inter partes costs order in favour of [NAME] and against [NAME]. The order will, of course, only cover costs incurred by [NAME] in responding to the family provision application and I will make that clear in the form of the order. For similar reasons, [NAME] will also receive the usual order for a successful executor-defendant in family provision proceedings that his costs as executor be paid out of the estate on an indemnity basis.

Costs as between [NAME] and [NAME] 1. [NAME]'s position as the respondent to the s 70 application is quite different. The application to remove her as trustee succeeded. Prima facie the costs of the application should follow the event. But this can only apply to costs incurred after 1 April when [NAME] was joined as a defendant and directions were made for the separate determination of the s 70 application.

2. I therefore turn to the application by [NAME] that both [NAME]' costs and [NAME]'s costs should be paid out of the estate. The first point to make is that if any order is to be made out of funds under administration, it should be made against the assets of [NAME]'s trust rather than the estate generally. The s 70 application concerned [NAME]'s trust only and there is no justification for costs associated with the administration of that trust to be imposed on the general estate.

3. In support of [NAME]'s application, counsel relied on UCPR r 42.25, which provides: 42.25 Costs of trustee or mortgagee (1) Subject to subrule (2), a person who is or has been a party to any proceedings in the capacity of trustee or mortgagee is entitled to be paid his or her costs in the proceedings, in so far as they are not paid by any other person, out of the fund held by the trustee or out of the mortgaged property, as the case may be. (2) The court may order that the person's costs not be so paid if— (a) the trustee or mortgagee has acted unreasonably, or (b) in the case of a trustee, the trustee has in substance acted for his or her own benefit rather than for the benefit of the fund.

1. Counsel submitted that [NAME]'s conduct had at all times been reasonable (or at least not unreasonable). In counsel's submission, she was therefore entitled to indemnity for her own costs and the costs awarded against her. Counsel emphasised in particular that the Court is generally reluctant to appoint a family member as trustee of a trust of the present type, a point which [NAME] had taken in her written submissions in opposition to the application (see J1 [25]).

2. Rule 42.25 was enacted against the background of longstanding equitable principles which govern a trustee's right of indemnity from the trust assets for expenses incurred in the course of administering the trust. Those principles apply to the costs incurred in legal proceedings (both the trustee's own costs and costs which may be awarded against the trustee) just as they apply to any other expense incurred by the trustee in administering the trust.

3. Generally speaking, a trustee is entitled to indemnity for all expenses which are honestly and reasonably incurred in execution of the trust. In New South Wales, the indemnity has been put on a statutory basis by TA s 59(4), which provides: A trustee may reimburse himself or herself, or pay or discharge out of the trust property all expenses incurred in or about execution of the trustee's trusts or powers.

1. Another basic feature of equity's administration of trust is that a trustee may obtain judicial advice about the administration of the trust from the Court (now put on a statutory basis by TA s 63). Generally speaking, and assuming that proper disclosure has been made to the Court, a trustee who acts in accordance with such advice will be immune from any liability for breach of trust. 2. [ADDRESS] also has power to relieve a trustee who acts in breach of trust from the consequences of that breach. But in such a case a failure to obtain advice may be relevant. TA s 85(2) provides: The relief may not be given unless it appears to the Court that the trustee has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the direction of the Court in the matter in which the trustee committed the breach.

1. The interplay between judicial advice and the trustee's right of indemnity, in the context of litigation by the trustee in the course of administering the trust, was authoritatively considered by the High Court in [NAME] [COMPANY] v [NAME] of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66. [ADDRESS] stated at [70]: … trustees who are sued, particularly for breach of trust, may sometimes experience uncertainty about whether they will be able to obtain indemnity as to the costs of their defence under s 59(4) in any event. Perhaps they will if their breach is excused under s 85(2); but they cannot be sure, in advance, that the court's discretionary power to excuse the breach will be exercised in their favour, and one of the matters to be excused is their failure to obtain the court's direction under s 63 or otherwise.

1. After making the point that an application for judicial advice resolves doubt about whether it is proper for a trustee to prosecute or defend litigation (and thus doubt about the trustee's entitlement for indemnity for the costs of the litigation), the Court stated at [74]: A necessary consequence of the provisions of s 63 of the Act is that a trustee who is sued should take no step in defence of the suit without first obtaining judicial advice about whether it is proper to defend the proceedings.

1. Earlier, at [47], the High Court had quoted the following statement of principle from the judgment of Lindley LJ in the leading English decision of In re [NAME] [1893] 1 Ch 547 (at 557): .. a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel's opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances. If, indeed, the Judge comes to the conclusion that he would have authorized the action or defence had he been applied to, he might, in the exercise of his discretion, allow the costs incurred by the trustee out of the estate; but I cannot imagine any other circumstances under which the costs of an unauthorized and unsuccessful action brought or defended by a trustee could be properly thrown on the estate.

1. The High Court continued (at [48]): That warning that trustees who become involved, or wish to become involved, in litigation should seek the court's sanction is the significant, and in later years influential, aspect of In re [NAME].

1. In [NAME] v Frost [2009] NSWSC 917 Brereton J (as his Honour then was) dealt with a contested application by an executor for indemnity for legal costs incurred as executor out of the estate. His Honour referred to UCPR r 42.25 and stated that the rule "in substance reflect[ed] the position at general law". After discussing some of the cases expounding the general law principles his Honour stated at [32]: Cases such as Re [NAME] and … [NAME] [citation omitted], [70], demonstrate the desirability and prudence of trustees acting promptly to obtain judicial advice, lest it otherwise be suggested that they have been gambling with money that is not their own, but the absence of such advice does not reverse the prima facie position established by UCPR, r 42.25. The statement was repeated by his Honour in [NAME] v [COMPANY] [2010] NSWSC 725 (a case where a belated application was made for judicial advice to sanction the defence of proceedings after the trustee had already embarked on that defence) at [29].

1. His Honour returned to the point in Grizonic v Suttor [2011] NSWSC 471, a case in which trustees were seeking indemnity out of the trust assets for their costs in defending proceedings concerning the assets of a trust. His Honour stated at [60]: It was also submitted that the trustees should not be entitled to costs, having not sought the advice of the court before embarking on the defence of the proceedings, invoking [NAME] [citation omitted]. However, while it may well be advisable or prudent for a trustee to seek judicial advice prior to incurring costs, so as to avoid personal risk in the event that it ultimately be found that the costs were not "properly" incurred in the administration of the trust, the decision of the High Court of Australia in The [NAME] case does not mean that a failure to seek such advice prophylactically disentitles a trustee from resorting to the trust funds if such resort is otherwise proper, and the absence of such advice does not reverse the prima facie position that prevails in equity, and is reinforced by statute: for example, UCPR r 42.25, and (NSW) Trustee Act 1925, s 59(4) [[NAME] v Frost, [32]; [NAME] v [COMPANY], [29]]. In this case, the trustees were vindicated; they successfully resisted the proceedings [NAME] brought against them (albeit by obtaining a dismissal for failure to provide security), and obtained a costs order against him.

1. Wales v Wales [2014] VSCA 101 was a case in the [ADDRESS] of Appeal concerning the costs of a successful application for the removal and replacement of the trustees of four family trusts. Ashley JA gave the judgment of the Court.

2. At [85] his Honour referred to the decision in [NAME] and the statement by the High Court in [NAME] at [74] that a trustee faced with proceedings should take no step before obtaining advice. But his Honour added at [86]-[87]:

86. It is, however, the fact that their Honours made other observations in less prescriptive language. So, in the passage immediately preceding the second passage cited by the judge, their Honours said that an application under s 63 by a trustee sued for breach of trust should be seen as a standard instance to which s 63 'can in appropriate cases apply. Further, in the second passage cited by the judge, their Honours stated that 'a trustee who is sued should take no step … without first obtaining judicial advice'. Earlier on, their Honours had stated that the legislative scheme 'is that it is desirable that trustees in doubt as to a course of action … should seek s 63 advice first'; and that it was understandable that the legislature should enact provisions enabling trustees to take advice before embarking on a course which might carry a risk of incurring costs outside the indemnity. 87. … failure to seek advice is likely to be most weighty in a case where breach of trust is alleged. That was the situation in Macedonian. Further, … the apparent rigour of the obligation to seek advice was modified in its application where a trustee had acted on legal advice. Those two matters would have assisted to put into perspective the significance of the appellants' failure to seek advice whether to contest the removal application.

1. In [NAME], the trustee had acted on legal advice in unsuccessfully defending proceedings. As appears clearly from the passage already quoted, this was not enough to justify the trustee having indemnity against the costs of those proceedings. But the [ADDRESS] of Appeal recognised that some costs would have been properly incurred had advice been sought, even if the advice had been (as the Court thought it would have been) that the proceedings should not be defended. A sum was allowed in favour of the trustee, representing the costs he would have incurred in making the application. It seems that this was what Ashley JA was referring to when he said that "the apparent rigour of the obligation to seek advice" had been "modified".

2. On the facts in Wales, the reasonableness or otherwise of the trustees' actions was not clear-cut. The argument for their removal was based, at least in part, on a conflict of interest which had arisen as a result of a previous failure to pay amounts due from the trust to an estate of a family member of which the trustees were executors. Although the trustees did not seek judicial advice before defending the removal application they did, before the removal application had been made, seek judicial advice on how to deal with the underlying overpayment issue.

3. But in the end his Honour accepted that the costs of defending the removal action had been somewhat higher than they would have been if the question had been pursued through judicial advice. His Honour made an assessment that the increase was about fifty per cent. The trustees' indemnity was confined to half of their costs.

4. Free Serbian Orthodox Church Diocese for Australia and New Zealand Property Trust v [NAME] (No 3) [2017] NSWCA 109 concerned the costs of an unsuccessful appeal by a trustee. Payne JA, who gave the judgment of the Court, stated at [42]: I accept as correct the statement of Brereton J in [NAME] v Frost [2009] NSWSC 917 at [32] that [NAME] does not mean that a failure by a trustee to obtain judicial advice reverses the prima facie position established by UCPR, r 42.25. In my view, however, the absence of an application for such advice is a matter highly relevant to the question of whether the trustee has "acted unreasonably".

1. Indemnity was denied. Part of the reason was the weaknesses in the appeal. But his Honour did refer to the failure to obtain advice observing (at [43(1)]): … the failure of the [COMPANY] to seek judicial advice before embarking on the appeal was unreasonable. Had it done so, the very real problems with the way it proposed to conduct the case would no doubt have become apparent.

1. In the present case, [NAME] did not seek judicial advice about her position as trustee at any point after the issue was raised in correspondence with her in September 2020. But her counsel submitted that this was not fatal to her claim for indemnity. Counsel relied on what Emmett AJA, speaking for the Court of Appeal, said in [NAME] v [NAME] (No 4) [2021] NSWCA 256 at [83]-[84]:

83. Ordinarily, the question of judicial advice is relevant only where a trustee commences proceedings which are unsuccessful or unsuccessfully defends proceedings brought against the trustee. However, the mere fact of being unsuccessful is, of itself, not sufficient to deprive a trustee of entitlement to indemnity in respect of the costs. It would be necessary, at the end of the day, for an inquiry to be conducted as to whether the Trustee acted reasonably in commencing proceedings or in defending proceedings in respect of which a trustee is unsuccessful. The part that s 69 [sic; s 59(4)?] of the Trustee Act plays is that that inquiry will be unnecessary if the trustee has sought advice and has been advised that commencing and prosecuting the proceedings on the one hand, or defending proceedings, on the other, would be justified.

84. To the extent that the High Court has said, in the passage cited by the primary judge, that a trustee "should" obtain judicial advice before commencing or defending proceedings, the High Court should be understood as saying no more than that it would be prudent for a trustee to seek judicial advice before commencing or defending proceedings. However, there is no legal obligation to do so. The rationale for doing so is to avoid an argument at the end of the day as to whether it was reasonable to commence and prosecute the proceedings or to defend the proceedings.

1. In support of the proposition that there "is no legal obligation" to obtain advice, his Honour cited [NAME] at [32], [NAME] at [60], Wales at [85]-[87] and Free Serbian Orthodox Church at [42].

2. Counsel for [NAME] referred to the passage in [83] about the need for an "inquiry" into the reasonableness of the trustee's conduct. But if counsel's purpose in doing so was to suggest that it was not open to the Court in the present application to deprive [NAME] of her right of indemnity unless some such inquiry had been undertaken, then I cannot agree.

3. I have already mentioned that the principles which apply to indemnity for expenses incurred by a trustee in litigation are only a particular application of the principles which apply generally to indemnity for costs incurred in the administration of the trust: see [NAME] at 555. The reference to an "enquiry" is a reminder that, as with any indemnity issue, a dispute about a trustee's indemnity for legal costs may give rise to a discrete substantive dispute. It may be necessary to join beneficiaries who have not been made parties to the litigation itself but who have an interest in the administration of the estate, and it may be necessary for there to be factual enquiries about the trustee's course of conduct and the reasons for it which will not necessarily have been canvassed in the litigation.

4. Usually such a dispute would fall to be determined in administration proceedings under UCPR Pt 54. There are unanswered questions about how this fits with UCPR r 42.25: see Olsen v James [2020] NSWSC 1015 at [127]-[130]. But it is not necessary to go into those questions for the purposes of the present judgment.

5. In some cases it may be better for the Court not to determine the trustee's right to indemnity for costs of proceedings as an ordinary issue arising in, and between the parties to, the proceedings themselves. Particularly is this so if the dispute about indemnity for costs of the proceedings is only part of a wider dispute which extends to other expenses as well. But if the Court has power to defer such an issue to be dealt with in administration proceedings, that does not mean that the Court is obliged to do so in every case. Independently of UCPR r 42.25, the Court's powers as to costs under TA s 93 clearly allow the Court to deal with the question of indemnity in a summary way.

6. In the present case, the estate is relatively small. The affected parties are [NAME] and [NAME], both of whom are represented in the proceedings. The issue has been fully argued. The question of indemnity should be dealt with in these proceedings.

7. I therefore come to the argument on the merits. In my view, the passage from [NAME] cited by counsel for [NAME] does not go far enough for counsel's purposes in the present case. It may be accepted that trustees have no affirmative obligation to obtain judicial advice before embarking on the prosecution for defence of litigation. They are free to litigate first and seek indemnity later. If they succeed in the proceedings, they will usually obtain indemnity. If they fail, they may still receive indemnity but that does not mean that they must necessarily do so.

8. Read in isolation, what Brereton J said in [NAME] at [32] appears to suggest that the strict view taken in [NAME] has been relaxed by the enactment of UCPR r 42.25. But I do not think that, in the broader context, his Honour intended to say that. As we have seen, only a few paragraphs earlier in the judgment his Honour has stated that the enactment of the rule had not changed the established equitable principles.

9. The decision in [NAME] was referred to with apparent approval by the High Court in [NAME]. It is also consistent with the language of TA s 85(2). That enactment proceeds on the basis that a trustee who could have avoided a breach and who seeks to be relieved from the consequence of it will ordinarily need to explain why advice was not sought in advance. As [NAME] illustrates, the relationship between breach by a trustee (the subject matter of s 85(2)) and the trustee's indemnity from trust assets is, in the context of litigation, a close one.

10. In this context, there is every reason to treat the failure to obtain advice as a factor which potentially goes to unreasonableness for the purposes of UCPR r 42.25. That proposition is expressly supported by what Payne JA said in Free Serbian Orthodox Church.

11. In Olsen at [97]-[103] I discussed the general equitable principles which apply to the onus in a trustee's claim for indemnity. I concluded, by reference to the Court of Appeal decision in Gatsios Holdings Pty Ltd v Kritharas Holdings Pty Ltd [2002] NSWCA 29, that the legal onus lies on the trustee to show that the expense in question has been reasonably and honestly incurred, but usually this is an undemanding test, but the onus of demonstrating reasonableness is not demanding; in usual circumstances, it only requires that the incurring of the expense was not unreasonable.

12. As Brereton J has pointed out, the language of r 42.25 is different. All that is required for the rule to apply is that the trustee is, or has been, a party to proceedings in the capacity. The rule creates an entitlement to reimbursement unless the trustee has acted in his own interest or has behaved unreasonably. In that sense, there is a reversal of the previous onus. But this makes little practical difference. Even if the trustee does not bear any onus, the Court may take a failure to obtain judicial advice into account, and if that failure is unexplained it is open to the Court to conclude that the trustee's behaviour was unreasonable.

13. In [NAME] and [NAME] the trustee or executor was successful in the litigation. [NAME] was a case about the availability of judicial advice, not indemnity. In [NAME] the trustee was unsuccessful but the Court found that had advice been sought in advance to sanction the trustee's actions in the proceedings, it would have been given.

14. These are all points of distinction from the present case. But in any event there is more to the present case than a mere failure to obtain judicial advice in advance.

15. As I explained at J1 [19], whether or not the complaints made on behalf of [NAME] against [NAME] were justified, the fact that she was subject to an order which prevented her from having any contact with [NAME] made her position as trustee untenable. From the outset she was unable to discharge her duties. Administering the trust was an affirmative obligation. It was not open to her to do nothing and wait for someone else to take action on [NAME]' behalf.

16. In my view the proper course for [NAME] would have been to make her own application under s 70. It would of course been perfectly legitimate for her to propose that she be replaced by a public trustee, in accordance with the usual approach of the Court, and to leave it to [NAME], as the respondent to the application, to suggest [NAME] or someone else. Had she taken this approach there could have been no criticism of her and she would undoubtedly have received an order that her costs be paid out of the trust, whether or not [NAME] was ultimately appointed as trustee.

17. I feel confident that if [NAME] had asked for judicial advice in September 2020, she would have been advised to take this course (or, perhaps, simply to resign in [NAME]'s favour, having regard to the financial issues which ultimately led me to conclude that [NAME] should be appointed). Instead she chose, for reasons which were never fully explored in the proceedings, to hold on as trustee.

18. In Miller v Cameron (1936) 54 CLR 572 Latham CJ at 579 took the view that a trustee who unreasonably resisted a request for resignation, and then proceedings to remove him, was not, in defending the proceedings, acting in his capacity as trustee at all. Rather he was in substance acting for his own benefit. It is unnecessary to consider whether, in the present case, [NAME] "acted for her own benefit" for the purposes of r 42.25(2)(b). I think that she did on any view act "unreasonably" for the purpose of r 42.25(2)(a).

19. Counsel for [NAME] did not make any submission that an amount should be allowed to reflect the indemnifiable costs which would have been incurred if advice had been sought, as was done in [NAME] and Wales. I therefore propose to pass over that issue. But in doing so, it does seem to me that, following receipt of the September 2020 letter, [NAME] adopted a quite uncompromising position. She did not accept that there was any conflict of interest, or any other reason for her to withdraw as trustee. The position ultimately taken in her submissions in the s 70 application was moderate and reasonable, but by then it was too late. [NAME] had had no practical alternative but to pursue the application. 20. [NAME] might arguably have been entitled at least to recover the costs of obtaining advice in response to the September 2020 letter which raised the question of her continuation as trustee. But the fees for that advice were billed separately to [NAME] and do not form part of the costs of these proceedings. It may be that it remains open to [NAME] to claim them as expenses of acting as trustee. It is not necessary to consider this any further for present purposes.

21.

For these reasons, I decline to grant [NAME] any indemnity for the costs awarded against her on the s 70 application, or for her own costs. She will have to bear the costs herself.

22. But otherwise, trustees who embark on litigation and are unsuccessful have only themselves (or, more realistically, their lawyers) to blame if the Court refuses to allow them to pass on to the trust beneficiaries liabilities and expenditure which has had no benefit for the trust.

Costs of costs argument 1. The costs arguments have produced a mixed result. As between [NAME] and [NAME] has failed. As against [NAME] has succeeded. In principle, this should result in an order for costs in [NAME]' favour as against [NAME], and an order for costs in [NAME]' favour as against [NAME]. In order to give effect to this, it is necessary to apportion the costs of the costs argument, which covered both applications. On the information available to me, I see no alternative but to apportion the costs equally.

Orders 1. The orders of the Court are:

1. Order that the plaintiff pay the first defendant's costs of the proceedings, to the extent attributable to the application for family provision, and including half of the costs of the costs argument.

2. Order that the first defendant's solicitor-client costs of the proceedings, to the extent attributable to the application for family provision, and including half of the costs of the costs argument, be paid out of the estate of the late [NAME].

3. Order that [NAME] be appointed trustee, in place of the second defendant, of the trust established by cl 3(d) of the Will of the late [NAME] dated 13 November 2015.

4. Order that the second defendant pay the plaintiff's costs of the proceedings from 1 April 2022 onwards, to the extent attributable to the plaintiff's application under s 70 of the Trustee Act 1925, including half of the costs of the costs argument.

5. Order that the second defendant have no recourse to the said trust for her costs of the proceedings, or the costs awarded against her under order (4).

********** 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. Decision last updated: 15 July 2022