Australian Karting Association Ltd v Karting

Background

1. Karting Australia is a company limited by guarantee registered under the Corporations Act 2001 (Cth), s 112. Since September 2013, it has been the national body responsible for promoting the sport of "go-kart" racing in Australia, also known as "karting". Prior to that time, Australian Karting Association Incorporated (AKA Inc), a not-for-profit association, was the responsible national body. The operations of AKA Inc were transferred to Karting Australia in September 2013.
2. Although no finding was made below, the evidence suggests that AKA Inc was incorporated under either the Associations Incorporation Act 1981 (Qld) or the Associations Incorporation Act 1981 (Vic). There are inconsistent references to the Queensland and Victorian legislation in the auditor's report in respect of the financial accounts of AKA Inc for the years ended 31 December 2006 (Queensland) and 30 June 2009 (Victoria). Although asked by the Court to identify the applicable State legislation governing AKA Inc, senior counsel for Karting Australia did not make any submission on this question. Whichever was the applicable State legislation, as an incorporated association with a management committee, AKA Inc was not a company with a board of directors: see the Queensland Associations Incorporation Act 1981, ss 60 and 61, and the Victorian Associations Incorporation Act 1981, s 3 (definition of "committee") and s 23. The significance of this distinction is referred to below at [23].
3. Karting NSW is a not-for-profit association incorporated under the Associations Incorporations Act 2009 (NSW). It is responsible for promoting the sport and conducting karting races in New South Wales and the Australian Capital Territory. As indicated, on 21 January 2019, the ordinary members of Karting Australia passed a resolution to expel Karting NSW as an ordinary member of Karting Australia.
4. The Constitution of Karting Australia provided that its membership consisted of a number of classes of members, including ordinary members and associate members (cl 2.1). Ordinary members are the State and Territory associations who have executed a memorandum of understanding under cl 8.5 regulating the relationship between Karting Australia and ordinary members, including financial matters and the matters provided for in cl 8.4, such as the responsibilities of ordinary members in relation to the "remittance of monies collected on behalf of the AKA" (cl 8.4(e)). Ordinary members have a right to vote, be given notice of a general meeting, and be heard at a general meeting (cl 2.2). Associate members are all Karting clubs affiliated with the ordinary members; they have no right to vote or be heard at a general meeting but may be given notice of a general meeting (cl 2.3).
5. Karting NSW executed a memorandum of understanding with Karting Australia dated 23 October 2013 confirming that the responsibilities allocated to Karting NSW as an ordinary member included remittance of monies collected on behalf of the AKA (cl 3.1(a)). This was a reference to driver levies paid by every driver who entered a race approved by Karting Australia. The memorandum provided that Karting NSW "will promptly pay any fees due to AKA as and when they fall due" (cl 3.4(a)(i)).

The AKA track development fund

1. The AKA Track Development Fund is a discretionary trust established by a deed of settlement dated 21 October 2005. The original trustee, AKA Inc, was replaced by Karting Australia on 12 November 2013.
2. The background to the establishment of the Trust is recorded at [5]-[6] of her Honour's reasons: Karting Australia tendered the minutes of the annual conference of AKA Inc, which took place on 13 August 1994. The minutes recorded that, relevantly, the following motions were carried: first, that AKA Inc set up a National Trust Fund on a trial basis for two years from 1 January 1995; and, secondly, that the income received by AKA Inc from the National Trust Fund be recorded monthly on a State by State basis with the Secretariat reporting to the National Karting Council (NKC) of AKA Inc on an annual basis on the funds collected. It was common ground that Karting NSW and the other State karting associations formed the Track Development Fund, which was a collective fund financed by contributions from each member State of driver levies. The fund was used for the purposes of local track development through loans which were made by the fund to particular clubs. For many years, this arrangement remained informal. The practice was for State karting associations to remit driver levies into a designated bank account. On 24 November 2002, the NKC met and resolved to establish a discretionary trust known as the Track Development Fund, which would be subject to a Trust Deed. This did not occur until 2005.
3. The discretionary 'beneficiaries' named in the trust deed are the Specified Beneficiaries and Corpus Beneficiaries, and their lawful successors: cl 2(d). The Specified Beneficiaries and Corpus Beneficiaries are defined in the Schedule to the trust deed, in each case, as the members of AKA Inc at the date of settlement, and relevantly included Karting NSW.
4. From October 2005, the State and Territory associations who were members of AKA Inc, including Karting NSW, collected and remitted driver levies to AKA Inc and, from November 2013 they did so to Karting Australia as the trustee of the Trust. The funds of the Trust were invested in bank deposits and receivables; the latter comprising loans to State associations and local karting clubs, for the sole purpose of track development. The loans were usually for a term of between five and ten years, depending on the amount. The obligation to pay interest was suspended, subject to strict performance of the borrower's obligations. Thus, the loans were effectively interest free provided the borrower complied with the terms of the loan. The loan agreements provided for events of default, which included the circumstance that Karting NSW ceased to be an ordinary member of Karting Australia. In that event, the principal sum together with accumulated interest which had been suspended became immediately repayable, at the option of Karting Australia.

Relevant terms of the Trust

1. The trustee has broad powers conferred by cl 6 of the trust deed, including the power to apply and invest monies in any investments (cl 6(a)), to borrow, lend (with or without security or interest) or guarantee (cl 6(b)), and to "appropriate assets" (cl 6(n)).
2. The trustee's power to appropriate assets of the Trust either in "its actual condition or state of investment", is required to be exercised in the manner prescribed in cl 6(n): … by setting apart or crediting in the books or accounts of the Trust any sum in or towards the satisfaction of any share whether vested or contingent to which any person may be entitled in the Trust Fund. …
3. The trustee is required to keep such records as may be required or as is necessary or desirable (cl 6(u)). If the Trust is a company, cl 12 required that it shall act in relation to the trust fund by resolution of its board of directors. This requirement applied to Karting Australia, which was a company. Karting Australia correctly accepted in oral argument that an informal resolution by way of a meeting of minds of the directors of the trustee would be sufficient. Contrary to Karting Australia's submissions, the requirement to act by a resolution of directors of the trustee did not apply to AKA Inc, which was an incorporated association with a management committee, and not a company with a board of directors: see [13] above.
4. Clause 7 conferred power on the trustee to make payments out of capital: Trustees May Pay Out Capital The Trustees from time to time in their absolute discretion and in such manner as they think fit may pay to any one or more members of the Discretionary Class, or apply to settle on trust, for their benefit, the whole or any part of the Trust Fund.
5. The entitlement to income of the Trust is dealt with by cl 15, which enabled the trustee to make distributions, accumulate income and to make distributions out of accumulations of income: 15 Distribution (a) The Trustees shall hold the Trust Fund or such parts of the Trust Fund as have not been appropriated or distributed and which have not been vested absolutely; and i) Discretions shall pay or apply or appropriate the whole or such part of the income of the Trust Fund and in such manner and at such times as the Trustees shall in their absolute discretion think fit to or for the benefit of one or more of the members of the discretionary class and if the Trustees shall think it desirable unequally between the members of such class or for or towards the maintenance, support, education, or benefit, of such one or more to the exclusion of the other or others of such members as the Trustees shall in their absolute discretion determine. ii) Accumulation Any income not applied as aforesaid may be applied to charitable purposes or paid to any Association, Corporation, or other body established for charitable purposes or paid or applied for the benefit of any other trust established for the benefit of any one or more of the Beneficiaries … and any balance of income may be accumulated by the Trustees. Such accumulation of income shall continue until "the date of vesting" PROVIDED THAT if the period of accumulation shall end or be determined by Law before "the date of vesting" the Trustees shall thereafter apply the whole of the income in accordance with the provisions of this Clause regarding income not accumulated. iii) Power to Resort From time to time at their discretion the Trustees may resort to any accumulations and apply them as income at any time prior to the date of vesting provided that this power to resort or any other power contained in this Deed shall not be exercised in any way which would result in the Settlor or any other person who has conferred a benefit on the settlement receiving any amount paid out of such accumulations.

Other relevant events

1. The primary judge summarised the genesis and course of the disputes between Karting Australia and Karting NSW at [65]-[101]. For present purposes, it is sufficient to mention the following matters. Karting NSW first wrote to Karting Australia on 16 October 2014 raising concerns regarding the administration of the trust fund and whether Karting NSW was obliged to continue contributing to the Trust. Karting NSW also wrote to Karting Australia on 4 August 2016 and requested the return of funds held by the Trust on its behalf so that it could conduct its own NSW-based track development fund. This request was refused by Karting Australia on 17 August 2016. Karting NSW says that these matters provide relevant context for certain changes which were made to the notes to the financial statements of the Trust in the financial years ending 31 December 2015 and thereafter.

The financial statements of the Trust

1. From 2006 to June 2011, the financial statements of the Trust were audited by G J Walsh of G J Walsh and Co for the year ended 31 December 2006, and after a change of the financial year, for the period ended 30 June 2009 and the financial years ended 30 June 2010 and 30 June 2011. C A Hill of C A Hill & Associates was the auditor for the 6-month period ended 31 December 2011 and the financial years ended 31 December 2012 and 31 December 2013. I Barfoot of Corporate Audit and Assurance Services was the auditor, relevantly, for the financial years ended 31 December 2014 to 31 December 2018.
2. According to the notes to the Trust's financial statements, the Trust was not a reporting entity and the financial report was a special purpose financial report which had been prepared relevantly to satisfy the requirements of the trust deed to prepare a financial report (2006, and to similar effect in 2013), meet the needs of beneficiaries (2010), and meet the needs of the unitholder and beneficiaries (2014-2018).
3. The Trust's financial statements for the 2006 year included comparative financial statements for the prior period 21 October 2005 to 31 December 2005 which recorded that in 2005 the "Capital Contributed" of $645,881 had been credited to the beneficiaries' loan accounts with the Trust; those beneficiaries being the various State and Territory associations. It should be inferred that the capital contributed was the amount of the contributions by those associations to the informal track development fund between 1994 and 2005, together with interest received on those contributions net of expenses. The 2006 financial statements recorded that the driver levies remitted by State and Territory associations to the trustee and interest income in 2006 had been fully distributed by the trustee and credited to the beneficiaries' loan accounts with the Trust.
4. Similarly, the Trust's financial statements for 2009 to 2018 recorded the distribution of the net income, being driver levies and interest income less expenses, to the State and Territory associations, including Karting NSW, which unpaid distributions were credited to the beneficiaries' loan accounts with the Trust.
5. The balance sheet/statement of financial position of the Trust from 2005 to 2018 recorded the unpaid distributions to the beneficiaries as a liability of the Trust, and the net assets of the Trust remained constant at $1 each year. For 2005 to 2013, these Trust liabilities were classified as current liabilities and variously described in the financial statements as "Beneficiaries' Loan Accounts" (2006), "Beneficiaries' Funds" (2009, 2010), "Unpaid trust distributions" (June 2011), "Beneficiary Loan" (December 2011), "Unsecured Beneficiary Loans" (2013).

Trustee's/director's approval and auditor's opinion

1. The financial statements of the Trust were audited and approved by the trustee by written resolutions of the committee members of AKA Inc for 2006-2012 and the directors of Karting Australia for 2013-2018.
2. For each of the years or relevant period from 2006 to 2018, the trustee declared that the financial statements present fairly the Trust's financial position as at the relevant date, and the trustee was of the opinion that there are reasonable grounds to believe that the Trust would be able to pay its debts as and when they become due and payable.
3. Ms Pamela Arnett, the national secretary of AKA Inc from about 2003 until 31 August 2013, was one of the five committee members of AKA Inc who signed the trustees' declaration, at least, for the June 2011 and December 2012 accounts of the Trust. The copy of the accounts of the Trust which were in evidence for June 2009 and June 2010 are unsigned by any committee members, including Ms Arnett. In cross-examination, Ms Arnett agreed that she would have checked that everything in the declaration was true and correct prior to signing. Her evidence was that the declaration was made in accordance with the resolution of the trustees. As noted, the trustees' declaration in relation to the June 2011 financial statements was a "present fairly" opinion.
4. The respective auditors gave unqualified opinions that the financial report of the Trust either present fairly (2006, Dec 2011, 2012, 2013 and 2018), or give a true and fair view (2009, 2010 and June 2011) or give a fair view of the Trust's financial position as at the relevant date (for 2014, 2015, 2016 and 2017).
5. No submissions were made by the parties as to the meaning of these expressions, nor was it suggested that the different expressions of opinion by the trustee and the auditors were material to the outcome of the appeal. Nevertheless, it is instructive to keep in mind the generally understood meaning of such expressions which appear in the Corporations Act, s 297 and the Australian Accounting Standard (AASB) 101, par 15.
6. The concept of "true and fair" in s 297 of the Corporations Act was considered in Grant-Taylor v Babcock Brown Ltd (in liq) [2015] FCA 149; (2015) 322 ALR 723 at [136], where Perram J said (appeal dismissed on other grounds: Grant-Taylor v Babcock Brown Ltd (in liq) [2016] FCAFC 60; (2016) 245 FCR 402): … I do not think 'true and fair' is a composite expression. Rather it reflects the reality that financial accounts not only deal with ascertainable facts but also with matters of opinion and impression. A financial statement will not be 'true' when it contains facts which are incorrect or where material facts are omitted. It will not be 'fair' where the opinions it contains are not reasonable in the context in which they appear. What is material to the former inquiry or contextual in the latter will usually include issues of accountancy but they are not determinative. It will follow that the obligation created by s 297 is substantive.

The pleadings

1. By its defence to the cross-claim, Karting Australia: 1. denied that AKA Inc or Karting Australia resolved to make a distribution to Karting NSW; 2. contended that both AKA Inc and Karting Australia recorded Karting NSW's contributions to the Trust "for record keeping purposes in order that the amount of [Karting NSW's] entitlement, when the date of vesting arrives, would be known in accordance with the terms of the trust deed"; and 3. admitted that, for each financial year AKA Inc and Karting Australia was trustee of the Trust, the trustee "(b) did not pay that distribution to [Karting NSW]; and (c) instead, credited the distribution to [Karting NSW's] loan account as recorded in the Financial Report for the Trust for that financial year".

The reasons of the primary judge

1. No complaint is made as to her Honour's identification of the relevant question at [109]: Karting Australia, as trustee, had an undoubted power under cll 7 and 15(a)(i) of the Trust Deed to pay out capital and make distributions of trust property. The question arises whether it exercised this power to make distributions to Karting NSW and the other Ordinary Members of Karting Australia who were beneficiaries of the trust.
2. Karting Australia challenged (by ground 1 of the notice of appeal) her Honour's conclusion at [109] that the answer to this question is yes.
3. Having carefully analysed the financial statements of the Trust for the relevant years (2006-2018), her Honour found at [110]: For each of the relevant years (2006-2018), the trust reported that its net assets were $1, including in the first financial year of the trust, 2006, when the trust's financial accounts recorded "capital contributions" from its beneficiaries. For each of those years it recorded income from interest and driver levies. The way in which the trust chose to deal with the capital sums provided at the outset (in 2005), the driver levies it received from its beneficiaries, and the interest payments it received from term deposits and other cash at bank was to credit those amounts to loan accounts in the names of the Ordinary Member beneficiaries. The effect of crediting these amounts to the beneficiaries' loan accounts, was to distribute the amounts to the beneficiaries. That is, the funds were no longer held by the trustee on trust pursuant to the terms of the discretionary trust; they were held by the trustee on a bare or absolute trust in favour of the beneficiary in the amounts set out in the loan accounts and were repayable on demand by each beneficiary. This interpretation is consistent with the net assets of the trust being $1 at the end of each financial year. It is also consistent with the total liabilities of the trust, which included the amounts in the loan accounts (the balance of each was set out in the notes to the accounts).
4. To the extent that Australian Karting relied upon the analysis of the financial statements of the Trust by Ms Fiona Bateman, accountant, whose report was admitted, subject to some limited exceptions, as a submission only, her Honour rejected Ms Bateman's evidence and preferred the expert evidence of Mr Darren Shore, the expert accountant relied upon by Karting NSW: at [111]. There is no challenge to that finding.

The appeal against the judgment in favour of Karting NSW

1. Ground 1 contends that her Honour erred in finding (at [109]) that Karting Australia, as trustee of the AKA track development fund, exercised the powers under cll 7 and 15(a)(i) of the trust deed to make distributions to Karting NSW in the sum of $616,065.06, giving five reasons: i. The accounts of the Trust did not, when properly construed, evidence or demonstrate there had been a decision by the Trustee of the Trust, to make the distributions contrary to her Honour's finding. ii. Further and/or alternatively, if and to the extent that the accounts of the Trust properly read, suggested there had been a distribution by the Appellant of the sort found by her Honour, those accounts were inadequate as a basis for finding that the Appellant had exercised the power under clause 7 and 15(a)(i) of the Trust Deed. iii. The evidence established that, at all material times, the intention of the Appellant as Trustee of the Trust (and the Trustee that preceded the Appellant), was to establish and maintain a development fund from which to lend sums to the members of the Appellant company, and the intention in regard to creating and maintaining such fund was inconsistent with making distributions of the kind found by her Honour. iv. There was no evidence to support any finding that there had in fact been a determination by the Appellant as trustee of the trust (or by the preceding Trustee of the Trust) to make distributions, save and apart from the entries in the accounts referred to by her Honour. v. If and to the extent the entries in the accounts suggested or purported to record that distributions had been made, the said entries were incorrect and her Honour should have so found.
2. Grounds 2 and 3 are related. The substance of ground 2 is that her Honour should have found that it was the "clear common intention" of Karting Australia and Karting NSW (and the other State and Territory associations) that a track development fund for go-karting in Australia would be created and would operate in a particularised fashion which, relevantly, included that:

• the driver levies collected by State and Territory associations on behalf of Karting Australia and remitted to Karting Australia would be accumulated and retained as a fund from which the trustee would make grants by way of loans to State and Territory bodies for the improvement or development of go-kart tracks for the life of the Trust;

Karting Australia's submissions

1. Karting Australia's case at trial was that there was no distribution to Karting NSW. As senior counsel for Karting Australia, who did not appear below, said in this Court: Our primary case was that there wasn't a distribution. I don't want to descend into a mere verbal game. I think the way it was put before her Honour was that there was no distribution, but the accounts recorded what would be received by the beneficiaries on the vesting date in accordance with the deed, in particular the schedule. So, it wasn't a distribution, it was simply noting what the entitlements to the beneficiaries would be, come vesting day.
2. In contrast, Karting Australia's argument on appeal acknowledged that the accounts of the Trust "do record a liability and there is a liability", and these accounts are "some evidence" of a distribution. However, any such distribution to Karting NSW was only "conditional" in the sense that payment of the amount distributed was deferred to the date of vesting of the Trust. The submission continued that the accounts of the Trust do not "represent an advance that was unconditional, payable forthwith", rather, the accounts could be interpreted "as a record of a contingent liability on the day of vesting", or "at best an advance, the terms of which are not revealed by the accounts".

New point on appeal

1. Karting NSW objected to the conditional distribution argument as raised for the first time on appeal. In response, Karting Australia referred to an alternative submission made in its closing written submissions at trial which was said to be similar to the conditional distribution argument. The alternative submission which trial counsel said was founded in note 1(k) to the accounts of the Trust (which can be taken to be a reference to this note in the 2018 accounts: see [80] below), was in the following terms: (vi) In summary, [Karting Australia's] position is, if the Court finds that there has been a distribution, as follows: … 3. If any "distributions" have been made in the accounts for the period 31 December 2015 to 31 December 2018, those "distributions" are held on trust until the date of vesting."
2. Senior counsel for Karting Australia accepted that the conditional distribution argument goes further than the submissions at trial, and "expanded the juristic grounds on which one might reach the conclusion" that no monies were owing to Karting NSW because, rather than construing the accounts of the Trust consistently with there being no intention to make a distribution, "that intention could just as easily be described as an intention that we record the fund as having been dealt with in such fashion that there is a form of conditional distribution". Counsel also said that the case being put at all times was that the monies were not payable until vesting date, and that "the fundamental nature of the cases remain consistent".
3. Accepting that Karting Australia has consistently contended that the amounts recorded in the accounts of the Trust as liabilities to beneficiaries were not payable until vesting date, the new point on appeal relies upon a materially different path of reasoning to arrive at that conclusion. The argument that the trustee exercised its power of distribution but imposed a condition of deferred payment is not a mere extension of the defence case run at trial. It involves a proposition directly contrary to the "no distribution" case.
4. A party is bound by the case it ran at trial. The exceptions to this principle are limited because it is inimical to the interests of justice to allow a party to advance an entirely new and different argument on appeal after having failed on a different basis before the primary judge: Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 at 645-646; Water Board v Moustakas (1988) 180 CLR 491 at 497; [1988] HCA 12.

Conditional distribution argument

1. It is convenient first to address Karting Australia's characterisation of the trustee's liability to Karting NSW as some form of deferred liability.

Whether the accounts record a contingent liability or entitlement

1. In Community Development Pty Ltd v Engwirda Construction Co (1969) 120 CLR 455 at 459; [1969] HCA 47, Kitto J said that in respect of a contingent liability there must be an existing obligation out of which a liability to pay a sum of money will arise from a future event, whether that event be one which must happen or only an event which may happen. Thus, a contingent liability is a liability that may or may not arise, depending on the occurrence (or non-occurrence) of a certain event. This is to be contrasted with a "prospective liability" which is an obligation to pay a sum of money which is not immediately payable, but which will certainly become due in the future either on some date which has already been determined or on some date determinable by reference to future events: Edwards v Attorney-General (2004) 60 NSWLR 667; [2004] NSWCA 272 at [59] (Young CJ in Eq).
2. Given its nature, a contingent liability is usually disclosed by way of a note to the accounts of an entity; it is not recorded as an actual liability unless the entity has determined to include a "provision" in the accounts for the potential liability, in which event the amount of the liability is shown in the accounts as a provision.
3. In this case, the accounts of the Trust recorded amounts owing to the beneficiaries as actual liabilities, the amount of "financial liabilities" to beneficiaries were not described in the accounts or the notes as a "provision", and the accounts do not include any note disclosing a contingent liability to the State and Territory associations in respect of unpaid distributions. On the contrary, from 2014 to 2018, note 11 to the accounts of the Trust stated that there were no contingent liabilities that may become payable by the Trust requiring disclosure in the financial report.
4. The suggested characterisation of the trustee's liability to Karting NSW as a contingent liability, payable on the date of vesting, cannot be accepted.

Whether the terms of loan unknown

1. The alternative submission by Karting Australia that the terms of the loan owing to Karting NSW are unknown, wrongly assumed that the unpaid distributions credited to the beneficiaries' loan account reflected consensual loans back to the trustee by the beneficiaries. There is no evidence that the beneficiaries, including Karting NSW, intended or agreed to any loan back to the trustee. Rather, the trustee acknowledged a debt to the beneficiaries in the amount of the unpaid distributions.
2. As indicated, Karting Australia admitted on the pleadings that the trustee had credited the distribution to Karting NSW's loan account as recorded in the accounts of the Trust for each financial year. Even without this admission on the pleadings, the better analysis, as her Honour found (at [119]), is that the unpaid distributions recorded in the accounts of the Trust were made by the trustee crediting the beneficiaries' loan account. An unpaid distribution is payable at call.

Whether notes to the accounts of the Trust consistent with conditional distribution

1. Karting Australia submitted that the intention of the trustee was clearly to "accumulate" the sums contributed by the beneficiaries for the purpose of the track development fund, and that any reference to "distribution" or "beneficiary loan" in the Trust's accounts needs to be read as giving rise to rights subject to these conditions of accumulation.
2. According to the submission, the accounts of the Trust should be read as recording "that there is a form of liability in [the] sense, that come the date of vesting, the beneficiaries will be entitled to the accumulated fund in the sums that are set out under the Beneficiaries Accumulation".
3. As to the trustee's intention to make a conditional distribution, senior counsel for Karting Australia said that "to the extent that one treats these accounts as displaying some form of informal resolution, … that's the informal resolution that should be found to have been produced by these accounts". Nonetheless, counsel accepted that the wording of the accounts is less amenable to this argument until the 2014/2015 accounts.
4. These submissions direct attention to notes 1(k), 8(a) in those accounts and the note in regard to the Beneficiaries Accumulation Summary.

Notes 1(k) and 8(a)

1. Note 1(k) ("Beneficiary Loans") as part of Note 1 ("Summary of Significant Accounting Policies") and note 8(a) as part of note 8 ("Financial Liabilities"), first appeared in the 2014 accounts and read: Note 1 … (k) Beneficiary Loans The capital and income of the Fund is held on trust for the Beneficiaries in the proportions contributed by the beneficiaries, by way of payment of levy or other charges for the specific purpose of the object known as Track Development. … Note 8: FINANCIAL LIABILITIES 2014 2013 Non-current Unsecured beneficiary loans: AKA NSW $484,423.97 $443,531.07 … a. The beneficiary loans are a result of the income distributed to the beneficiaries but not yet paid.
2. Karting Australia submitted that note 1(k) can be read with note 8(a) in the 2014 accounts "which is the case we want to make". That submission should be rejected.
3. The content of note 1(k) in the 2014 accounts looks to the position on vesting of the Trust because it is only on vesting that the capital and income is held on trust "in the proportions contributed by the beneficiaries", being the language of the note. The note accurately describes the terms of cl 15(b) of the trust deed with respect to the vesting of capital and income of the Trust. The note does not address distributions made prior to the date of vesting, nor does it purport to qualify or place conditions on the liabilities to beneficiaries recorded in the 2014 accounts.
4. Turning to note 8(a) to the 2014 accounts, this note describes the "beneficiary loans" disclosed in note 8 as financial liabilities of the Trust as being the result of the "income distributed to the beneficiaries but not yet paid." That is consistent with the trustee's intention being to distribute the income of the Trust by crediting the unpaid distributions to the beneficiaries' loan account and acknowledging the debt to beneficiaries in the accounts. The note is inconsistent with the conditional distribution argument.
5. Note 1(k) was amended in the 2015 accounts to refer to "Beneficiary Accumulation", and in the 2015 to 2018 accounts this note read: 1(k) Beneficiary Accumulation The capital and income of the Fund is held on trust for the Beneficiaries until the Date of Vesting as detailed in the Trust Deed of the Trust. (Emphasis added.)
6. In 2015 to 2017, note 8(a) was in the same terms as in 2014 set out at [76] above. In 2018, note 8(a) as amended referred to "accumulations" and read: 8a. The beneficiary accumulations are the result of the income distributed to the beneficiaries that is available for application by the Trustee and held on trust for the beneficiaries until the Date of Vesting as required by the Trust Deed of the Trust. (Emphasis added)

Beneficiaries Accumulation Summary

1. Karting Australia also submitted that the note in regard to the Beneficiaries Accumulation Summary (from 2015) is inconsistent with respect to driver levies having been distributed and payable at call. The reference in this note to "accumulation" in the 2015 to 2018 accounts contrasts with the 2014 accounts, which referred to "share" of profit and "share" of net income.
2. In the 2014 accounts for the Trust Fund, and before the notes to the financial statements, the "Beneficiaries Profit Distribution Summary" contained the following description of the beneficiaries' profit "share" and net income "share": BENEFICIARIES' SHARE OF PROFIT The Beneficiaries share the profit in the proportions contributed by the Beneficiaries by way of payment of levy or other charge for the specific purpose of the object known as track development. The Beneficiaries share in the net income generated from sources other than those imposed on the Beneficiaries, primarily interest received less expenses, in proportions based on the prior year closing balances. (Emphasis added)
3. In the 2015 to 2018 accounts for the Trust Fund, this summary was restyled as the "Beneficiaries Accumulation Summary" and the references to the "share" of the profit or net income were replaced with references to "accumulation" of income and net income: BENEFICIARIES ACCUMULATION The beneficiaries accumulate the income generated from driver levies charged for the specific purpose of the object known as track development, in the proportion to the amount contributed by each beneficiary. The beneficiaries accumulate the net income generated from sources other than those imposed on the beneficiaries, primarily interest received less expenses, in proportions based on the prior year closing balances. (Emphasis added)
4. Notwithstanding this change in wording, given that this summary addresses the same subject matter as note 8 and 8(a), being "income distributed" to beneficiaries, the references to "accumulation" in the summary should be read consistently with the first part of note 8 which disclosed the creditors of the Trust in respect of the financial liabilities recorded in the statement of financial position, and with note 8(a) which disclosed that "[t]he beneficiary loans are a result of the income distributed to the beneficiaries but not yet paid" (2015-2017 accounts), and that "[t]he beneficiary accumulations are the result of the income distributed to the beneficiaries" (2018 accounts).

Whether accounts simply mistaken?

1. Karting Australia's alternative submission that if the language of the accounts has to be read as giving rise to a distribution payable at call the accounts were simply "mistaken", was not mentioned in oral argument.
2. This characterisation of the accounts of the Trust cannot be accepted. First, as Karting Australia acknowledged at trial, no evidence was adduced that the accounts of the Trust were somehow inaccurate. Second, Karting Australia failed to identify any specific errors(s) in the entries recorded in the accounts of the Trust. Third, although on notice of the foreshadowed claim by Karting NSW since at least 2016, Karting Australia did not ever resolve to amend the accounts of the Trust before the commencement of the proceedings.

Whether conditional distribution consistent with the trustee's powers

1. Given the conclusion above, it is not necessary to decide whether the trust deed permitted a conditional distribution "in the fashion" for which Karting Australia contended. Nevertheless, I will indicate my reasons why this construction of the terms of the trust deed is unsound.

Clause 7

1. Karting Australia submitted that the reference in cl 7 of the trust deed to the trustee's power to make payments to beneficiaries out of capital "in such manner as [the trustees] think fit", also confers on the trustee the power to impose a condition that a distribution of capital will take effect on the date of vesting. That submission misreads the effect of cl 7.
2. The reference in cl 7 to the power to pay out of capital "in such manner as [the trustees] think fit", is a reference to the permitted manner of distribution as provided for in cl 7, being either payment, application, or settlement on trust. Clause 7 distinguishes between the trustee's power to pay the whole or any part of the trust fund "to" any beneficiary, and the power to apply or settle on trust the whole or any part of the trust fund "for their benefit".
3. On a textual reading, and contrary to the concession in argument by senior counsel for Karting Australia, the words "for their benefit" do not qualify the earlier reference to the power to pay "to" any beneficiary the whole or any part of the trust fund. However, nothing turns on this construction question since it is implicit that a payment "to" a beneficiary is for their benefit.
4. The exercise of the trustee's power to "pay" to a beneficiary the whole or any part of the trust fund means what it says, the power is to make payment "to" a beneficiary. By contrast, a purported distribution of capital to a beneficiary with a deferred payment such as the date of vesting of the trust, is not a payment "to" a beneficiary.
5. The difficulty with any suggestion that the trustee exercised the power conferred by cl 7 either to "apply" or "settle on trust" part of the trust fund for Karting NSW on the date of vesting of the Trust, is that there is no evidence justifying an inference that this was the trustee's intention. Nor was there evidence, let alone any submission by Karting Australia as to the manner of application or settlement on trust of part of the trust fund for Karting NSW to take effect on a deferred date, or how any such distribution was said to be "for [its] benefit".

Clause 15(a)(i)

1. Clause 15(a)(i) conferred power on the trustee to "pay or apply or appropriate" the whole or part of income in such manner and at such times as the trustees think fit "to" or "for the benefit" of one or more beneficiary. Again, there is a distinction between the power to pay income "to" a beneficiary and the power to apply or appropriate income "for the benefit" "of" a beneficiary. Like cl 7, the words "for the benefit" in cl 15(a)(i) do not apply to a payment of income "to" a beneficiary, however, it is implicit that a payment "to" a beneficiary will be for its benefit.
2. As indicated at [100] above, a purported distribution of income to a beneficiary to take effect on the date of vesting of the Trust does not answer the description of a payment "to" a beneficiary within cl 15(a)(i) of the trust deed.
3. It was not suggested that the trustee had exercised its power to appropriate any part of the trust fund either in "its actual condition or state of investment", such as any of the Trust's receivables, term deposits or cash at bank, in the manner prescribed in cl 6(n) of the trust deed by setting apart or crediting in the books or accounts of the Trust any sum in or towards satisfaction of any share of such assets vested or contingent. Nor was it suggested that the trustee had applied income of the Trust "for the benefit" of Karting NSW.

Clause 15(a)(ii)

1. To the extent that Karting Australia submitted that the trustee intended to "accumulate" the sums contributed by the beneficiaries for the purpose of the track development fund, the submission is unsound.
2. First, the accumulation of income under cl 15(a)(ii) only applies to "any balance of income" not otherwise distributed under cl 15(a)(i) and the accumulations become part of the trust fund, subject to the power conferred by cl 15(a)(iii) to resort to the accumulations and apply them as income at any time prior to the date of vesting of the Trust. The power of accumulation does not permit the trustee to impose "conditions" on such accumulations.
3. Second, for the reasons given above, the references to "accumulation" in the accounts of the Trust from 2015 provide no support for Karting Australia's submission that any reference to "distribution" or "beneficiary loan" in the Trust's accounts is to be read as giving rise to rights subject to the so-called "conditions of accumulation", such as deferred payment on the date of vesting.
4. Third, the asserted intention of the trustee to accumulate income arising from driver levies is inconsistent with the audited accounts of the Trust, as approved by the trustee, specifically:

• the profit and loss/income statements of the Trust record that the net income of the Trust for each year or relevant period was fully distributed to the beneficiaries;
• the balance sheets/statements of financial position of the Trust record a corresponding liability to the beneficiaries equal to the unpaid distributions to beneficiaries; and
• the net assets of the Trust remained constant at $1.00 each year, rather than there being an increase in net assets each year equivalent to the amount of net income which Karting Australia says the trustee intended to accumulate for the beneficiaries.

1. For the above reasons, the conditional distribution argument cannot be accepted.

No distribution argument

1. The no distribution argument was barely mentioned by Karting Australia in oral argument.
2. The starting point is to observe that Karting Australia accepted in its written submissions that the accounts of the Trust may be relevant as prima facie evidence that the trustee had in fact resolved to make the relevant distributions, and that the accounts and their adoption by Karting Australia may have constituted part of a process by which Karting Australia informally exercised the power conferred upon it under the trust deed to make distributions.
3. Karting Australia said that the approval and adoption of the accounts of the Trust by the board of Karting Australia does not constitute part of an informal exercise of power if it be shown that there was no intention on the part of the trustee to exercise that power which would usually have called for a resolution of directors, as to which there was no separate minute of resolution of the trustee to make the distributions.
4. Karting Australia submitted that the accounts of the Trust are an inadequate basis to infer that the trustee had resolved to make distributions to the beneficiaries as recorded in the accounts. According to the submission, it was unlikely that the trustee would have made distributions to beneficiaries payable at call, as this would have given rise to a mismatch between assets and liabilities. The submission continued that the notes to the accounts show the way in which "[the Trust] was supposed to truly operate".
5. It is convenient first to address the accounts of the Trust from 2005 to 2012, when AKA Inc was trustee.

Trust's financial statements: December 2005 to December 2012

1. Karting Australia sought to resist the inference that AKA Inc had made distributions to Karting NSW in the amounts shown in the accounts as current liabilities of the Trust for 2005 to 2012, by pointing to the absence of evidence of a resolution by the "directors" of the trustee to make a distribution. The premise of this submission is unsound. As indicated, the requirement in cl 12(c) of the trust deed that the trustee shall act by a resolution of the board of directors where the trustee is a company, did not apply to AKA Inc. It was an incorporated association with a committee of management, not a company with a board of directors.
2. Thus, AKA Inc was not required by the trust deed to pass any resolution to exercise its power of distribution of capital or income conferred by cl 7 and cl 15(a)(i) of the trust deed. In these circumstances, the conduct of AKA Inc as trustee in crediting the relevant distributions to Karting NSW's loan account with the Trust in the period 2005 to 2012 (which is admitted on the pleadings) and acknowledging the debt owing to Karting NSW in its audited accounts, justifies the inference that the trustee's intention was to make the unpaid distributions to beneficiaries, including Karting NSW, as recorded in the accounts of the Trust from 2006 to 2012.
3. Even if under its Constitution a resolution of the committee of AKA Inc was required to exercise the power to make distributions, the conduct of AKA Inc as trustee in approving the audited accounts of the Trust for 2006, 2009, 2010, 2011 and 2012 justifies the inference that it resolved informally to make the relevant distributions to beneficiaries, including Karting NSW. Support for the drawing of this inference is also provided by the following matters.
4. First, that AKA Inc credited the relevant distributions to Karting NSW's loan account with the Trust for the period 2005 to 2012 is consistent with AKA Inc's intention to exercise the power of distribution. As noted, this conduct of AKA Inc was admitted by Karting Australia on the pleadings.
5. Second, the declaration by AKA Inc that the financial statements of the Trust "present fairly" the financial position of the Trust as at the specified dates, conveyed its belief that those financial statements provided the faithful representation of the effects of transactions, specifically, the distributions of income to beneficiaries, as recorded in the profit and loss/income statement, and the recognition of liabilities of the trustee to the beneficiaries for unpaid distributions, as recorded in the balance sheet/statement of financial position.

No common intention to accumulate income

1. Contrary to Karting Australia's submissions, her Honour did not fail to have regard to the origins and purpose of the track development fund, or the other background matters to which reference was made in submissions below, which were relied upon as being inconsistent with an intention of AKA Inc as trustee to make distributions. Her Honour addressed those matters when rejecting Karting Australia's submissions, based on Ms Bateman's analysis, that the only way the Trust would "work" would be if the initial capital sums contributed in 2005 and the driver levies collected every year were added to the trust fund, which would remain in the hands of the trustee until the vesting date.
2. There was no error in her Honour's finding that Ms Bateman's evidence was flawed and inconsistent with the terms of the trust deed and the Trust's financial statements. As explained above, the fact that the unpaid distributions were credited to the beneficiaries' loan account meant that the distributions never left the hands of the trustee and therefore remained available as an asset for the purposes of the Trust, including for further loans to members or held as cash or in investments such as term deposits. That was consistent with the terms of the trust deed.
3. There was no inconsistency between the trustee's intention to make distributions to beneficiaries which were unpaid and acknowledged as a debt, and the trustee making loans for track development for terms generally between 5-10 years whilst there was a consensus between the trustee and beneficiaries as to the operations of the fund the subject of the Trust. The subsequent divergence of interests between Karting Australia and Karting NSW is no reason to impute a different intention to AKA Inc with respect to distributions to beneficiaries prior to that time as recorded in the financial statements of the Trust approved by AKA Inc.

Section 1305, Corporations Act did not apply to AKA Inc

1. One further matter should be mentioned. Although it was common ground that s 1305 of the Corporations Act applied to AKA Inc and therefore the financial statements of the Trust were prima facie evidence of the matters stated or recorded therein, that assumption overlooked that AKA Inc was not a "company registered under this Act", being the Corporations Act (see the definition of "company" in Corporations Act, s 9). Thus, AKA Inc was not subject to the obligation imposed on a "company" by Corporations Act, s 286 to keep financial records, and its "books", including financial statements, were not kept under a requirement of the Corporations Act. Accordingly, Corporations Act, s 1305 did not apply to AKA Inc.
2. Nonetheless, that s 1305 of the Corporations Act did not apply to the financial statements of the Trust whilst AKA Inc was trustee does not diminish the inferences to be drawn as to AKA Inc's intentions as referred to at [116]-[117] above.

Trust's financial statements: 2013 to 2018

1. The parties diverged as to the significance of s 1305 of the Corporations Act in drawing an inference as to Karting Australia's intention to make distributions in the period 2013 to 2018. Karting Australia submitted that s 1305 of the Corporations Act is "insufficient to establish the underlying transaction".

Section 1305, Corporations Act

1. The general provision in s 1305 of the Corporations Act concerns the admissibility of books in evidence, and s 1305(1) provides that a book kept by a body corporate under a requirement of the Act is admissible in any proceeding and is prima facie evidence of any of the matters stated or recorded in the book. Section 1305(2) provides that a document purporting to be kept by a body corporate is, unless the contrary is proven, taken to be a book kept as mentioned in s 1305(1).
2. Section 1305 has the effect that the statement of a matter in a book kept by a company is sufficient to prove that matter in civil proceedings, unless other evidence convinces the court to the contrary on the balance of probabilities: ASIC v Rich at [396]-[397]. As Austin J said at [397]: Section 1305(1) does not make the company's books conclusive evidence of the matters they contain, in the sense of requiring the tribunal of fact to make a finding in terms of the content of the books in the absence of proof to the contrary by the opposing party. The books are prima facie evidence of the matters stated in them, but the weight of that evidence is to be measured in accordance with the common sense of the tribunal of fact (Phipson on Evidence, 16th edn (2005), at [7-17]).
3. In Hoh v Ying Mui Pty Ltd [2019] VSCA 203 at [193]-[193], the Victorian Court of Appeal (Beach and Hargrave JJA and Sifris AJA) referred to a possible tension between statements by that Court in Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [37], referring to the decision of the Full Federal Court in Whitton v Regis Towers Pty Ltd [2007] FCAFC 125; (2007) 161 FCR 20 at [59], and the statements in ASIC v Rich.
4. In Livingspring, the Victorian Court of Appeal said at [37]: As the Full Federal Court said in Whitton v Regis Towers Real Estate Pty Ltd, s 1305 does not elevate an entry in a book of account to the status of prima facie evidence of the transaction(s) which the entry purports to record.
5. Whitton involved a proof of debt submitted by an administrator of a company, which had been rejected by a trustee of a bankrupt estate. The proof of debt was based on the books of the company which the primary judge found to be insufficiently reliable, specifically, certain debit entries in a director's loan account with the company were described in the relevant journal entries as "balancing entries". After observing that these entries were the outcome of an undisclosed process of judgment or inference by the staff in the accounting firm which compiled the accounts retrospectively (at [55]), the Full Federal Court said of a journal entry recording a balancing debit entry of $1,198,969.72 in the director's loan account with the company (at [59]): The particular entry (and many others) is not a direct record of an actual transaction. Section 1305 of the Corporations Act does not elevate the entry to prima facie evidence that any such transaction (or series of transactions) exists. It can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that, in the absence of any directly recordable transaction nevertheless, as a balancing entry, such a figure should appear in the accounts. Mr Harris took the matter no further and, indeed, eroded any weight the entry may have had.

The inference to be drawn from the accounts for 2013-2018

1. In this case, the accounts of the Trust were audited, there is an admission on the pleadings that the trustee credited the distributions to the loan account of Karting NSW, and the notes to accounts for 2015-2018 upon which Karting Australia relies do not support either its conditional distribution or no distribution argument.
2. Notwithstanding the absence of a minute of resolution of the directors of Karting Australia as required by cl 12(c) of the trust deed, the resolution of directors of Karting Australia approving the audited accounts of the Trust in each of the years 2013 to 2018 justifies an inference that Karting Australia informally resolved to make distributions of income to beneficiaries, including Karting NSW, as recorded in the accounts of the Trust for 2013 to 2018. Again, the matters referred to at [118]-[120] above support the drawing of this inference in the period when Karting Australia was the trustee.
3. There is a further matter which supports the drawing of this inference. Note 12 to the 2014 accounts of the Trust disclosed accounting errors in prior periods which the trustee corrected in the 2014 year, as shown in the 2013 comparative accounts that were included in the 2014 accounts. One error concerned revenue from driver levies. In 2013, revenue from driver levies was recognised directly into the beneficiary loans (by an increase in the amount of those loans) without being recognised first in the statement of income in 2013 as revenue and then distributed by crediting the amount of the distribution to the beneficiary loans. The other error in 2013 was to record an amount as a payable when it should have been recognised as revenue, being driver levies received. The combined effect of these errors in the 2013 financial statement, when corrected in 2014, was stated in note 12 as: … an increase in the amount disclosed as a distribution to beneficiaries on the Statement of Income of $106,915.20, an increase in the amount of Trade and Other Receivables on the Statement of Financial Position of $72,650.20 and an increase in the amount of Beneficiary Loans on the Statement of Financial Position of $72,650.20.
4. The significance of Karting Australia correcting these prior period accounting errors in 2014 is that it can be inferred that the directors of Karting Australia specifically turned their minds to the issue which was subsequently in dispute at trial. The directors confirmed in 2014 that the adjusted net income of the Trust for 2013 had been distributed to beneficiaries and the unpaid distribution had been credited to the beneficiaries' loan account with the Trust. That is inconsistent with the no distribution argument.

No common intention to accumulate income

1. Karting Australia submits that her Honour's finding of an informal exercise of the power of distribution by the trustee is inconsistent with the common intention of the trustee and Karting NSW (and the other State and Territory associations) with respect to the establishment and operation of the track development fund. That argument has been rejected above at [122]-[124], when addressing the accounts of the Trust during the period AKA Inc was trustee. There is no reason to take a different view of the later period when Karting Australia was trustee. Two matters are sufficient to make the point.
2. First, the asserted common intention to "accumulate" the driver levies cannot be accepted, principally because it is contradicted by Karting Australia's conduct mentioned above; the unpaid distributions of income were credited to the beneficiaries loan account with the Trust and Karting Australia approved the accounts containing the acknowledgment of debt to the beneficiaries.
3. Second, the asserted common intention that there be "no distribution" of remitted monies cannot be accepted, principally because it is inconsistent with the terms of the trust deed which permitted distributions of capital and income, and also because it is inconsistent with the effects of transactions recorded by Karting Australia in the accounts of the Trust with respect to the recognition of unpaid distributions to beneficiaries as a liability of Karting Australia.
4. In my view, there was no error by her Honour in rejecting the no distribution argument.

The appeal against the dismissal of Karting Australia's money claim

1. Ground 4 challenged the finding that it was unconscionable for Karting Australia to seek repayment of the principal sum of the third loan. Given the concession by Karting Australia noted at [10] above in the event that the appeal against the judgment on the cross-claim failed, it is not necessary to address this ground.

Conclusion and Orders

1. The appeal has failed and there is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.
2. I propose the following orders: 1. Appeal dismissed. 2. Appellant to pay the respondent's costs of the appeal.
3. SIMPSON AJA: I agree with Gleeson JA.

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