Victorian Reports Decisions

Young and Ors v Murphy and Anor; Swinbank and Ors v Murphy and Anor [1996] VicRp 19; [1996] 1 VR 279 (27 June 1994)

YOUNG and ORS v MURPHY and ANOR; SWINBANK and ORS v MURPHY and ANOR

SUPREME COURT OF VICTORIA COURT OF APPEAL

BROOKING (1), PHILLIPS (2) and BATT JJ (3)

16-19 May;, 27 June 1994

Brooking J I have had the advantage of reading the reasons for judgment of JD Phillips J. I am in agreement with them and wish to deal only with two of the questions argued. The first is that of the standing of the new trustees to sue for breach of trust. The second is that of their standing to sue the auditors. A large body of case law bearing on both questions has grown up in the United States, and this is reflected in the extensive treatment accorded to them by the American text writers. There is no reason to suppose that on these basic questions the law applied in the United States differs from that of Australia, although in the United States at times a state statute affects the position, as by requiring that every action be prosecuted in the name of the real party in interest but providing that a trustee of an express trust may sue without joining the beneficiaries (Scott on Trusts, 4th ed, s280.7). I turn at once to the first question, standing to sue for breach of trust.

Putting to one side the special case of charitable trusts, a trustee who has committed a breach of trust may be sued in respect of that breach either by a beneficiary (including someone representing his estate) or by a co-trustee or successor trustee: Occidental Life Insurance Co of Australia Ltd v Bank of Melbourne (unreported, Full Court, 26 November 1991). Proceedings to have a breach of trust redressed may be taken by a beneficiary against a trustee, or a former trustee or the estate of a former trustee, or a stranger to the trust who has become liable to redress a breach of trust. Such proceedings may also be taken by a trustee against a co-trustee, or a former trustee or the estate of a former trustee, or against a stranger to the trust who has become liable as mentioned: Scott on Trusts, s294 and s294.1; Bogert, Handbook of the Law of Trusts, s157 and s166; Re Cross; Harston v Tenison (1881) 20 Ch D 109; Space Investments Ltd v Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] UKPC 1; [1986] 1 WLR 1072 at 1074. Where it is a new trustee who takes proceedings to redress a breach of trust committed before his appointment, he can sue without the aid of a vesting order: Re Bennet [1906] 1 Ch 216 at 230-231 per Stirling LJ; Scott on Trusts, s109. Indeed, recognition of the right to sue precedes the invention of the vesting order by the Trustee Act 1850 (13 and 14 Vict c 60). That recognition is founded on general equitable principles.

Questions which may arise in proceedings brought by a beneficiary or beneficiaries for breach of trust do not arise in this appeal.

The standing of a trustee to take proceedings to have a breach of trust redressed against a trustee or former trustee or a stranger who has become liable to redress a breach of trust is well recognised. Not only may a trustee take such proceedings, but he runs the risk of himself committing a breach of trust if he fails to do so: Scott on Trusts, s177, s223 and s223.3; Bogert, Law of Trusts and -

Trustees, s592; Bogert, Handbook of the Law of Trusts, s97; Re Brogden (1888) 38 Ch D 546. His obligation to take the proceedings (unless they would be futile) is part of his duty to get in the trust estate, which includes rights of action against co-trustees or former trustees and strangers for breach of trust. This is clear as a matter of both principle and authority. Moreover, since the trustee will take the proceedings for breach of trust for the benefit of the beneficiaries, he can sue even if he was a party to the breach of trust or some other breach of trust. The principle is shortly stated in Snell's Equity, 29th ed, at 286-287, where it is said of a new trustee: If ... he discovers that breaches of trust have been committed, he must obtain satisfaction for them from the old trustee, just in the same way as an original trustee must get in any part of the trust estate which is outstanding: and the only excuse for not doing so is that it would be useless to take proceedings against the old trustees. Snell rightly cites Re Forest of Dean Coal Mining Co (1878) 10 Ch D 450 for the proposition. (This decision is misunderstood in the 16th ed of Lewin on Trusts at 221, where it is said to stand as authority for the view that a trustee, in contradistinction to a beneficiary, has no cause of action against a former trustee in respect of a breach of trust committed by the latter where the remedy sounds in damages.) The right and duty of a successor trustee to sue his predecessor for breach of trust is in Re Lane's Will 97 A 587 (1916) correctly founded on his duty to obtain all the property that belongs to the trust and for that purpose to get in from the preceding trustees or their representatives whatever the successor trustee finds to be necessary to reimburse the trust estate for losses sustained through breach of trust. Similarly in Wentworth v Tompson (1859) 2 Legge 1238 the Full Court of New South Wales, in rejecting the suggestion that a trustee could not sue his co-trustees for breach of trust where he had been himself a party to that breach, observed at 1241 that it was the duty of each trustee to recover the trust fund, for the benefit of the objects of it. In the same way, Scott on Trusts, 4th ed, s294.2, in asserting the right of a trustee who in breach of trust transfers property to a person who has notice of the trust or pays no value to sue the transferee notwithstanding his own breach of trust, rests that view on the circumstance that the trustee is suing for the benefit of the trust estate. Likewise it is said in Scott, s200.2, that a co-trustee is not debarred by his own misconduct from maintaining a suit to redress a breach of trust committed by a trustee, since the purpose of the suit is to maintain the interests of the beneficiaries. Statements of principle to the same effect are contained in Scott on Trusts, s294.2; Bogert, Handbook of the Law of Trusts, s166; 76 Am Jur 2d, s673.

In Carson v Sloane (1884) 13 LR Ir 139 one of the trustees of a settlement sued his co-trustee, William Sloane, and his brother, James Sloane, to compel the brother to restore part of the trust fund which the trustees had, in breach of trust, allowed to fall into his hands. The brother had, with full notice of the trust, obtained and misapplied part of the trust fund. In holding that the plaintiff could maintain his action seeking payment by the brother and a declaration that the sum in question was charged on certain real estate, Porter MR said this at 147: Now, in this case, it is true that the plaintiff was, in 1880, guilty of a breach of trust in allowing the defendant James Sloane to grasp this fund; but he is still a trustee, and bound to get it back - not alone for his own protection, but for the protection of the cestuis que trust. -

Further authority for the view that a trustee is not debarred from obtaining redress from his co-trustee for a breach of trust by the fact that he participated in it will be found in the following authorities, among others: Franco v Franco [1796] EngR 2349; (1796) 3 Ves Jun 76; 30 ER 902: May v Selby (1842) 1 Y and C (CC) 235; [1842] EngR 170; 62 ER 869 ; Price v Blakemore [1843] EngR 960; (1843) 6 Beav 507; 49 ER 922; Hughes v Key [1855] EngR 359; (1855) 20 Beav 395; 52 ER 655; Baynard v Woolley [1855] EngR 392; (1855) 20 Beav 583; 52 ER 729 (where Sir John Romilly MR said that the books were full of cases in which trustees who had been guilty of breaches of trust had called on their co-trustees to replace funds); Butler v Butler (1877) 7 Ch D 116 per Baggallay LJ at 120-1 and Thesiger LJ at 121; Coverlid v Joel (1879) 1 OB and F 138 at 140.

In Village of Brookfield v Pentis 101 F 2d 516 (1939) at 522 the Seventh Circuit Court of Appeals spoke of "the right of a trustee in equity to sue for the restoration and preservation of trust funds so that the duties of administering them may be performed" and observed, "The trustee's estate and his power over the subject matter are commensurate with the duties which the trust devolves upon him and are sufficient to enable him to perform all those duties".

In general, if the trustee takes proceedings to have a breach of trust redressed, he need not make the beneficiaries parties. For in general the trustee sufficiently represents their interests for the purposes of proceedings to have a breach of trust redressed. As was said by Porter MR in Carson v Sloane (1884) 13 LR Ir 139 at 147: "If one of the cestuis que trust could follow this fund, why cannot the trustee who represents them all?" The right of the trustee in general to sue for breach of trust without making the beneficiaries parties is well established. See, for example, Greenwood v Wakeford [1839] EngR 886; (1839) 1 Beav 576; 48 ER 1064; Robinson v Evans (1843) 7 Jur 738; Price v Blakemore [1843] EngR 960; (1843) 6 Beav 507; 49 ER 922; Bridget v Hames (1844) 1 Coll 72; 63 ER 326; Horsley v Fawcett (1847) 11 Beav 565; 50 ER 935; Noble v Meymott [1851] EngR 693; (1851) 14 Beav 471; 51 ER 367; Wentworth v Tompson (1859) 2 Legge 1238; Davies v Lyon (1875) 1 NZ Jur (NS) 86; Coverlid v Joel (1879) 1 OB and F 138; Re Cross; Harston v Tenison (1881) 20 Ch D 109; Williams v Barton [1927] 2 Ch 9.

But, while the trustee in general sufficiently represents the beneficiaries' interests for the purposes of proceedings to redress a breach of trust, they should be made parties if their interests may not be properly represented by the trustee. If it can be said that for any reason the trustee should not be regarded as a party who will properly represent the interests of all beneficiaries, then he should not be regarded as able to sue without joining any beneficiary. Cases of suggested fraud or collusion or a hidden interest of the trustee may be put to one side. The proceedings which the trustee brings may be such as to raise, or be capable of raising, questions between one beneficiary and another or questions between the beneficiaries and himself. In such a case the trustee does not sufficiently represent the interests of the beneficiaries for the purposes of the proceedings. Accordingly, if in the proceedings the trustee seeks the execution or administration of the trust in addition to seeking to have the breach of trust redressed, the beneficiaries will or may be necessary parties, since their interests inter se or their rights against the trustee may have to be determined. This is not so if in the proceedings the trustee seeks only to get in the trust fund, or seeks in addition only any account necessary for that purpose. On the other hand, in proceedings for the execution or administration of the trust the interests of the beneficiaries may conflict among themselves and there may in addition be a conflict of interest between the trustee and the beneficiaries with regard to the accounting by the

trustee required for the purposes of the general distribution of the trust estate which is asked for in the -

proceedings. So a distinction is drawn between proceedings which seek merely to get back the trust fund and proceedings for the execution or administration of the trust. The former can be maintained by the trustee without joining the beneficiaries; the latter are or may be incapable of being so maintained. The decisions most frequently cited are Franco v Franco [1796] EngR 2349; (1796) 3 Ves Jun 76; 30 ER 902 and Horsley v Fawcett [1849] EngR 411; (1847) 11 Beav 565; 50 ER 935. The early decisions are noted in Calvert's Parties in Equity, 2nd ed, 1847, at 277-84 and Lewin on Trusts, 3rd ed, 1857, at 850-852, and a large number of authorities, old and new, will be found considered in 9 ALR 2d 10, especially s5, s21, s25 and s30. Reference should be made to Chancellor v Morecraft [1848] EngR 115; (1848) 11 Beav 262; 50 ER 817; Groom v Booth (1853) 1 Drew 548; [1853] EngR 715; 61 ER 561; the note to the report of Devaynes v Robinson [1857] EngR 430; (1857) 24 Beav 86; 53 ER 289 ; Re Jordan; Haywood v Hamilton [1904] 1 Ch 260 at 263; Equity Trustees etc Co v Fenwick [1905] VicLawRp 24; [1905] VLR 154 at 164; Carey v Brown [1875] USSC 25; 92 US 171 (1875); Re Straut Estate 126 NY 201; 27 NE 259 (1891); Re Lane's Will 97 A 587 (1916); Bogert, Law of Trusts and Trustees, s593.

On behalf of the appellants four grounds were advanced for the rejection of the view that the respondents were entitled to maintain the action in so far as it alleged a liability for breach of trust in the former trustee and other persons. It was said in the first place that the principle or rule which allowed a successor trustee to sue for breach of trust, a former trustee guilty of the breach and third persons who had become liable for breach of trust was confined to proceedings to recover the trust property or property into which it could be traced and that only the beneficiaries could maintain proceedings for equitable compensation in respect of a breach of trust. The only authority cited for this proposition was the passage in the 16th ed of Lewin on Trusts at 221 asserting that a trustee, in contradistinction to a beneficiary, has no cause of action against a former trustee in respect of a breach of trust committed by the latter where the remedy sounds in damages. But this passage is, as I have said, founded on a misreading of what was said in Re Forest of Dean Coal Mining Co Counsel were unable to suggest any reason why, as regards the new trustee's standing to sue for breach of trust, a distinction should be drawn between the original trust property, or other property, in specie and claims for equitable compensation. As I have said, the trustee's right and duty to sue is part of his duty to get in the trust estate, which includes rights of action against co-trustees or former trustees and strangers for breach of trust. Whether the remedy or relief sought is specific relief or, on the other hand, monetary compensation for the loss is immaterial to the question of title to sue. The suggested distinction is not supported by the cases or the text-writers with the exception of the errant passage in Lewin. Defaulting trustees are required to make restitution to the estate: they must restore to the estate the assets of which they have deprived it. This they may do in different ways. Payment of compensation is as much a means of making restitution as making restitution in specie: Adamson, Ex Parte; Re Collie (1878) 8 Ch D 807 at 819; Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd (1966) 2 NSWLR 211; Bartlett v Barclays Trust Co (No 2) [1980] Ch 515 at 543; Hill v Rose [1990] VicRp 13; [1990] VR 129 at 143-144; Occidental Life Insurance Co of Australia Ltd v Bank of Melbourne (unreported, Full Court, 26 November 1991).

The first ground put forward by the appellants on this question of standing accordingly fails. -

The second ground is that the new trustee lacks standing to sue without joining the beneficiaries because the circumstances are such that the rights of the beneficiaries between themselves are brought into question. I have said that, while a trustee in general sufficiently represents the interests of beneficiaries in proceedings to redress a breach of trust, the beneficiaries should be made parties if questions between one beneficiary and another may arise in the proceedings: this has been the rule for 200 years. What is said in the present case is that a question will arise as to who is beneficially entitled to any accretion to the trust fund which results from the successful prosecution of the claims for breach of trust. This question, it is said, will arise because of the changes in the identity of unit holders which have taken place since the breaches of trust occurred. But the fact that there may be doubt as to the existence or extent of the interest of beneficiaries will not prevent a trustee from suing to redress a breach of trust without making any of the beneficiaries parties. Such a doubt will have this effect only if the question will or may arise in the proceedings sought to be maintained. As it was put in Lewin on Trusts, 3rd ed, 1857, at 852, using an expression current at the time, "the frame of the suit" must not involve any matter of contest, whether between the plaintiff and the beneficiaries or between the beneficiaries themselves.

The second ground taken in relation to standing is therefore not sustained. I would in any event, as at present advised, wonder whether any serious question of the kind suggested could arise with regard to the proceeds of the claims for breach of trust, assuming them to be successful. In general, a beneficiary under a trust can assign his interest under it. If he does so, the assignee can sue the trustee for a breach of trust committed before the assignment: Scott on Trusts, s132-s132.2. I should have thought that any proceeds of the claims for breach of trust in the present action would be held by the new trustee as an accretion to the trust fund of the particular trust concerned and that former unit holders of that trust would have no rights with regard to that accretion. This conclusion would seem to be correct in principle, and it is supported by what is said in Peterson v Hopson 29 NE 2d 140 (1940) at 149-150. The conclusion also gains support from the decision of the Ontario Court of Appeal in Pigott and Pigott Construction Co v Nesbitt Thomson and Co (1938) 4 DLR 593, in which it is implicit that the fruits of an action to rescind for fraud a contract made by a trustee for the purchase of shares belong in equity, not to the person who was the beneficiary at the time of the fraud, but to the person to whom the beneficial interest in the shares has been assigned. Compare what was said by Gummow J in Elders Trustee and Executor Co Ltd v EG Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193 at 231-232. But since the question need not be determined for the purposes of the appeal and does not arise in the action and since no unit holder is represented before us we need not and should not express any concluded view on the point. It is enough to say that the suggested question concerning the rights of beneficiaries among themselves is not involved in what used to be called "the frame of the suit".

The appellants raised what they called the argument of "double jeopardy" as the third ground on this question of standing. The submission was that the new trustees could not sue for the alleged breaches of trust without joining the beneficiaries because judgment in the action, whether for or against the plaintiffs, would not bar an action by beneficiaries complaining of the same breaches of trust. The same point was long ago noticed in Lewin on Trusts, 3rd ed, 1857, at 850-851 in stating the rule laid down in Franco v Franco and other decisions: -

Where a breach of trust has been committed, it is competent to one or more of the trustees at any time to institute a suit against the person liable to make good the fund without making the cestuis que trust parties. It may be objected, that, as a suit by the cestuis que trust would also clearly lie in such a case, the defendant would thus be liable to be twice vexed for the same matter. However, the rule from its great convenience has been repeatedly recognised, and may be considered established.

If a claim falls within the rule that a trustee may sue to redress a breach of trust without making any of the beneficiaries parties where he seeks only to have the trust fund restored, the trustee will have standing, without joining the beneficiaries, to require the defendant or defendants to redress in full the breach of trust, according to equitable principles, so that it will not be possible for any beneficiary in other proceedings to maintain a claim for breach of trust against the person or persons successfully sued by the trustee: the trustee's judgment swallows up the beneficiary's claim. If, on the other hand, the trustee's action is unsuccessful, then the adjudication will by the same token, in the absence of fraud or collusion, bind the beneficiaries. This must be so on principle, since the trustee and beneficiaries are privies, and authority is not wanting. In Potts v Thames Haven Dock and Railway Co (1851) 15 Jur 1004 a contract by a trustee for the sale of land subject to the trust was held to be specifically enforceable at the suit of the trustee without joining the persons beneficially interested. The objection taken was based on the contention that if the suit failed the defendant might be harassed by a similar suit by the beneficial owners. This contention must be taken to have been rejected. Similarly, in Re Straut Estate 126 NY 201; 27 NE 259 (1891) a successor trustee had unsuccessfully sued the personal representative of a deceased trustee to compel him to account for trust properties said to have been misappropriated by the deceased. A later action by a beneficiary claiming the same relief was held by the New York Court of Appeals to be doomed to failure on the ground that the matter was res judicata: the successor trustee had represented the whole title to and interest in the trust property in the earlier action. So, where the plaintiff sued to prevent trespasses to reservoirs which he held in trust, the court, in ruling the action to be maintainable, observed that "the beneficiaries would be concluded by the judgment, which would be a bar to a subsequent suit on the same cause of action by them": Koch v Story [1910] 107 P 1093 at 1095.

I refer again to the words of Porter MR in Carson v Sloane (1884) 13 LR Ir 139 at 147, "If one of the cestuis que trust could follow this fund, why cannot the trustee who represents them all?" So it has been said to be the duty of the new trustee "as the representative of the beneficiaries" to obtain from the preceding trustee whatever is necessary to reimburse the trust estate for breaches of trust committed by the predecessor: Re Lane's Will 97 A 587 (1916) at 588. Where a trustee sues to redress a breach of trust, seeking only to have the trust fund restored, the trustee and the beneficiaries are in privity. This is shown by what was said in Cox v Dublin City Distillery Co Ltd (No 3) [1917] 1 IR 203 at 223-224 per O'Brien LC at 234-236 per Ronan LJ and at 239 per Molony CJ. In addition, one should not overlook R16.02 of the rules of court, which provides that where a party sues as trustee a judgment in the proceeding shall bind the persons having a beneficial interest under the trust as it does the trustee. See further Re De Leeuw [1922] 2 Ch 540 at 550-1. Additional authority for the view that the beneficiaries will be bound by the outcome of the present proceedings will be found in what was said in Pople v Evans [1969] 2 Ch 255 at 261 and 269. Finally, I refer to Defries, Norton v Levy (1883) 48 LT 703, where Pollock B -

remarked at 704: "Equity certainly will not allow the same matter to be tried once between the parties and over again against the trustees."

In the present case the new trustees seek to redress in full the alleged breaches of trust; if they succeed, their judgment will, as I have said, swallow up the claim that any beneficiary might have made in respect of those breaches. The case does not raise for consideration problems which might arise if one beneficiary under a trust took proceedings for breach of trust seeking direct payment to himself of his share in the money to be restored to the trust estate and another beneficiary, or a new trustee, later sued in respect of the same breach of trust. Nor does it raise questions which might have to be determined if, for example, a breach of trust (such as a misappropriation of part of the capital of the trust fund) affected the interest of both the life beneficiary and the beneficiary in remainder and the life tenant sued in respect of his loss; what would happen if the remainderman, or a new trustee, sought to have the capital restored? Compare the brief discussion in Occidental Life Insurance Co of Australia Ltd v Bank of Melbourne (unreported, Full Court, 26 November 1991) at 23-24.

The first three grounds of attack on the new trustees' standing to sue for breach of trust fail. As a fourth ground of attack the appellants in their written submissions relied on certain provisions of the trust deeds in support of an argument that those deeds excluded or limited the right to sue in respect of breaches of trust which the trustee or its successor would otherwise have had. We were told by counsel that for all purposes it was enough to refer to the consolidation which has been prepared of the trust deeds concerning the trust known as the Estate Mortgage Depositors Trust No 1. I have assumed that this is correct without confirming its correctness for myself, and have accordingly had regard to that consolidation alone, treating it as containing provisions which are identical to those contained in the deeds concerning the other trusts. The trust deed (as I shall call the consolidation) contains three provisions on which the appellants relied. These are the proviso to CL3(b), the proviso to CL28(k) and CL28(m). The submission based on these provisions lacked substance and in the end I took the appellants to resile from it. If the submission is to be regarded as still current, I would without hesitation reject it. The three clauses relied on are as follows: 3(b). No Unit Holder shall be entitled to require the transfer to him of any investment forming part of the Fund or be entitled to interfere with or question the exercise or non-exercise by the Trustee or the Manager on its behalf of the rights of the Trustee as owner of such investments PROVIDED THAT nothing herein contained shall in any way prejudice the rights of a Unit Holder to bring an action against the Trustee or the Manager for breach of duty. 28(k). No Unit Holder shall be entitled to require the transfer to him of any of the property comprised in the Trust Fund nor be entitled to interfere with the exercise or non-exercise by the Manager or the Trustee of any of the trusts powers authorities or discretions conferred upon them by this Deed or in respect of such property PROVIDED THAT nothing herein contained shall in any way prejudice the rights of a Unit Holder to bring an action against the Trustee or the Manager for breach of duty, fraud, neglect or default. 28(m). The Trustee shall be entitled to commence institute carry on and prosecute all actions suits and proceedings at law to obtain and recover any moneys payable to it or to enforce the payment thereof or for damage against any person arising out of any loss suffered by Unit Holders and to pursue the same to judgment decree order and execution or to discontinue become non suited in or abandon or otherwise to act therein as the -

Trustee may determine and the Trustee shall be indemnified out of the Trust Fund in respect to all costs charges and expenses incurred by it in respect to any such action suit or proceeding.

The argument initially put on behalf of the appellants was that the express reference to an action against the trustee for breach of duty in the proviso to CL3(b) and CL28(k) was to be contrasted with the words used to describe the legal proceedings comprehended by CL28(m), that CL28(m) contained an exhaustive statement of the proceedings which a trustee could maintain, and that accordingly a new trustee could not sue the former trustee for breach of trust. As I have said, I took this argument to have been abandoned. The provisos to CL3(b) and CL28(k), like other parts of the trust deed (CL34(f) and CL34(g)), recognise that the trustee may become liable to the unit holders for breach of duty. Those provisos are intended only, from an abundance of caution, to make it clear that CL3(b) and CL28(k) do not impinge upon the rights of action mentioned in the provisos. As to CL28(m), the legal proceedings to which it refers may very well include proceedings against a former trustee to recover compensation for breach of trust. But, whether this is so or not, the clause is not to be construed as limiting or purporting to limit the powers of a trustee by rendering the trustee incapable of maintaining proceedings other than those to which it refers.

So much for the standing of the new trustees to sue for breach of trust. Before turning to the allegations against the auditors contained in the statement of claim I say something about the provisions of the trust deed relating to auditors and audit. The trust deed by CL1 defines "the Auditor" as the auditor referred to in CL24. By CL24, subject to the power of the trustee to remove the auditor and the ability of the auditor to retire, the auditor is to be Priestley and Morris. By CL25(b), the auditor is to receive such fee for his services as is determined by the trustee. CL25(c) is as follows ("the Register" being the register of unit holders): The Auditor shall report to the Trustee all matters relating to the examination by the Auditor of the books of account of the Trust, his general review of the accounting procedures and the results of such tests of accounting records and other supporting evidence as he deems necessary in the circumstances and in particular report to the Trustee that the Register has been audited and found correct. Such report shall be furnished to the Trustee upon the Auditor's completion of each audit of the accounts of the Fund and at such other times as the Trustee shall require.

CL26 also had better be set out in full: The Manager shall cause true accounts to be kept of all receipts and expenditure of the Trust and the matters in respect of which such receipts and expenditures respectively take place and of the assets and credits and liabilities of the Trust which accounts shall be regularly examined by the Auditor. The books of account shall be kept at the Registered Office for the time being of the Manager and shall during normal business hours be open for inspection by the Unit Holders the Trustee and the Auditor. The Auditor shall be entitled to obtain from the Manager and the Trustee all such information accounts and explanations as may be necessary to properly audit the accounts of the Trust Fund.

Finally, by CL30 the trustee covenants with the manager and with the intent that the benefit of the covenant shall inure not only to the manager but to the unit holders jointly and to each of them severally that, inter alia:

(g) The Trustee will: ... - (ii) keep or cause to be kept proper books of account in relation to the Units to which the Trust relates; (iii) cause those accounts to be audited at the end of each Financial Year (or if required in writing by the Trustee at the end of each half-year) of the Trust by the Auditor; and

(iv) send or cause to be sent by post a statement of the accounts with the report of the Auditor thereon within two months of the end of each financial year to each of the Unit Holders.

These three covenants contained in para(g) of CL30 of the deed reflect the requirements of para(e)(iii) and para(iv) and para(f)(i) and para(iii) of s1069(1) of the Corporations Law and the corresponding previous requirements of para(c)(ii) and para(iii) and para(ca)(i) and para(iii) of s168(1) of the Companies Code. In his recent work The Law of Public Unit Trusts, Dr Hughes, at 161-162, refers to the covenants required by s1069(1) of the Corporations Law and says of the covenant "to keep ... proper books of account in relation to ... prescribed interests" that it is arguable that it extends to the keeping of books of account in relation to the conduct of the scheme itself rather than simply records in relation to prescribed interest holdings. The narrow scope, on a literal reading, of the present covenant to "keep ... proper books of account in relation to the Units to which the Trust relates" was not the subject of argument before us. It may be noted that in the particulars under subpara(c) of para17 of their defence Priestley and Morris admit that they audited the books of account kept or caused to be kept by BPTC as trustee and that they did so pursuant to the covenant contained in para(g)(iii) of CL30 of the deed, which requires the auditing of the books of account kept in relation to the units. From the particulars in the pleading it is clear that the books of account admitted to have been audited in accordance with the requirements of the covenant are not the books relating to the units in the literal sense but the financial accounts of the trusts.

In view of the absence of argument on the point and the fact that the questions posed for preliminary determination and answered by Gobbo J are to be answered by reference to the allegations contained in the statement of claim, I think it unnecessary and undesirable to say anything about the effect of the provisions of the trust deed concerning audit.

I turn now to the allegations in the statement of claim against Priestley and Morris. By para3, references to BPTC in the pleading are, unless the contrary is stated, to be taken as references to that company in its capacity, before 7 November 1990, of trustee of each of the unit trusts. Para66 alleges that Priestley and Morris was at all material times appointed, retained and engaged by BPTC for reward to be, and in fact acted as, the auditor of each of the trusts. Para68 is not happily drawn, but it is clear enough (and counsel for Priestley and Morris accept) that the paragraph is intended to allege duties of care on the part of Priestley and Morris which arise both by reason of implied terms of the contract of employment of the auditors and by reason of the law of tort. One of the difficulties about the paragraph is that, having alleged "duties of care" which are evidently said to arise both as a matter of contract and under the general law, the paragraph goes on, in a series of subparagraphs, to state the content of the particular duties in a way which sometimes does and sometimes does not import a duty of care as opposed to a duty to perform certain acts, or to perform those acts in certain events. I need not dwell on this point, since it has not been suggested that the difficulty affects the determination of the question with which we are concerned. -

Para72 and para75 allege that in breach of the retainer and general law duty of care, Priestley and Morris negligently did or omitted to do certain things. Then it is said, in para76, that by reason of those breaches the assets of the trusts were lost or diminished. The prayer for relief claims against Priestley and Morris damages for those losses to the trusts.

On this branch of the case the question for our consideration is whether Gobbo J erred in holding that the new trustees could maintain an action against Priestley and Morris in respect of the wrongful acts and omissions alleged to have taken place before the new trustees were appointed. The causes of action set up are for damages for breach of contract and damages in tort, the tort being alleged to have resulted in economic loss consisting in the loss or diminution of assets of the particular trust under consideration.

I turn now to the applicable principles. In 1759 Lord Northington observed:

"The transmutation to a trustee is the same in its consequences as the transmutation of possession without a trust; it conveys to the trustee the legal burthens, and it invests the trustee with the legal privileges": Burgess v Wheate [1757] EngR 5; (1759) 1 Eden 177; 28 ER 652 at Eden 251. So if a third person commits a tort with respect to trust property, it is in general the trustee and not the beneficiaries who can maintain an action; but a beneficiary in possession of trust property can bring an action in tort that is available to a person in possession. The trustee can maintain such actions in tort as he could maintain if he were the beneficial owner of the property: Lewin on Trusts, 16th ed, at 220; Ford and Lee, Principles of the Law of Trusts, 2nd ed, s147; Scott on Trusts, s280, s280.1, s281 and s282; Bogert, Law of Trusts and Trustees, s594; Bogert, Handbook of the Law of Trusts, s166; 76 Am Jur 2d, s678 and s680; 90 Corpus Juris Secundum, s361; 9 ALR 2d, s30-s32; Underwood v Pennington (1877) 37 LT 320, a case of ejectment; Loxton v Moir [1914] HCA 89; (1914) 18 CLR 360 at 376 per Isaacs J; Bushell v Borchard (1917) 17 SR (NSW) 370 at 374 per Gordon J (in that case the real question was whether a duty of care was owed to the beneficiaries); Uselman v Uselman 464 NW 2d 130 (1990). The beneficiaries should not be joined as parties: Scott on Trusts, s280.7; Bogert, Law of Trusts and Trustees, s594.

Similarly, a trustee holding a contract in trust can maintain such actions on it as he could maintain if the contract was held free of trust: Potts v Thames Haven Dock and Railway Co (1851) 15 Jur 1004; Porteous v Reynar (1887) 13 App Cas 120 at 128; Pigott and Pigott Construction Co v Nesbitt, Thomson and Co (1938) 4 DLR 593 at 602; Scott on Trusts, s280.2 and s280.4; Bogert, Law of Trusts and Trustees, s594; 90 Corpus Juris Secundum, s361; compare Moore v Lee (1871) 2 VR (L) 4 at 7. The beneficiaries are not necessary parties to the trustee's action: Potts v Thames Haven Dock and Railway Co; Scott, s280.7; Bogert, Law of Trusts and Trustees, s594; 76 Am Jur 2d, s680; 9 ALR 2d, s30. Nor can a beneficiary sue on a contract held in trust: New York Guaranty and Indemnity Co v Memphis Water Co [1883] USSC 74; 107 US 205 (1883); Scott, s281 and 282. (We are not here concerned with contracts of the kind considered in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107. Nor is it necessary here to discuss in what exceptional circumstances a beneficiary may directly or indirectly enforce a claim for the benefit of the trust estate, a matter considered in Hayim v Citibank NA [1987] AC 730 at 747-9; Ramage v Waclaw (1988) 12 NSWLR 84 and Parker-Tweedale v Dunbar Bank PLC (No 1) [1991] Ch 12.) -

A right of action in tort or contract held by a trustee as such is capable of passing to and so becoming enforceable by his successor: Scott, s81, s111 and s280.1. There is, it is true, a dictum of North J to the effect that new trustees could not sue solicitors employed by the former trustees for negligence in the course of that employment (Plaskitt v Eddis (1898) 79 LT 136 at 138); but, with respect, this rests upon a misunderstanding or misapplication of what was decided in Rae v Meek (1889) 14 App Cas 558 and Mara v Browne [1896] 1 Ch 199. Those cases decided two points: that solicitors employed to advise trustees owed no

duty to the beneficiaries and that solicitors were not to be made constructive trustees merely because they acted for the express trustees in transactions within their legal powers. The cases were in no way concerned with whether a former trustee's right of action against the solicitors to the trust can be enforced by a new trustee.

The rule that in general it is the trustee, and (except as regards breaches of trust) the trustee alone, who can sue for torts with respect to the trust estate and enforce contracts made in the administration of the trust and indeed take any appropriate proceedings to protect the estate and enforce rights belonging to it, is reflected by the long line of cases of which Lee v Sankey (1873) LR 15 Eq 204 is an example: in general the trustee alone may sue for breach of duty an agent employed by him unless the agent has made himself liable as a trustee, in which case the trustee and the beneficiary each have standing. Compar v Gurner (1863) 2 SCR (NSW) Eq 105; (1864) 3 SCR (NSW) Eq 22; Grehan v Rich (1921) 21 SR(NSW) 712; Sorrell v Incorporated Law Institute of NSW (1959) 60 SR(NSW) 95.

The appointment of new trustees and the transfer of the trust property to them are two distinct matters: Noble v Meymott [1851] EngR 693; (1851) 14 Beav 471; 51 ER 367 at Beav 478. In Victoria a vesting order consequential on the appointment of a new trustee vests in the new trustee any chose in action and enables him to recover it by action. This is the result of s58, and especially s58(5), of the Trustee Act 1958. The corresponding provisions in New South Wales are s78 and s78(6) of the Trustee Act 1925. Accordingly, in those states, once a new trustee is appointed and a vesting order made, the person with standing to enforce a pre-existing right of action for a tort committed in respect of the trust property is, in general, the new trustee and the person with standing to enforce a contract that was held in trust by the former trustee or to enforce a pre-existing right of action arising from such a contract is the new trustee.

A contract was held in trust by the former trustee if it was made in the course of administering the trust. A contract made by a trustee because he is administering a trust is not necessarily made in the course of the administration. It may be made for his private purposes as trustee as opposed to being made in the management of the trust estate. Elaboration on the distinction is unnecessary, since in the present case the contracts were beyond question made in the course of administering the trust.

I return now to the facts of the present case as pleaded. The torts alleged against Priestley and Morris are torts with respect to trust property, the claim being one for damages for economic loss. Until the appointment of the new trustees the proper plaintiff was BPTC, the legal owner of the trust property and the person to whom the duty of care was owed. The effect of the vesting order made by the Supreme Court of New South Wales is to vest in the new trustees the whole of the trust property, including the rights of action in tort set up in these proceedings in respect of loss sustained by the trust estate. As regards the rights of action in -

contract asserted in the statement of claim, the contracts alleged were, as I have said, plainly made in the course of administering the trust, so that the right of action for breach which resided in the former trustee was held by him as part of the trust property. It has passed to the new trustees, along with all the other trust property, by virtue of the vesting order. Whether or not the new trustees could without a vesting order have maintained an action for breaches of contract committed before their appointment (as to which see Wentworth v Gurner (1863) 2 SCR (NSW) Eq 105; at 112; (1864) 3 SCR (NSW) Eq 22 at 27), they may do so by virtue of the vesting order.

In dealing with the standing of the new trustees to sue for breach of trust I have mentioned the provisions of CL28(m) of the trust deed. The terms of a trust deed or other instrument can indirectly determine whether it is the trustee or a beneficiary who can maintain an action against a third person in respect of property subject to the trust, as by showing whether the beneficiary is entitled to possession. Whether the instrument can, so to speak, directly determine the question of standing to sue a third person, by expressly conferring standing where it would not otherwise exist or by expressly taking it away, and if so on what principle, is a question that has not been argued before us and that it is not necessary to consider. I have already said that in my view CL28(m) is not to be construed as limiting or purporting to limit the powers of a trustee by rendering the trustee incapable of maintaining proceedings other than those to which it refers. In any event, the action brought against Priestley and Morris falls within the legal proceedings described by CL28(m).

His Honour was accordingly right in concluding that the new trustees were entitled to maintain the action as against Priestley and Morris.

Batt J having chosen not to deliver a separate judgment, it is appropriate that in conclusion I acknowledge the assistance I have derived from my discussions with him.

Phillips J

There is a number of appeals before the court, arising out of proceeding No 12377 of 1991 and proceeding No 8120 of 1993.

In the first of these, the new trustees of the Meridian Investment Trusts Nos 1, 2, 3, 4, 5 and 6 are suing a number of individuals, two companies, a firm of accountants and the members of a firm of solicitors for alleged breaches of trust and breaches of duty arising out of the administration of the trusts before 7 November 1990, when the trustee was Burns Philp Trustee Co Ltd, which is now called BPTC Ltd and is in liquidation. On 10 September 1993, an order was apparently made by Smith J for a number of questions of law to be determined under R47.04. The parties subsequently agreed upon a restatement of the questions requiring answer and upon a statement of relevant facts, and another order was made by Smith J on 1 December 1993 (although it seems that neither of the orders made by Smith J has been authenticated). On that basis the matter came before Gobbo J for hearing and determination last December. By order made on 18 February 1994, answers were given to almost all of the questions asked and, by order made on 25 February 1994, costs were dealt with. The third, fourth and fifth, sixth, seventh, ninth and tenth-named defendants in the proceeding then sought leave to appeal and that was granted on 18 March. Six notices of appeal were filed accordingly and those appeals are now before the court.

In the proceeding No 8120 of 1993, the plaintiffs are the same new trustees, but in this case they are suing the former professional indemnity insurers of -

BPTC Ltd, in liquidation. Again, an order was apparently made by Smith J for the determination of certain questions of law under R47.04 and, again, the parties agreed upon a restatement of the questions to be asked and upon a statement of facts, which in this case included substantial portions of the statement of facts agreed in proceeding No 12377 of 1991. The matter came before Gobbo J and was heard and determined by him in conjunction with the other proceeding and, again by orders made on 18 and 25 February

1994, his Honour determined two of the questions raised and dealt with costs. The defendants obtained leave to appeal on 18 March 1994 and on the same day filed notices of appeal. Those two appeals are now before this court and argument was heard in conjunction with argument on the appeals in the other proceeding.

In this judgment, I deal first with the appeals in proceeding No 12377 of 1991 and in conclusion with the appeals in proceeding No 8120 of 1993. I would only add that, although in the course of the argument more than one Victorian statute and more than one New South Wales statute were referred to, no party sought to raise the question whether Victorian law or New South Wales law applied - either overall or in any particular respect - and so in what follows, I do not address that question. I proceed, as did the parties, upon the assumption that either law or both laws may be relevant to a final resolution of the issues in these proceedings.

PROCEEDING NO 12377 OF 1991

The questions which were answered below concern the standing of the respondents (the plaintiffs), as the new trustees of the six trusts in question, to sue the appellants for the claims which are now articulated in the fourth further amended statement of claim dated 29 November 1993 ("the pleading"). We were told that this document was the result of earlier attempts to strike out certain portions of the statement of claim, and the fact that those attempts were not wholly successful was no doubt reflected in the criticisms of the pleading which the appellants made from time to time in the course of the argument before us. Nonetheless, the questions were posed upon the basis of the pleading as it now stands, and, as will be seen, substantially upon the assumption that allegations of duty and breach would in due course be established.

The claims by the respondents which fall for consideration on this appeal are in four categories. First, there are the claims being made by the new trustees for breaches by the former trustee ("BPTC") of duties allegedly owed to the beneficiaries of the trusts. In relation to these claims, the former trustee would have been liable to the beneficiaries (or so much is being supposed) but, because the former trustee could not have sued itself, there was no right of action in the former trustee for these breaches of duty, and so no right of action which might have passed from the former trustee to the new trustees upon their appointment. The question, then, is whether the new trustees, by virtue of their appointment as such, gained a right to sue the former trustee on behalf of the beneficiaries. Reliance was placed by the appellants upon changes in the structure of these trusts which produced the result, it was claimed, that the present unit holders were not those who had suffered loss through the breaches of duty relied upon. Additional claims against officers of BPTC for having participated in or procured the breaches of trust by BPTC may conveniently be regarded as ancillary to the claims against BPTC itself.

In the second category, the claims mounted by the new trustees depend upon breaches of duties which were owed, it is alleged, by some of the appellants to -

BPTC - duties in tort or arising out of contract or the fiduciary relationship existing between a company and its officers. In this category, there are claims against Mr Young (the general manager of BPTC and a director) and Messrs Burns, Henderson and Short (also directors of BPTC). Claims are made, too, against Burns Philp and Co Ltd ("BPC") which is said to have been in a position to control the board of BPTC and, on that account, itself a "shadow director" of BPTC by virtue of the companies legislation. Secondary claims are

then made against BPC as the employer of Messrs Young, Burns and Heiler (another director of BPTC) on the ground of vicarious liability; and against the tenth defendant (a firm of solicitors) on the ground that the partners of Mr Short (himself a solicitor) are liable for his wrongs by virtue of s10 of the Partnership Act 1892 (NSW). But it can be seen that, in this second category of claim, the underlying duties are all said to have been owed (with only one exception to be mentioned later) to BPTC, and to BPTC alone. The right of action for breaches of these duties was vested in BPTC before it ceased to be trustee and the new trustees claim to sue, by virtue of their appointment, as successor to the former trustee. The question is whether these rights of actions did pass to the new trustees upon their appointment.

In the third category, the respondents' claims are based upon some statutory imposition of liability, affecting directors and managers. Thus it is said against BPC and the other appellants who are alleged also to have been directors of BPTC (and in the case of Mr Young, the manager also of BPTC), that each is liable by virtue of s229 a of the relevant Companies Code or s233 of the Corporations Law. Further or alternatively, liability is claimed to exist by virtue of s19(2)(b) of the Trustee Companies Act 1984 (Vic) and s11(6) or s31(3) of the Trustee Companies Act 1964 (NSW). The question under these statutory provisions is in favour of whom such liability is imposed and, in particular, whether it is a liability which the new trustees are entitled to enforce.

In the fourth category, claims are made by the new trustees against those who were engaged by BPTC to act in relation to the trusts. Thus, a claim is made by the new trustees against Priestley and Morris (a firm), which is the seventh-named defendant in the proceeding. That firm was retained by BPTC, it is alleged, to act as auditors of the trust accounts. It is alleged that the auditors were thereafter in breach of their duties to BPTC (both in contract and in tort) in respect of the auditing of the trust accounts and the new trustees claim to sue as successors to the right of action vested in BPTC until its removal as trustee.

It should be noted that, although the questions answered below involved claims in the first category (that is, claims by the new trustees against BPTC), BPTC, which is eighth defendant in the proceeding, was not an appellant. BPTC was removed as trustee of the trusts by Order of the Supreme Court of New South Wales made on 7 November 1990 and the respondents were appointed in its place; and, again by Order of that court, BPTC was put into liquidation on 3 December 1990. Why the appellants in proceeding No 12377 of 1991 should be concerned with the claims made in the pleading against BPTC is not immediately clear, but it becomes apparent, I think, when some of the statutory claims, at least, are under consideration. At all events, the argument before us proceeded upon the footing that the right of the respondents to proceed against the appellants depended in part at least upon their right, if any, to proceed against the former trustee and I am content to proceed upon that footing. Certainly, the appeal in the second proceeding (No 8120 of 1993) raises squarely for decision the right of the respondents to sue the former trustee. -

It remains to observe that in large part the appellants made common cause in the six appeals in this proceeding. Written submissions were filed by all appellants and by the respondents and these were particularly helpful. Oral argument for the appellants was left in the main to counsel for BPC, although there was some supplementary argument addressed to the court by counsel for the seventh defendant, the auditors.

CLAIMS AGAINST THE FORMER TRUSTEE

The claims against BPTC depend upon the duties alleged in para18 of the pleading. Any reference in this pleading to BPTC is said, by para3, to be a reference "to BPTC in its capacity prior to 7 November 1990 as Trustee of each of the Trusts", and para18 refers to BPTC expressly in that capacity. In that capacity, BPTC is said to have owed to the unit holders of the trusts the various duties that are there set out, such as to carry out the terms of the trusts, to exercise due diligence in carrying out its functions, to safeguard the interests of unit holders and so on. In para19, it is alleged that recommendations were made to BPTC from time to time by the manager of each of the trusts that funds of the trusts be invested in a certain manner, but these investments, it is alleged, were not authorised or were hazardous, speculative or imprudent; were not based upon independent valuations; were recommended by the manager for extraneous purposes; or were not in the interests of the unit holders. In para20, it is alleged that BPTC, in respect of these recommendations of the manager, accepted the recommendations and invested funds and did so without carrying out any independent or adequate examination of the recommendations. In para21, it is alleged that by reason of those breaches of duty, "the assets of the Trusts were lost or diminished and remain lost and diminished". BPTC is said then to be liable to account for such losses and make good the assets of the trusts and the respondents claim to sue as current trustees to enforce the obligations of BPTC.

In succeeding paragraphs of the pleading, other allegations of breach of duty are made against BPTC - that it ought to have removed the manager of the trusts in the interests of the unit holders and failed to do so; that it participated in amendment of the trust deeds in July 1987, without proper authority and contrary to the interests of the unit holders; and that it participated in unauthorised amendment to the trust deeds on 21 March 1990. All of such things are alleged to have been done in breach of the duties owed by BPTC to unit holders, as pleaded in para18, and in consequence of these breaches the assets of the trusts are said again to have been "lost or diminished and remain lost and diminished". We were told (and this is probably to be seen in the particulars with which we were not supplied) that the loss is said to have followed because, had the manager been removed or the amendments in question not made, then investments would not have been approved as they were and losses flowing therefrom would not have been suffered.

For present purposes, that is sufficient to describe the way in which the claims against BPTC are pleaded. The appellants relied upon the fact that the pleading asserted only that the "assets of the Trusts were lost or diminished and remain lost and diminished" and that there was no allegation of loss suffered by any particular unit holders or any particular class of unit holders. Counsel referred us to the fact that since the commencement of the proceeding there had been significant changes in the structure of the trusts. By these changes, all of those who were unit holders immediately before the changes became instead unit holders in a holding trust. That holding trust was so constructed that for and on -

its behalf two individuals became the only unit holders in the six trusts, the subject matter of this proceeding. All of the former unit holders had their units in these six trusts redeemed under terms in the trust deeds which fixed the redemption price by reference to net tangible assets. Thus, upon redemption those former unit holders took a sum fixed otherwise than by reference to any rights against BPTC to have it make good the trust assets and, similarly, it was explained, the two individuals, who became unit holders for and on behalf of the holding trust, became unit holders at a price which, again, had reference only to net tangible assets and thus not to the value of any rights of action against BPTC for breaches of trust. By reference to this restructuring of the trusts, the

appellants claimed that, even if the respondents were entitled to make claims against the former trustee BPTC for breaches of trust committed by it while trustee, the suit was being brought by the respondents only as trustees for current unit holders and they were not the unit holders who had suffered loss by reason of the breaches. In this regard, the appellants also relied upon the fact that from time to time after the breaches of duty were committed, the identity of the unit holders must have changed (even before the restructuring of the trusts) as some unit holders left a trust and others joined it, whether by transfer of the units or by redemption and application.

The respondents' standing to sue BPTC in respect of the breaches of duty alleged against it was the subject of the first four questions answered below, all of which were answered in favour of the respondents' having sufficient standing. Question 1 was typical of these questions:

1. Do the plaintiffs have standing to sue for the breaches of the duties which are alleged in para20 of the Fourth Further Amended Statement of Claim?

Questions 2, 3 and 4 were the like questions in relation to para24, para31 and para35 of the pleading and to each of these four questions, the answer was a simple Yes. The appellants appeal against these answers, claiming that the answer should have been in the negative although, as already noted, BPTC is not itself an appellant.

In essence, the appellants contended that the duties relied upon to justify the claims made against BPTC by the respondents were duties alleged to have been owed to the unit holders, and not otherwise. It was submitted that while the unit holders - or at least the unit holders at the time when the losses were suffered - might have been entitled to sue BPTC for these breaches of duty, the new trustees were not entitled to make the claims for them. Confronting the difficulty that the trustee is commonly said to be the proper plaintiff to sue for wrongs to the trust property, the appellants contended that a new trustee was entitled to sue only in order to recover trust property (on the ground that it was the legal owner of that trust property) or to enforce a right of action of which the former trustee was the legal owner (because such a right of action could form part of the trust property which passed to a new trustee by virtue of the vesting order made upon its appointment). In contrast, it was contended that the new trustee had no right to sue the former trustee for equitable compensation and damages for breaches of duty owed to the unit holders, because that was not the recovery of trust property vested in the trustee for the time being, nor was it the exercise of a right of action vested in the former trustee and passing to the new trustee upon appointment.

The appellants relied upon a number of decided cases to demonstrate that all of them depended upon the handling of trust funds, rather than the trustee's obligation to make compensation for wrongdoing. Brooking J has canvassed the -

authorities at length and I agree, with respect, with his Honour's analysis. Suffice it to say therefore that, in my opinion, the distinction sought to be made was without substance. It was accepted that a new trustee could sue the old trustee for trust property that was in his hands or for compensation for trust property that he was no longer able to deliver up because it had been lost by his fault. But in such a case the trustee's obligation to recoup the trust funds, while it may be described as part of his obligation to deliver up the trust property, may be described also as part of his obligation to pay compensation for any wrongdoing affecting the trust property and causing loss to it. Essentially, when the

beneficiaries complain of loss, they complain of loss to the trust assets and it is for such loss to the trust assets that the trustee may be answerable by reason of breaches of duty. Whether the measure of the loss is fixed by some diminution in the trust property or whether it be fixed by profits improperly made seems to me to involve no difference in principle; one way or the other the trustee is being made answerable for some breach of duty to ensure that the beneficiaries have the benefit of trust property, properly preserved and properly augmented. In short, I think that the distinction for which the appellants contended should be rejected.

Then it was said that the respondents, as current trustees of the trusts, could sue only for those who were now the unit holders and not for those who had been unit holders at the time when the loss and damage was suffered. Again, I think the submission should be rejected. The trustees are suing for loss or damage to the assets held on trust and an order that the former trustee recoup that loss or damage does not answer the claims of particular beneficiaries. As I see it, the identity of the beneficiaries from time to time is irrelevant to such a claim. Old unit holders might have sold on terms that they kept such benefits as might flow from such causes of action, or alternatively might have sold at a price in anticipation of some recovery; that is a matter between them and their purchasers and cannot be known to the trustee. It does not affect the right or standing of the new trustees to sue in order to ensure that the trust property is properly maintained. Counsel was not able to refer us to any case in which an alteration in the identity of the beneficiaries had been considered relevant to a claim by the trustee against some third party to have the trust estate properly restored or compensated.

Then it was said that in this particular case, the trust deeds affected the result because of the provision for redemption. That units could be redeemed only at a price fixed by reference to net tangible assets was said to have fixed upon those unit holders whose units were redeemed a loss for which they could still seek compensation from the former trustee, BPTC. But again, that seems to me to misunderstand the nature of the beneficiaries' right to sue a trustee for default. It must be accepted that the beneficiaries have such a right, but the right of the beneficiaries is to see that the trustee makes good any loss or damage to the trust estate. It is unnecessary to decide whether an order obtained by a particular beneficiary should be limited in some way by reference to the extent of that particular beneficiary's interest in the total trust estate; such a question does not arise for decision here. What is said then is that the beneficiaries, upon redeeming their units, took in exchange for their units a redemption price which was wholly inadequate to reflect the trust property if and when properly restored in consequence of BPTC's breaches of duty. That, it was said, was a loss for which they could still sue BPTC and, were it not so, success by the new trustees in their claims against BPTC for its breaches of duty could result only in some "windfall" gain to the current unit holders. -

A number of things may be said of this. First, as at present advised, it seems to me that former unit holders who sought and obtained redemption of their units according to the trust deeds, abandoned any claim thereafter to participate in the trust funds. While they were unit holders, they might have claimed as beneficiaries to have the right to enforce against BPTC its liability for breaches of trust - although whether the beneficiaries would have been permitted to assert that right once a new trustee had been appointed and was capable of suing BPTC on behalf of all beneficiaries is another matter. But once their units were redeemed, the unit holders arguably lost the right to have recourse to BPTC for its breaches of duty; if their cause of action was for loss or damage to the trust funds, it is difficult to see what cause of action could have survived in them, after redemption. The

terms upon which redemption may be achieved are, after all, a matter of internal regulation to the unit trust; it is in this case found spelled out in the trust deeds. The interest of beneficiaries in the trust funds is as therein described and, even if it were the case that the trust deeds made inadequate provision for a proper price upon redemption, the provision which is made serves to limit the interest of the unit holders. The unit holders have neither more nor less interest in the trust funds than is provided by the trust deeds. Redemption is the result of a voluntary choice on the part of the unit holder; and if a unit holder chooses to redeem on terms provided by the trust deeds, it is difficult to see what cause of action remains in him to have the trustee for the time being add to the trust funds thereafter.

On that basis, I think that the argument that the former unit holders should be regarded as gaining, upon redemption, some right against BPTC to compel it to make compensation to them for the losses they sustained upon redemption, should be rejected. On the other hand, if the argument for the former unit holders be put on the basis that they gained a right, before redemption and while unit holders, to have BPTC make compensation in their favour by reason of BPTC's breaches of trust and that they did not lose such rights upon redemption, that would mean only this, for present purposes: the respondents, if successful in their suit as current trustees against BPTC for its breaches of trust, would be required to hold the fruits of the litigation for all of the beneficiaries affected by the losses incurred and retaining rights in the matter, which ex hypothesi would include former unit holders. Such a result would be a complete answer to the submission that success for the respondents must mean a "windfall" for the current unit holders. I say nothing, however, about whether that result would follow, because it does not fall for decision now.

But if, quite apart from how the question be approached, it be concluded that former unit holders have no residual claims against the former trustee and that the fruits of litigation by the new trustees against the former trustee will go in augmentation of a trust fund in which only current unit holders have an interest, then the submission that success for the respondents means a "windfall" for the current unit holders would still not mean, in my view, that the current trustees lack standing to make the claims. The so-called "windfall" is no more than the proper restoration of the trust funds, enuring for the benefit of those who happen for the time being to be the unit holders in these trusts. It cannot be right in principle that the former trustee is no longer bound to make compensation (if otherwise it be so bound) only because the current unit holders have joined the trust after the losses occasioned by those breaches were sustained. Nor does that seem to me an untoward result. As I said earlier, unit holders have their interest in the trust property as defined by the trust deeds; and just as former unit holders -

cease to have interests in the trust property when they relinquish their units, so those who hold the units for the time being have between them - and subject to the trust deeds - the only beneficial interests in the trust property for the time being.

Finally, it was contended that if the respondents were held to have standing to sue BPTC, that must mean that BPTC is exposed, not just to the suit of the new trustees, but also to the suit of the former unit holders who were members of these trusts when the losses were sustained. What I have said thus far requires the rejection of that argument. There is no "double jeopardy", as it was called in argument. The new trustees, when they sue BPTC for its breaches of trust, do so for the beneficiaries for the time being in order to restore the trust property to its proper state. Either there is no right of action in the former unit holders because their units were redeemed by them and they departed from these trusts altogether; or (on the other suggestion made, which does not at present commend itself to

me) those former unit holders retain some right to participate in the fruits of this litigation brought against the former trustee by the current trustees. Either way, those former unit holders could not independently mount their own proceeding against BPTC based upon the same breaches of trust.

Brooking J has dealt with the claims against BPTC itself in much greater detail than I have attempted and I agree with what his Honour has written. In short, I agree that all of the arguments put on behalf of the appellants on this aspect of the case should be rejected. In my view, Gobbo J was correct to give an affirmative answer to the first four questions posed.

CLAIMS AGAINST DIRECTORS

It is convenient first to take the claims based upon the allegation that Messrs. Young, Burns, Henderson and Short knowingly participated in the breaches of trust committed by BPTC. Young was allegedly not only a director of BPTC but also its general manager. In para46, para47 and para48, it is alleged that the breaches of duty by BPTC were either "knowingly procured by Young" or that he "knowingly participated in and procured" those breaches of duty. By reason thereof, it is alleged in para49, "the assets of the Trusts were lost or diminished and remain lost and diminished". In para50, para51 and para52, it is alleged that Young is obliged to make good the loss, that he was liable at the suit of BPTC when it was trustee and that the plaintiffs, as successors to that right of action, are entitled to sue as current trustees.

Question 5 related to this portion of the pleading. It was as follows:

5. Assuming that Young may be liable for participation in and procurement of the breaches of duty by BPTC, do the plaintiffs have standing to sue Young for the alleged participation in and procurement of the breaches of duty by BPTC, as alleged in para46, para47 and para48? Again the answer given below was a simple affirmative and this is now challenged on appeal. The learned judge held that the plaintiffs had standing to sue Young for such participation and procurement without joinder of beneficiaries, as a cause of action which might have been enforced by BPTC and which may now be enforced by the current trustees. In his reasons for judgment, his Honour said that the essence of this cause of action was "not so much the breach of trust by the trustee but the procurement by the officer or director in a breach by the trustee company", a claim "which is based on breach of a common law duty of care or breach of fiduciary duty". -

The appellants were critical of this portion of the judgment on the ground that, if this view of the claim were correct, the claim would already be covered by other portions of the pleading based upon breach of a common law duty to take care or breach of fiduciary duty, on the part of Young. I think that probably the appellants are correct in suggesting that the basis for this claim is really the second limb of Barnes v Addy (1874) LR 9 Ch App 244; it is a claim made by the new trustee against one who is alleged to have knowingly participated in a breach of trust by the former trustee. On that basis, the appellants argue that, although the participant may be liable to the beneficiaries, and may be jointly liable with the defaulting trustee, he is not liable to the defaulting trustee, who, by virtue of his own wrongdoing, is precluded from suing. The only authorities cited for this proposition were US Surgical Corporation v Hospital Products International [1982] 2 NSWLR 766 at 817 and Catt v Marac Australia Ltd (1986) 9 NSWLR 639 at 660-661. In my view, neither of these is sufficient to sustain the proposition of law which otherwise has been

consistently rejected. As Brooking J's review of the cases demonstrates, a defaulting trustee remains obliged, notwithstanding his own wrongdoing, to make good the trust property and, if necessary, to institute proceedings against those who participated in the wrongdoing to make good the loss. Whatever the consequences might be in respect of his own liabilities, the trustee does not cease to be so obliged; certainly he does not become disqualified from proceeding.

Accordingly, I think that the learned judge was correct to give an affirmative answer to Q 5. Question 6 was in like form in relation to Messrs. Burns, Henderson and Short who were alleged (with Heiler) in para54 of the pleading to have been knowing participants in and to have procured a certain breach of duty by BPTC. For like reasons, I think that the affirmative answer given to Q 6 was also correct.

That brings me now to the allegations against directors of BPTC and against BPC as a "shadow director", that they are liable for breaches of duties owed by them to BPTC. Para56 and para56A deal with the duties said to be owed to BPTC by Messrs. Young "as General Manager and a director of BPTC" and Burns, Henderson, Heiler and Short "as directors of BPTC". (The position of Young as general manager adds nothing to the points now under consideration and in what follows I simply ignore it.) In both para56 and para56A, each of these five is said to have been obliged: ... in the exercise of his powers and in the performance of his duties to exercise due skill and care to ensure that BPTC properly and adequately performed the duties alleged in para18 ... so as to avoid the Trust assets being lost or diminished. In para56, this is said to have been "a duty of care ... under the common law" and in para56A, "a fiduciary duty or ... otherwise ... an obligation in equity". In para57, para58 and para59, it is said that in breach of these duties, Messrs. Young, Burns, Henderson, Heiler and Short "caused or permitted the breaches of duty of BPTC" earlier alleged in the pleading, and that by reason thereof "the assets of the Trusts were lost or diminished and remain lost and diminished". In para59A, para59B and para59C, it is alleged that all five were under an obligation to make good the loss, that they were liable at the suit of BPTC while trustee of the trusts, and that the plaintiffs are now entitled to sue as successors to that right of action in BPTC.

In this case, the relevant questions were Q 7, Q 11 and Q 12. Question 7 was in a typical form: -

Assuming that each of Young, Burns, Henderson, Heiler and Short owed to BPTC a duty of care under the common law:

(a) Was that duty owed to BPTC as Trustee of the Trusts as is alleged in para56? (b) Do the plaintiffs have standing to sue for damages for the breach of that duty which is alleged in para57?

Questions 11 and 12 referred to para58 instead of para57. Question 11 proceeded upon the assumption that the five men mentioned "owed a fiduciary duty to BPTC", while Q 12 proceeded upon the assumption that the five were "otherwise under an obligation in equity" as alleged in para56A. Affirmative answers were given below to Q 7, Q 11 and Q 12 and those answers are now challenged on appeal.

In my view, whether resting on supposed duties of care arising at common law or resting upon fiduciary duties or other obligations in equity, the underlying duties relied upon in para56 and para56A were, as there alleged, owed by the five men named "as directors of

BPTC ... to BPTC". In para56, it is alleged that the duties were owed to BPTC "as Trustee" but, as that is the very thing asked by Q 7(a), those words must surely be disregarded for the purpose of answering the question which is whether the duties were owed to BPTC "as Trustee of the Trusts as is alleged in para56". In para56A there is no such qualification in the pleading and therefore Q 11 and Q 12 simply ask whether the fiduciary duty or other obligation in equity was owed to BPTC "as Trustee of the Trusts".

The judge below expressed some dissatisfaction with the question so framed. As his Honour said in relation to Q 7 in particular: The real question raised by the preliminary question is not evident on the face of the question but was manifested in the discussion. The question asked whether the assumed duty of care, is, as the defendants contend, owed to BPTC exclusively to it in its personal capacity or can such a duty, as the plaintiffs contend, be owed to BPTC both in its personal capacity and in its capacity as trustee. It was because his Honour rejected "the argument put forward for the defendants that any duty owed and any breach must by its nature be personal to the trustee" that affirmative answers were given to Q 7, and then to Q 11 and Q 12.

To my mind, the criticism levelled below at the form of these three questions was well merited. The allegations in para56 and para56A are of duties owed to BPTC by those who were its directors, and of duties which were owed by them "as directors of BPTC". It is difficult to know what is meant by the question whether directors owe their duties to their company "as trustee" or "personally". In my view, such duties are owed by the directors to their company, and further description of the company as obligee can only be misleading. Whether said to arise at common law or by reason of the fiduciary relationship existing between director and company or, let it be said, by statute, the duty of care is reasonably well defined; the director is obliged to take reasonable care not to cause loss to the company in the performance of his duties or in the discharge of his office - just as, similarly, he is obliged to perform those duties and to discharge that office faithfully as a fiduciary and, by statute if not otherwise, to act honestly in the performance of those duties and in the discharge of his office. Those duties are owed to the company irrespective of its business activities and, if the company be a trustee for others of certain property held by it or if the company carries on trading as a trustee for others, that matters not (at least ordinarily) to the definition of the duties owed by the directors to the company. The activities of the -

company will be relevant only to the way in which loss may be suffered, should the directors fail to discharge their duties fully.

In both para56 and para56A, it is alleged (whether by reason of "a duty of care ... under the common law" or by reason of "a fiduciary duty or ... otherwise ... an obligation in equity") that the directors were bound to exercise due skill and care "to ensure that BPTC properly and adequately performed" its duties, as alleged in para18 - duties which, it may be remembered, are alleged in para18 to have been owed by BPTC to the unit holders. Thus, it is alleged that the five directors were duty bound to take care to ensure a result, a pleading which it is difficult to sustain. The breach of the duties is said (in para57 and para58) to have been that the directors "caused or permitted the breaches of duty of BPTC" earlier alleged. In my view, this all should be understood as amounting to a plea that the five men named, as directors of BPTC, owed to BPTC certain duties by which, or by reason of which, they were bound to exercise due skill and care; that they caused or permitted BPTC to commit breaches of the duties which it owed to unit holders which occasioned loss to the trust property; and that, in so causing or permitting those breaches

to occur, the five were guilty themselves of breaches of the duties of care which they owed to BPTC. If the pleading is to be regarded as sufficient, it must be taken to be implicit in this that by causing or permitting BPTC to commit breaches of trust occasioning loss to the trust property, loss was occasioned to BPTC.

That is sufficient to demonstrate how the business activities of the company become relevant to identify the loss which is said to have occurred as a result of a breach by the director of his duties to the company, BPTC. The business activity of BPTC as trustee of these trusts was itself the framework within which the directors came to perform the duties which they owed to the company by virtue of their office as director; but the duties which were owed are nonetheless general duties and are not owed to the company in some specific role or character - or at least they are not owed to the company in some specific role or character when the duties are alleged to have arisen only in virtue of the office which is held. In this, such duties may be contrasted with some specific contractual obligation undertaken by a third party to the company and undertaken to the company when acting in some particular capacity. Thus a valuer may contract with an individual who is in fact acting as executor of an estate; or he may contract with a company which is in fact acting as trustee of a trading trust. In such cases, the benefit of the contractual obligation may well be held by the executor or by the trustee for and on behalf of the deceased estate or the trust, as the case may be; but no sufficient basis is made here for any such conclusion in relation to the directors' duties which arose simply in virtue of the office.

It follows that if there be a breach by the directors of the duties which they did owe to the company, being the former trustee BPTC, and if the company was thereby damnified, BPTC might have a right of action against the directors for breach of their duties. In so far as those duties were founded in the common law, there might be a right of damages and, if they be fiduciary duties, there might be a right to equitable compensation. Either way, it is the company in which the right of action is vested. The plaintiffs now claim to have succeeded to that right of action by virtue of their appointment as new trustees, but by what right can that be so? The right of action held by the former trustee cannot be shown to have been trust property; there is no basis upon which to conclude that it was. Unlike the valuer whom I have used for illustration, the directors cannot be said on the pleading in this case to have owed their duties to the company only in relation to -

some particular trust or trusts; nor were those duties imposed upon them in relation to some particular item or items of trust property as such. Rather the existence of both the trusts and the trust property was but the context in which the duties fell to be discharged by those who owed duties to the company generally as its officers. There is no basis, then, for supposing that the right of action was trust property in the hands of BPTC or for supposing that the right of action passed to the new trustees, upon their appointment as such.

On that basis, it follows that any right of action against the former directors for breaches of duties said to have been owed to BPTC remains with that company. That company is now in liquidation and so it is a matter for the liquidator whether to pursue the directors for those alleged breaches of duty. Whether he could be persuaded to bring such proceedings (perhaps, if indemnified as to costs) is a matter which does not fall for decision. But the benefit of such proceedings would belong to the creditors generally, in the liquidation, consistently with my view that the directors owed their duties to BPTC and not to BPTC in a particular capacity. It is, I think, misleading to suggest that the duties were owed to

BPTC "personally", because that may be mistaken to mean that those who are beneficiaries under the trusts have no concern with the pursuit of the directors. That is not so because, in so far as BPTC may now be called upon to recompense the beneficiaries (through the new trustees) for loss to the trust property, thus far those beneficiaries may well be interested in the former trustee's pursuing its directors for breaches of their duties. It is important that the plaintiffs do not allege in this portion of the pleading that the directors owed any duties to the beneficiaries; the only duties relied upon are those said to be owed by the directors to BPTC, the former trustee.

That BPTC's right over against its own directors is property available for creditors generally in the winding up of BPTC is, I think, consistent with the decision of this court in Re Enhill Pty Ltd [1983] VicRp 52; [1983] 1 VR 561, where the trustee's right of indemnity out of the assets of the trust was considered in the winding up of the trustee. It had been held in Re Byrne Australia Pty Ltd [1981] 1 NSWLR 394 that the proceeds of a trustee's right of indemnity out of the assets could be used in the winding up only for the payment of the creditors of the trust: see also Re Byrne Australia Pty Ltd (No 2) [1981] 2 NSWLR 364. This court declined to follow those two decisions of Needham J, holding instead that the trustee's right of indemnity out of the trust assets was property available to the liquidator for division among the trustee's creditors generally in the winding up of the trustee. In substance, this court was of the view that the special considerations affecting a trustee's right of indemnity out of the assets were not such as to confine the availability of that right, considered as an item of property in the winding up, to creditors of the trust. Of course, in the present case there are no such special considerations, where BPTC, if it is to be considered as having some right of "indemnity" from its directors, is relying upon duties which those directors owed generally to their company; nor is that "indemnity" to come out of the assets of the trust. In those circumstances, the difference of opinion between the Supreme Court of New South Wales and this court on the question of the trustee's right of indemnity out of trust assets when the trustee is being wound up (as to which see also Re Suco Gold Pty Ltd (In liq) (1983) 33 SASR 99; Kemtron Industries Pty Ltd v Commissioner of Stamp Duties (Qld) [1984] 1 QdR 576 and Ramsay v National Australia Bank Ltd [1989] VicRp 7; [1989] VR 59) is not a difference of opinion which is at all relevant. -

For these reasons, in my view incorrect answers were given to Q 7, Q 11 and Q 12 below. Instead of the affirmative answer given to all parts of those questions, the answer to each of the three questions should have been as follows:

(a) On the assumption directed to be made, the duty was not owed to BPTC "as Trustee of the Trusts", if by that is meant that any right of action for breach of the duty was trust property. (b) No.

PARTICULAR CLAIMS AGAINST BPC

I turn now to the more particular claims made against BPC in this area. First, there is the claim that BPC is vicariously liable for the alleged wrongs of Young, Burns and Heiler. The basis for this is laid in para85 to para88A of the pleading. In para85, it is alleged that Young, in acting as a director and general manager of BPTC and each of Burns and Heiler, in acting as a director of BPTC, was acting as an employee of BPC and in the usual course of that employment. In para86, it is alleged further or alternatively that the breaches by Young, Burns and Heiler of the duty of care which each was alleged in para56 to owe to BPTC constituted "torts", and associated allegations are made in order to bring the case

within s7 of the Law Reform (Vicarious Liability) Act 1983 (NSW), which makes a master vicariously liable for the tort of his servant in the circumstances there described. In para88, it is alleged by reference to both para85 and para86 that BPC was vicariously liable to BPTC for the loss and damage "which the Trusts have suffered and will suffer as a result of the wrongful conduct of Young, Burns and Heiler" and, in para88A, the respondents claimed, as current trustees and successors to that right of action in BPTC, to enforce that vicarious liability in BPC.

The relevant question was Q 26. It read thus:

26. If BPC is vicariously liable for the wrongful conduct of Young, Burns and Heiler:

(a) Was that liability owed to BPTC as Trustee of the Trusts as is alleged in para88? (b) Do the plaintiffs have standing to sue in respect of such liability?

Below, both parts of this question were answered Yes and the appellants now challenge those answers.

At the outset, it may be observed that in para88 the plaintiff alleges only that "BPC was vicariously liable to BPTC", and not (as represented in Q 26) that any vicarious liability "was owed to BPTC as Trustee of the Trusts" - although perhaps so much should by now be taken as implied in the pleading. It matters not; for as already pointed out in relation to Q 7, the allegation that a duty or liability was owed to BPTC "as Trustee", where found in the pleading, is necessarily to be disregarded if the question posed in those terms is to be sensibly addressed. Secondly, Q 26 speaks of "wrongful conduct", an expression apparently embracing much more than merely the "torts" which, according to s7 of the New South Wales Act of 1983, form the basis of the liability there imposed upon the "master". How far the expression "vicarious liability" is apt in relation to wrongs which are not torts is a question which was not explored before us and I do not address it now. I am content to proceed upon the footing that Q 26 asks about such liability (if any) as rests on BPC for the wrongs (of whatever nature) of its employees, committed in the course of their employment.

But, that having been said, there are other difficulties in answering Q 26 in view of what I have so far said about the liability of Messrs Young and Burns. -

Although Heiler is not a defendant in this proceeding, what I have said about the liability of Young and Burns obviously applies in relation to alleged misconduct by Heiler, in so far as he, like Burns, is alleged to have been guilty of misconduct while a director of BPTC. I have concluded that, in relation to liability for participation in and procurement of breaches of duty by BPTC, Young and the other directors, if liable therefor, are liable at the suit of the respondents, as current trustees and successors, therefore, to the right of action vested in BPTC until its removal as trustee. Such right of action is, in my view, part of the trust property which passed from the former trustee to the new trustees upon their appointment. (This was the subject of Q 5 and Q 6.) On the other hand, in so far as the respondents seek to make Young and the other directors answerable for such liability as they incurred to BPTC for breaches of the duties which they owed to BPTC as its officers, thus far I think that the respondents do not have sufficient standing to enforce any liability incurred by those officers to BPTC. That right of action, vested in BPTC, did not pass, I think, to the new trustees upon their appointment. (This was the subject of Q 7, Q 11 and Q 12.)

It seems to me that the question about BPC's so-called vicarious liability should be answered in line with the foregoing. Thus, to the extent that Young, Burns and Heiler are (or would, if sued, have been) answerable to the respondents as new trustees of the trusts, then so far will BPC, if vicariously liable for their wrongful conduct, be answerable also. But in so far as Young, Burns and Heiler are (or would, if sued, have been) not answerable to the respondents as new trustees for wrongs committed by them, then so far will BPC, if vicariously liable for those wrongs, not be answerable to the respondents either. That seems to me to be the case whether the vicarious liability is said to arise under and by virtue of s7 of the New South Wales Act of 1983 or independently of it. For these reasons, I think that Q 26 should have been answered: Yes, to the extent that Young and Burns are answerable (and Heiler, if sued, would have been answerable) for that wrongful conduct to the plaintiffs, but not otherwise.

I have mentioned already that BPC is, according to the allegations made in the pleading, itself a "shadow director" of BPTC by virtue of the provisions of the Corporations Law or alternatively the relevant Companies Code. The allegation is made fairly shortly in para77. In para82, it is alleged that BPC "as a director of BPTC owed to BPTC as Trustee of the Trusts" a duty of care. That duty of care is pleaded, more particularly, as "a duty of care to exercise reasonable care and skill to ensure that BPTC properly and adequately performed the duties alleged in para18". Breach of that duty is alleged in para83, where it is said that BPC "negligently caused and permitted the breaches of duty of BPTC" earlier referred to in the pleading, in consequence of which (in para84) the assets of the trusts were lost and diminished and remain lost and diminished. BPC is then said to have been liable at all times for such loss and damage at the suit of BPTC (para84A) and (in para84B) the respondents claim to enforce that right of action, as current trustees and successors to BPTC.

The relevant question in this regard was Q 20. That reads:

20. Assuming that BPC was a director of BPTC, and assuming that BPC owed a duty of care to BPTC: (a) Was that duty owed to BPTC as Trustee of the Trusts as is alleged in para82?

(b) Do the plaintiffs have standing to sue for damages for the breach of that duty which is alleged in para83? -

Below, both parts of this question were answered Yes and both answers are now challenged.

This allegation that BPC owed a duty of care to BPTC, as a "director of BPTC", is very much in line with the like allegations made against the individuals who were directors of BPTC. What I have said about their position covers this aspect of the pleading to enforce a like liability against BPC. For the reasons given earlier, BPC may be liable to BPTC for breaches of the duties which it is said were owed by BPC "as a director of BPTC", but BPC is not, in my opinion, liable to the respondents as new trustees under the trusts. In my view, the answers to Q 20(a) and (b) should have been as I have suggested already in relation to Q 7(a) and (b).

But this does not exhaust the claims made against BPC in respect of such a "duty of care". In para82A it is also alleged that at all material times BPC "exercised control over the affairs, activities and conduct of BPTC as trustee of the trusts or had the capacity to

exercise such control" and possessed the knowledge of Young, Burns, Henderson and Heiler, and that, if BPTC breached its said duties and obligations, BPC was aware or ought to have been aware that it was reasonably foreseeable that the assets of the trusts would or might be lost or diminished and the unit holders thus suffer loss and damage. By reason of all these matters alleged in para82 a, it is said in para82B that:

... BPC at all material times owed a duty of care to BPTC as Trustee of the Trusts to exercise due skill and care to ensure that BPTC properly performed or complied with the duties referred to in para18 above. Breach of this "duty of care" owed "to BPTC" is ascribed in para83 in the same terms as already described in relation to the duty of care alleged in para82; and the allegations of loss and diminution of the assets of the trust, liability of BPC therefor and the right of the respondents to sue as successors to BPTC and as current trustees are alike all pleaded in para84, para84A and para84B.

In the case of the duty of care alleged in para82B, Q 22 is the relevant question. It reads:

22. Assuming that, as a consequence of the matters pleaded in para82A, BPC owed a duty of care to BPTC:

(a)Was that duty owed to BPTC as Trustee of the Trusts as is alleged in para82B? (b) Do the plaintiffs have standing to sue for damages for the breach of that duty which is alleged in para83?

Again, both parts of this question were answered Yes below and both answers are now under challenge.

The duty of care alleged in para82B, is alleged in much the same terms as that earlier alleged in para82 against BPC "as a director of BPTC". The difference is that in that case the duty of care was said to have arisen because BPC was "a director of BPTC"; in this case, it is said to have arisen because of the particular matters alleged in para82A - the control exercised by BPC over BPTC, the knowledge it had of its affairs and duties, and what could be reasonably foreseen - in short that there was some proximity between BPTC and BPC giving rise to the duty of care. Once again, it is alleged as a duty of care owed to BPTC and because it cannot, in law, be a duty of care to achieve a particular result, it must be understood as a duty of care to avoid loss to BPTC. It is not alleged that there was a duty of care owed by BPTC to the unit holders; nor is it alleged that the duty of care was owed to BPTC to avoid its causing loss to the trust property. All -

that is alleged is that it was a duty of care "to ensure that BPTC properly performed or complied with the duties" which BPTC owed to unit holders. In these allegations, I do not see any sufficient basis for concluding that such cause of action as might exist for breach of that duty of care belonged to the unit holders or the trustee for unit holders. Accordingly, such right of action as might exist to enforce the duty of care alleged in para82B is not shown to have been trust property when vested in BPTC and so is not a right of action which the respondents may now enforce, as current trustees and successors to BPTC. In my opinion, Q 22 should have been answered in the way I have suggested in relation to Q 7 and Q 20.

That brings me to the difficult allegations made against BPC in para84C to para84G, which further seek to build upon the matters alleged in para82A already mentioned. Para84C alleges that, by reason of the matters alleged in para82A, BPC at all material times:

(a) owed the duties to the unit holders referred to in para18 above; and (b) undertook a duty to BPTC not to act in a manner contrary to the duties and obligations referred to in para18 above.

In para84D it is alleged that BPC "caused and permitted the breaches of duty of BPTC" earlier alleged, and did so in breach of "the duties" referred to in para84C. In para84E, it is alleged that "By reason of the breaches of duty referred to in para84D" (presumably those alleged against BPC in that paragraph) "the assets of the Trusts were lost or diminished and remain lost and diminished" and, in para84F, that BPC was and is under an obligation to make good the loss. In para84G, the plaintiffs claim to sue "as successors to the right of action for breach of the duty to BPTC referred to in para84C(b) above and as current trustees of the trusts".

All of this is very confusing. As pointed out by counsel for the appellants, the allegation in para84C(a) that BPC actually "owed the duties to the unit holders referred to in para18", suggests that BPC is alleged to have become a trustee, as was BPTC. How else could it have owed "the duties to the unit holders" which were owed by the trustee for the time being? Yet it is said in para84C(b), that BPC "undertook a duty to BPTC" not to act contrary to "the duties and obligations [sic]" referred to in para18. It is not alleged that BPC was otherwise a trustee de son tort; it is not, for instance, said that BPC in some way handled the trust property. It seems to me that para84C must be read as alleging a duty in BPC to BPTC - a reading which is confirmed by para84G. In those circumstances, BPC must be taken to have allegedly owed to BPTC a duty not to act contrary to the duties to unit holders referred to in para18, but such a duty is not, I think, one known to the law.

There were two questions posed by reference to "the duties" alleged in para84C. They are Q 24 and Q 25. The first of these is as follows:

24. Assuming that BPC owed to the unit holders the duties which are alleged in para84C(a), do the plaintiffs have standing to sue for the breach of those duties which is alleged in para84D? It may be that on one reading of para84G the plaintiffs claim to sue only in relation to the "breach of the duty to BPTC referred to in para84C(b)", in which case there would be no point to Q 24. But be that as it may, I am not persuaded to make the assumption which Q 24 directs because no basis has been laid in the pleading for BPC's owing the duties referred to in para18 directly to unit holders. I consider it therefore inappropriate to attempt any answer to Q 24. -

Below, the question was answered in the affirmative. In my opinion, that answer should be set aside and no answer given.

As for Q 25, that reads as follows:

25. Assuming that, as a consequence of the matters pleaded in para82A, BPC undertook the duty which is alleged in para84C(b):

(a) Was that duty owed to BPTC as Trustee of the Trusts? (b) Do the plaintiffs have standing to sue for the breach of that duty which is alleged in para84D?

Again, affirmative answers were given to both parts of this question and those answers are now under challenge.

Consistently with Q 24, Q 25 is directed only at the duty to BPTC which is said to have been undertaken in para84C(b). The relevant portion of para84C is simply of a duty, undertaken by BPC to BPTC, that it (BPC) not act in a manner contrary to "the duties and obligations referred to in para18" and, even if that were a duty recognised by the law, there is not sufficient in this pleading, in my view, to create any right of action for breach of that duty an item of trust property. In essence, that is because the matters referred to in para82A, and which are said to have given rise to the duty undertaken by BPC to BPTC according to para84C, are matters affecting only the general relationship between BPC and BPTC. For instance, the fact that BPC "exercised control over the affairs activities and conduct of BPTC" is, as I follow it, a perfectly generalised assertion in relation to the position of BPC as holding company of BPTC. It is not alleged that that degree of control was exercised by BPC over BPTC solely in relation to its acting as trustee of the trusts and for the purpose of its so acting; it was allegedly exercised over BPTC generally, although, of course, that included BPTC when acting as trustee of the trusts. In this respect, the allegations against BPC in para84C are not unlike those alleged against BPC in para82B, where the duty of care is alleged in virtue of BPC's role "as a director of BPTC". In both, there is not sufficient in the pleading, in my opinion, to create the right of action for breach of the duty an item of trust property.

Now, that is what I take Q 25(a) to be asking about and, on the footing just described, I think that the answer should have been in the negative, qualified in the way already suggested above in respect of Q 7(a). So too, Q 25(b) should have been answered in the negative (as suggested for the answer to Q 7(b)); for once it is concluded that nothing in the pleading is sufficient to establish that the right of action was part of the trust property in BPTC before its removal as trustee, there is nothing to establish that the plaintiffs have standing to sue for breach of that duty, as successors to BPTC.

TRUSTEE COMPANIES ACT

Next, it is alleged that s19(2)(B) of the Trustee Companies Act 1984 (Vic) and s11(6) or alternatively s31(3) of the Trustee Companies Act 1964 (NSW) made each of Young, Burns, Henderson, Heiler and Short (directors of BPTC) and BPC (as a "shadow" director of BPTC) liable to make good the losses sustained to the trust property as a result of BPTC's alleged breaches of duty. The basis for this claim is that, the former trustee BPTC being liable and BPTC being itself a "trustee company", the directors and manager of that trustee company are made responsible, too, by the statutory provisions just mentioned.

Although these statutory provisions are not the same in all respects, it is sufficient for present purposes to set out s19(2) of the Victorian statute. That is as follows: -

(2) Where a trustee company is appointed or acts in any of the offices referred to in subs(1) - (a) all the capital of the trustee company and all other assets of the trustee company shall be liable for the proper discharge of the office in which the trustee company was appointed or acted; and (b) the directors and manager of the trustee company shall be individually and collectively responsible for the proper discharge, during the respective tenures of their offices as directors or manager, of the office in which the trustee company was appointed or acted.

In relation to the individual directors of BPTC, that is, Young, Burns, Henderson, Heiler and Short, the allegation that they are answerable under these statutory provisions

(including s19(2)(b) of the Victorian statute) is laid in para63. That simply alleges against "each of the directors" that he was, and they were "collectively, responsible for the proper discharge by BPTC of the duties of its office as Trustee of the Trusts". Each is then alleged to be liable to "reimburse reinstate or otherwise make good the assets of the Trusts" (para65) and the plaintiffs claim to enforce that liability, as current trustees of the trusts (para65A).

Although para63 is framed in terms of "each of the directors", it relates (by definition in para62) to the individuals who were directors, and in another part of the pleading a similar claim of liability under the statutes is found made, in like terms, against BPC as a "shadow director": see para79, para81 and para81A. The allegation that BPC was a "shadow director" of BPTC is found in para77, as earlier mentioned.

It was these allegations, both against the individuals who were directors of BPTC and against BPC as a "shadow director" that gave rise to Q 17 and Q 18, and also, I think, to Q 19. The first, Q 17, asks to whom the responsibility, alleged in para63 against the individual directors, was owed; and Q 18 asks the like question in relation to the responsibility alleged in para79 against BPC. Below, both these questions were answered: "To the Plaintiffs as Trustees" - and that answer is now challenged on appeal. In my view, it is unnecessary to give any answer expressly to Q 17 and Q 18, because the field is amply covered by Q 19. Now, that question is as follows:

19. Assuming that BPC was a director of BPTC as alleged in para77, do the plaintiffs have standing to enforce any liability on the part of the directors including BPC arising by virtue of s19(2)(b) of the Trustee Companies Act 1984 (Vic) and s11(6) or s31(3) of the Trustee Companies Act 1964 (NSW)? To this question, the answer Yes was given below and that answer is now under challenge.

It can be seen that Q 19 commences by addressing the position of BPC as a "shadow director" of BPTC. When it was pointed out in the course of argument that it was by no means clear that BPC, even if a "shadow director" by virtue of the companies legislation, was a director of BPTC within the meaning of the statutes mentioned in Q 19, it was agreed by all at the bar table that Q 19 might be treated, if necessary by amendment by order of this court, as raising for decision the question of the respondents' standing to enforce such responsibility, if any, as was laid on directors of BPTC by s19(2)(b) of the Trustee Companies Act 1984 (or its equivalents in New South Wales). To that end, I think that the question should now be amended to read: -

Do the Plaintiffs have standing to enforce any liability on the part of the directors of BPTC arising by virtue of s19(2)(b) of the Trustee Companies Act 1984 (Vic) and s11(6) or 31(3) of the Trustee Companies Act 1964 (NSW)? When the question is so read, the answer below was in my view correct and that answer should therefore be left to stand now as the answer to Q 19, as amended.

It was submitted that in giving an affirmative answer to Q 19, Gobbo J failed to have regard to what was said to be the object of these provisions, that is, to provide protection to the beneficiaries of trusts being administered by trustee companies. It was said that, that being the object, any liability under the section is liability at the suit of the beneficiaries, and not at the suit of the trustee itself. But this is not a suit by the trustee against its own directors or manager. Instead, this is a suit by the new trustees against the directors and manager of the former trustee. It seems to me that if that former trustee is

answerable to the new trustee, then s19(2)(b) makes answerable also the directors and manager of the former trustee company. Counsel for the appellants relied upon the fact that s19(2)(b) does not specify to whom such directors and manager shall be "responsible", as therein provided; but, in my opinion, that is because the section is meant to create in the persons concerned a liability to those to whom the trustee company is itself answerable. As I think that the former trustee company is answerable to the new trustee, it follows that under this provision the directors and manager of the former trustee company may be made liable also.

Before leaving this aspect of the case, mention must be made of another portion of the pleading raising a case under the same statutory provisions - this time in relation only to the individuals who were directors of BPTC, that is, Young, Burns, Henderson, Heiler and Short. This further allegation, that those five are answerable under s19(2)(b) of the Victorian statute (and its equivalent in New South Wales) is in para56 where, it may be recalled, a duty of care is alleged against them "under the common law". That duty of care is alleged not only "under the common law", but also "pursuant to" the statutes mentioned above. The duty which is said to be owed pursuant to the statutes, is more fully described in para56 (so far as presently relevant) as being:

a duty of care ... in the exercise of his powers and in the performance of his duties to exercise due skill and care to ensure that BPTC properly and adequately performed the duties alleged in para18 ... so as to avoid the trust assets being lost or diminished.

The meaning of this allegation is by no means clear. Nor is it easy to see how any duty of care, however expressed, can be said to arise under s19(2)(b). But that is the pleading and in relation to that pleading, this question was posed:

8. Assuming that each of Young, Burns, Henderson, Heiler and Short owed a duty of care pursuant to s19(2)(b) of the Trustee Companies Act 1984 (Vic) and s11(6) of the Trustee Companies Act 1964 (NSW):

(a) Was that duty on the true construction of those sections owed to BPTC? (b) If the answer to (a) is affirmative, was the duty owed to BPTC as Trustee of the Trusts as is alleged in para56? (c) Do the plaintiffs have standing to sue for damages for the breach of that duty which is alleged in para57?

To each part of this question, an affirmative answer was given below and those answers are now challenged on appeal. To my mind, no answers should have been given to Q 8 because of the similarity of the ground covered by Q 19 and because of the difficulties in making the assumption which is required by Q 8. -

I can deal quite briefly with this last. The assumption required by Q 8 is based, as I understand it, upon the construction of the statutory provisions referred to. Confining attention to s19(2)(b) by way of example, I do not understand the basis for the assumption, which means only that I do not see how s19(2)(b) can be so construed. I do not say, especially at this early stage of the proceeding, that s19(2)(b) could never be so construed as to give rise to a "duty of care", but, as at present advised, the basis for the assumption has not been made out. If that be so, I cannot proceed to answer Q 8(a), which further explores the true construction of the section. In short, if it has not been established that on

its true construction the section gives rise to a duty of care, I cannot say to whom that duty is owed on the true construction of the section.

The foregoing is to be considered in conjunction with the similarity of the ground covered by Q 19, where the question about the operation of the statutory provisions is similar, but at the same time is altogether lacking the complication of the added assumption that the statute gives rise to a duty of care. In these circumstances, I think it plain, with respect, that no answer should have been attempted to Q 8. In lieu of the answers given, I would respond to the effect that it is inappropriate to answer any part of that question.

COMPANIES CODE AND CORPORATIONS LAW

Next, it is pleaded by the respondents that each of Young, Burns, Henderson, Heiler and Short is made liable by s229A of the relevant Companies Code or s233 of the Corporations Law to discharge the liabilities of BPTC in respect of its alleged breaches of trust - and a like claim is made against BPC also. Although there are differences between s229A and s233, it is sufficient to set out the former:

229A(1) Where -

(a) a relevant corporation, while acting or purporting to act in a capacity of trustee of a trust, incurs a liability - (i) in the case of a company - whether within or outside Australia; (ii) in the case of a registered overseas foreign company - within Australia; or (iii) in the case of a foreign company that is neither a registered overseas foreign company nor a recognised foreign company - within the State; and (b) the relevant corporation is for any reason not entitled to be fully indemnified out of the assets of the trust in respect of the liability, the relevant corporation and the persons who were directors of the relevant corporation at the time when the liability was incurred and were not innocent directors in relation to the incurring of the liability are jointly and severally liable to discharge the liability.

"(2) For the purposes of this section, a trustee of a trust shall not, by reason only that-

(a) the trust has no assets; or (b) the assets of the trust are insufficient to indemnify the trustee in respect of the liability concerned, be taken not to be entitled to be fully indemnified out of the assets of the trust in respect of a liability.

"(3) In this section - ... "innocent director", in relation to the incurring of a liability by a relevant corporation while acting or purporting to act in a capacity of trustee of a trust, means a person who - -

(a) was a director of the relevant corporation at the time when the liability was incurred; and (b) if the persons who were directors of the relevant corporation at that time had been at that time the trustees of the trust and had incurred the liability, would have been entitled to be fully indemnified in respect of the liability by one or more of the other trustees; "liability" means a debt, liability or other obligation ...

As for the individual directors, the relevant portion of the pleading is para60 to para62A. It is there alleged that BPTC "has incurred the liabilities" referred to in earlier paragraphs of the pleading; that "BPTC is not entitled to be indemnified fully or at all out of the funds of the Trusts in respect of the said liabilities"; that by virtue of s229A or s233, each of the five directors "is liable to discharge the said liabilities of BPTC"; and that the plaintiffs, "as current Trustee of the Trusts" are entitled to bring the proceeding to enforce that liability.

In relation to BPC, the pleading is much the same. In para77, BPC's status as a "shadow director" is alleged and then, in relation to s229A and s233, the relevant portion of the pleading is to be found in para60, para61, para78 and para78A. The wording of the claim against BPC "as a director of BPTC" is much the same as it is in relation to the individual directors.

These claims by the respondents gave rise to Q 15 and Q 16, which read as follows:

15. Assuming that BPTC is liable for the breaches of duties alleged in para20, para24 and para31 and 35, is that a liability to which S229A of the Companies Code or S233 of the Corporations Law applies?

16. Assuming that there is a liability arising from the breaches of duties alleged in para20, para24, para31 and para35 to which s229A of the Companies Code or s233 of the Corporations Law applies, is such a liability enforceable by the Plaintiffs against Young, Burns, Henderson, Heiler and Short, or against BPC (assuming that BPC was a director of BPTC as alleged in para77)? Both these questions were answered affirmatively below and both answers are now challenged on appeal.

For the appellants, it was submitted that s229A, however wide in appearance, did not on its true construction apply to the liability incurred by a trustee to make equitable compensation for breach of trust. In such a case, it was contended, it cannot be said that the trustee "incurs a liability" within the meaning of s229A (and hence s233 of the Corporations Law). Reliance was placed upon the second reading speech relevant to s229A; for that included the following (as quoted by Gobbo J below): Liability of Directors of Trading Trusts

Currently persons contracting with a trustee, whether an individual or a corporation, are entitled to be subrogated to the trustee's right of indemnity out of the trust assets to meet liabilities properly incurred. However if the trustee acts in breach of trust or in a manner which is not authorised by the terms of the trust, the trustee's right of indemnity, and therefore the creditor's right of subrogation, is lost. The problem this creates for creditors has been exacerbated by the widespread use of business structures involving a nominally capitalised corporate trustee to carry on business on behalf of a trust, together with other refinements, such as the careful siphoning of funds into the trust business. In such cases the creditor's primary right to sue the corporate trustee for the debt may well be worthless. I think there is a general recognition in the business community that the legal system cannot tolerate the continued use of artificial legal contrivances which result in the -

deliberate avoidance of liabilities legitimately owed to other persons. It is proposed to amend the Companies Act to impose personal liability on directors of companies acting as trustee when a debt has been incurred but the trustee company is not entitled to be indemnified out of the assets of the trust.

Although it was submitted below that this passage showed that the section was directed only to creditors and not to beneficiaries, the submission was rejected by his Honour on the ground that there was no "warrant for reading down the wide word `liability' so as to exclude claims for breach of trust" and there was "no logical explanation why aggrieved beneficiaries or persons claiming for them are any less within the spirit of the legislation than creditors". Before us, the same arguments were repeated. In my view, the word "liability", which is defined in the section to mean "a debt liability or other obligation", cannot readily be read down to exclude a liability to pay damages or equitable compensation; nor do I think that the conclusion that it is to be read down is warranted by the cases relied upon: Hamilton v Abbott (1980) 5 ACLR 391; Russell Halpern Nominees Pty Ltd v Martin (1986) 10 ACLR 539; Hussein v Good (1990) 1 ACSR 710; Hawkins v Bank of China (1992) 10 ACLC 588 at 595; compare Wickstead v Browne (1992) 30 NSWLR 1 at 14. Nonetheless, in my view the section is to be confined, as the appellants submit, to cases in which the liability is incurred to creditors, and not to beneficiaries.

My reasons for this lie in the words of the section. Subs(1)(b) makes it plain that the section applies only where the relevant company is "not entitled to be fully indemnified out of the assets of the trust in respect of the liability". Although that encompasses a case in which the company is not entitled to be indemnified out of the assets of the trust at all, it indicates to me that the mischief being addressed is a case in which a liability has been incurred such as might attract the right of indemnity, but has been incurred in circumstances in which the indemnity is not available. Subs(2) shows that those circumstances are not simply that the trust has no assets or no sufficient assets to afford the relevant indemnity; it must be on some other ground that the indemnity is not available. The obvious case in which indemnity is refused is a liability incurred by a trustee in circumstances in which the trustee was not authorised by the trust to incur the liability - or in other words, a liability incurred by the trustee in breach of trust. Thus, what the section is concerned with is a liability incurred in breach of trust and not for breach of trust.

At the least, this reasoning appears to me to raise an ambiguity in the word "liability", an ambiguity sufficient to justify reference to the second reading speech. Of course, reference to such extraneous material must be justified, in a case like the present, by the relevant provisions of the companies legislation, which allow reference to such materials where there is ambiguity but which permit it also to confirm what appears otherwise to be the meaning of the section: see Companies and Securities (Interpretation and Miscellaneous Provisions) Code s5B(1) and s5B(3) (compare Corporations Law s109J(2) and (4)). Although both para(a) and para(b) of s5B(1) were relied upon by the appellants, I am not clear that para(a) (to confirm the meaning) is useful to them; I prefer to rest my decision upon para(b) on the ground that there is an ambiguity in the word "liability". That ambiguity may then be resolved by reference to the second reading speech.

Reference to that speech makes it plain, I think, that the mischief being addressed by s229A, and subsequently by s233 of the Corporations Law, was the absence of any right of indemnity in the trustee when the trustee was acting -

in breach of trust; for the first paragraph of what has been quoted raises that very problem. The following reference to the use of "a nominally capitalised corporate trustee" is described only as having exacerbated "the problem". Moreover, in describing the effect of the new section, when introduced into the Companies Code, the minister described the section as imposing personal liability on directors "when a debt has been incurred but the trustee company is not entitled to be indemnified out of the assets of the trust". However

apt that may be to describe a liability incurred by the trustee company to some third party in breach of trust, it is singularly inapt to describe a liability incurred by the trustee company to the beneficiaries for its breach of trust.

It is for these reasons that I regard this section as applying only to liabilities incurred in breach of trust, and not a liability incurred for breach of trust. All of the provisions of the section, including the definition of "innocent director" appear to me consonant with this interpretation. It is true that, in s233 of the Corporations Law, an added condition for the operation of the section is found in s233(1)(c) which requires, also, that:

(c) the relevant body corporate has not discharged, and is unable to discharge, the liability or a part of the liability.

That, however, may be explained by the belated recognition that there was no need to cast personal liability upon directors of a trustee company where the trustee company itself has sufficient assets to meet the liability.

Nor is that at all inconsistent with the section's operating only in relation to liabilities incurred to creditors; for where debts are incurred, whether in pursuance of the trust or in breach of it, the trustee must answer first in accordance with the principle that the trustee is personally liable for all debts and other obligations which it undertakes. When a trustee company has sufficient funds to meet the liability in any event, there is no need for a provision like s233, because the creditor has his right of payment from the trustee company and that right should be sufficient. It is only when the creditor has no effective right against the trustee company for want of assets and must look to the trustee's right of subrogation that the problem arises - and hence the need, as it was perceived, to make directors personally liable where the right of indemnity was excluded by the breach of trust.

The foregoing may be put in this way. The section operates, in my view, not simply because the trustee "incurs a liability", but because, in the circumstances of the case, the trustee is precluded from having resort to the assets of the trust in respect of that liability. The section creates an alternative source for the satisfaction of the liability, where the liability is not to be met out of the assets because of the circumstances in which the liability was incurred. The mere fact that the trust has no assets or that they are insufficient is expressly made irrelevant. Therefore, the section had in contemplation, by its very terms, that the assets might have been reached for the purpose of indemnifying the trustee in respect of the liability, had it not been for the circumstances in which the liability was incurred - and that is confirmed by the terms of the second reading speech. In a case like the present, where the trustee is sought to be made liable to the beneficiaries for breach of trust, it is not the case that the assets might have been used for the purpose of indemnifying the trustee, were it not for the trustee's breach of trust. Had it not been for the trustee's breach of trust, there would be no liability at all in the trustee; and that claim for breach of trust is not one which could have been cast upon the assets in any circumstances. In short, the section -

is there for the benefit of the creditors, not for the benefit of the beneficiaries or, as I put it earlier, the section is to meet a liability incurred in breach of trust, but not a liability incurred for breach of trust.

As I have said, the relevant questions about claims based upon s229A and s233 were Q 15 and Q 16. Question 15 asks whether the liability of BPTC for breaches of trust is a

liability to which those sections apply and, for the reasons I have given, I think that the answer should have been No. Question 16 then does not arise.

CLAIMS UNDER THE PARTNERSHIP ACT

It remains to deal with the appeal of the tenth defendant, the members of a firm of solicitors, against whom claims are made (in para91 of the pleading) on the basis that, being the firm of which the director Short was at the time a member, the firm is made liable for his wrongs by s10 of the Partnership Act 1892 (NSW). S10 reads:

10. Where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner of the firm, or any penalty is incurred, the firm is liable therefor to the same extent as the partner so acting or omitting to act.

It is alleged against the partners that Mr Short, being a member of the firm, accepted appointment as a director of BPTC with the firm's authority (para89 of the pleading) and "in the ordinary course of the business of" the firm (para90).

The firm was separately represented before us and filed written submissions. In these, the firm adopted and relied upon the submissions made by BPC, in so far as those submission related to the position of Mr Short. The firm adopted also some of the submissions made by the auditors, although as no retainer by BPTC of the firm is alleged in the pleading, their position is quite different from that of the auditors. The only claim made against the partners depends upon the allegations of wrongdoing by Mr Short and the liability of the partners in consequence under s10 of the Partnership Act. What is, I think, said on behalf of the firm is that whatever loss or injury was caused by the wrongdoing of Mr Short, it was suffered by BPTC and not by the new trustees.

The answer to the claims against the firm of solicitors lies in what I have already said. The claims against Mr Short founded only on his position as a director are not shown to have been such as to make them trust property in the hands of BPTC and, if they were not trust property in the hands of BPTC, it is not established that the new trustees are entitled to enforce those claims, as successors to the former trustee. If they may not enforce the claims against Mr Short, then s10 does not avail them because, as I read it, it exposes the members of the firm to liability "to the same extent as the partner" who in this case is Mr Short.

On the other hand, there are claims made against Mr Short founded in his having knowingly participated in or procured breaches of trust by BPTC. These stand in different case. For reasons already given, they are claims that may be enforced at the suit of the new trustees against Mr Short and so, on the basis that s10 exposes the members of the firm to liability "to the same extent as the partner" (ie, Mr Short), the new trustees cannot be said to lack standing to pursue a claim under s10. If Mr Short is liable at the suit of the respondents, then so too are those made "liable ... to the same extent" under s10. -

This is sufficient to indicate how the question of liability under s10 should, I think, be approached. There are other bases of liability alleged against Mr Short, such as s229A of a Companies Code, s233 of the Corporations Law and s19(2)(b) of the Trustee Companies Act. I have already held s229A and s233 inapplicable and so put those aside. Whether s10 can effectively build upon a liability under s19(2)(b) once shown to exist in Mr

Short, is not a question that needs be addressed now. I have said enough to indicate that in my view the respondents cannot be said to lack all standing to pursue claims of one sort or another against Mr Short's partners under s10 of the Partnership Act, and further resolution of the right to sue is not required at this stage. I say nothing about whether the claims mounted by reference to s10 are of a type contemplated by that section. The question is only of standing and we are not asked to consider the legitimacy of the claims as if this were an application to strike out or stay the claims as hopeless. Whether s10 will sustain the particular claims made is not a matter I have considered.

In relation to the partners in Mr Short's firm, the only question affecting them is the perfectly general Q 27 which asks if the plaintiffs have standing to bring and maintain the claims referred to in the various paragraphs of the pleading upon which attention is being focussed for this purpose, and one of those is para91. Below, Q 27 was answered with a simple Yes and, to the extent that it relates to the compendious plea in para91, that answer has not been shown, in my opinion, to be wrong.

As I see it, liability of the partners to the respondents under para91 will not exceed the extent to which Mr Short himself is liable at the suit of the new trustees, but that is itself reflected in the terms of para91, which reads: By reason of the matters alleged in para17B, para89 and para90, FHP [the firm] is, pursuant to the provisions of s10 of the Partnership Act (1892) of New South Wales liable to the Plaintiffs to the same extent as Short for the losses or injuries caused by each of the wrongful acts or omissions of Short alleged in para54 to para65A. That Mr Short may not be liable under some of the para54 to para65A is not to the point when the question is of the respondents' standing to sue for the claim in para91. Because the partners are made liable in certain circumstances to the same extent as Mr Short is liable, the respondents have standing to sue them, as they have standing to sue Mr Short. Whether the claim will be successful is another matter altogether.

What I have said deals with Q 27 in so far as it asks about the claims in para91. There does not appear to be a need for any further or other answer to Q 27, for, as was explained to us in argument, the ground sought to be covered has already been covered by the earlier and more specific questions asked. That is subject only to one rider: in as much as there was no appeal against the answer to Q 27 in so far as it relates to para45C of the pleading, the answer given below should, I suppose, be treated as unaffected by these appeals and the answer recast to recognise that fact. I would, however, hear counsel as to the form of the answer required to Q 27.

THE AUDITORS

That brings me to the fourth category of claims made in this case by the respondents as current trustees. Those claims are against Priestley and Morris, the firm of accountants retained by BPTC to audit the trust accounts (and the seventh-named defendant in the proceeding). -

First, counsel for the auditors drew the attention of the court to some dates, relevant to the claims against his clients. BPTC was (as mentioned above) removed as trustee of the trusts in question on 7 November 1990 by order of the Supreme Court of New South Wales. By orders made by the same court, a provisional liquidator was appointed to BPTC on 19 October 1990 and an order for winding up was made on 3 December 1990. In contrast, the auditors themselves were not retained by BPTC beyond 4 July 1990, some four months before BPTC was removed as trustee. Thus, there could have been no

contract between the new trustees and the auditors; nor can it be said that the auditors owed to the new trustees directly any duty of care, and that is not pleaded. What is pleaded against the auditors is a retainer by the former trustee BPTC and a duty of care owed either under that contract or in tort. Other duties are also pleaded, but that is sufficient for present purposes. Various breaches of the duties are ascribed, by reason of which it is said "the assets of the Trusts were lost or diminished and remain lost and diminished". The respondents, as plaintiffs in the proceeding, claim to sue as the successors to such claims as were vested formerly in BPTC, when trustee of the trusts. Reference may be made to para66 to para76 a of the pleading.

On behalf of the auditors it was submitted that such claims, if any, as were vested in BPTC when it was trustee were vested in it "personally", so that the plaintiffs cannot now sue thereon as successors to the former trustee. It was submitted that "the retainer was not held by BPTC as trust property", so that the right of action arising out of breach of the terms of the retainer or breach of the common law duty of care is not a right of action which itself can be regarded as trust property and which on that account passed from BPTC to the new trustees upon their appointment. In my view, this submission should be rejected, as it was at first instance.

Brooking J has dealt in detail with the claims against the auditors and I agree with what his Honour has written. In making the contract with Priestley and Morris to be auditors of the trusts, BPTC was clearly acting in the administration of the trusts and for the purposes of the trusts. It follows then that the benefit of the contract was itself trust property, with the result that any right of action arising thereunder was trust property too. Further, that is so, whether the respondents rest their claim in contract or in tort; for in either case, the circumstances giving rise to the duty are such that the cause of action is trust property so that the proceeds of any such action would be property belonging to the beneficiaries and would not be property of BPTC available for its creditors generally. If, as counsel for the auditors submitted, the question whether the right of action is trust property depends upon all of the circumstances, including such connection as there is with the administration of the trust and the nature and extent of that connection, then in this case I think the connection is such that the rights of action being asserted against the auditors were trust property when vested in BPTC and therefore, upon appointment of the new trustees, passed to the new trustees for the benefit of the trusts.

I would only add what is implied already - that I reject the argument that was put at one stage on behalf of the auditors based upon the terms of the vesting order made by the Supreme Court of New South Wales, when the respondents were appointed trustees in place of BPTC. That order contained this clause:

6. Subject to any further order of the Court, there not vest in the new trustees any right of action of the first defendant [ie BPTC] against any third party in respect of an -

indemnity or contribution for any claim against it for breach of trust. This order shall be without prejudice to any right of subrogation which the new trustees may have in respect of any such right of action. Suffice it to say that the right of action, whether in contract or in tort, against the auditors and formerly vested in BPTC was not a right of action "in respect of an indemnity or contribution" within the meaning of this CL6. The auditors are not being sued because BPTC is liable for some breach of trust; rather they are sued because loss is said to have been sustained to the assets of the trusts directly from breaches of duty (whether in contract or in tort) committed by the auditors themselves. Such a right of action

against the auditors is not a right of action "in respect of an indemnity or contribution for any claim against [BPTC] for a breach of trust".

In relation to the auditors, the relevant questions about the standing of the respondents were Q 26A and Q 26B. They simply asked whether the respondents had standing to bring the claim against the seventh defendant for breach of the retainer as alleged in para72 of the pleading (that was Q 26A) or (in Q 26B) for breach of the retainer and the duties of care as alleged in para75. To both those questions, an affirmative answer was given below. Both answers were challenged on this appeal by the auditors but, for the reasons I have given, I think that both answers were correct.

PROCEEDING NO 8120 OF 1993

The foregoing is sufficient to dispose of the matters calling for consideration on the appeals brought to this court in proceeding No 12377 of 1991 and I turn now to the appeals by the defendants in proceeding No 8120 of 1993. It will be recalled that in that proceeding the new trustees of the six trusts in question are suing the former professional indemnity insurers of BPTC. Although those insurers purported to avoid the relevant insurance policies, the new trustees challenged that step and in December 1992 commenced proceedings in the Supreme Court of New South Wales, Commercial Division, seeking leave under s6 of the Law Reform (Miscellaneous Provisions) Act 1946 to proceed directly against the insurers under the policies formerly held by BPTC, now in liquidation.

Under s6, where there is a contract of insurance offering indemnity against liability to pay damages for compensation, the amount of the liability is a charge on the insurance moneys and such charge is "enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured". Accordingly, in those proceedings (which were subsequently cross-vested to this court), the capacity of the new trustees to seek to enforce the relevant policies of insurance under the 1946 Act was regarded as contingent upon their standing to sue BPTC in proceeding No 12377 of 1991 for its breaches of trust. Two questions only were addressed in this regard; first, whether the plaintiffs had such standing to sue BPTC for those breaches of trust and secondly whether the plaintiffs had standing to seek leave under s6 of the 1946 Act to proceed directly against the insurers. The answer to the first of these was regarded as dictating the answer to the second; no doubt because of the terms of the statute, no separate argument was put by reference to CL6 of the vesting order. Below, both questions were answered Yes and from both these answers the appellants appealed.

The appellants were represented before us by counsel other than counsel appearing in the other proceeding, and written submissions were filed. Although -

counsel on these appeals addressed relatively briefly in support of their written submissions, they put much the same argument on the question of standing as did BPC - namely, that the right to sue for breaches of trust resided, if anywhere, in the beneficiaries and not in the new trustees. For the reasons already given, I think that the argument should be rejected and, as that was the only ground upon which it was submitted that the orders below should be set aside, the appeals in this second proceeding should, I think, be dismissed.

Finally, like Brooking J, I too should acknowledge my debt to Batt J for his assistance in the preparation of the foregoing.

Batt J I agree with the conclusions reached by Brooking J and by JD Phillips J and with their Honours' reasons.

Questions answered accordingly.

No 12377 of 1991

Solicitors for the third defendant: Corrs Chambers Westgarth. Solicitors for the fourth and fifth defendants: Purves Clarke Richards. Solicitors for the sixth defendant: Minter Ellison Morris Fletcher. Solicitors for the seventh defendant: Ebsworth and Ebsworth. Solicitors for the ninth defendant: Clayton Utz. Solicitors for the tenth defendant: Sly and Weigall. Solicitors for the plaintiffs: Baker and McKenzie.

No 8120 of 1993

Solicitors for the defendants: Phillips Fox; Colin Biggers and Paisley. Solicitors for the plaintiffs: Baker and McKenzie.

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