The Official Assignee in Bankruptcy in the Property of Keith James Bainbridge v Annie Catherine Menzies and Simon Middleton Palmer as Trustees

• Jurisdiction: New Zealand
• Judge: Bell
• Judgment Date: 14 February 2011
• Neutral Citation: [2011] NZHC 87
• Docket Number: CIV-2010-404-005457
• Court: High Court
• Date: 14 February 2011

BETWEEN

The Official Assignee in Bankruptcy in the Property of Keith James Bainbridge

Plaintiff

and

Annie Catherine Menzies and Simon Middleton Palmer as Trustees

Defendants

[2011] NZHC 87

CIV-2010-404-005457

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRYCIV

Application to sustain a caveat under s145A Land Transfer Act 1952 — interest claimed related to plaintiff'administration of a bankrupt trustee — trust owed debt to bankrupt trustee — claim based on bankrupt trustee'equitable lien which passed to plaintiff in bankruptcy — debtor trustee'rights — property subject to mortgage — whether the bankrupt trustee'equitable lien passed to the plaintiff under s42 Insolvency Act 1967 (property passing to Assignee and commencement of bankruptcy) — whether an equitable lien was a caveatable interest — whether the plaintiff had direct recourse against the trust as a trust creditor.

Appearances:

K W Fulton for Plaintiff

M J McCartney SC for Defendants

CAVEAT JUDGMENT OF ASSOCIATE JUDGE Bell

1 The Official Assignee applies under s 145A of the Land Transfer Act 1952 for an order sustaining caveat 8546792.1 registered against the certificate of title to the property at 13A Summit Drive, Mt Albert, Auckland, Identifier 56327 (North Auckland Registry). Associate Judge Sargisson made an interim order sustaining the caveat on 24 August 2010.

2 The interest claimed under the caveat is:

Simon Middleton Palmer (Palmer) and Annie Catherine Menzies (Menzies) are the registered proprietors of the property as trustees of the Kahurangi Trust, such trust being established by deed dated 7 September 1999 (Trust); Keith James Bainbridge (Bainbridge) having been a trustee of the Trust on trust from 7 December 1999 to 31 March 2005; Palmer, Menzies and Bainbridge (Trustees) having incurred liabilities to Bainbridge pursuant to deeds of acknowledgement of debt dated 1 November 1999, 6 June 2000 and 2 May 2002; Bainbridge being entitled (notwithstanding his resignation as trustee) to an equitable lien over all the trust property for indemnification for any liabilities entered into by him as a trustee; and all property of Bainbridge including the equitable lien has vested in the Official Assignee absolutely, the Official Assignee being a trustee in the bankruptcy of Bainbridge, adjudicated bankrupt on 22 June 2005 and by virtue of s 42 of the Insolvency Act 1967.

3 The caveat satisfies the requirements of s 137(2) of the Land Transfer Act 1952, especially the requirements to state the nature of the interest claimed and how the interest is derived from the registered proprietors.

4 In an application to sustain a caveat, the onus is on the caveator to show that he has a caveatable interest. An application to sustain a caveat is a summary procedure which is quite unsuitable for determining disputed questions of fact. Accordingly, there will be a decision not to sustain a caveat only if it is patently clear that the caveat cannot be maintained either because there was no valid ground for lodging the caveat in the first place, or that a valid ground no longer exists, or that no useful purpose will be served by maintaining the caveat. The patent clarity will not exist where the caveator has a reasonably arguable case in support of the interest claimed. The interest claimed by the caveator must be a proprietary interest in land. It may be an equitable interest. The Court has a residual discretion whether to make an order removing the caveat or not, but that discretion is exercised cautiously. See Sims v Lowe [1988] 1 NZLR 656 (CA) at 660, Pacific Homes Ltd (In Receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656.

5 The present proceeding arises out of the Official Assignee'administration of the bankruptcy of Keith Bainbridge. Mr Bainbridge filed a debtor'petition on 22 June 2005. Under s 444(2) of the Insolvency Act 2006, his bankruptcy is governed by the Insolvency Act 1967. Mr Bainbridge was discharged on 28 May 2010.

6 Mr Bainbridge had been a property developer. The only creditor of his bankruptcy is a Mr Humphrey O'Leary, who is owed $941,400.85 under an arbitration award. Mr O'Leary bought a property from Mr Bainbridge and made a successful leaky home claim.

7 A trust called the Kahurangi Trust was established by a deed dated 7 September 1999. The settlor is Simon Middleton Palmer, an Auckland solicitor. The trustees were Mr Bainbridge, Annie Catherine Menzies, his wife, and Mr Palmer. It is a discretionary family trust. It contains indemnity provisions:

• 14 Indemnity and limitation of trustees' liability

• 14.1 For the purposes of this clause a Trustee includes a former Trustee or any officer of any Trustee, former Trustee, additional or substituted Trustee.

• 14.2 Where the Trustees take or omit any action or incur any liabilities, they do so as Trustees and not in their personal capacities. No person has recourse to any property belonging to any Trustee which does not form part of the Trust Fund.

• 14.3 No Trustee is liable for any loss incurred by the Trust Fund or by any Beneficiary not attributable to that Trustee'own fraud, dishonesty or wilful commission or omission by that Trustee of any act known to be a breach of trust.

• 14.4 No Trustee shall be bound to take any legal proceedings against any co-trustee or former trustee for any breach or alleged breach of trust committed by such person.

• 14.5 A Trustee is hereby fully and completely indemnified from the Trust Fund for any personal liability which that Trustee may sustain in:

  • a. Exercising or omitting to exercise any function, duty or power of the Trustee; or

  • b. Purporting, in good faith, to exercise as Trustee any function, duty or power which is not authorised or which may be a breach of this Trust unless any such loss or liability is attributable to such Trustee'fraud, dishonesty or wilful commission or omission of any act known by that Trustee to be a breach of trust.

• 14.6 Simon Middleton Palmer has accepted office as trustee at the request of Keith James Bainbridge and Annie Catherine Menzies who hereby personally indemnify him for any loss or liability which he may sustain or incur in:

  • a. Exercising or omitting to exercise any function, duty or power of the Trustees under this deed; or

  • b. Purporting in good faith, to exercise as Trustee any function, duty or power which is not authorised under this deed or which may be a breach of trust; 1

  • Simon Middleton Palmer may call on Keith James Bainbridge and Annie Catherine Menzies to discharge their liability under this indemnity notwithstanding that the rights of indemnity in clause 14.5 have not been exhausted.

8 Mr Bainbridge made loans to the trustees of the Kahurangi Trust:

(a) 1 November	1999: $ 380,000
(b) 6 June 2000:	$ 1,382,989
(c) 2 May 2002	$ 366,621

9 The first loan is recorded in a deed of forgiveness of debt. Deeds of acknowledgement of debt for the last two loans were put in evidence. Those last two deeds contain the following:

The liability of the borrower under this deed shall at all times be limited to the assets for the time being of the Kahurangi Trust and shall not in any way be personal.

10 Mr Bainbridge resigned as trustee on 31 March 2005.

11 The defendants, the remaining trustees, own the property at 13A Summit Drive, Mt Albert.

12 There is other litigation on foot between the Official Assignee and the defendants under CIV-2009-404-3391. The Official Assignee is claiming the sum of

$ 1,394,072, plus associated relief. He says that this sum is due under the loans made, after setting aside various forgiveness of debt by Mr Bainbridge under ss 55 and 58 of the Insolvency Act and s 60 of the Property Law Act and making various other adjustments. The defendants strongly contest the Official Assignee'claim.

Caveatable Interest

13 At first sight, it may seem odd that the Official Assignee is claiming a caveatable interest in the trustees' property. The deeds of acknowledgement of debt do not give Mr Bainbridge any security. There is therefore no security which could pass to the Official Assignee on his becoming bankrupt.

14 However, the Official Assignee does not rely on Mr Bainbridge'rights as creditor of the Kahurangi Trust, but on his rights as one of the trustees. The Official Assignee says that, as a trustee of the Kahurangi Trust, Mr Bainbridge has certain rights over trust property — the trustee'equitable lien — and those rights have passed under s 42 of the Insolvency Act 1967.

15 The starting point is that, as the deeds of acknowledgement of debt recognise, Mr Bainbridge and his co-trustees were debtors of Mr Bainbridge as sole creditor. It is his rights as a debtor trustee that are in issue here.

16 Where trustees incur liabilities to external creditors, they have rights of indemnity (also called rights of exoneration and recoupment out of trust assets). The right of indemnity may be expressly provided under a trust deed, but it also arises in equity — Worrall v Harford (1802) 8 Ves. Jun. 4 at 8, 32 E.R. 250 at 252 per Lord Eldon:

It is in the nature of the office of a trustee, whether expressed in the instrument or not, that the trust property shall reimburse him of all the charges and expenses incurred in the execution of the trust. That is implied in every deed.

17 It is now provided under statute — s 38(2) of the Trustee Act 1952:

A trustee may reimburse himself or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers; but, except as provided in this Act or any other Act or as agreed by the persons beneficially interested under the trust, no trustee shall be allowed the costs of any professional services...