Britroc Investments Pty Limited ACN 089 125 315 as trustee for the Nicholson Family Superannuation Fund v PT Limited ACN 004 454 666

Background

1. Mr Troy and Mrs Marie Nicholson were until February 2012 the trustees of a family superannuation fund, the Nicholson Family Superannuation Fund ("the Fund"). Troy and Marie Nicholson are the only members of the Fund, which was established on 18 June 2002.
2. In February 2012 Britroc, the plaintiff, replaced the Nicholsons as trustee of the Fund so it would become compliant with the Superannuation Industry (Supervision) Act 1993 (Cth) ("SIS Act"). Since February 2012 Troy and Marie Nicholson have been Britroc's only officers.
3. The current application for relief is the result of what appears to have been the 2008 the fraud of unknown persons, who took advantage of the Nicholsons' purchase, through the Fund of a property in Camden Valley Way, Narellan ("the subject property"), a property associated Mr Nicholson's real estate business.
4. The fraud was occasioned because under the SIS Act a self-managed superannuation fund ("SMSF") such as the Fund, is unable to borrow money for property investment directly. But such SMSFs are in certain circumstances permitted to take on liabilities for limited non-recourse loans to assist the SMSF in the acquisition of property. The legal estate of the subject property is held by a custodian, not the SMSF itself, so that if default occurs the mortgagee's recourse is limited to the realisation of the property, the subject of the borrowings. The SMSF's other assets are protected.
5. This SIS Act policy means that to borrow money to acquire real estate, such as the Fund did, it is necessary to use the custodian structure. That structure allowed fraudsters to take advantage of the Nicholsons and PT Limited ("PT"), a subsidiary of Perpetual Trustee Limited, who they nominated as custodian in the structure they set up for the Fund.
6. In early 2008 the Nicholsons decided in their capacity as trustees of the Fund decided to purchase the freehold of the subject property, which was occupied under lease by Mr Nicholson's real estate business. The purchase price for the acquisition was partly paid from monies available within the Fund itself and partly through borrowings the Fund sought to arrange. The Nicholsons exchanged contracts on behalf of the Fund on 17 August 2008 to purchase the subject property for $780,000. The strange events, that will now be recorded occurred over the next few months.
7. In order to take advantage of the legislation's prescribed custodian structure the Nicholsons approached an enterprise that called itself "the Astute Group" ("Astute"), and which advertised itself on the internet providing "property warrants", as follows: "The Astute Property Warrant The Astute Group has worked closely with government and compliance authorities to develop the Astute Property Instalment Warrant. Astute has arranged that its Property warrant is held for the SMSF by Perpetual Trustees Limited for the duration of the warrant. Exclusive limited recourse finance has been arranged."
8. Astute had published an information memorandum dated March 2008, which gave further information about the service it provided. That service included what Astute described, as a "warrant" arrangement, in which Astute would provide the services of an entity to act as a custodian to hold the Fund's real estate, so its borrowings would comply with the SIS Act.
9. Astute's information memorandum foreshadowed that it would set up this "warrant" structure in a formal way, as follows: "6. Astute arranges the conveyance and settlement on the Property. Your Astute Property Instalment Warrant is issued to you at the time of settlement."
10. One of the odd features of what happened in this case is that no separate "instalment warrant" was ever created.
11. Astute's information memorandum went into some detail, as follows, explaining its relationship with Perpetual Trustee Limited, the provider of custodian services, through PT: "The Trustee The Trustee for each Property is Perpetual Trustee Limited. Perpetual provides independent third party custodial services for unlisted, listed, wholesale and retail property funds, property syndicates, mortgage and income funds that comply with the requirements of ASIC Policy Statements and the Corporations Act 2001 and presently has over $60 billion of funds under administration. Astute has appointed Perpetual to hold the legal title to each Property on an individual trust for each investor, in accordance with the terms of the Trust Deed. This arrangement has been put in place to ensure that there is proper segregation of each Property from the assets of Astute and from any other Properties held under Astute Property Instalment Warrants."
12. But the defendant, PT, says and I accept: that it never agreed to be the trustee of any such arrangement with Astute, that it had no dealings with Astute; and that it had no involvement in this transaction. PT has submitted to the granting of relief in the proceedings, although it has not consented to the relief sought.
13. The Nicholsons were attracted by the service that Astute appeared to provide. Astute had been recommended to them by persons they knew. Astute's information memorandum looks regular. And it is of sufficiently professional quality that reasonable people would act upon it. The Nicholsons authorised an exchange of contracts for the purchase of the property using Astute's services to comply with the SIS Act.
14. The contract of sale dated 17 April 2008: shows a purchase price of $780,000, a deposit of $78,000 and a balance due of $702,000. The vendors were Ian Matthew Tyson and Joanna Rhonda Tyson. The purchasers were originally described in typescript on the contract as respectively "Troy Nicholson and Maree Nicholson as trustees for the Nicholson Superannuation Fund". The original conveyancers were described as "Coutts Conveyancing". But someone has changed by hand the entry for both the purchaser and the purchaser's solicitor.
15. The change shows the name of the purchaser as "PT Limited". After that changed name, and in similar handwriting, is another strange entry: a circle with the numeral "1" inside it and the words "SC" after it, followed by "as trustees for the "Nicholson Superannuation Fund" (sic).
16. The Nicholsons say that Astute required them to use "Oz Property Law" in Canberra as their conveyancers for the Fund on this transaction rather than their conveyancer of choice, Coutts Conveyancing. The handwritten changes to the typescript of the contract for sale delete the name of Coutts Conveyancing and substitute the words "Oz Property Law, GPO Box 503 Canberra ACT 2601" as the purchaser's solicitor.
17. Astute apparently induced the Nicholsons to use Oz Property Law by telling them that using this service provider was necessary for them to comply with the SIS Act. Of course this is wrong. But Astute told them this and for a period of time, they accepted it.
18. The fraudsters first created a fraudulent Security Trust Deed dated 14 August 2008 that purported to govern PT's relationship as custodian with the Fund. But I accept that the signatures for PT on it were forgeries, similar to the ones detailed below on the mortgage.
19. The Fund submitted a transfer to the Tysons for execution. That transfer, probably prepared by someone associated with Oz Property Law, shows a degree of indecision. The purchaser is shown initially as "Perpetual Trustees" with no corporate name. That entry is then crossed out and in handwriting the words, "PT Limited ACN 004454666" appear. The transfer dated 22 August 2008 is signed in the name of a person describing himself as the transferee's solicitor or conveyancer, "Eugene Chan".
20. A mortgage was necessary to set up the security arrangements between the custodian and the lender. The form of mortgage (AE 186815) created is dated 22 August 2008 and shows "PT Limited" as the mortgagor. The mortgagee is Permanent Trustee Australia Limited. The signatories for the mortgagor, PT, appear to be "Ivan Holyman" as a director and "Joanne Hawkins", as company secretary. There were persons with these names at PT at that time. But I accept the evidence from PT that these signatures are forgeries.
21. This mortgage, in apparent conformity with the SIS Act and regulations, provides on default for limited recourse, to the proceeds of the sale of the secured property. Settlement occurred about 22 August 2009.
22. Mariner Mortgage Management Limited ("Mariner") provided the funds. The fraudulent third parties, arranged to send a letter dated 20 August 2008 to Mariner, to give it information as lender about settlement and to authorise Mariner to obtain information as required from the current insurer of PT as to the currency of the insurances held over the subject property.
23. It can be assumed that this letter was sent to Mariner. It was necessary for the transaction to proceed. But this fraud was high risk: the merest inquiry by Mariner of PT or the insurer would probably have revealed the fraudster's activities.
24. Settlement took place on 28 September 2008. I am satisfied that Mariner advanced approximately $435,000 of the $780,000. The balance of $345,000 was provided by the fund itself.
25. Two other minor fees were paid at the time of settlement: an amount of $1,100 for the "First annual fee and consent to act", invoiced by the fraudsters, and secondly a payment to Robert Wehbe & Partners, a law firm which purported to act for the defendant and was paid $484 allegedly for its legal services.
26. The events that followed are probably the only discernible explanation for the fraud practised upon the Nicholsons. But the astuteness of the professionals acting for the Nicholsons at the time meant that this fraud could not be brought to fruition.
27. Shortly after the settlement Astute sent some correspondence to the Nicholsons. The exact date of the correspondence is unclear, because the first letter is undated. But it must have been in about the first week of September 2008, because the invoice attached to it is so dated. Astute's letter of early September provides, as follows: "Congratulations on the settlement of your selected property. Now that this major step has been completed there are a few remaining steps before your investment can be registered as a complying warrant, they are as follows: Payment to BCS Auditors. Their invoice for $550.00 is attached. Payment to P.T. Limited for the establishment of the bare trust and the first years annual management fee. Their invoice for $1,100 is attached. Payment to Robert Wehbe & Partners Pty Ltd for acting on behalf of P.T. Limited in relation to the purchase and the Astute Property Warrant. Their invoice for $484.00 is attached. Payment to your advisor, Total Financial Solutions, which we understand to have been agreed between yourselves as $11,700 (1% up front & 0.5% ongoing, 1st year's ongoing to be paid annually in advance). Payment to Astute Property Warrants Pty Ltd. Our invoice is attached."
28. Attached to that letter was an invoice dated only "September 5, 2008", and curiously nominated as "Invoice #1", as if Astute did not have any other business at the time. The invoice provided for the Nicholsons to pay a total amount of $7,800, of which $709.09 was purportedly a GST component, in exchange for Astute providing a "Property Instalment Warrant" to the Fund in relation to the subject property.
29. The Nicholsons had no idea this invoice was coming. Though not a very clever fraud, it may be one to which less astute persons may well have succumbed and paid the fee demanded. The Nicholsons protested. In response to that Astute wrote back the following: "Dear Troy, Following on from our letter of last week we thought it worthwhile to further discuss this matter and open up the communication channels. As we have received no response regarding the outstanding invoices we can only presume that cash flow remains a issue for you. Obviously we need to come to an agreement on meeting these payments, but firstly we need your indication on how this can be organised. Could you please call me at your earliest convenience to discuss these issues or organise a formal meeting. Our concern is that if these matters are not attended to the warrant will not be compliant and P.T. Limited will have no option but to instruct the sale of the property. Could you please acknowledge this letter and communicate with Astute Property Warrants by the 26th of September 2008. Yours sincerely, Terry Hallinan Astute Property Warrants Pty Ltd"
30. Astute was pressing for its money. It was apparently prepared to mislead the Nicholsons about their legal obligations in order to secure payment of its invoice. No doubt threats that the Fund might not be compliant and threats to sell the property would instil fear in many SMSF owners, and would be enough in many circumstances to secure payment of Astute's invoice.
31. But the Nicholsons took a different course. This correspondence seems to have made them less than satisfied about the quality of the assistance they were getting from Oz Conveyancing Services.
32. The Nicholsons returned to Coutts Conveyancing Services. And Coutts wrote to Astute on 25 September 2008, referring to Astute's apparent threat that if the invoice was not paid there would not be SIS Act compliance and that the property would have to be sold. In this letter Coutts pointed out: that there was no basis for Astute to issue the invoice; that Mariner apparently had full direct commission arrangements with Astute; and, that no further invoice was necessary. Coutts indicated that the Nicholsons were not aware of ever signing any contract entitling Astute to issue an invoice of this kind.
33. Coutts wrote a further letter on 3 October 2008, which included the following: "4. As you may or may not be aware, such request of payment by Total Financial Solutions was never advised up front on commencement of the purchase of the above named property. In the duration of the matter the payment to Total Financial Solutions was advised to our client. We confirm that the agreement between our client and Total Financial Solutions was that such payment would be waived in total. Further we note your claim of an ongoing commission fee and note that such claim of fee is the first our client has heard of such agreement and refuses to pay such amount - such advise (sic) so late in the matter can be bordering on extortion. We would believe such agreement is not related to your firm and such matter should be taken up directly by Total Financial Solutions if necessary."
34. But the principal fraud - the insertion of PT into the transaction - was to remain undiscovered by the Nicholsons for almost another four years after October 2008. The fraud came to light only in the course of the Fund's attempts to refinance its loan in relation to the subject property.
35. When the fund was refinancing, it had to obtain PT's consent as the registered proprietor of the property. So the Fund wrote to PT in March 2012. In response to the Fund's request for the execution of loan financing documents, PT stated for the first time on 27 March 2012 that it was unaware of the Fund, unaware of the subject property or of the purchase and custodianship transactions, and stated that the documents being relied upon as having been signed by the defendant were forgeries.
36. The Nicholsons acted quickly to take steps to investigate the fraud as far as they could and to rectify matters. Those steps ultimately led to the bringing of these proceedings.
37. Lenders changed independently in June 2009. The existing lender, Mariner, assigned to Balmain Funds Administration Limited ("Balmain") all of its right title interest in its loan to PT. That was an arms length business arrangement between Mariner and Balmain.
38. But on 24 August 2012, as part of the arrangements by which the Nicholsons sought to rectify the 2008 fraud after its discovery, Balmain in turn assigned its registered interest in the loan to Britroc, the present plaintiff, which by that stage had become the trustee of the Fund. Bitroc had found it difficult to find outside lenders to advance funds on the strength of the assignment of an originally fraudulent mortgage.
39. This creates a curiosity relevant to the relief now sought: Britroc is the assignee of the mortgage and is therefore the lender to itself in its capacity as trustee of the Fund. The Court must be satisfied in order to grant the relief sought that the continuation of this arrangement is not in breach of the SIS Act.
40. The other consequence of what the Nicholsons discovered in 2012 is that they caused Tromare Pty Ltd ("Tromare") to be incorporated, and to consent to act as custodian instead of PT. The Nicholsons have provided sufficient information to satisfy the Court of Tromare's fitness to hold that property and of its consent to act as trustee. The defendant, PT, not unnaturally wants to take no further part in the Fund's affairs and wishes to play no further part as custodian of the relevant property.
41. The correspondence with PT preliminary to these proceedings, through Church & Grace Solicitors and Attorneys, makes clear that it does not claims any beneficial interest in the property, was never a party to any of the original 2008 arrangements and did not execute the mortgage. Church & Grace indicated on 27 October 2014 on behalf of PT that it has no interest in opposing the relief claimed in paragraphs 1 to 3 of the Amended Summons. PT was satisfied that the making of the declarations in paragraphs 4, 5 and 6 of the Amended Summons would provide satisfactory protection to it for its position with respect to the mortgage and the security trustee. Bergin CJ in Equity has already made those declarations.

Relief Sought

1. This now brings the Court to two final matters: whether the relief sought will not be inconsistent with the SIS Act, and the proof of the elements required for a grant of relief. The principal relief sought by Britroc is prayer 1, a declaration that PT holds the property on trust for the plaintiff. Prayer 3 seeks the vesting of the property in Tromare as the new custodian. The plaintiff no longer presses prayer 2 because there are still monies outstanding on the mortgage, now owing to Britroc. If an order were made in accordance with prayer 2 for the property to vest in Britroc as trustee of the Fund, it concedes that it would be, in effect, borrowing directly from a related party, which is not permitted by SIS Act, s 65.
2. The Court must be satisfied that the orders which are sought will not create a situation which might lead to or be in breach of the SIS Act. I am satisfied on the evidence before the Court, and without detailing further the evidence and relevant legal obligations here that the original mortgage from Mariner was negotiated at arm's length terms and that although the property is currently leased to a business associated with the Nicholsons, and that the continuation of that relationship is not a breach of the SIS Act, because the relevant leases were also negotiated on arm's length terms.
3. I now turn to each of the prayers for relief. In relation to prayer 1, I am satisfied that PT holds the subject property on resulting trust for the Fund. Not only did the Fund supply the part of the purchase price already mentioned but mortgage payments were made on behalf of the Fund to Mariner and Balmain and now Bitroc since then, such that it can be said that the responsibility for the payment of the whole purchase price and/or mortgage payments thereafter have been assumed by the Fund. I refer here in particular to Napier v Public Trustee (Western Australia) (1980) 32 ALR 153. The doctrine of resulting trust will arise in circumstances where the balance of the purchase price is paid by the discharge of obligations to a mortgagee, as has occurred here: Black Uhlans Inc. v New South Wales Crime Commission [2002] NSWSC 1060 at [144] per Campbell J (as his Honour then was).
4. The sufficiently of this resulting trust means it is not necessary to consider other doctrines to ground the relief sought in prayer 1, such as constructive trust. There does not appear to be a relevant express trust. The Court is satisfied therefore that the relief sought in prayer 1 should be granted.
5. The Court will also make the orders to appoint Tromare as the trustee of the bare trust to replace PT as custodian and vest the subject property in Tromare, as the new bare trustee. This is a classic case, for the application of Trustee Act, s 71. Such a vesting order may be made where a resulting or constructive trust has arisen: see Sayer v McHugh (1985) 1 NSWLR 440 at 452 per Yeldham J. A vesting order is the most direct and practical solution to the problems that have been created by the circumstances outlined: in Kennedy v Kennedy [2011] NSWSC 1619 at [16] to [22]).
6. As declarations 4, 5 and 6 have already been made, that leads to prayer for relief 7, based on Real Property Act 1900, s 138. This section provides as follows: "138 Court may direct cancellation of folios and other actions related to folios (1) A court may, in proceedings for the recovery of any land, estate or interest from the person registered as proprietor of the land, make ancillary orders of the kind set out in subsection (3), if the court is of the opinion that the circumstances of the case require any such order to be made. (2) A court may, in proceedings for the possession or production of a certificate of title or in proceedings in which the court makes a determination as to an estate or interest in land, make ancillary orders of the kind set out in subsection (3), if the court is of the opinion that the certificate of title has not been, or is not likely to be, produced by a person for the purposes of the registration of a dealing affecting the land concerned. (3) A court may order the Registrar-General to do one or more of the following: (a) cancel or amend a folio of the Register, (b) cancel, amend or make a recording in a folio of the Register, (c) create a new folio of the Register, (c1) create a new edition of a computer folio, (d) issue a new certificate of title. (3A) If a court makes an order under subsection (3) (c), the Registrar-General may require a person to lodge with the Registrar-General a plan (being, where the Registrar-General so specifies, a plan of survey) of the relevant land, together with such number of copies of the plan, if any, as the Registrar-General may specify. (4) The Registrar-General must give effect to any such order. (5) A court that makes an order under this section may order that a person deliver a certificate of title or other instrument to the Registrar-General for the purpose of giving effect to any such order. (6) An action does not lie against the Registrar-General for recovery of damages sustained through deprivation of land, or any estate or interest in land, because of compliance by the Registrar-General with an order under this section. (7) In this section: court does not include the Local Court or a tribunal."
7. The present proceedings are "proceedings for the recovery of land, estate or interest from the person registered as proprietor of the land". It is appropriate that orders be made as requested here for the cancellation of the mortgage under Real Property Act, s 138(3). The mortgage was fraudulently executed. It now only secures borrowings from the Fund. The plaintiff, Bitroc the only party affected, seeks its cancellation. There is no suggestion that the Fund or PT were in any way involved in the original fraud.
8. The Court will make orders in terms of prayer 7. There was concern at the hearing whether the Registrar-General would need to be joined as a party to grant the relief sought in prayer 7. But at the Court's request the solicitors for the plaintiff corresponded with the Registrar-General, who indicated he does not seek to be joined as a party but will act upon notice of the Court's orderto cancel the mortgage, provided he is provided with the certificate of title. I understand from counsel for the plaintiff that the certificate of title is available to the Nicholsons for this purpose.
9. That leaves finally then prayer 8 as to costs. The parties have requested a short adjournment for the purposes of having discussions as to whether their costs dispute can be agreed. The Court will allow that. I will adjourn the balance of the proceedings for a short period to deal with issues of costs.
10. The Court's declarations and orders therefore will be as follows:- 1. A declaration that the Defendant holds [the subject property] on bare trust for the Plaintiff. 2. (a) Tromare Pty Limited ACN: 169 324 681 [registered office not published] is appointed trustee of the bare trust declared in order 1; and 3. (2) (b) Vest [the subject property] in Tromare Pty Limited ACN 169 324 681 for an estate in fee simple but subject to the trust declared in order 1, as affected by order 3(a). 4. An order pursuant to section 138(3) of the Real Property Act 1900 that the Mortgage no. AE 186815 be cancelled. 5. Adjourn the matter for supplementary issues in relation to costs to 9.30am on 19 May 2015.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 May 2015