Coates v. McInerney and Another

(1992) 6 ACSR 748
(1992) 7 WAR 537

(Judgment by: Anderson J)

v. McInerney and Another

Supreme Court of Western Australia

Anderson J

Hearing date: 28 February 1992
Judgment date: 28 February 1992


Judgment by:
Anderson J

This is an action by the liquidator of Newman Air Charter Pty Ltd. That company was placed in liquidation after failing to meet a statutory demand for payment of a debt to Haskill Investments Pty Ltd. The winding up order was made eventually on 18 December 1991 by White AJ. He held that the amount of the indebtedness of the company to Haskill Investments Pty Ltd was not less than $42,370. I refer to his reasons for making the winding up order in company No 220 of 1990 delivered on 18 December 1991.

It seems that the company acted only as a trustee for the McInerney Family Trust. Its own assets comprise, so far as I can determine, shareholders' funds of only $2, that being its paid up capital. The trust fund of which it was trustee comprises assets described in para 4 of the statement of claim as the following assets: 4(a) one unencumbered Piper Cherokee aeroplane registration number VHDDJ situated at Broome; 4(b) one unencumbered Cessna aeroplane registration number VHMOB situated at Newman; 4(c) one Cessna aeroplane registration number VHTLV leased from Australian Guarantee Corporation and believed to be located either at Broome or Hedland; 4(d) one Piper Aztec aeroplane registered number VHKMA situated at Northam and leased from Esanda Finance Corporation Ltd; 4(e) various debtor accounts totalling $54,000.

The liquidator claims to be indemnified from the trust fund in respect of the liabilities incurred by the company in its capacity as trustee prior to the making of the winding up order which, as I have said, was made on 18 December 1991. On that day (so it is contended on one side of this case) the company ceased to be trustee of the trust fund. That is a contention which probably is correct. I pass no firm opinion on that.

I have no doubt that the liquidator is entitled to the indemnity that he claims, that is, a trustee's indemnity. I refer to Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367 ; 27 ALR 129 ; 4 ACLR 575 and Re Enhill Pty Ltd [1983] 1 VR 561 as just two authorities which would support that claim. It is said that in this case the liquidator is not entitled to a trustee's indemnity because the company's entitlement to indemnity terminated upon the termination of the company's trusteeship and hence there was no entitlement to which the liquidator could become subrogated.

For that proposition Mr Duckham relies on cl 12 of the trust deed. The clause is reproduced in the defence at p 6 of the papers and it is in the following terms:

Indemnity for trustee. The trustee shall be entitled to be indemnified out of the trust fund against liabilities incurred by the trustee in the execution or attempted execution or as a consequence of the failure to exercise any of the trusts's authorities, powers and discretions in this deed or by virtue of being the trustee of this trust, but the trustee shall not be entitled to be indemnified by any beneficiary personally in respect of those liabilities or other matters.

It is said that under this clause only the trustee actually in office is indemnified. However, I must disagree. Any right of indemnity would arise upon the liability arising and the question is whether that right of indemnity, arising at that time, that is to say, during the holding of the office by the trustee who held office at the time that the liability was incurred, is then lost by subsequent loss of office.

There is abundant authority that it is not so lost. I do not need to refer to all of the authorities. It is, I think, sufficient to refer to Kemtron v Commissioner of Stamp Duties (1984) 15 ACR 627 at 634. The question is whether there is anything in cl 12 which would affect the general equitable doctrine that loss of office does not terminate the right of indemnity. In my view there is nothing in cl 12 which would modify the general equitable doctrine.

Mr Duckham attempted to persuade me that the right of indemnity had been waived and that, in any event, the company never had an entitlement to be indemnified because the liability to Haskill Investments Pty Ltd had been incurred in breach of trust, or without authority; the basis for that latter proposition being that the arrangement between the company, in its capacity as trustee, and Haskill Investments Pty Ltd was an arrangement whereby the trustee, that is, the company, agreed to pay compound interest. I understand Mr Duckham's submission to be that if that is so, if there was an arrangement to pay compound interest, it was a profligate arrangement, beyond the power of a trustee and probably in breach of trust; an arrangement against which, therefore, the trustee ought not to be indemnified.

These matters of waiver and breach of trust (or ultra vires) were not pleaded. Mr Duckham applied to amend his pleadings but this is an expedited trial and I declined to allow such significant amendments at such a late stage in the proceedings. My decision to decline the application for leave to amend was in no small measure influenced by my unfavourable view as to the evidence which was sought to be produced in support of the proposed pleas of waiver and ultra vires. I did not think that the evidence to which I was taken to support those proposed pleas was anything other than very slight and very obscure; so oblique and so slight as to be wholly without weight. I therefore refused each application to amend.

I can see no reason why the well settled principle that a trustee is entitled to indemnity from trust assets and that the liquidator of an insolvent trustee may enforce that indemnity should not be applied in this case. Mr Duckham has argued forcefully that the present trustee, who is apparently Mrs Dawn McInerney, the second defendant, should be permitted, as an exercise of discretion on my part, to retain possession and use of the assets for the benefit of the trust, at least until the extent of the deficiency (and therefore the extent of the need for indemnity) is established.

I understood his submission to be that I should mould any decree that I make in this action in such a way as to bring about a situation whereby the defendants may retain the possession and use of these commercial chattels so as to continue to earn income for the general benefit of the trust until a little more is known about the extent of the deficiency and the extent of the need for indemnity.

While I do not say there are never any cases in which that kind of decree would be made, I do not think it is a course that should be taken in this case. I do not think it is a course that would be taken except in cases where it is quite clear to the court that the deficiency is much less than the value of the trust fund, and perhaps also where there is no risk at all that the trust fund might be diminished in the interim period.

I do not want to say any more about that aspect of the matter, other than that I do not think this is that kind of case and I am not prepared to make such an order in this case.

I am a little troubled about the identification of the assets of the trust. The positive orders that are sought on behalf of the plaintiff would operate upon all of the assets of the trust but only a few have been identified. Two of those assets are unencumbered airplanes, and by that I mean light aircraft in which no person other than the trustee of the trust has an interest. Another way of saying that might be to say that the entire interest in each of those airplanes comprises part of the trust fund. I do not see any difficulty with those two aircraft, in making an order that they be delivered up.

There is another aircraft described in para 4(c) of the statement of claim which is said to be leased. The terms of that lease are not known to the court. The nature of the lessee's interests in that aircraft are therefore not known to the court. It may be that it is a chattel lease which has within it an option to purchase at the expiration of the term. I do not know; it may not be such a lease.

As to the aircraft described in 4(d), I am told from the bar table by Mr Duckham, and could not avoid noticing nods of acquiescence from the other side of the bar table, that this aircraft has been, in effect, repossessed. That might not be the right term to use, but there is in my mind a question as to whether there is any interest in that aircraft that could presently be said to comprise any part of the trust fund. Then, of course, there are described in para 4(e) various debtor accounts totalling $54,000, and I know no more about them than that.

As to assets of that description, it seems to me at present to be quite inappropriate to make an order for delivery up. What I propose, therefore, is to make a declaration that Newman Air Charter Pty Ltd (in liq) is entitled to be indemnified out of the assets of the R F McInerney Family Trust in respect of liabilities incurred by Newman while trustee of the trust and in that capacity, and to make a declaration that the plaintiff, David John Coates, in his capacity as liquidator of Newman is entitled to enforce those rights of indemnity.

I will make an order that the defendants do deliver up possession and custody of the assets described in paras 4(a) and (b) of the amended statement of claim and give liberty to the plaintiff to apply in respect to the appropriate orders to be made in relation to the assets described in paras 4(c) and (d) of the statement of claim as to delivery up of possession. I think some further investigation will have to be made in regard to the status of those two chattels.

As to the other assets, I think it is appropriate to make an order that the plaintiff, David John Coates, be appointed receiver of the assets of the trust, including its book debts, for the purpose of realising those assets in order to ensure that the company, Newman, and Mr Coates, in his capacity as liquidator of that company, enjoy the benefit of the indemnity to which they are entitled in law.

I will give liberty to counsel to formulate an appropriate set of orders in regard to the receivership and will hear counsel further on the return of the applications to formalise the orders, as to the formal orders that ought finally to be made. May I express the expectation that, so far as possible, counsel will agree on the terms of those orders.