Re Perpetual Trustee Company Limited as trustee for the Joseph Babington Davis Settlement

By its summons filed on 20 August 2020, Perpetual Trustee Company Ltd (Perpetual), as trustee for the Joseph Babington Davis Settlement (the Trust) seeks the Court's opinion, advice and direction pursuant to s 63 of the Trustee Act 1925 (NSW) (the Trustee Act), or the Court's inherent jurisdiction, on the questions set out in the statement of facts filed in this proceeding.

The questions relate to Perpetual's defence of two proceedings in this Court in which Perpetual, and related companies for which Perpetual is responsible, have been sued as defendants by a number of beneficiaries of the Trust.

It will be convenient to adopt Perpetual's description of the two proceedings as the 2018 Proceeding and the 2020 Proceeding. These proceedings were respectively commenced in the Corporations List and the General List of the Equity Division of this Court. It will also be convenient to defer an explanation of the issues raised by the two proceedings until after I have set out a brief explanation of the terms of the deed that established the Trust and the primary events that have given rise to the two proceedings.

The outline of the terms of the Trust and the relevant events set out below is substantially taken from the statement of facts filed on 20 August 2020 and a supplementary statement of facts dated 11 September 2020 that was included in the court book. Those documents became part of Exhibit A, which comprised the court book, other than Perpetual's summons.

The court book also included copies of the significant documents relevant to the creation of the Trust and the primary events that have given rise to the two proceedings.

Perpetual also tendered a written opinion of Mr AJ McInerney of senior counsel dated 29 October 2020. Counsel's opinion was admitted into evidence as Confidential Exhibit B and placed in an envelope marked not to be opened or inspected without the approval of a judge.

The Trust was created by an Indenture dated 19 March 1934 by Mr Joseph Babington Davis (the Settlor). The amount of the capital of the Trust was £26,500.

The original trustees of the Trust were a chartered accountant and a solicitor but, relevantly, between 1940 and 25 May 2005, the trustee of the Trust was Permanent Trust Co (Canberra) Ltd (PTCCL). That company has since been deregistered.

On or about 25 May 2005, PTCCL retired as trustee and Union Trustee Co (Canberra) Ltd, which is now known as the Trust Company (UTCCL) Ltd (UTCCL) was appointed as the replacement trustee of the Trust.

It has been alleged by the plaintiffs in the 2020 Proceeding that, between approximately 25 May 2004 and 1 March 2015, the Trust Company (Australia) Ltd (TTCAL) was a trustee of the Trust, and has held itself out to be a trustee.

In or about December 2013, UTCCL and TTCAL were acquired by Perpetual Ltd. It is sufficient to record that, on 1 March 2015, by operation of the Corporations Act 2001 (Cth) (the Corporations Act), there came into effect a total transfer of the estate assets and liabilities of UTCCL and TTCAL to Perpetual, and Perpetual was appointed as trustee of the Trust.

Perpetual is the sixth defendant in the 2018 Proceeding and the fourth defendant in the 2020 Proceeding. UTCCL and TTCAL are the second and third defendants respectively in the 2020 Proceeding.

“UTCCL, TTCAL and Perpetual are referred to as the “Perpetual Entities”. Relevantly, the plaintiffs in the 2020 Proceeding allege that Perpetual is now responsible for any liability that UTCCL and TTCAL may have to the plaintiffs. Perpetual is the sole applicant for judicial advice. In the 2020 Proceeding, the interests of each of the second, third and fourth defendants are the same, and they are represented by the same firm of solicitors.

The £26,500 capital of the Trust was used to purchase 26,500 B Class shares of £1 each in a company originally called Canberra Babington Trust Ltd, and now known as Canberra Babington Pty Ltd (the Company). The Company was incorporated on 19 January 1934.

By clause 5 of the Memorandum of Association of the Company dated 29 December 1933, the capital of the Company was £150,000 divided into 150,000 shares of £1 each.

Under the Articles of Association of the Company dated 29 December 1933, the authorised share capital of the Company was £150,000, divided into 100,000 A Class shares of £1 each, and 50,000 B Class shares of £1 each. The Articles of Association provided that, until the death of both the Settlor and his wife, Mabel Davis, the holders of the A Class shares were entitled to one vote per share at a general meeting, and the holders of the B Class shares had no right to receive notice of, or be present at, any general meeting.

Consequently, at the time the Trust was created, as the holder of B Class shares, the trustee of the Trust had no right to receive notice of, or be present at, any general meeting of the Company.

As at 9 September 1942, the Company had 32 A Class shares and 48,500 B Class shares on issue, which included the 26,500 B Class shares held by PTCCL as trustee of the Trust.

Relevantly, the terms of the Trust were that the trustee was to hold the capital of the Trust on trust:

For reasons that have not been explained, the amounts of £2,000 and £10,000 were not paid out of the capital of the Trust to Veronica Lees. That is relevant because the executors of the estate of Veronica Lees have, through their solicitors, advised Perpetual that the estate of Veronica Lees claims an entitlement to payment of the two sums. The effect of this claim is that there may remain an issue in the administration of the Trust even after the completion of the 2018 and 2020 Proceedings.

The only assets that have comprised the Trust’s property have been the shares held in the Company, and any income earned on those shares before the income was paid to the beneficiary who was entitled to payment.

The terms of the Trust do not empower the trustee for the time being to borrow money. The absence of a borrowing power will be seen to be relevant to the inability of PTCCL, at relevant times, to take up rights issues in the share capital of the Company, which has had the consequence of diluting the Trust’s shareholding in the Company. That consequence is the primary cause of the 2018 and the 2020 Proceedings.

The Settlor died on 2 July 1940. Mabel Davis renounced her rights to the income of the Trust by way of deed made on or about 8 April 1940. She died on 6 March 1967. Veronica Lees died on 11 May 2014.

Accordingly, under the terms of the Trust, the grandchildren of the Settlor that have survived Mabel Davis and Veronica Lees are now entitled to the capital of the Trust in equal shares.

The grandchildren entitled to the remainder include four grandchildren of the Settlor, and the executor of the estate of another grandchild, by the first wife of the Settlor, who died before he married Mabel Davis. These five beneficiaries have been called the Davis Descendants for the purpose of this application, and are the plaintiffs in both the 2018 and the 2020 Proceedings.

Veronica Lees was also survived by her three children, who are the remaining grandchildren, and are referred to as the Lees Descendants. The Lees Descendants are the second to fourth defendants in the 2018 Proceeding.

The Lees Descendants are entitled to share equally in the capital of the Trust with the Davis Descendants. However, it is not in that capacity that they have been made the defendants to the 2018 Proceedings. As a result of the events that will be explained below, the Lees Descendants have acquired shares of their own in the Company, together with a company called Vesta Pty Ltd (Vesta), which is a company that was controlled by Veronica Lees during her lifetime. Vesta is the fifth defendant in the 2018 Proceedings.

The remaining defendants are the Company as first defendant and Perpetual, as trustee for the Trust, as the sixth defendant.

By a further amended statement of claim filed by the Davis Descendants on 14 September 2020 in the 2018 Proceeding (2018 SOC), the Davis Descendants seek the following relief:

Apparently, a single share in the Company has been transferred to each of the Davis Descendants so that they have standing to prosecute the 2018 Proceeding.

The Davis Descendants do not seek any relief against Perpetual in the 2018 Proceeding in its own capacity. Perpetual has been joined so that it will be bound, as trustee of the Trust, by the outcome of the proceeding, and will be obliged to transfer the shares in the Company that it holds on behalf of the Davis Descendants to the Lees Descendants and Vesta or the Company, if the Davis Descendants succeed in obtaining the order sought in prayer 1. As a shareholder in the Company, Perpetual is also a necessary party to the alternative claim, in prayer 2, that the Company be wound up.

In par 142 of the 2018 SOC, the Davis Descendants allege that, on the basis of the facts earlier pleaded:

Then, in par 143, which is referred to in prayer 1, the Davis Descendants list the conduct that they claim justifies the Court in making the order under s 233 of the Corporations Act that they seek. Most of that conduct is not material to Perpetual's application for judicial advice, as it did not involve the trustee for the time being of the Trust, and is not the basis of any claim made against the Perpetual Entities in the 2020 Proceeding. It is not necessary for the Court to set out the parts of par 143 of the 2018 SOC that are not material to any claim by the Davis Descendants against the Perpetual Entities.

Materially, par 143 of the 2018 SOC alleges:

It will be convenient at this stage to explain, in broad terms, the circumstances in which the rights issues occurred, as alleged by the Davis Descendants.

The following background facts will assist in an understanding as to how Veronica Lees and her children and her company, Vesta, were able to cause the Company to make the rights issues that are the subject of the dispute.

As I have explained above, initially the Company had issued shares of 32 A Class shares and 48,500 B Class shares. By 14 November 1961, Mabel Davis held 26 A Class shares, Veronica Lees held 5 A Class shares, and another person who was a life director of the Company held 1 A Class share. Therefore, Mabel Davis was in a position to control the general meetings of the Company. At that time, Veronica Lees held 22,000 B Class shares, and PTCCL continued to hold 26,500 shares on behalf of the Trust.

On 14 November 1961, at an adjourned extraordinary general meeting of the members of the Company, it was resolved that all of the A and B Class shares be converted into ordinary shares. Consequently, the issued capital of the Company became 48,532 ordinary shares of £1 each. The holders of all of the ordinary shares were then entitled to vote at general meetings of the Company.

The result was that PTCCL became the majority shareholder, with 26,500 ordinary shares, and Veronica Lees held 22,005 ordinary shares. It is not necessary to set out the detail, but Veronica Lees transferred a number of shares to the Lees Descendants and Vesta that enabled them to participate in subsequent rights issues by the Company.

During the period when PTCCL was the trustee of the Trust, the directors and shareholders in the Company caused the Company to engage in four rights issues of shares on 25 January 1962, 8 March 1980, 14 June 1994 and 6 June 1997. Those rights issues have been referred to as the First to Fourth Rights Issues in the 2018 SOC. It is not necessary for the purpose of these reasons to set out in detail the circumstances of each of the Rights Issues. Although the offer to take up the rights attributable to the shares in the Company held by PTCCL was made to that trustee on each occasion, as it held within the Trust no other assets but the shares in the Company, and as it did not have a power to borrow, PTCCL was required to decline to participate in the Rights Issues. One or more of the Lees Descendants and Vesta held shares in the Company at the time of each of the Rights Issues, and those defendants, in varying quantities, accepted the offers made. The consequence was that the proportionate shareholding of PTCCL in the Company, as trustee of the Trust, was progressively diluted, and the proportion of the shares held by the Lees Descendants and Vesta was proportionally increased.

When, upon the death of Veronica Lees, the shares in the capital of the Trust vested in the Davis Descendants, they found that their entitlement to shares in the Company had been reduced, compared to the shares to which the Lees Descendants and Vesta were entitled, because of the effect of the Rights Issues and the inability of PTCCL to take up the shares.

The relative entitlement of the Davis Descendants to shares in the Company was also reduced by the fact that all of the Rights Issues took place for an allotment price of the nominal value of the shares, being £1. The principal asset of the Company was, until recent times, a substantial residential apartment building in the eastern suburbs of Sydney. The Davis Descendants allege that the market value of the building increased substantially over the years, so that the real value of the shares in the Company determined proportionally to the market value of the Company’s assets grew substantially more than an equivalent of £1 per share. If shares had been allotted in implementation of the Rights Issues on the basis of the market value of the shares to be issued, then the number of shares issued would have been proportionately reduced. The cumulative effect would have been that the proportion of the shares in the Company to which the Lees Descendants and Vesta are entitled, whether directly or as beneficiaries of the Trust, would have been substantially reduced compared to the entitlement of the Davis Descendants as beneficiaries of the Trust.

In their defence to the 2018 SOC, the Lees Descendants and Vesta pleaded a number of positive defences, including that PTCCL was aware of each of the Rights Issues and received the offers, and also knew that if it did not accept the offers the proportion of the shares held by it in the Company would be reduced. PTCCL did not object to the Rights Issues prior to their taking effect. The Company therefore lost the opportunity to respond to any valid objection to the Rights Issues that PTCCL may have been entitled to make. In particular, PTCCL did not object to any shares being issued as part of any Rights Issue at nominal value, rather than market value. Insofar as the Davis Descendants alleged that Veronica Lees breached her fiduciary duties to the Company as a director, by her participation in the Rights Issues, the Lees Descendants and Vesta pleaded that, as Veronica Lees died on 11 May 2014, the claim is defeated by a defence of laches. Those defendants also pleaded that, by reason of the conduct of PTCCL, the Davis Descendants are estopped from making the allegations concerning the impropriety of the Rights Issues.

The Lees Descendants and Vesta therefore raised defences to the 2018 SOC based upon the conduct of PTCCL in its capacity as trustee of the Trust.

In response, the Davis Descendants commenced the 2020 Proceeding by filing a statement of claim on 1 May 2020. Their current pleading is an amended statement of claim filed on 5 May 2020 (2020 SOC).

As PTCCL has been deregistered, the first defendants are certain Lloyd’s underwriters who are potentially liable to the Davis Descendants under insurance policies issued to PTCCL. As mentioned, the Perpetual Entities are the second to fourth defendants.

It is not necessary to describe the claims made by the Davis Descendants against the Lloyd’s underwriters in the 2020 SOC.

The 2020 SOC pleads relevant background facts, and the circumstances in which the four Rights Issues occurred. It then pleads, in pars 62 to 68, a claim of breach of trust against PTCCL. It then pleads, in pars 73 to 80, the circumstances in which each of the Perpetual Entities became, or is alleged to have become, trustee of the Trust. The 2020 SOC pleads, in par 81, that the Perpetual Entities owed duties to the beneficiaries of the Trust, including a duty to act with reasonable diligence, to preserve the assets of the Trust, and to act impartially between beneficiaries.

The 2020 SOC then pleads:

It is not necessary to set out the particulars of loss that are appended to par 86.

By further particulars provided by letter dated 13 August 2020, the Davis Descendants gave the following particulars of the allegation in par 82 of the 2020 SOC (Exhibit C):

The questions upon which Perpetual seeks the Court’s advice concern Perpetual’s defences to the 2018 and the 2020 Proceeding. Those questions, as initially posed, were (varied to conform with the terms used in these reasons):

On 6 July 2020, Black J heard and determined an application for an order that the 2018 and the 2020 Proceedings be heard together, on the basis that evidence in one be evidence in the other. My understanding is that his Honour delivered an ex tempore judgment, and held that the order sought should be made.

The two Proceedings have now been fixed for hearing commencing on 3 December 2020.

When the application for judicial advice was fixed for hearing on 15 September 2020 before me by Ward CJ in Eq on 3 November 2020, her Honour made directions for the Davis Descendants to apply for leave, on the basis that they would not submit that there was any waiver of legal professional privilege by Perpetual, and that they would consent to be excluded from that part of the hearing during which the Court dealt with matters confidential to Perpetual. The Davis Descendants have applied to the Court for leave to make submissions on Perpetual’s application.

At the hearing on 3 November 2020, Perpetual did not object to the Davis Descendants making submissions, and the application proceeded on that basis. Legal representatives of the Lees Descendants and the Lloyd’s underwriters were permitted to listen to the open part of the hearing. Perpetual’s confidential application was made in the equivalent of a closed court.

Section 63 of the Trustee Act materially provides:

At the beginning of the hearing, Perpetual informed the Court that the advice that it sought had been revised from the questions in the statement of facts and was contained in draft short minutes of order. Relevantly, Perpetual sought the following advice:

The Davis Descendants did not object to the Court giving to Perpetual the advice sought in order 2 of the draft short minutes of order.

However, upon the Court suggesting that it was implied in s 63(2) of the Trustee Act that the Court should not give advice retrospectively, senior counsel for Perpetual informed the Court that Perpetual would not pursue its application for that advice.

In its defence to the 2018 SOC filed on 5 June 2019, Perpetual responded to the Davis Descendants’ prayers for relief by stating that it did not oppose the orders sought in prayers 1 and 1A, whereby those parties sought relief for oppression. However, it said that any transfer of shares by Perpetual in the Company was subject to Perpetual’s right of indemnity as trustee of the Trust. Perpetual, as a shareholder in the Company, opposed the making of a winding up order, essentially on the ground that any relief obtained by the Davis Descendants on their oppression claim would be adequate relief, and because the Company was solvent.

In its response to the Davis Descendants’ allegations of fact in the 2018 SOC, Perpetual adopted a neutral stance. That proposition appears to be accepted by the Davis Descendants. Perpetual made admissions where appropriate, and did not admit allegations where it was not able to do so. It did not respond to allegations that were not made against it. Perpetual made formal allegations necessary to support its resistance to the making of a winding up order in respect of the Company as an appropriate form of relief.

Perpetual has adopted a positive, though minimalist, response to being joined as a defendant to the 2018 Proceedings. It is sometimes appropriate for a trustee, who is joined as a defendant in proceedings, and where the substantive issues will adequately be contested by opposing beneficiaries of the trust, to submit to the decision of the court: see Application of Uncle’s Joint Pty Ltd [2014] NSWSC 321 (Uncle’s Joint) at [26]. That is not an issue that needs to be considered on this application. It is not implied from my mentioning this issue that I consider that it is inappropriate for Perpetual in the 2018 Proceeding to actively participate in a neutral and minimalist way to protect its right of indemnity and to oppose the winding up of the Company.

The Davis Descendants opposed the Court giving Perpetual the advice sought in order 3 of the draft short minutes of order that it would be justified in defending the 2018 Proceeding on the basis of the proposed draft defence.

The amendments made by the 2018 SOC are not of great significance insofar as Perpetual is concerned. The draft defence to the 2018 SOC is the same as the previous defence, save that Perpetual wishes to add the allegations in pars 48A to 48E. By those paragraphs, Perpetual seeks to plead a further answer to the relief sought in the 2018 SOC in respect of the First to Fourth Rights Issues. Paragraph 48B makes a claim that the claim in the 2018 Proceeding is premised on a breach of equitable duty by the directors of the Company that was statutorily barred at both law and in equity. Paragraph 48C alleges that, in the 2018 Proceeding, the first to fifth defendants’ pleading of defences of laches and estoppel is premised on eight circumstances set out in the paragraph concerning the implementation of the Rights Issues. By par 48D, Perpetual alleges that, if and to the extent the factual allegations made by the first to fifth defendants are made out, and if the First to Fourth Rights Issues were validly made in accordance with the Company’s Memorandum and Articles of Association, Perpetual relies on the defences of laches and estoppel pleaded by the first to fifth defendants. Finally, par 48E alleges that, if the First to Fourth Rights Issues were validly made, the members of the Company, including PTCCL, gave their unanimous assent to, acquiesced in or ratified, or adopted as the conventional basis of their dealings and are estopped from impugning, the decisions, and the decision-making, of the Company.

Thus, by par 48B, Perpetual would plead a positive limitation defence. Paragraphs 48C and 48D would plead defences of laches and estoppel that are derivative of the other defendants succeeding in establishing those defences. Paragraph 48E would plead a positive defence of unanimous assent, acquiescence, ratification and estoppel premised on the First to Fourth Rights Issues being validly made.

The Davis Descendants’ opposition to the advice sought by Perpetual being given was based upon the proposition that no relief is sought against Perpetual in the 2018 SOC in its personal capacity. It followed, as argued, that the Court should exercise the discretion that it has by virtue of the inclusion of the word “may” in s 63(1) of the Trustee Act by declining to give the advice, because the Court should not sanction Perpetual conducting a positive defence to the 2018 Proceeding as it has no proper interest as trustee in doing so.

Perpetual’s proposed defence to the 2020 SOC contains pars 88 to 92 that are in identical terms to pars 48A to 48E of the defence to the 2018 SOC. From Perpetual’s perspective, the primary difference between the two Proceedings is that a claim is made in the 2020 Proceeding against each of the Perpetual Entities for breach of trust. That is on the basis that, upon becoming trustee of the Trust, none of the Perpetual Entities took the steps that the Davis Descendants allege in the 2020 Proceedings should have been taken to preserve the assets of the Trust in respect of the First to Fourth Rights Issues. Hence, the application by Perpetual for the advice sought in order 4 of the draft short minutes of order.

If the Court gives the advice in order 4, which is a matter that will be considered below, then Perpetual will be authorised to defend the Perpetual Entities on the grounds that will be pleaded in pars 86 to 94 of the proposed defence to the 2020 SOC. As the 2018 and the 2020 Proceedings will be heard and determined together, the prosecution of pars 86 to 94 will necessarily prosecute pars 48A to 48E of the proposed defence to the 2018 SOC.

Perpetual gave the following reason for wanting to add pars 48A to 48E to its defence to the 2018 SOC. That, as the two Proceedings will be heard together, Perpetual wished to avoid the possibility – however perhaps technical or remote – that findings made by the Court in the 2018 Proceeding would create issue estoppels which would be inconsistent with the success of Perpetual’s defence of the 2020 Proceeding.

In my view, as a matter of common sense, if the Court gives Perpetual advice that authorises it to conduct its proposed defence of the 2020 Proceeding, it should also authorise Perpetual to include the mirror defences in the 2018 Proceeding. That will obviate the possibility of some technical defect in Perpetual’s defence, and also the possibility of some confusion. The conduct by Perpetual of its defence of the 2020 Proceeding should not in any way increase the costs of the 2018 Proceedings, or subject the Davis Descendants to any additional jeopardy.

There may have been a case for the Court to give different advice than what is sought by Perpetual in order 3, along the lines that Perpetual is authorised to prosecute the defences in proposed pars 48A to 48E of the defence to the 2018 SOC to the extent that the equivalent paragraphs in the defence to the 2020 SOC are prosecuted. That course would mean that the Court would not positively advise Perpetual that, from the date of the advice, Perpetual is justified in prosecuting the proposed defence to the 2018 SOC generally. As mentioned above, the Court has not been asked to address the question of whether Perpetual is justified in prosecuting a minimalist defence when it could have submitted to the judgment of the Court.

However, I have decided that, if I give the advice sought by Perpetual in order 4 of the draft short minutes of order, I should also give the advice sought in order 3. As mentioned, the Davis Descendants informed the Court that they had no objection to the Court giving the advice sought in order 2. That entails that the Davis Descendants did not object to Perpetual conducting the minimalist defence that will now continue, arising out of the paragraphs of the proposed defence to the 2018 SOC, other than pars 48A to 48E. The other beneficiaries, the Lees Beneficiaries, are aware of the terms of order 3, and participated passively in the application for advice, and did not state any opposition to the Court giving Perpetual the advice sought in order 3.

In the circumstances, there is no reason for the Court to overcomplicate the effect of the advice that it will give to Perpetual, if it also gives the advice sought by order 4 in relation to Perpetual’s defence of the 2020 Proceeding.

I will now turn to a consideration of whether the Court should give the advice sought by order 4.

As a preliminary matter, Perpetual no longer seeks the advice that it originally sought in question (c) in the statement of facts, which, if answered affirmatively, would have authorised Perpetual to pay its costs of defending the two Proceedings out of the assets of the Trust. By reason of order 5 of the proposed short minutes of order, Perpetual now only seeks advice that its entitlement to be indemnified for its costs of the two Proceedings should be determined by application to the trial judge. It is obvious that that advice should be given, if the Court gives the advice sought in order 3 and 4.

The alteration in Perpetual’s position greatly simplifies the process of giving the advice sought by Perpetual in relation to both Proceedings. It is obviously desirable, in a case where a trustee is comfortably able to fund its defence of a claim by beneficiaries for breach of trust, that the issue of the trustee’s entitlement to be indemnified for its costs of the defence out of the assets of the trust be dealt with at the end of the hearing by the trial judge. Noting that the trial judge will have the evidence necessary to decide the question, they will be best placed to make judgments about whether there has been a breach of trust, and whether the nature of the breach is such as to disentitle the trustee to exercise the trustee’s indemnity. The trial judge will also be best placed to decide whether the trustee should be excused under s 85 of the Trustee Act. Cases will arise in which the Court must decide the hard question of whether a trustee, who is unable to fund its defence, should be authorised to do so out of the trust assets, notwithstanding the possibility that the assets will thereby be depleted, and it will ultimately be found that the trustee should have been denied the indemnity. Brereton J (as his Honour then was) considered some of the issues relevant to this problem in Uncle’s Joint at [30] to [33].

The Court has therefore been spared the need to decide this difficult question. As a practical matter, it is easier for the Court to advise a trustee that it is justified in conducting a defence of a claim by a beneficiary that it has breached the trust, when there is no application by the trustee to fund its defence out of the trust assets, than it is where the trustee seeks an authorisation that it do so. In a case such as the present, the authorisation to conduct the defence will not prejudge the issue of breach, the issue of the nature and consequences of the breach, the issue of whether the trustee should be excused, and the issue of the trustee’s entitlement to exoneration out of the assets of the trust.

I have decided that, if the Court has power under s 63 of the Trustee Act to give Perpetual the advice that it seeks in order 4 of the draft short minutes of order, the Court should do so.

I do not propose to give elaborate reasons for that conclusion. While some aspects of the advice given by senior counsel in his confidential opinion may be arguable, I am comfortably satisfied that his advice that the Perpetual Entities have reasonable prospects of defeating the claims against them is sound, and that the Perpetual Entities’ prospects of success justify the Court advising Perpetual that it is justified in defending the 2020 Proceeding on the grounds stated in the draft defence.

It is not appropriate that the Court provide reasons that disclose any aspects of the confidential advice. All I will say is that liability for breach of trust on the part of the Perpetual Entities will depend upon a finding that, no earlier than 25 May 2005, when UTCCL became trustee of the Trust, the Perpetual Entities, or one of them, ought to have appreciated that it had a reasonable claim against the Company and its directors for relief that would have benefited the Trust. That would be by reason of the setting aside of the First to Fourth Rights Issues, or some form of compensation in lieu of that relief. The last of the Rights Issues, the Fourth, took place more than six years before 25 May 2005. Any proceedings commenced by the Perpetual Entities would have been inherently contentious and risky. A serious question would have arisen about the propriety of the Perpetual Entities risking the assets of the Trust in the commencement of the proceedings suggested by the 2020 SOC at the time.

The Davis Descendants submit, however, that the Court cannot give the advice sought in order 4 of the draft short minutes of order because it does not have power to do so.

The submission is based upon the following reasoning by Barrett J (as his Honour then was) in Australian Pipeline Ltd [2006] NSWSC 1316; (2006) 60 ACSR 625 (Australian Pipeline):

The Davis Descendants noted that this aspect of Barrett J’s judgment in Australian Pipeline had been set out, with apparent approval, by Emmett AJA in The Application of Eurolinx Pty Ltd in its capacity as trustee for the Colbert Security Trust [2017] NSWSC 1306 at [25]. Hallen AsJ (as his Honour then was) also set out [23]-[28] of the judgment in Australian Pipeline in Application of Gnitekram Marketing Pty Ltd [2010] NSWSC 1328 at [12].

The Davis Descendants argue that the Court does not have power to give the advice sought by Perpetual, on a proper interpretation of the wording “any question respecting the management or administration of the trust property” in s 63(1) of the Trustee Act. They submit that this admits of the distinction between the management or administration of the trust property and a claim by beneficiaries against the trustee for breach of trust in the management or administration of the trust property, where the suit will either fail, or if it succeeds a personal liability will be established in the trustee to replenish the trust or compensate the beneficiaries. The argument requires the acceptance of the proposition that, if the conduct constituting the breach of trust has been completed, and the only question is whether the trustee is or is not liable for breach of trust, the issues that arise on the claim are not in respect of the management or administration of the trust property.

I respectfully prefer and will follow the judgment of Slattery J in Northey v Juul [2014] NSWSC 464:

The justification for the conclusion reached by Slattery J may be found in the following propositions.

In Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan and Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66; [2008] HCA 42 (the Macedonian Church case), the plurality said (footnotes omitted):

This is, in my view, a peremptory and binding statement of the proper approach to the interpretation of s 63 of the Trustee Act. This approach prohibits any implication that excludes a question from the ambit of the power of the Court to give advice, because the subject of the question is the liability of the trustee for breach of trust, when the potential basis for that liability is a matter of the management or administration of the trust property.

It is clear that the Davis Descendants have sued the Perpetual Entities on the basis that they improperly managed or administered the Trust, by failing to seek relief against the effect on the assets of the Trust of the First to Fourth Rights Issues. The Court therefore has power to give the advice sought by Perpetual in order 4 of the draft short minutes of order.

Furthermore, the proposition that a claim by beneficiaries against the trustee for breach of trust in the management or administration of the trust can conceptually be separated from the management or administration of the trust itself, because the conduct alleged to constitute the breach has been completed, falsely assumes that the consequences of a judgment for or against the trustee can be separated from the management or administration of the trust, or even of the trust assets.

As Williams J said in National Trustees Executors and Agency Company of Australasia Ltd v Barnes (1941) 64 CLR 268; [1941] HCA 3 (Barnes) at 279 (footnotes omitted):

Furthermore, the plurality in the Macedonian Church case said at [69]-[72] (footnotes omitted):

These authorities establish that, when a trustee is sued by beneficiaries for breach of trust in the management or administration of the trust assets, the trustee may defend itself, and that conduct is itself an incident of the administration of the trust. The potential for personal liability for breach of trust on the part of the trustee does not take the matter outside the ambit of the management or administration of the assets of the trust. The trustee may be entitled to an indemnity for its costs out of the trust assets if it wins. It may also be entitled to the same indemnity if it loses. That is because the trustee has accepted an onerous liability to manage and administer the trust, and circumstances may entail a breach of trust that the Court does not consider is sufficiently serious or blameworthy to warrant the loss of the trustee’s indemnity. Additionally, there is always the possibility of the trustee being excused under s 85 of the Trustee Act, even in the case of a failure to seek judicial advice under s 63 of the Trustee Act. Judicial advice is available even to trustees in potential breach of trust with respect to whether they should defend themselves. Until the Court makes a decision that denies to the trustee the ordinary right of indemnity, the possibility that the trustee’s costs will be paid out of the assets of the trust means that the conclusion of the suit against the trustee will generally not conclude the administration of the trust. That is so even if all that would otherwise remain to be done by the trustee is the transfer of the assets to the beneficiaries who are entitled to those assets.

Darke J in Segal v Osborne (No 2) [2016] NSWSC 1328 reached similar conclusions at [6]-[12].

It is not necessary for the Court to decide whether the outstanding need for Perpetual to deal with the claim by the executors of Veronica Lees in respect of the unpaid amount of £12,000 makes a difference in relation to Perpetual’s entitlement to be given the advice from the Court that it has sought.

Consequently, the Court will give advice to Perpetual in the following terms:

In addition, the Court makes an order pursuant to s 93 of the Trustee Act 1925 (NSW) that the costs of Perpetual of this application, commenced by summons filed on 14 August 2020, be paid out of the trust fund of the Joseph Babington Davis Settlement made by Indenture dated 19 March 1934.