Indemnity out of trust assets for costs of engaging in litigation

Wills and Estates: 23 March 2019

Olrey Pty Ltd (No 2) [2016] VSC 18

On 17 November 2015 His Honour Justice McDonald handed down a decision in respect of an application made by the Trustee of the FRG Investments Trust pursuant to r. 54.02 ( see Re Olrey Pty Ltd [2015] VSC 643). The questions that the Trustee sought advice upon and His Honour's respective decisions were as follows:

• Whether the trustee would be justified in defending a proceeding brought against it and bringing a counterclaim;
  The Court found that it would be appropriate and the trustee would be justified in defending the claims made against it.
• Whether the trustee would be entitled to have recourse to the assets of the trust to pay its costs of:
  • The application for advice;
    The Court directed that the costs of the application for advice were to be paid out of the assets of trust.
  • The defence of the proceeding; and
  • The prosecution of the counterclaim.
    Subject to further order, the Court found that it would not be appropriate and the trustee would not be justified in paying the costs of defending and pursuing a counterclaim out of the assets of the trust.

At the time His Honour considered the application on 17 December 2015, the heart of the claims against the trustee were two Barns v Addy (knowing receipt of trust property) claims. After delivery of the judgment, the Plaintiffs gave notice that they would be withdrawing both Barns v Addy claims and seeking entirely new relief against the trustee - removal of Olrey as trustee, declaration that property is held by Olrey on constructive and/or resulting trust.

The Plaintiffs also withdrew the caveat they had lodged over one of the properties, which underpinned the trustee's counterclaim, seeking to have the caveat withdrawn. The Plaintiffs were subsequently granted leave to amend their statement of claim in this regard, were ordered to pay the trustee's costs thrown away by reason of the amendments and were also ordered to pay $36,593 by way of security for the trustee's costs of the proceeding.

After delivery of the amended statement of claim, the trustee issued this fresh section 54.02 application for judicial advice seeking (briefly summarised):

• Direction that it would be justified in defending claims, but that such defence be limited to only certain allegations pleaded (the claims against Olrey constituted a small portion of wide-ranging disputes between the beneficiaries and their corporate entities);
• In the event that the trustee is removed, that the scope of its limited defence be expanded;
• The trustee be permitted to have recourse to the assets of the trust to pay the reasonable costs of this application and the costs of its limited defence.

The Court made orders directing that the trustee would be justified in defending only the claims advanced against it. The Court was not prepared to direct that the trustee be justified in leading evidence in relation to any further allegations not made specifically against the trustee. The justification was expanded in the event that the trustee was removed.

The Court ordered that the trustee was permitted to have recourse to the assets of the trust to pay the reasonable costs of its defence only as ordered above.