Bare Trustees Wear Some Clothes: The rights and obligations of a bare trustee

The recent Full Court of the Federal Court decision in Queensland Nickel Sales Pty Ltd v Park in his capacity as liquidator of Queensland Nickel Ltd (in liq) [2023] FCAFC 150 took an expansive view of the rights and obligations of a bare trustee after the appointment of a replacement trustee.

The case also restates the equitable principles upon which the notion of an architectural lien is based.

KEYWORDS: recoupment and exoneration; bare trust; liquidator’s lien; architect’s lien

BACKGROUND: The case concerned the disposition of proceeds arising out of the Queensland Nickel and Mineralogy litigation which had been brought by the special purpose liquidators funded by a commercial funder Vannin Capital Operations Ltd.

The primary judge had dismissed various arguments made by the Palmer parties and had upheld the arguments made by the SPLs regarding their costs and expenses and Vannin respecting its funding premium. The Full Court upheld the findings of the primary judge.

The Full Court had some interesting things to say about the validity of funding premiums and the construction of the terms of appointment of special purpose liquidators however our interest here is what it had to say about the rights and obligations of bare trustees.

The issue arose as follows:

• Queensland Nickel Pty Ltd (in liq) (QNI) was the manager of a joint venture between 2 other Palmer companies and owed fiduciary duties to the JV.
• In March 20-216, while the litigation was underway, the joint venture partners who were shareholders of QNI appointed another Palmer entity Queensland Nickel Sales Pty Ltd (QNS) as manager of the JV.
• On 5 July 2022, Mineralogy, another Palmer company, paid QNI $102,684,346.26 pursuant to a judgment in the Mineralogy proceeding, special leave to appeal to the High Court having been refused.
• That same day, QNS, as replacement trustee, demanded that the entire amount be paid to it, without deduction. The demand was not complied with.
• The SPLs then made application seeking judicial advice about whether before any proceeds were remitted to the replacement trustee, they were entitled to discharge the liabilities that QNI had incurred to Vannin, their remuneration and costs and the admitted proofs of debt of any creditor of QNI (and QNI’s total liabilities exceeded the Mineralogy payment).

Grounds of appeal covered issues such as the parameters of the SPLs’ authority under their appointment orders, whether the funding premium was unreasonable and the evidence that had to be adduced to show this, the nature and extent of the property held on trust by QNI for the JV and the scope of a released provided by the Palmer parties.

Ground 4 alleged that the primary judge had erred in finding that the Mineralogy proceedings’ claims and expenses had been properly incurred by QNI (via its SPLs) given its removal as trustee and therefore status as a bare trustee and in finding that as bare trustee, nonetheless QNI was still empowered to get the trust property in, protect it and vindicate the rights attaching to it.

FINDINGS:

The Full Court rejected the argument that the obligations of a bare trustee were limited to transferring assets to the new trustee or as directed to beneficiaries [175].

In the decision, Markovic, Banks-Smith and Halley JJ:

• noted that it has long been accepted that what a bare trustee must do in discharge of its obligations will vary with the nature of the trust property and whatever might threaten it: Bruton Holdings Pty Ltd (in liq) v Federal Commissioner of Taxation(2011) 193 FCR 442;[2011] FCAFC 79;
• applied an earlier decision concerning a deed of arrangement that had expired through the effluxion of time where the High Court had said that while the former trustee no longer held the deed property under the deed, as bare trustee, the trustee still had an obligation to continue certain proceedings to vindicate rights associated with trust property (CGU Insurance Limited v One.Tel Limited (in liquidation)(2010) 242 CLR 174;  [2010] HCA 26); and
• noted that in CGU and Bruton, no new trustee had been appointed which was not the position here. However they concluded that the characterisation “of the rights and obligations of a bare trustee are equally apposite to any bare trustee, including as in this case, a trustee who had commenced proceedings to vindicate rights associated with trust property but has been replaced by a new trustee “ [183].

The Full Court then took a practical approach saying:

“Further, the stark reality is that on any view, the trust estate in this case was enriched by a figure of between some $74 million and $97 million. Even if it were to be assumed that the pursuit of the Mineralogy proceeding was unauthorised or in breach of trust, a trustee is entitled to be indemnified for costs and expenses incurred in securing benefits for the trust fund. As the Full Court of this Court explained in Fitzwood Pty Ltd (ACN 005 180 163) v Unique Goal Pty Ltd (In Liq) (ACN 064 926 843) [2002] FCAFC 285 at  [138] (Lee, Hill and Drummond JJ):

It is because the trustee’s right of indemnity is founded on this equitable consideration that requires beneficiaries who benefit from the activities of their trustee to meet the liabilities incurred by the trustee in generating these benefits that trustees are not disentitled to indemnity merely because they have been guilty of breach of trust or other misconduct. Even a trustee who improperly incurs a liability is entitled to be indemnified in respect of that liability to the extent to which, acting in good faith, he has benefited the trust estate. Nor does a trustee liable to compensate the trust for loss caused by his misconduct necessarily lose his right of indemnity: if there is a balance in favour of the defaulting trustee between what is due to the trust from the trustee by way of compensation and what is due to the trustee from the trust by way of indemnity, the trustee can recover the balance (and he can do that without first paying what is due by way of compensation). See RWG Management Ltd v Commissioner for Corporate Affairs [1985] VicRp 42;  [1985] VR 385 at 396 and 397-398. “[185]

Therefore, QNI as a bare trustee was entitled to be reimbursed for the expenses incurred in prosecuting the proceedings, including the SPLs’ costs and to be exonerated respecting payment of the funding premium (that is, Vannin’s funding premium could be paid out of trust monies).

LIQUIDATOR’S LIEN: Further, although not put to the Full Court, the liquidator’s lien described in In re Universal Distributing Co Ltd (in liq) (1930) 48 CLR 171 and affirmed by the High Court in Stewart v Atco Controls Pty Ltd (in liq) (2014) 307 ALR 562 would probably also have given QNI its costs and expenses and also exoneration respecting any obligation to pay the funding premium. The argument here being that like a secured creditor, the beneficiaries of a trust should not be able to take the benefit of a fund raised by the former trustee without the trustee’s costs and expenses, including remuneration, first having been met.

Side note – ARCHITECT’S LIEN:  Again, we see the application of the equitable consideration that requires beneficiaries who benefit from the activities of their trustee, to meet the liabilities incurred by the trustee in generating these benefits.

This consideration underpins my argument that:

• where an architect has been engaged to prepare drawings and plans for a site and the implied copyright license to use the plans and drawing on the land has become irrevocable by reason of the issue of the development consent;
• while the architect remains unpaid, where the increase in value of the land upon the granting of the development consent based upon the architect’s plans and drawings, exceeds the cost of the architect’s exertions, an architectural lien arises to compensate the architect;
• that is, those seeking to take the benefit of the increase in value, first should compensate the architect for the exertions that enabled the creation of the benefit.

Related articles:

• FAQs – Architects vs unpaid fees: is a lien the answer?
• Architects vs Unpaid Fees: Is a lien the answer?