Application by Karellas Investments Pty Ltd

HIS HONOUR: The Plaintiff, Karellas Investments Pty Limited, as trustee for the Karellas Family Trust No. 3 (“the Trustee”), seeks judicial advice on certain questions in relation to proceedings commenced by Marzena Karellas (“Marzena”), the former wife of Andrew Karellas Jnr, in the District Court at Sydney (“the District Court proceedings”). They were married between May 2010 and August 2014.

The Trust was established by Deed dated 6 November 1991. The Trust is a discretionary trust with respect to both income and capital and the discretionary objects of the Trust are described in Clause 1(d) as "Eligible Beneficiaries". (There appears to be no dispute that, as the spouse of Andrew, at the relevant time, Marzena was an “Eligible Beneficiary”: Second Schedule (d)).

Under Clause 3(a) of the Trust Deed, the Trustee stands possessed of the Trust Fund until the Perpetuity Date, to:

Clause 3(c) of the Trust Deed provided that “Any determination made pursuant to sub-clauses (a) and (b) …shall be irrevocable with respect to the income of the year to which the determination relates”.

In the District Court Proceedings, which were commenced by Statement of Claim filed 24 February 2016, with an amended Statement of Claim filed 12 April 2016, Marzena, in summary, alleges that:

She seeks judgment for that sum by way of equitable damages or compensation, or by way of an order that it be paid, together with interest accrued thereon and costs. If Marzena succeeds, then the value of the Trust assets held by the Trustee will be diminished by the amount ordered to be paid.

The Plaintiff’s Summons was filed on 14 July 2016. The Trustee seeks the opinion, advice and directions of the Court in respect of the questions set out in the Statement of Facts dated 11 July 2016 filed in the proceedings.

The Trustee seeks advice on the following questions:

The Trustee does not seek advice on whether it is entitled to have recourse to the assets of the trust to pay its costs of the defence of the District Court proceeding. It does, however, seek its costs of this application.

The Trustee has read on the application, the Summons and the Statement of Facts dated 11 July 2016, and has tendered an exhibit to the Statement of Facts (which has been marked Ex. A).

In compliance with s 63(3) of the Trustee Act 1925 (NSW) and Uniform Civil Procedure Rules, rule 55.1, the application was commenced by Summons and the Statement of Facts:

In addition, I have read a copy of a joint opinion of counsel (confidential Ex. B) going to some aspects of the District Court proceedings and a confidential estimate of costs (confidential Ex. C). (Each of these exhibits will be retained in an envelope marked “Not to be opened except with the leave of the Court”).

The Court was assisted by the written and oral submissions of counsel for the Trustee. The written submissions will also remain with the Court file.

The provision of all of these documents has enabled me to familiarise myself with the issues, quite thoroughly, before the hearing and saved time and expense at the hearing: Morris v Smoel (as executors of the will of Morris, dec’d) [2013] VSCA 11, per Maxwell P, at [5] – [6]. The Plaintiff’s legal representatives are to be commended for the course followed.

The application, which is made under the Trustee Act, s 63, appears to be in conformity with the course commended by the High Court in Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42. In that case, it was held, at [74], that a trustee who is sued "should take no step in defence of the suit without first obtaining judicial advice as to whether it is proper to defend the proceedings. But deciding whether it would be proper for a trustee to defend proceedings instituted about the trust is radically different from deciding the issues that are to be agitated in the [District Court] proceedings. The two steps are not to be elided. In particular, the judicial advice proceedings are not to be treated as a trial of the issues that are to be agitated in the [District Court] proceedings".

The issue for determination in these proceedings is not whether the Trustee is entitled to succeed on the defences proposed, or whether the joint opinion of counsel is correct, but whether, in all of the circumstances established by the Statement of Facts, including counsels’ advice received, the Trustee would be justified, and would be properly performing its duty as trustee, if it defended the District Court proceedings.

Whether it would be appropriate to provide advice as to the nature of the defences proposed is a matter to which I shall return.

As will be read, s 63 makes clear that it is not necessary – unless the Court otherwise orders, or the Rules otherwise provide – that notice of an application for judicial advice be given to any person other than the trustee.

The application for judicial advice has not been served on Marzena and she is not named in the Summons. This is appropriate because no questions of disputed fact are to be resolved, the application merely addressing whether the Trustee is justified in defending the District Court proceeding. Also because she no longer falls within any category of discretionary object of the Trust, and has no interest in whether the Trustee receives advice that it is justified in defending the District Court Proceedings in the manner proposed so as to be entitled to indemnity from the Trust assets, she did not have to be served with any of the documents in these proceedings.

The Trustee submits:

It also submits that each of the questions posed should be answered “Yes”.

I have previously set out the relevant principles to be applied in an application for judicial advice in Application by Marilyn Joy Cottee; Estate of Gwenyth Shirley Smith [2013] NSWSC 47 at [29]-[42]. In that case, I wrote:

It can be seen, from the above, that a trustee’s application for judicial advice about whether to defend proceedings is not only directed to the personal protection of the trustee, by resolving doubt about whether it is proper for a trustee to incur associated costs and expenses, but also to the no less important purpose of protecting the interests of the trust by ensuring that those interests are not subordinated to the trustee’s fear of personal liability for costs. It satisfies the jurisdictional bar required, namely, “the existence of a question respecting the management or administration of the trust property or a question respecting the interpretation of the trust instrument”: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand at [58].

In In the application of NSW Trustee & Guardian [2014] NSWSC 423, Kunc J stated, at [2], that he was going “to summarise and restate some important aspects of practice and procedure in relation to applications for judicial advice, in particular the role of the trustee prior to the making of such an application and the function of counsel's opinion that almost inevitably must accompany such an application”.

Relevantly to this application, his Honour then wrote, at [3]:

His Honour also dealt with the necessity for the application to be accompanied by the opinion of a suitably qualified legal practitioner, noting at [27] that “[t]he content of that opinion will be a significant matter which the Court will take into account in determining whether or not to give the advice sought”, and at [28] that the “advice can be the opinion relied upon by the trustee in deciding upon its provisional course of action … or an opinion especially prepared for the purposes of the application”.

His Honour then referred to the utility of the opinion, referring to the decision of Lindsay J in Re Estate Late Chow Cho-Poon [2013] NSWSC 844 at [108] – [110] and [113] – [120] (which I shall not repeat).

Kunc J, then, stated, at [30]:

In Bideena Pty Ltd as trustee for the Bideena Pty Ltd Superannuation Fund (2016) 334 ALR 146; [2016] NSWSC 735, Sackar J noted, at [40], that “[w]here the application is supported by an opinion of Counsel that is confidential, it may be difficult for a judge to provide reasons that are as full as would otherwise be given”. That is the position in these proceedings.

Finally, I should refer to Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand, at [106]:

In relation to the advice sought as to the nature of the defences and whether such advice should be given about the appropriateness of those defences, I refer to the remarks of Palmer J in Re Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247, at [80]:

His Honour’s remarks were referred to, without apparent disapproval by the plurality of the High Court, at [161]. At [162] - [164], the plurality noted that Palmer J’s remarks should not be interpreted as drawing a distinction between mere “sufficiency” and “strength” and emphasised that his Honour had considered the “merits and strengths of the claim” as a relevant factor.

The remarks of Palmer J have also been referred to, with approval, by Davies J in Quickfit Franchising Systems Pty Ltd as Trustee for the Jax Quickfit Franchising Systems Unit Trust [2012] NSWSC 1114, by Darke J in Re Rosewood Research Pty Ltd (No 2) [2014] NSWSC 1226, by Slattery J in Re Application of the Anglican Property Trust Diocese of Bathurst [2016] NSWSC 13, and by Sackar J in Bideena Pty Ltd as trustee for the Bideena Pty Ltd Superannuation Fund.

I should note that Brereton J in Lenyco Pty Ltd; In the matter of the Daquino Family Trust [2009] NSWSC 846 did provide advice that a trustee “would be justified in doing all things necessary or reasonably incidental to conduct the defence of proceedings … in which it is the first defendant in relation to all defences raised by it set out in the draft defence to be filed in those proceedings, a copy of which is PX03 herein, and on such other bases as it may be advised from time to time”.

At the outset, it should be noted that the allegations of a breach of trust do not concern the personal interests of the Trustee. It is not being sued in proceedings in which there are criticisms of its conduct as trustee and no relief is being sought in the District Court proceedings against it, personally, because of its past acts and course of conduct (other than in respect of it not paying the amount which it is said ought to have been paid to Marzena).

The matter at stake is not the personal liability of the Trustee and it has no direct pecuniary interest in defending the allegations. To the contrary, the allegations concern the duty owed by it, as Trustee of the Trust, to pay the amount claimed by Marzena, or any part of it, to her, out of the property of the Trust. Whilst the trust is a private one, the Trustee has no financial interest in the property of the trust.

I am satisfied that the determination of the proceedings concerns the administration and management of the Trust.

I am also satisfied, in the circumstances of this case, that it is appropriate to give judicial advice to the Trustee at this stage of the District Court proceedings. I am also of the view that, on the materials before the Court, it is in the best interests of the Trust to provide the advice.

The practical effect of the questions upon which judicial advice is sought is to see whether the Trustee is justified in defending the District Court proceedings in order to establish the existence of any amount that is to be paid out of the property of the Trust by the Trustee to a person who claims such amount. If the Trustee does not defend the proceedings then the Trust Fund will necessarily be deprived of the value of the amount claimed.

As stated, the Trustee is the proper party to resist Marzena’s claim in the District Court proceedings. It is the natural and proper contradictor in respect of most, if not all, of the relief claimed in the District Court proceedings.

There is no suggestion in what I have read that the Trustee is acting otherwise than in good faith.

Marzena asserts in Paragraph 8 of the amended Statement of Claim that no part of the monies have been paid to her “or applied to her maintenance education, benefit or advancement in life”.

The Trustee proposes to defend the District Court Proceedings on the basis that it has, in fact, applied the relevant sums for her "maintenance, education, benefit or advancement in life" as an Eligible Beneficiary, on the basis that:

There may be a question whether the distributions proved to have been made were for Marzena’s "maintenance, education, benefit or advancement in life", but that will be for determination in the substantive proceedings.

Having read confidential Ex. B, I am satisfied that in relation to the first question posed, the answer should be “Yes”. I consider that too much time should not be spent on the question whether Marzena’s claim, which principally alleges a breach of trust, comes within the jurisdiction of the District Court, and that it would be open to the Trustee to apply to have the proceedings remitted to the Supreme Court.

Reference need only be made to s 144 of the Civil Procedure Act 2005 (NSW) and s 134(1)(e) and (1)(h) of the District Court Act 1973 (NSW) to be satisfied that it is arguable that the District Court does not have jurisdiction to grant the relief sought by Marzena. Also see, Chianti Pty Ltd v Leume Pty Ltd (2007) 35 WAR 488; [2007] WASCA 270, per Martin CJ, at [4].

Although these reasons for judgment are in the nature of a private advice to the Trustee from the Court, “it is neither necessary nor appropriate for the Court to recount or consider the reasoning in counsels’ opinion in detail, as that opinion remains subject to legal professional privilege” in the Trustee: Loblay and Loblay [2013] NSWSC 1195, per Robb J, at [29].

Whether the Trustee will succeed in the defence of the claims made may involve questions of fact and of law, including what distributions were made to, or on behalf of, Marzena, and whether each of those distributions fall within the meaning of the term “maintenance, education, benefit or advancement in life”. Those issues should be determined at trial rather than on this application.

The Court is of the opinion that the Trustee may act upon the contents of confidential Ex. B to defend the District Court proceedings. The Court has carefully considered that Exhibit and is of the view, without affirming the necessary correctness of the joint opinion of counsel, that the reasoning in concluding that the Trustee appears to have a good defence to the proceedings is sufficiently sound to warrant the Trustee prosecuting the defence.

The joint opinion of counsel is an important factor inclining the Court to the view that the Trustee would be justified in defending the District Court proceedings. Whether the Trustee does so, solely on the terms identified, or otherwise, as it may be advised from time to time, is a matter for advice from its legal advisers.

In the circumstances, I do not propose to provide judicial advice on the precise terms of the Trustee’s defence other than in answering the third question in the way proposed. In other words, the Trustee would be justified in not raising the estoppel argument as a defence.

In the circumstances, pursuant to s 63 of the Trustee Act, I order that the Trustee: