Trusting legal costs are covered…

Is a trustee able to be indemnified from trust assets for legal costs spent fighting an application to remove him or her as trustee?

A trust is not a separate legal entity, and so at first instance its debts and liabilities need to paid by its trustee: Octavo Investments v Knight (1979) 144 CLR 360.  Generally the trustee then has a right of indemnity which arises in equity as a first charge on trust assets for all costs and expenses properly incurred;  see too S36(2) of the Trustee Act 1958 (Vic). In other words, he is not left holding the baby for the costs and expenses he has incurred as trustee of the trust (for the benefit of the beneficiaries.)  Obvious exceptions are where the trustee has acted in violation of his duties, is grossly negligent or has engaged in misconduct.  Mere mistakes (with honest intentions) will not remove the right for indemnity.

But what about when a beneficiary sues for the removal of the trustee? Can the trustee then be indemnified for legal costs of defending such a claim?  At this point, the position becomes murkier.  Depending on the findings eventually made by the Court, the trustee could be found to have been representing and acting in his own interests in defending the action, rather than advancing the interests of the trust estate.  He could then be liable for costs of the action: Miller v Cameron (1936) 54 CLR 572; Drummond V Drummond [1999] NSWSC 923.

In Tomasevic & Anor. v Jovetic & Ors (No. 3) [2012] VSC 558, decision handed down last Friday,  Justice Sifris of the Victorian Supreme Court referred to the principle in Miller.  He commented that ‘a lack of success in a proceeding does not automatically deny the trustee reimbursement from the trust fund’, and he referred to Order 63.26 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) which provide that unless the Court provides otherwise, a party who sues or is sued as trustee is entitled to the costs of the proceeding out of the funds held by the trustee, in so far as the costs are not paid by any other person.

Although Justice Sifris ordered the removal of one trustee, he did not do so for misconduct, but in order to remove an impasse in management of the trust between two trustees acting in good faith with conflicting views.  He found that the trustee who he ordered removed had not refused to be removed unreasonably, or due to obstinancy, and he was not plainly unsuitable to remain as trustee.  Rather, the trustee’s refusal to resign was found to have arisen ‘from his desire to protect the trust’, and he was justified in resisting the plaintiff’s allegations.

Ultimately His Honour ordered that part of that trustee’s costs be paid from trust assets (taking into account other matters including the trust’s financial position, and that the opposing parties as trustees ‘each did the wrong thing and the right thing’).

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One thought on “Trusting legal costs are covered…

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