CRC Gosford Pty Ltd & Anor v Columbus Investment Services Ltd as Trustee for the Gosford Ownership Trust and the Gosford Landholding Trust & Anor

The Undisputed Facts

1. On 4 June 2002, Allco Holdings Pty Ltd ("Allco") established GOT with CIS as trustee. GOT was registered as a managed investment scheme under the Corporations Act 2001 (Cth) on 12 September 2002. The terms of GOT are set out in the GOT Constitution, which has been amended on a number of occasions. The most recent version of the GOT Constitution is dated 9 January 2008.
2. On 28 June 2002, AFG Pty Ltd established GLT with CIS as trustee. The terms of the Trust were set out in the GLT Constitution, which was last amended on 29 October 2002.
3. In around June 2002, CIS as trustee of GLT issued units in GLT to CIS as trustee of GOT. CIS, as trustee of GOT, is the only holder of units in GLT.
4. Between October to December 2002, CIS, as trustee of GOT, issued: 1. The A Units in GOT to CRC. 2. The Residual Units to CIS, in its capacity as trustee and responsible entity for the Record Realty Trust ("RRT"). 3. C Units to RR Funding Pty Ltd.
5. On 17 December 2002, the C Units were redeemed.
6. On 18 December 2007, all of CRC's A Units were redeemed and CRC was issued with 38,449,437 B Units.
7. In January 2011, the Residual Units were purchased from CIS, in its capacity as trustee of the RRT.
8. Currently, the only units on issue in GOT are the B Units, held by CRC, and the Residual Units. Apart from a single Residual Unit held by CIS, the Residual Units are currently held by four entities - SIF, Stark Gosford Ltd, Credit Suisse (Singapore) Limited and Makira SP6 Limited.
9. On 29 October 2002, CIS, as trustee of GLT, acquired an interest in the Property.
10. The Property was owned by McCross Developments Pty Ltd (later Walker Corporation Ltd) and was, at that time, subject to a 10 year lease (with two five year options) in favour of the Crown. CIS, as trustee of GLT, acquired a concurrent 99-year lease over the Property (with an option to renew for 99 years) for a rental premium of $38.5M.
11. The funding to acquire the interest in the Property came from the issue of units in GLT to CIS, as trustee of GOT. CIS, as trustee of GOT, in turn sourced the funds to buy its units in GLT from the issue of A Units in GOT to CRC and the issue of Residual Units. CRC borrowed the money required to acquire these units from ANZ under the Gosford Syndicated Facility Agreement dated 28 October 2002 ("SFA").
12. On the same day, by Security Trust Deed, ANZ established the Gosford Security Trust under which ANZ, as security trustee, was to hold the securities granted to it on trust. CRC entered into a "CRC Security Deed" with ANZ, as security trustee, under which CRC gave security (in various forms) over all of its assets to secure the money owing, or which would become owing, by CRC under the transaction documents, which included the SFA. The security given included an equitable mortgage over all of its present and future rights in GOT, and an equitable mortgage of the "Deposit Account".
13. The "Deposit Account" was defined in cl 24.2 of the CRC Security Deed to mean "the account so described in the Details" and was an account over which CRC granted an equitable mortgage to ANZ (see cl 2.2 of the CRC Security Deed at CB3 831). The CRC Security Deed stated that the details of the account were "To be advised". The contemporaneous documents indicate that it was an account named "CRC Gosford Pty Ltd Deposit Account" with ANZ with BSB 012 110 and Account Number 8373 13615.
14. Under cl 18.2 of the SFA, CIS (as trustee for GOT) gave a guarantee to ANZ of CRC's liability to pay money under the relevant transaction documents. To secure this guarantee, CIS entered into the "GOT Security Deed" (also on 28 October 2002) whereby CIS gave security (in various forms) over all of its assets to ANZ.
15. In addition, on 28 October 2002 CIS (as trustee for GLT) and CRC entered into a deed titled "GLT Indemnity" under which, among other things, CIS agreed to indemnify CRC for certain amounts. This indemnity was secured by, among other things, a charge in favour of CRC over all of the assets of GLT granted under the "GLT Security Deed".
16. Finally, by separate instrument of mortgage ("CIS Mortgage of Lease"), CIS as trustee for GLT granted CRC a mortgage over all of CIS's interest in the Property and the concurrent lease over the Property. This mortgage was to secure money payable by CIS as trustee for GLT to CRC under, relevantly, the GLT Indemnity. In turn, CRC then granted to a mortgage of all of its interest in the CIS Mortgage of Lease to ANZ under the CRC Mortgage of Lease.
17. In summary: 1. CIS, as trustee for GOT, guaranteed CRC's liability to ANZ, and to secure that guarantee gave direct security to ANZ under the GOT Security Deed. 2. CIS, as trustee for GLT, gave CRC an indemnity, and to secure that indemnity gave direct security to CRC under the GLT Security Deed and the CIS Mortgage of Lease. 3. CRC gave direct security over all of its assets to ANZ for CRC's liability under the SFA, which included CRC's rights under the GLT Indemnity and the GLT Security Deed.
18. In late 2007, the loan provided by ANZ to CRC was refinanced by Max. Max obtained the finance to pay ANZ out by issuing "Gosford Series" notes to the "Max Noteholders". Max's obligations under the notes were secured by a charge given over its assets in favour of BNY Trust Company of Australia Limited (formerly JP Morgan Trust Australia Limited) as security trustee of the Max Realty Security Trust.
19. In summary, the relevant overall effect of the refinancing was that: 1. ANZ was replaced as the security trustee of the Gosford Security Trust by BNY Trust (Australia) Registry Ltd ("BNY"). 2. ANZ was replaced as the Agent and Financier by Max. 3. The Max Noteholders had all of the rights previously held by ANZ to enforce the loan and securities.
20. As part of the refinancing CRC's A Units were redeemed for $31,762,788, which was the amount owing under CRC's loan from ANZ. At about the same time an amount of approximately $5M was paid by GOT to the Residual Unitholders, and $1.6M approximately was lent by GLT to RRT (see paragraph 16 of the Statement of Agreed Facts).
21. By the Fifth Supplemental Deed to the GOT Constitution dated, stamped and lodged with ASIC on 30 June 2004, amendments were made to Schedule 2 of the GOT Constitution concerning the amount due to CRC under the redemption provisions (the "Withdrawal Price") which was payable at redemption. At the time of redemption (in 2007) CRC held 34,374,696 A Units. According to the Fifth Supplemental Deed, the specified amount per unit at the time of redemption in December 2017 was $0.91481. As a result, the Withdrawal Price payable was 34,374,696 x $0.91481 = $31,446,315.60. Thus, at redemption CRC received approximately $300,000 more that it was entitled from GOT upon redemption.
22. There were also minor amendments to the various security and transaction documents, reflected in the "Global Amending Deed No 1" dated 18 December 2007.
23. On 28 October 2002, the head lessor of the Property gave a notice to the tenant (WorkCover NSW) to pay rent into the Deposit Account.
24. On 11 November 2002, CRC gave a notice to CIS, as trustee of GLT, irrevocably authorising and directing CIS to pay into the Deposit Account "all amounts which are or at any time become due" to CRC under the GLT Indemnity, GLT Security Deed or CIS Mortgage of Lease: CB3 1142.
25. Both parties accept that between October 2002 and May 2009: 1. The tenant made regular payments of rent into the Deposit Account. 2. Expenses related to the Property were paid from the Deposit Account. 3. Regular loan repayments were made from the Deposit Account to satisfy CRC's obligations under the SFA.
26. By cl 14.14(b) of the SFA (as amended by the Global Amending Deed No 1), CRC undertook that as at 31 December 2008, the ratio of the loan balance to its assets would be no larger than 77%. Failure to remedy a breach of the undertaking within 30 days was an event of default: see cll 15.1(b) and 15.2(b) of the SFA.
27. In early 2009, CRC breached the LVR covenant and was given until 26 February 2009 to remedy the breach. In order to remedy the breach, it was necessary for an additional amount of $912,935 in principal to be paid to Max. CIS paid the additional amount of $912,935 to Max on 25 February 2009. Entries in the Gosford cashbooks record the payment of $912,935 as being a partial repayment of an existing loan from the RRT to GLT, which was in turn loaned to by GLT to GOT, which loaned the money to CRC. It is not clear how this loan was repaid but it has not been asserted to be relevant in these proceedings.
28. On 20 and 23 March 2009, Mr Veal caused a change in shareholding in CRC's ultimate holding company, Allco Australian Holdings Ltd. This triggered an event of default under the security arrangements. On 20 April 2009, Max wrote to CRC notifying it that in Max's view the change in control had led to an event of default and that Max intended to instruct BNY, as security trustee, to appoint a receiver. CRC disputed that there had been an event of default.
29. On 27 April 2009, Max demanded payment from CRC of the total amount owing under the SFA (then being $35,781,050.02).
30. On 29 April 2009, Mr Peter Hedge was appointed receiver and manager of CRC pursuant to the CRC Security Deed. Mr Hedge remained receiver and manager of CRC until 23 May 2012. On 24 May 2012, Mr Heesh replaced Mr Hedge as receiver and manager of CRC and remained in that position until 11 August 2017.
31. Mr Hedge remained receiver and manager of the GLT secured property until 1 June 2012, when he was replaced by Mr Heesh. Mr Heesh ceased to be receiver of the GLT secured property on 5 March 2013.
32. The appointment of the receivers led to changes in the account into which the tenant made rental payments. Section 421 of the Corporations Act 2001 (Cth) required the receiver to open a receivership bank account and for the rent received by the receiver to be deposited into that account. Mr Hedge, as receiver appointed over the Property, established a GLT receivership account with BankWest (BSB 302-100, Account Number 1502122; Account Name "PJ Hedge as Receiver & Manager of 92 Donnison Street") and from at least August 2009 until June 2012 rent was paid into this account. It appears that the receivership account was changed when Mr Hedge was replaced by Mr Heesh as receiver of the GLT secured property in June 2012.
33. In late February 2013, the account into which the tenant paid rent was altered again: the tenant was directed to make payments into a CRC receivership account with Macquarie Bank (BSB 184-446, Account Number 255157141). That account was closed in November 2013, after which time rental payments were made into a separate Macquarie Bank receivership account for CRC (BSB 182-222, Account Number 85421434). Monthly rental payments were made into this account until November 2016 when the Property was sold.
34. CIS (as trustee for GLT) sold its interest in the Property on 15 November 2016 for a total purchase price of $37,500,000. From the settlement sum: 1. $23,878,235.43 was paid to BNY Trust Company of Australia Limited as security trustee for Max; and 2. $9,482,988.98 was paid to CIS as trustee for GLT. The deposit of $3,750,000 was also released to CIS as trustee for GLT.
35. In addition, at settlement CRC and BNY gave a release of some of the securities previously given by CIS.
36. Much of what I have set out above in [17]-[51] is taken from the Second Defendant's Closing Submissions dated 22 June 2020 ("DCS"), and with which Mr P Braham SC (who appeared with Mr J Arnott and Mr D Reynolds) for CRC agreed. Ms V Whittaker SC (with Mr T Prince) appeared for SIF.
37. Clauses 11.1 to 11.3 of the GOT Constitution are in the in the following terms (at CB2 557): "11.1 The Trustee must determine the Distributable Income, the Taxable Income and the Capital Gains of the Trust for each Financial Year. 11.2 Distributable Income for a Financial Year will be the amount the Trustee determines to be the distributable income being: (a) Taxable Income, excluding Taxable Capital Gains; (b) Capital Gains; (c) the additional amount (if any) which if distributed in cash to Members for the period would prevent the Trustee being liable to tax on the Taxable Income of the Trust under section 99 or section 99A of the Tax Act for the Financial Year; and (d) any further amount, whether income or capital, which the Trustee considers appropriate for inclusion in Distributable Income. 11.3 The Trustee may decide the classification of any item as being on income or capital account and the extent to which reserves or provisions need to be made."
38. "Distributable Income" is defined (see CB2 573) as "the amount determined by the Trustee under clause 11.2". "Taxable Income" for a Financial Year is defined as "the amount the Trustee determines to be the "net income" of the Trust under s 95(1) of the Tax Act for the Financial Year" (at CB2 576). "Financial Year" means the year ending 30 June. "Capital Gains" is also a defined term: see CB2 573.
39. Clauses 11.1 to 11.3 of the GLT Constitution are in identical terms.
40. I have referred to the GLT Indemnity. The following terms (at CB3 905-909) are relevant or potentially relevant: "2 Indemnity 2.1 Consideration GLT acknowledges that CRC is acting in reliance on GLT incurring obligations and giving rights under this indemnity. 2.2 Indemnity - Finance GLT indemnifies CRC from time to time if and to the extent that CRC does not receive from the GOT Trustee by way of distribution in respect of the CRC Units any amount due by CRC to the Agent, the Security Trustee or a Financier under the Facility Agreement on the due date ("Indemnity Amount"). GLT agrees to pay amounts due under this clause on demand from CRC. 2.3 Indemnity-Tax If and to the extent that any sum constituting a distribution to CRC in respect of the redemption of CRC Units ("Redemption Amount"), is treated as subject to tax in the hands of CRC, GLT will pay CRC an amount sufficient to reimburse CRC for any tax incurred by it in respect of the Redemption Amount if and to the extent that CRC does not receive an equivalent amount from GOT Trustee by way of distribution in respect of its CRC Units. In calculating this reimbursement amount, GLT may deduct from the amount of tax incurred by CRC in respect of the Redemption Amount, the balance of the Sinking Fund and the value of any other Authorised Investments. 7 No merger This indemnity does not merge with or adversely affect, and is not adversely affected by, any of the following: (a) any other guarantee, indemnity, or Encumbrance, or other right or remedy to which CRC is entitled; or (b) a judgment which CRC obtains against GLT, the GOT Trustee or any other person in connection with the Indemnified Amounts, or any amount payable by GOT Trustee in respect of the CRC Units. CRC may still exercise its rights under this indemnity as well as under the judgment, Encumbrance or right or remedy. 8 GLT's right suspended As long as any Indemnity Amount remains unpaid or may become owing, GLT may not, without CRC's consent: (a) reduce its liability under this indemnity by claiming that it or the GOT Trustee or any other person has a right of set-off or counterclaim against CRC or any other person; or (b) exercise any legal right to claim to be entitled to the benefit of another guarantee, indemnity, or Encumbrance given in connection with or any amount payable under this indemnity. (For example, GLT may not try to enforce or require the enforcement of any Encumbrance CRC has taken to ensure payment of an Indemnity Amount.)"

Some Further Factual Matters

1. It should be noted that the GOT Constitution provides the framework for distributions to both cashflow units such as the A Units (and later the B Units) but also for the Residual Units. Recital C of the GOT Constitution (at CB2 540) refers to the "Residual Return Units in the Trust" issued to "the Residual Return Member" and "Cashflow Return Units in the Trust" issued to CRC who together with the Residual Return Member are "the Members". Clause 4.4 provides that the Cashflow Return Units, the Residual Units (and the other class of units known as the C Units) are each a separate class for the purposes of cl 4.3. The Withdrawal Price for both Cashflow Return Units and Residual Units are as set out in the relevant schedule for these classes of units: see Schedule 3 for Residual Units at CB2 598 and Schedule 4 for B Units at CB599-617.
2. More generally, Residual Units are stated to have "the rights, obligations and restrictions as set out in schedule 3": see CB2 575. Schedule 3 is found at CB2 598 and relevantly: "1. While there are Cashflow Return Units on issue carrying income entitlements, Residual Return Units will entitle the holder to Income Distributions in accordance with clause 11.5."
3. Clause 11.5(a) (at CB2 557) relevantly provides that if the Taxable Income of the Trust for the Financial Year does not include "Taxable Capital Gains" then the Member will be entitled to the Distributable Income for the Financial Year. The parties are agreed that "Taxable Capital Gains" were not included in the "Taxable Income". There appears to be a distribution of distributable income to Residual Unitholders only when the cashflow unitholders (i.e. CRC) hold these units: see cl 11.5(c) at CB2 558.
4. Schedule 3 also provides: "3. After the redemption of all the Cashflow Return Units and the Class C Units, any amounts payable under this constitution (including amounts payable under clauses 8, 11 and 23) to the holder of a Residual Return Unit are to be paid in priority to all amounts payable under the constitution to all other Members": CB2 598.
5. Schedule 4 sets out the entitlement for B Units in the event that inter alia the trustee of GLT sells the Property the Withdrawal Price in defined is Schedule 4 (CB2 601) as the aggregate of: "(a) the Specified Amount for the relevant Withdrawal Date; and (b) an amount (which may be negative) equal to the tax liability incurred or which will be incurred by the holder of the [B Units] as a result of the redemption of the [B Units] less any amounts held in reserve by the holder of the [B Units] in respect of this tax liability to the extent that the reserve is attributable to the [B Units] on the Withdrawal Date."
6. In Schedule 4 there then follows a table detailing specified amounts of the Withdrawal Price per B Units at particular dates.
7. It is agreed between the parties that: 1. Under the redemption provision of the GOT Constitution CRC was entitled to receive an amount of approximately $34M. The amount due to CRC under the redemption provisions is often referred to as "the Withdrawal Amount" or "the Withdrawal Price". 2. Only $23.8M of the Withdrawal Amount has been paid to CRC leaving a shortfall of $10.33M claimed by CRC out of the $12.2M. I have rounded all figures in these reasons, and refer to the amount unpaid to CRC and to which it is entitled, subject to SIF's contentions, as "the balance of the Withdrawal Amount".
8. Although by the SOC and Summons the relief sought is principally declaratory, very likely by reason of the clarification of issues between the parties, by the Plaintiffs' Opening Submissions dated 27 May 2020 ("POS") at 174 CRC seeks the following orders: "(1) An order that CIS as trustee of the Gosford Ownership Trust be restrained from giving effect to its determination set out in its letter dated 7 December 2017; (2) An order that, within seven days of the date of the order, CIS as trustee of the Gosford Ownership Trust pay CRC the amount of $10,331,766.57 in further and final payment of the Withdrawal Price payable following its redemption of the [B Units] issued to CRC (plus CRCs proportional share of any interest that has accrued on that amount since the date of redemption); (3) An order that, within seven days of the date of the order, Timothy Heesh is to pay to CRC the amount of $2,367,102.48 plus accrued interest (a total as at 30 April 2020 of $2,832,074) which he is holding pending the resolution of the proceedings; (4) An order that SIF pay the Plaintiffs' costs of the proceedings as agreed or assessed."
9. It will be observed that the amount asserted by CRC on the balance of the Withdrawal Amount is $10,331,766.57 and I do not understand there to be any dispute that, if CRC is entitled to the balance of the Withdrawal Amount, that that is the amount which is due, or that if CRC is successful that the orders set out above are appropriate.
10. SIF resists CRC's claim to the balance of the Withdrawal Amount on three bases. First SIF asserts that in the years 2007 to 2016 CRC received an overpayment of $6.4M, because that is the amount paid to CRC beyond the taxable income of GOT. Second SIF asserts that for the year ending 30 June 2007, GOT overpaid CRC $3.65M, which it claims was a loan by GOT to CRC. For reasons which I shall elucidate CRC rejects both of these claims (and also asserts an estoppel) but in addition mounts a case in the alternative that from 2009 (when a demand was made by CRC on the GLT Indemnity) any monies that CRC received that were not (on SIF's case) distributed in accordance with the GOT Constitutions were payments made pursuant to the GLT Indemnity and to which CRC was entitled. SIF accepts that those monies in excess of what, it says, CRC was entitled as distributions were paid by GLT pursuant to the GLT Indemnity but asserts that CIS as a trustee of GLT has a right of subrogation enabling it to recover the balance of the Withdrawal Amount held by CIS as trustee for GOT.
11. I should note that the amount in Schedule 4 has not been shown to be determined by the debt to financiers as Ms Whittaker contended (see T246.10-11 and T253.13-15), but rather to net income as explained by Mr Braham by reference to the documents at Tab 62 of the Court Book (from CB4 1457, and see T37-T38 and T214.45).
12. There also appeared to be a theme in SIF's submissions to the effect that CRC was merely a vehicle for the project by which the financier was to make money by virtue of lending, and that it was not intended that CRC would itself make any profit. Whilst it is clear that CRC was established solely for the purpose of the Gosford scheme and had no assets other than units in the GOT and no other operations (see CRC's 2006 and 2007 Annual Reports at CB6 2356-2372), given that the scheme originally had ANZ as the lender (rather than any Allco related corporation) this seems unlikely. In any event there is nothing in the GOT Constitution that precludes CRC from making a profit out of the purchase of A Units and later B Units. If the distributions under cl 11 of the GOT Constitution and the amount received as the Withdrawal Price following sale yield more than what CRC was required to repay to ANZ (and later Max) then there is nothing to indicate that CRC was not entitled or not expected to retain that difference.
13. Nor is there anything in the advice of Mallesons Stephen Jaques, who acted for Allco in the establishment of the trusts and advised on the taxation implications, that supports SIF's contention: see CB2 391-399. The advice contains a statement: "As the CRC class unitholder will be presently entitled to all of the income of GOT up to, but not including, the earlier of the income year in which its units are redeemed or the underlying property is sold, those unitholders will include in their assessable income all of the net income of the trust for the particular income year, provided that there is trust law income in each particular income year in which it is a unitholder. It consequence, the trustee should not be taxed on the net income of GOT in these years."
14. Nowhere is there any requirement for CRC to refund the difference between what it was to receive under the GOT and what it had to pay to ANZ or Max.
15. I should also note that Mr Braham explained why it is that the transaction underlying the trust scheme has proven so successful in yielding the rather handsome profit it has, notwithstanding the financial crisis of CRC that precipitated the appointment of receivers in 2009. The accelerated payment of all monies obtained from the GLT (and in turn received by GLT from the tenants) led to a much reduced level of interest due by CRC to Max, because principal was being repaid earlier than expected and the market interest rate was dropping dramatically while rents were steady or improving.

The $6.4M (Issues 1, 2 & 7)

1. SIF contends that: 1. CRC received amounts from GOT that exceeded GOT's "Taxable Income". 2. CIS as trustee of GOT had a discretion to pay amounts to CRC in excess of GOT's "Taxable Income". 3. It should be inferred that CIS did not exercise that discretion. 4. The amounts paid to CRC in excess of the "Taxable Income" were overpayments to CRC which CRC is, and has always been, liable to refund CIS.
2. CRC accepts that the amounts paid to it exceeded the "Taxable Income" of GOT, but points to the fact that: 1. It was CIS as trustee which was required to determine the "Distributable Income", the "Taxable Income" and the "Capital Gains" of the Trust for each financial year. 2. CIS was also trustee of GLT and that SIF accepts that the distribution by CIS to GOT of all of the monies it did distribute was a distribution in accordance with the GLT Constitution. 3. The trustees had to determine both whether to include an additional amount which would ensure that the Trust was not liable for tax (see cl 11.2(c), set out in [53] above), and "any further amount, whether income or capital, which the Trustee considers appropriate for inclusion in Distributable Income" (cl 11.2(d)). CRC contends that clearly "Taxable Income" was not the same as "Distributable Income", the latter being what the trustee determines to be the distributable income which included taxable income but also further amounts determined by the trustee, as per subclauses (c) and (d). 4. The trustee needed to determine these amounts but the determination was not one that was left to the discretion of the trustee. This was a unit trust with commercial considerations in mind, not a discretionary trust. The Residual Unitholders had no right to income from the Trust - their right was to whatever was left in the Trust after redemption of the other units and in particular the capital gain derived. 5. Powers that appear to give a trustee an absolute discretion can involve something different to the ordinary sense of that phrase: see Dundee General Hospitals Board of Management v Walker [1952] 1 All ER, 1952 SC (HL) 78 where the executor had bequeathed a legacy to the hospital "only if [the] trustees shall in their sole and absolute discretion be satisfied that, at the testator's death, the infirmary had not been taken over" by the State or a local authority: see the discussion in Geraint W Thomas, Thomas on Powers (Oxford University Press, 2nd ed, 2012, Oxford University Press) at 11.32. In Finch v Telstra Super Pty Ltd [2010] HCA 36; (2010) 242 CLR 254 the trustee had a duty to distribute to those who fell within the definition of "Total and Permanent Invalidity" and a duty not to distribute to those who did not and, in the view of the High Court at [30]: "forming that opinion [as to whether the member's contract of employment had come to an end and whether he was unlikely ever to engage in gainful work] was not a matter of discretionary power to think one thing or the other; it was an ingredient in the performance of a trust duty".
3. SIF and CRC agreed that the determinations required of the Trustee in cll 11.1 and 11.2(a),(b) and (c) were not discretionary. SIF, however, asserted that cl 11.2(d) does import a discretion and that there is no evidence that it exercised that discretion. CRC contends that cl 11.2(d) was not in a different category to cll 11.2(a),(b) and (c), but alternatively contends that if a discretion was required by cl 11.2(d) then it should be inferred that it was exercised by CIS as trustee of GOT, from: 1. The fact that it is agreed that CIS as trustee of GLT distributed all of GLT's income to GOT and that distribution did not involve any overpayment by GLT to GOT, and CIS was also the trustee of GOT in making distributions to CRC. 2. The absence of any notification by CIS to CRC that it was making payments to CRC beyond the amount it was required to make pursuant to the GOT Constitution, in a context where by agreement all of the income distributed by GLT to GOT was deposited to the nominated Deposit Account to which the financier had access. 3. The absence of any claim by CIS as trustee of GOT to entitlement to recover the alleged excess payment until 2016 when the Property was sold, even where the A Units were redeemed in December 2007. 4. The fact that none of the accounts of GOT as exist record that amounts beyond taxable income were paid to CRC as a loan or excess payment: see for example CB6 2344-2354. 5. The absence of any evidence from any officer or employee of CIS that a determination was not made that the amount paid to CRC should be distributed to CRC pursuant to the GOT Constitution, and that amounts were paid to CRC in excess of its entitlement. 6. Note 5 in the accounts of GOT (see CB6 2351), which states: "Cash flow return units Cash flow return units are issued by the Trust to fund the acquisition of the investment in the landholding trust. The cash flow return units attributable to each investment property are secured on that property. Under the terms of the units, the holders of the cash flow return units are entitled to all income from the property after the payment of property management expenses. The original term of the cash flow return units is normally up to the first lease renewal date for the underlying property. The cash flow return units become fully redeemable in certain circumstances. These include: - the underlying asset being sold, - refinancing of the cash flow return units, - cash flows not being received under the cash flow return units as and when required by the constitution for the relevant property Ownership Trust; or - the underlying loan requiring payment. The amount payable upon redemption of the cash flow return units is fixed in advance under the terms of the constitution. The Trust provides an indemnity to the owner of the cash flow return units ("CRC company") for any loss or liability arising from an increase in the company tax rate." (Emphasis added).
4. SIF points out that the terms of the particular trust are critical and that "unit trust" and "discretionary trust" do not, in the absence of an applicable statutory definition, have a constant fixed and normative meaning. In support of this proposition, SIF rely on CPT Custodian Pty Ltd v Commissioner of State Revenue; Commissioner of State Revenue v Karingal 2 Holdings Pty Ltd [2005] HCA 53; (2005) 224 CLR 98 [15] citing Kent v SS "Maria Luisa" (No 2) (2003) 130 FCR 12 at 33. SIF contends that generally the word "determines" can mean "decides" or alternatively "calculates". SIF accepts that "determines" in relation to cll 11.2(a) to (c) should be interpreted as "calculates", but contends that in cl 11.2(d) it should be read as "determines" and that it grants the trustee a discretion. CRC accepts SIF's submission in respect of cll 11.2(a) to (c) but disputes that "determines" in cl 11.2 should be given a different meaning when applied to cl 11.2(d).
5. In relation to the issue of whether cl 11.2(d) imports a discretion SIF contends: 1. The general principles of construction applicable to contracts are applicable (see Segelov v Ernst & Young Services Pty Ltd (2015) 89 NSWLR 431 [83] per Meagher, Gleeson and Leeming JJA and Lewski v Commissioner of Taxation (2017) 254 FCR 14 [119] (the Court)) and that "the clause should be construed to avoid it making commercial nonsense or working commercial inconvenience" (see DCS 63, citing Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35] (French CJ, Hayne, Crennan and Kiefel JJ)) and regard must be had to the text, context and purpose (Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 [46] (French CJ, Nettle and Gordon JJ) and Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 [51] (the Court)). 2. Each of the amounts in cll 11.2(a) to (c) are amounts which can be objectively determined (see the definitions of "Taxable Income", "Taxable Capital Gains" and "Capital Gains" used in cl 11 (at CB2 467 and 470) and that cl 11.2(d) however is framed in different terms - i.e. "considers appropriate". 3. The absence of any relevant surrounding circumstances tending against SIF's construction. 4. Karger v Paul [1984] VR 161 at 164 supports the contention that the conferral of a discretionary power requires that there be exercise of "an active discretion" and that "it be given real and genuine consideration."
6. Mr Braham contends that there are reasons why cl 11.2(d) should not be seen as a true discretion and, in particular, that the GOT is a commercial unit trust and it would be very surprising that a trustee of such a trust would be given a wide discretion that might permit one group of unitholders to be disadvantaged over another. Mr Braham also contended that SIF's argument would mean that the trustee would leave funds undistributed and hence make the Trust liable to pay tax and that there is nothing to indicate on what basis the discretion was to be exercised.
7. SIF resists CRC's contention that cases such as Dundee General and Finch relied on by CRC have any relevance here: these being cases in which the trustee had a duty to do something if a certain factual condition was satisfied, and cl 11.2(d) is not framed in this way.
8. I accept SIF's contention that cases such as Dundee General and Finch are not relevant here at all. I think it is important that cl 11.2(d) is only giving a power to the trustee to add an amount to what is already required to be distributed under one of cll 11.2(a), (b) or (c). Thus the trustee is not empowered to reduce "Taxable Income" or to reduce payment of an amount which would otherwise be taxable. That there is no guidance given to the trustee as to the matters to which the trustee should have regard does not tell against the subclause granting the trustee a discretion. In my view the words "considers appropriate" carries with it the implication of a discretion, and that unlike cll (a) to (c) that does not involve merely a calculation.
9. I must then turn to whether it should be accepted that CIS must be taken to have exercised its discretion.
10. There are a number of factors which lead to the conclusion advanced by CRC as an alternative argument that it ought to be inferred that CIS did exercise its discretion in accordance with the power granted to it by the GOT Constitution to distribute more than the Taxable Income to CRC: 1. There is no dispute that the monies were paid by GLT to the various deposit accounts, and that those payments constituted distributions to GOT in accordance with the GLT Constitution. GOT acquiesced in the payment of all distributions due to it from GLT into an account that effectively operated as a payment to CRC or its lenders. If CIS, as trustee of GOT, did not intend the payment to be distributed in accordance with the GOT Constitution to CRC then it would be expected that CIS would advise CRC of that fact. CRC had no role in how the distributions were determined by the trustee and whether amounts were being included because of cll 11.2(a)-(d), and it would have no knowledge that any amount paid by GLT to GOT (and inferentially by GOT to CRC) was not a distribution in accordance with cl 11 unless CIS told it that was so. 2. If CIS as trustee of GOT had determined that CRC was not entitled to all of the funds that GOT had received from GLT or had not made a determination pursuant to cl 11 that all of the funds deposited were distributions to CRC, then then one would expect that CIS would at the very least record in its books the overpayment and notify CRC of that fact. Not only has no record been produced, but there is nothing in the audited accounts of GOT (such as exist) which reflect any loan by GOT to CRC or liability to GOT by CRC. SIF contended that there was no requirement for the trustee to make a formal written determination (see DCS 61), but in a context where it was entirely clear that all of the net income due to it from GLT was being paid to an account over which CRC's financiers had control, the absence of any written record or notation supports the inference that CIS had determined that all of the net income of GOT was to be distributed in accordance with cl 11 of the GOT Constitution. 3. There were tendered by SIF some documents prepared in 2016 by a Mr Timothy Rich (see the email dated 5 August 2016 (Tabs 181 and 181A), but these are drafts and appear to involve an attempt by Mr Rich, who is a former director of CRC, to prepare alternative accounting scenarios or "versions", two of which included the $3.8M as a loan and one which did not. Mr Rich in his email describes one of the issues that "he is trying to get to the bottom of" as "in the loan". He was not called by SIF to explain the documentation and the role that he was, at August 2016, undertaking and for whom and on whose behalf, and I accept Mr Braham's submissions that they are of no probative value whatsoever. 4. CIS as trustee of GLT in fact determined pursuant to an identical clause, it is agreed, that all of the net income received from the tenants was to be distributed to GLT. That conclusion is not based on any particular information or evidence that is present in the case of GLT but absent in the case of GOT. The fact that GOT was the only unitholder under that trust does not affect the position that cl 11.2 is in identical terms in both the GOT and GLT Constitutions and the Residual Unitholders under the GOT Constitution were not entitled to income from the Trust. SIF accepts that it was open to CIS as trustee of GOT to distribute more than the Taxable Income by way of distributions pursuant to cl 11.2 of the GOT Constitution. It seems inherently unlikely that, having exercised a discretion as trustee of GLT, CIS failed to consider and exercise its discretion as trustee of GOT, and SIF's contentions seek a finding that CIS, in breach of its duties as trustee, failed to make a determination required of it. 5. No evidence has been called by SIF from CIS (or anyone who was an officer, director, or employee of CIS) to support the contention advanced by SIF that CIS did not, in accordance with its obligations, carry out the determinations required of it pursuant to cl 11.2 of the GOT Constitution (whether involving a discretion or not). 6. There is a note in the audited financial statements and reports for GOT (see CB6 2351). This note is referred to in at [74] above. These audited account statements are signed by the company secretary and contain the following statement (at CB6 2346): "This financial report was authorised for issue by the directors of [CIS] the responsible entity of [GOT]." 7. When CRC became entitled to payment on redemption of its A Units in 2007, CIS as trustee of GOT paid CRC its full entitlement and did not seek then to reduce by any amount what was paid on redemption of those units by asserting a right to deduct excess payments. Indeed according to SIF's submissions CIS paid CRC a slightly higher amount than that to which it was strictly entitled on redemption: see ­­­­[37] above. 8. If the amounts in excess of the Taxable Income were not distributed in accordance with cl 11.2 and had the character of a loan (as SIF contends) then that would have constituted a breach of GOT's obligations (and those of CRC) under the SFA (see CB2 718-719). 9. Whilst it might well be expected in other circumstances that the trustee would record the fact of its determination under cl 11.2(d) (which on SIF's submissions prejudiced the Residual Uniholders), I have already referred to the context which is that all of the net income due to GOT was being put into an account to which the financiers had access and that fact and Note 5 set out at [74] above make the absence of any express statement of a determination less significant. In my view in a context where the net income was being entirely passed over to CRC's financiers the absence of any recording by CIS that only a portion of it was a distribution supports, with the other matters to which I have referred, the inference that a determination was made by the trustee to distribute all of the net income to CRC.
11. I have referred to the absence of any witness called by SIF. SIF contends that in the absence of evidence of actual consideration by CIS it should be inferred that the trustee did not consider whether any amount was appropriate for inclusion in "Distributable Income" as per cl 11.2(d).
12. SIF has accepted that CRC is owed the balance of the Withdrawal Amount and it is SIF which asserts, as effectively an offset available to GOT, that the monies otherwise agreed to be payable to CRC (i.e. the balance of the Withdrawal Amount) are subject to a set off. In a case in which SIF asserts that CIS paid out to CRC more than CRC was entitled by way of distribution (which distribution was to be determined by CIS) in my view the onus lay on SIF to establish by evidence that the payments made were not made as distributions in accordance with the GOT Constitution. Hence, in accordance with The Glendarroch [1894] P 226 at 231 "the ordinary course of practice" that "each party would have to prove the part of the matter which lies upon him" per Lord Esher MR and expressed per Lopes LJ at 234 as the general rule that "the burden of proof lies on the person who affirms a particular thing" applies. Mr Braham referred to the principle and Ms Whittaker did not challenge its application. Ms Whittaker did assert, however, that it was open to CRC to call evidence from CIS. There are three answers to that: 1. CIS was clearly taking a position opposed to the interest of CRC and favourable to SIF. It had been joined, correctly, as a defendant in the proceedings. 2. There is evidence that: 1. As at November 2016 Mr Stephen Kilcran was acting as the representative of CIS as trustee for GLT with an address "c/- SIF". 2. The solicitors acting for CIS in 2017, Webb Henderson (see CB8 3998), are the solicitors acting for SIF in these proceedings. 3. Mr Kilcran was during the hearing of this matter present in the offices of Webb Henderson (see T248.40-T249.1). 1. The question of onus is a separate question to whether the onus has been discharged.
13. In relation to 83 and (2), since it is SIF's case that the trustee was entitled to withhold from CRC and retain for GOT to the benefit of the Residual Unitholders the monies that were withheld it stands to reason that the interests of the trustee and SIF were aligned and yet, notwithstanding that and the connection between CIS and SIF referred to above, SIF called no witness from CIS to support its case. This was put by Mr Braham as a Blatch v Archer point (see Blatch v Archer (1774) 98 ER 969, and see Hampton Court Ltd v Crooks (1957) 97 CLR 367), but it might also be seen as a Jones v Dunkel point (see Jones v Dunkel (1959) 101 CLR 298). The plurality in the High Court in Australian Securities and Investments Commission (ASIC) v Hellicar [2012] HCA 17; (2012) 247 CLR 345 at [165]-[167] held that the Blatch v Archer maxim that "all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted" could not be used to reduce the cogency of evidence actually adduced, but here SIF did not call any evidence from CIS. In Hellicar on the Jones v Dunkel point the High Court found no basis for concluding that a witness whose record of a meeting was tendered would have given evidence adverse to ASIC's case (at [168]), but again here SIF has not called witnesses for CIS to establish the factual matter needed to establish its case, the implication being that the evidence such witnesses could give would not have assisted SIF's case: see Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11; (2011) 243 CLR 361 [63]-[64] per Heydon, Crennan and Bell JJ and Manly Council v Byrne [2004] NSWCA 123 [51]-[58] per Campbell J (with whom Beazley JA and Pearlman AJA agreed).
14. In the absence of any communication by CIS to CRC that CIS was paying more into the Deposit Account than was warranted on a distribution to CRC, in the absence of any evidence from a person then acting as the controlling mind or relevant officer of CIS, and in a context where CIS as trustee for GLT had correctly (it is agreed) distributed all of the GLT income to GOT and paid it into the Deposit Account, I do not think it should be inferred that CIS did not make a determination under cl 11.2(d). Rather, I think that the matters to which I have referred support the inference that a determination was made by CIS as trustee of GOT that the income should be distributed to CRC pursuant to cl 11 of the GOT Constitution. There are, in evidence, no GOT Financial Statements that undermine the conclusion that CIS as trustee of GOT intended that CRC should receive all of the net income received by GOT from GLT.

The $3.6M Claim (Issues 1, 2 and 6)

1. Even if SIF is unsuccessful on its claim that excess monies were paid to CRC (i.e. excess over monies that were required to be distributed in the period from 1 July 2007 onward) SIF claims that in the financial year ending June 2007, CIS, as trustee of GOT, lent CRC $3.6M. In support of that contention SIF relies on a notation in the accounts of CRC (see Note 6 at CB6 2370) to the following effect: "Surplus cashflows received by [CRC] are deemed a liability to the unit trust as the surplus cashflows cannot be used by [CRC] until future events have occurred (if any)."
2. CRC responds to that contention as follows: 1. The audited accounts and financial statements of GOT do not make any reference to a loan or debt owed by GOT to CRC. 2. There is no documentation which establishes that a loan was in fact made by GOT to CRC, or debt incurred by CRC to GOT. 3. SIF's contention is inconsistent with the Statement of Agreed Facts (paragraphs 3 and 4) since it is agreed that the Taxable Income to which even on SIF's case CRC was entitled was $3.6M for the 2007 year. 4. There is no correspondence in 2006 and 2007 which refers to the fact that monies are being paid to CRC beyond distributable income. This links to the more general considerations to which I have already referred concerning the inference of a determination - indeed the conclusion that income received by CRC was income distributed by CIS in accordance with the GOT Constitution undermines this claim as well. 5. The first time that the possibility of a loan is raised by the trustee with CRC is in 2016, and no mention of it is made in the documents relating to the restructure in 2007 which saw ANZ replaced by Max. 6. The A Units held by CRC were redeemed and payment made in 2007 - if there was a loan of $3.6M in existence at that time, as SIF alleges, it is most surprising that CIS did not reduce the amount paid to CRC by that amount at the time of redemption, and no explanation has been offered as to why the claimed loan was not deducted. 7. CRC relies on the evidence of Mr Blaikie a "chartered accountant and solicitor in [his] current role as Senior Tax Counsel at Clayton Utz" who had extensive experience with unit trusts including those established by Allco in the period in which the Gosford scheme was established, that there is nothing to support the claim of a debt owed by CRC to GOT and that treatment of income as "deferred income" reflected in Note 5 does not carry with it the inference that the recipient is legally obliged to repay the money so described.

Mr Blaikie's Evidence

1. Mr Blaikie's report is found at CB1 216 to 254. His expertise was not challenged but there were significant challenges to the admissibility of portions of the report, some of which objections I upheld. Mr Blaikie expressed the following opinions: 1. The distributable income for the 2007 income tax year ("2007") was $3,806,765 and the taxable income was $3,630,324: CB1 224. 2. The financial reports for GOT show no difference in the treatment of the excess over the taxable income of $176,441 and the accounting treatment was "to recognise the entirety of the distribution as the income of GOT": CB1 225. 3. The audited financial statements of GOT do not identify or establish the existence of any liability as between GOT and GLT: CB1 225. 4. The taxable distribution detailed on the CRC consolidated schedule (Document 27 in Annexure C, which was provided to Mr Blaikie, see CB1 253) is consistent with the net income stated in the tax return of GOT in 2007, but the sums distributed by GOT to CRC during the relevant period "are actually recorded in the statement of cash flows in the audited accounts of CRC" in his opinion: CB1 226. 5. There is a disjunct between the accounting treatment of distributions by GOT to CRC in the audit of the GOT and audit of CRC: CB1 228. The GOT audit treats the only unitholders as the Residual Unitholders and treats the payments to CRC as payments of interest and principal rather than distributions. 6. CRC's accounting treatment of amounts as not yet receivable "can be explicable by seeking to defer recognition of income until greater certainty surrounding the project's financial success, which is consistent with GOT's explanation in its financial statements at Note 5 that explains these certain events": CB1 229. 7. In his opinion there is no indication in either the audited accounts of GOT and CRC or in the cash flow accounts of CRC that CRC is a debtor of GOT. CRC owned A Units (at that time) and there is between GOT and CRC a relationship "of equity rather than a debt": CB1 230. 8. The 2007 PwC audited statements sought to display Cashflow Return Units as "interest bearing loans and borrowings" which then required PwC to "classify the balance of the Distribution that exceeded the hypothetical 'interest'" and "that could not create a debtor/ creditor relationship between GOT and CRC unless the underlying transaction documents created one": CB1 231.
2. The DCS: 1. Point out at paragraph 79 that the annual reports for GOT for 2003 to 2007 inclusive each "contain an express and unqualified statement by the directors of the trustee that no distributions were paid in the year" and that at all relevant times s 300 of the Corporations Act 2001 (Cth) required a director's report for a registered managed investment scheme to include details of dividends or distributions paid to members during the year. 2. Submit that the Court should reject Mr Blaikie's evidence of "reinterpreting" the GOT financial statements, and his attempt to explain the "true underlying legal nature of what occurred" and his assertion that the reference to "unitholders" in Note 1(b) of GOT's accounts was to the Residual Unitholders to whom the distributions had been made: DCS at paragraphs 80-82 and T123.43-45. 3. Submit that the Court should reject Mr Blaikie's assertions that the GOT accounts showed a distribution of the whole of the net cash flow to CRC which, submit the DCS at paragraph 83, "were incomprehensible". 4. Submit that the Court should reject Mr Blaikie's evidence (at CB1 229, T130.13-24, T134-5, T137.5-138.34, T141.18-38 and at T140-3) that the note referring to treating $3.8M as deferred income should be seen as a distribution in accordance with cl 11.2 of the GOT Constitution.
3. I make the following observations: 1. This case is not concerned with whether or not the auditors of GOT prepared accounts that did not meet the relevant statutory requirements. 2. The audited accounts contain positive assertions that no distributions were made to unitholders - that is inconsistent with the position of both SIF and CRC, since SIF contends that more was paid out to CRC than should have been and CRC submits that, pursuant to the GOT Constitution, it was entitled as distributions to what was paid to it. SIF does not contend that there were no distributions by GOT to CRC as the accounts suggest is the case. Indeed significantly, the Statement of Agreed Facts record as an agreed fact that $3.6M was the Taxable Income from GOT for the 2007 year, the same amount as the claimed loan. 3. Mr Blaikie accepted that the accounts of GOT were inconsistent with those of CRC and I did not understand him to be asserting that the approach taken by the auditors of GOT was one that he thought was appropriate, but rather that the only justification for treating distributions as nil is if only Residual Unitholders were treated as the unitholders under the Trust. If it be the position that the audited GOT accounts were misleading and breached relevant standards this does not preclude Mr Blaikie from expressing his view on how the accounts appear to have been prepared. 4. At DCS 82 there appears to be criticism of Mr Blaikie for assuming a view as to what Unit A unitholders were entitled, but Mr Blaikie's view was not shown to be inconsistent with the GOT Constitution and it was not put to him that it was. 5. Clearly, whether the GOT accounts are reliable or not, they do not provide any support for the case advanced by SIF. The question is whether CRC can nevertheless rely on the GOT accounts by asserting that they are signed accounts of CIS on behalf of the Trust in which no reference is made to monies being owed by CRC to GOT, and I think it is entitled to do so, particularly since there is no evidence from the trustee about any of the matters in dispute. 6. By the DCS at paragraph 83, SIF seeks to dismiss the significance of Note 5 in the 2007 financial statements which states that the holders of the Cash Flow Return Units are "entitled to all income from the property after the payment of property management expenses" as "merely a high level accountant's attempted summary of the legal position of the [Cashflow return units]". The problem with that submission is that the statement forms part of an annual report certified by the company secretary (see CB6 2345) and it contains a statement "this financial report was authorised for issue by the directors of [CIS] the responsible entity of [GOT]", so I think the Court is entitled to proceed on the basis that the trustee (CIS) took the view that distributions to CRC of all the net income received from GLT was appropriate and in accordance with the requirements of cl 11 of the GOT Constitution. Whether it was correct to do so is not an issue in these proceedings.
4. In relation to the question of whether Note 5 indicates that CRC was in fact indebted to GOT, Mr Blaikie resists that conclusion for a number of reasons, including: 1. that accounting treatment in the books of CRC cannot make something a debt if there is no underlying debt, just as a statement of a credit in its accounts does not establish that money is owed to CRC; and 2. that an entity can choose to treat part of income received as not yet accrued without that meaning that the difference is a debt.
5. Mr Blaikie in cross-examination referred to Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314, a case in which a dance studio was held entitled to defer income received from dance students in advance until after the lessons had been conducted. Mr Blaikie pointed out that in Arthur Murray there was no legal obligation to pay back the prepaid amounts to students and yet the studio could treat the income as deferred: see T141.14-31, and T143.21-45.
6. In Arthur Murray the Court, Barwick CJ, Kitto and Taylor JJ, said at 319: "It is true that in a case like the present the circumstances of the receipt do not prevent the amount received from becoming immediately the beneficial property of the company; for the fact that it has been paid in advance is not enough to affect it with any trust or charge, or to place any legal impediment in the way of the recipient's dealing with it as he will. But those circumstances nevertheless make it surely necessary, as a matter of business good sense, that the recipient should treat each amount of fees received but not yet earned as subject to the contingency that the whole or some part of it may have in effect to be paid back, even if only as damages, should the agreed quid pro quo not be rendered in due course. The possibility of having to make such a payment back (we speak, of course, in practical terms) is an inherent characteristic of the receipt itself."
7. Ms Whittaker contended that Arthur Murray does not support Mr Blaikie's claims that CRC had a choice to defer income, but I understood Mr Blaikie in referring to Arthur Murray in cross-examination (see T141) to be responding to the proposition put to him that treating income as deferred necessarily means that there was a liability to repay the amount. He asserted that a company can treat payments as deferred income even when it is not required, as a matter of law, to repay the amounts received. Arthur Murray certainly supports that proposition.
8. Arthur Murray was dealing with "fees received but not yet earned" with the fees being subject to contingency "in practical terms" and a contingency of the type seen in that case was not identified by Mr Blaikie. It was put to Mr Blaikie that "deferred income" is income to which CRC is not entitled (which Mr Blaikie did not accept: see T141.13-30). It was not put to Mr Blaikie that CRC could have had no basis to treat income as deferred, indeed it was put to him that a possible future call on a guarantee from GOT could be a reason, which he accepted was a limited possibility (see T136.1-7), and in re-examination he agreed that "now, reading the accounts of CRC, one just doesn't know why the accrual was made of some part of the distributions received from GOT": T143.38-41. If that issue had been pursued part of the definition of Withdrawal Amount set out at [61] may have provided an explanation for the deferred income approach adopted, but this was not explored with Mr Blaikie. In any event, once it is accepted that deferral of income does not, of itself, entail recognition of a debt by the accounting entity the foundation of SIF's case on the $3.6M debt is removed.
9. There is no expert opinion proffered by SIF to say that CRC could not treat some portion of what it received as deferred income and more importantly the issue is not whether it could do so but whether the note in the CRC accounts leads to the conclusion that CRC had received a loan from GOT, which on Mr Blaikie's evidence it does not. Further, Mr Blaikie's point that the accounts of company A cannot establish the existence of a debt to company B which is not recorded in any document including the books of account of company B or supported by any evidence or communications between A and B giving rise to the debt, remains unaffected. To the extent that this entails an accounting opinion I accept it. To the extent that it calls for a view of the law it accords with my understanding, although I accept that an unequivocal statement of debt in the accounts of company A might support a case in which other evidence was put forward by company B to support the contention that a loan had been advanced.
10. Much of what I have said in relation to issue 7 (the $6.4M issue) applies here too. I am not persuaded that any loan was made by GOT to CRC for the following reasons: 1. No evidence has been called by SIF from CIS to establish that a loan was made to CRC either through a conversation or in writing. 2. The GOT audited accounts and financial statements do not show any evidence of a loan from GOT to CRC. 3. The $3.6M claimed loan and the alternative claimed loan of $676,494 are both inconsistent with the Statement of Agreed Facts which show the Taxable Income of GOT to be $3.6M and the amount paid to CRC as $3.8M, which would mean that only $200K, at most, could have been a loan from GOT. My conclusion that it should be inferred that CIS as trustee of GOT distributed all of the net income received from GLT itself undermines the loan contention. 4. A loan from GOT to CRC would have involved CIS (and CRC) breaching its obligations as guarantor under the SFA: see CB2 718. 5. The statement in CRC's accounts does not establish that a loan was made, only that CRC was treating part of what it had received as deferred income. Whether it was entitled to do so is not an issue calling for determination in this case, but Mr Blaikie's evidence which I accept is that treatment of an amount as deferred income does not carry with it implicit recognition that a debt is owed to GOT. 6. The cash flow statements of CRC for the relevant year do not evidence any loan to CRC but rather distributions paid by GOT: see CB6 2368, and see T149.24-34. 7. The fact that CIS as trustee of GOT in December 2007 paid out to CRC the full redemption price for the A Units (and indeed a sum in excess of that price) tells against CIS considering that any debt was owed to it by CRC.

Estoppel (Issues 3 & 4)

1. CRC ran an alternative answer to SIF's claims based on estoppel. Whilst strictly it is not necessary to consider these issues given my conclusion on issue 1 I shall express my conclusions on them. The argument as advanced was that GOT is estopped from contending that the amounts received by CRC after 1 July 2007 are to be dealt with differently from the amounts CRC received before that date. It is alleged that GOT represented that the payments made into the Deposit Account were distributions of the Distributable Income from GOT (to which CRC was entitled), and that CRC acted on the basis that it had the benefits of those funds. In view of my conclusions in respect of issues 1, 2, 6 and 7 this issue does not arise, but I shall express my views on it nevertheless.
2. CRC contends that GOT's actions gave rise to an estoppel by representation, or alternatively that the situation could instead be characterised as an estoppel by convention: see paragraphs 128-129 of the POS.
3. Estoppel by representation was considered by the High Court in Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394. At 422, Brennan J defined estoppel by representation: "Estoppel by representation of a fact (estoppel in pais) precludes a party who, by his representation, has induced another party to adopt or accept the fact and thereby to act to the other party's detriment from asserting a right inconsistent with the fact on which the other party acted: Thompson v Palmer (1933) 49 CLR 507; Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641."
4. The party seeking to establish the existence of estoppel by representation must prove a representation was made and that he or she relied on said representation.
5. In Futurepower Developments Pty Ltd v TJ & RF Fordham Pty Ltd t/as TRN Group [2019] NSWSC 1554 at [67] to [69], I referred to the relevant principles in relation to estoppel by convention, as follows: "[67] The principles of estoppel by convention (also known as estoppel in pais) were explained in Ryledar Pty Ltd t/as Volume Plus v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 per Tobias JA (with whom Mason P and Campbell JA agreed). His Honour made reference to Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226, Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641, Amalgamated Investment & Property Co Ltd (in Liq) v Texas Commerce International Bank [1982] QB 84, The "Indian Grace" (No 2) [1998] AC 878 and Moratic Pty Ltd v Gordon [2007] NSWSC 5; (2007) 13 BPR 24,713. Tobias JA explained (at [194]) that: "estoppel by convention is a form of estoppel founded upon an assumed state of affairs by the parties whether as to a matter of fact or a matter of legal effect which both will be estopped from denying: Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244-245. That assumed state of affairs takes as a given the terms of the contract as known to and understood by the parties but from which the parties have departed for the purpose of their furtherance of their relationship under the contract." Tobais JA referred (at [195] of Ryledar) to the observation of Dixon J (as his Honour then was) at 676 of Grundt that: "belief in the correctness of the facts or state of affairs assumed is not always necessary. Parties may adopt as the conventional basis of a transaction between them an assumption which they know to be contrary to the actual state of affairs." Tobias JA also cited with approval (at [198] of Ryledar) what had been said by Lord Steyn in The "Indian Grace" at 913: "…an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared … or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption." [68] In Moratic (in a passage cited with implicit approval in Ryledar at [100]), Brereton J (as His Honour then was) stated the matters which are required to establish conventional estoppel: "[32] … In common law conventional estoppel, it is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of its legal relationship with the defendant; (2) that the defendant has adopted the same assumption; (3) that both parties have conducted their relationship on the basis of that mutual assumption; (4) that each party knew or intended that the other act on that basis; and (5) that departure from the assumption will occasion detriment to the plaintiff [Waterman v Gerling, [83], [96]]." [69] It should also be noted that, contrary to [the Plaintiff's] submissions (PCS para 83), it is not necessary that it was conduct of the party against whom the conventional estoppel is asserted that led to the assumption being adopted: see Moratic at [32]-[37] and H. G. Beale (ed), Chitty on Contract (Thomson Reuters, 33rd ed, 2018) at 4-108."
6. CRC alleges that GOT is estopped from contending that the amounts received by CRC after 1 July 2007 are to be dealt with differently from the amounts CRC received before that date because CRC had an understanding as a result of: 1. The terms of the direction to pay into the Deposit Account. 2. The statements in the GOT accounts which set out that "Under the terms of the units, the holders of the cash flow return units are entitled to all income from the property after the payment of property management expenses" (at CB6 2351). 3. The statements in CRC's accounts in the period prior to 30 June 2007 that "The holders of the [A Units] are entitled to all income from the property after the payment of property management fees."
7. CRC alleges that GOT did nothing to indicate payments made after 1 July 2007 to the Deposit Account had a different character to the payments made prior to that date. CRC understood that it was entitled to the funds in the Deposit Account (to pay ANZ and later Max) - and CRC alleges GOT did nothing to indicate the position was different and, specifically, GOT never indicated those payments were a mix of Taxable Income and undocumented loan drawdowns that would have to be repaid by CRC in the future.
8. The Defendants assert the estoppel by representation case should be rejected for the following reasons: 1. GOT did not make a clear representation to CRC that CRC was entitled to all the net income from the Property. 2. There is a "striking absence of evidence" from CRC that it acted in reasonable reliance on any alleged representation made by GOT: see DCS 120. In particular, the Defendants note that CRC did not call any witness to state that they relied upon any alleged representation. The Defendants further assert the evidence in fact indicates that CRC did not believe the asserted representation: e.g. the cashbooks prepared by Mr Rich record loans by GOT to CRC in 2007 and thereafter. 3. CRC has not made clear the alleged change of position or detriment suffered as a result of the alleged representation. The Defendants contend that Mr Veal's evidence "goes no higher than if he had been told that CRC owed money to GOT, that he would have taken advice, and assuming the advice would have recommended him to do so, he would have caused a demand to be made under the GLT Indemnity or "cause CRC's and Max's involvement in the transaction to have ceased"": see the Affidavit of Mr Veal dated 14 February 2019 at CB1 200 at paragraphs 52-53.
9. The only evidence from CRC in relation to the estoppel case is from Mr Veal (who did not become a director of CRC until August 2016) saying what he would have done had he been told that amounts paid into the Deposit Account were loans and to be treated as a debt "owed by CRC to GOT or GLT" and had he received legal and accounting advice (without any evidence as to what that advice would likely have been).
10. Mr Veal does not give evidence to support the factual assertions of CRC's understanding as set out in [103] above. Another difficulty is this: in 2009 CRC made a demand on GOT and GLT which led to a receivers being appointed to GOT and GLT. It is not clear what different position would have obtained had CRC become aware that GOT and GLT were treating part of the payments to CRC as loans.
11. I accept the submissions SIF referred to in [105(2)] and [105(3)] above and am not persuaded that the requirements for conventional or representational estoppel have been met. Issue 4 does not therefore arise.

Subrogation (Issue 5)

1. Although it is not necessary to do so having regard to my conclusions on issues 1, 2, 6 and 7, I shall deal with this alternative argument against the possibility that my earlier conclusions are erroneous.
2. CRC maintains that if, contrary to its primary position, some monies that were paid to it were not distributions pursuant to the GOT Constitution then the monies were due to it as payments required from GLT pursuant to the GLT Indemnity. SIF accepts that that is so, but contends that by reason of those payments GLT has a right of subrogation to recover from the withheld funds otherwise due to CRC from GOT.
3. SIF put its subrogation argument in two different ways. SIF's primary contention is that the situation is analogous to that which pertains to the field of insurance. For example, says SIF, an insurer under a public liability policy who has indemnified the homeowner liable to a visitor by paying the claim of the visitor is entitled to pursue any person liable to the homeowner (e.g. a builder) to recoup or reduce the loss suffered by the homeowner: see DCS 130. SIF contends that the situation is also analogous, although less so, to that which pertains in the field of sureties.
4. I have understood SIF's primary argument on subrogation to contain the following elements: 1. Under the GLT Indemnity GLT promises to indemnify CRC to the extent that CRC does not receive from GOT by way of distribution any amount due on a particular date to its financer, i.e. relevantly now Max. Clause 2 of the GLT Indemnity should be viewed as an indemnity because the essence of an indemnity is a promise by the promisor that he will keep the promisee harmless against loss as a result of entering into a transaction with a third party which is a primary, independent obligation: see Sunbird Plaza Pty Ltd v Maloney [1988] HCA 11; (1988) 166 CLR 245 at 254 per Mason CJ with whom Deane, Dawson, and Toohey JJ concurred, and Canty v Paperlinx Australia Pty Ltd [2014] NSWCA 309 at [39] per Gleeson JA, with whom Barrett JA and Emmett JA concurred. SIF contends that the promise in the GLT Indemnity was one to keep CRC "harmless from loss". 2. CRC has repaid all the monies due to Max (leaving aside the Max debt issue). 3. If a portion of the distributions paid to CRC was not distributed in accordance with the GOT Constitution, as SIF contends, then the excess amount must be recognised as payment by GLT under its GLT Indemnity obligations - i.e. the lower level of distribution produced a shortfall between what was due to Max from CRC and what CRC received from GOT. 4. In answer to CRC's contention that an unpaid debt to Max is not a loss, SIF contends: 1. that the loss is CRC's liability to Max and; 2. being unable to meet a liability or the continued burden of a liability is as much a loss as the creation of one: see T251.7-9. 1. Having indemnified CRC for its loss, GLT is entitled to the benefit of any amount otherwise available to CRC that will reduce the loss that CRC has suffered and for which GLT has indemnified CRC. GLT therefore "steps into the shoes" of CRC to recover from GOT what GOT owes CRC. 2. SIF contends that GLT's claimed entitlement to recoup the equivalent of amounts paid under the GLT Indemnity from monies due to CRC from GOT is in accordance with basic principles relating to subrogation. 3. SIF draws attention to the terms of cl 8 of the GLT Indemnity which precludes a right of subrogation before indemnity is given which, SIF contends, implies that there is a right of subrogation when the indemnity has been paid as is the case here (on the assumptions relevant to this part of the case). 4. SIF contends that had the monies not been paid under the GLT Indemnity then CRC would have had to have paid the money owing to Max out of the Withdrawal Price. 5. The DCS refer to the proposition that contracts of indemnity are to be construed in accordance with ordinary principles of construction save that any ambiguity should be resolved in favour of the indemnifier: see Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88, 92 and see BI (Contracting) Pty Ltd v AW Baulderstone Holdings Pty Ltd [2007] NSWCA 173 [19] and [25], and Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424.
5. CRC's response to these contentions is as follows: 1. That the principles of subrogation have no application here because subrogation requires the party asserting the right to have indemnified another party and indemnification requires that other party to have suffered loss. CRC contends that no "loss" was suffered by CRC and that the payment by GLT to CRC under the GLT Indemnity was not for a "loss" and nor was it a promise to keep CRC "harmless from loss", rather it was for a shortfall between what had been distributed by GOT and what CRC was already required to pay Max. 2. The GLT Indemnity, although it uses the word indemnity, is not in truth an indemnity against loss because it is not concerned with indemnification for loss. CRC owed Max whatever it owed because the distributions from GOT were insufficient to meet the debt due for the relevant period. Mr Braham described it in his oral submissions as a "contingent promise" (see T61-T68), and in the POS at paragraph 153 as a "conditional limited recourse provision", noting that an example of the latter phrase being applied may be seen in HP Mercantile Pty Ltd v Hartnett [2016] NSWCA 342 at [69]. Insurances on a contingency do not attract a right of subrogation. 3. If, contrary to its primary position, the payment by GLT to CRC can be described as one of loss there is no scope for the principles of subrogation in the circumstances of this matter. 4. A further contention is that cl 7 of the GLT Indemnity provides that the indemnity "does not merge with or adversely affect, and is not adversely affected by…(a) any other guarantee, indemnity, or Encumbrance, or other right or remedy to which CRC is entitled…" This Mr Braham submitted was quite inconsistent with CRC being required to account back to GLT by means of a debt owed to it by GOT. This argument can be seen as either a contention that subrogation, if otherwise available, has been excluded or alternatively that it is a factor to be taken into account as to whether subrogation is available at all.
6. Alternatively, as a secondary argument, whilst accepting that CIS as trustee of GLT was not a surety, SIF contends that, having paid out to CRC the amount owed to Max, it is entitled to enforce Max's rights to repayment in a similar fashion to a surety who has paid out on an indemnity or guarantee. In making this submission, SIF relies on cases such as Ghana Commercial Bank v Chandiram [1960] AC 732 and H & S Credits Ltd (in liq), Tucker v Roberts [1969] Qd R 280 in support of this argument. In Ghana Commercial Bank Lord Jenkins, delivering the advice of the primary Court, said at 745: "It is not open to doubt that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit."
7. In response, CRC repeats much of its contentions in respect of the insurance analogy and also draws attention to the fact that that line of authority is concerned with a surety taking over the security that the creditor held over the property of the debtor. It involves the surety paying the creditor and here GLT was not required to pay CRC's creditor Max anything that CRC was required to pay, but rather GLT was required to pay CRC directly. Thus the entire argument is based on a false premise since the money was paid to CRC and CRC used the money that it recovered to pay Max.
8. CRC also contended that cases such as Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234 and Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27; (2008) 232 CLR 635 preclude a claim by CIS as trustee of GLT to obtain rights of Max to recover against CRC, since there was no obligation owed by GLT to Max under the GLT Indemnity, CRC further contended that having regard to the extensive documentation of rights it is unrealistic to think that the parties intended that GLT could recover what it paid under the GLT Indemnity from CRC.
9. The term subrogation literally means "substitution" and "is used in the context of English and Commonwealth Law to describe a process by which one party is substituted for another so that he may enforce that other's rights against a third party for his own benefit": see Charles Mitchell, The Law of Subrogation (1994, Clarendon Press, Oxford) at 1.
10. The doctrine of subrogation is particularly important in the fields of insurance, guarantees and trusts, but there are other areas in which it is applied: see J.D. Heydon, M.J. Leeming and P.G. Turner, Meagher, Gummow and Lehane's: Equity Doctrines and Remedies (LexisNexis Butterworths, 5th ed, 2015) at [9.040].
11. In the insurance field, when an insurer indemnifies an insured for the insured's loss it is entitled to "stand in the shoes" of the insured and sue the third party who caused the loss which the insured suffered.
12. In the field of guarantees, a guarantor who has paid the creditor out can enforce such securities as the creditor held over the debtor's property - a classic example of the operation of the doctrine in this sphere being Ghana Commercial Bank.
13. A right of subrogation can be conferred by contract, but a right can arise on the basis of equitable considerations: see Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (supra) at [9.020]. A right of subrogation can be excluded by contract: see Re TH Knitwear (Wholesale) Ltd [1987] 1 W.L.R. 371 at 376 per Browne-Wilkinson V-C and Morris v Ford Motor Co Ltd [1973] Q.B. 792 at 812 per James LJ, and see Mitchell (supra) at 48, and J. Birds, B. Lynch and S. Paul, MacGillivray on Insurance Law: Relating to all Risks Other than Marine (Sweet & Maxwell Ltd, 14th ed, 2018) at 24-033.
14. In the case of guarantees a Court of Equity puts the surety in the situation of the debtor with respect to securities taken by the creditor because the equity for subrogation is derived from the obligation of the debtor to indemnify the surety and "because it would be unconscientious for the debtor to recover back the securities from the creditor while the debtor was obliged to indemnify the surety": see Bofinger v Kingsway Group Ltd [2009] HCA 44 [8]; (2009) 239 CLR 269 at 280-1, citing Turner V-C in Yonge v Reynell (1852) 9 Hare 809 at 818-819; 68 ER 744 at 748-749 and see O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 223 and Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 at 153.
15. In Burnand v Rodocanachi Sons & Co (1882) 7 App Cas 333 at 339 Lord Blackburn said: "The general rule of law (and it is obvious justice) is that where there is a contract of indemnity (it matters not whether it is a marine policy, or a policy against fire on land, or any other contract of indemnity) and a loss happens, anything which reduces or diminishes that loss reduces or diminishes the amount which the indemnifier is bound to pay; and if the indemnifier has already paid it, then, if anything which diminishes the loss comes into the hands of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to be recouped by having that amount back."
16. In Castellain v Preston (1883) 11 QBD 380, the owner of a property held an insurance policy against fire. The insured entered into a contract for sale of the property and pending completion a fire occurred causing significant damage to the property insured. The insurer, unaware of the sale, paid out the claim but the sale proceeded without any abatement of the purchase price because at that time the risk lay with the purchaser. The insurer claimed that it was entitled to recover the amount paid to the insured from the sale proceeds. The Court of Appeal (reversing the trial judge's decision) found that the insurer should succeed in its claim.
17. SIF place considerable emphasis on Castellain and the pronouncements of the Court of Appeal, see DCS 136 to 139: "136 Brett LJ set out the extent of the rights to which an insurer is subrogated as follows: "[A]s between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, which such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right court or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished": (1883) 11 QBD 380 (CA), 388 (emphasis added). 137 Cotton LJ made similar remarks: "[I]f there is a money or any other benefit received which ought to be taken into account in diminishing the loss or in ascertaining what the real loss is against which the contract of indemnity is given, the indemnifier ought to be allowed to take advantage of it in order to calculate what the real loss is, even although the benefit is not a contract or right of suit which arises and has its birth from the accident insured against": (1883) 11 QBD 380 (CA), 395 (emphasis added). 138 Bowen LJ (at 402) quoted the following passage Lord Cairns LC in Simpson v Thompson: "[The] well known principle of law … that where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss": (1877) 3 App Cas 279, 284 (emphasis added). 139 Bowen LJ went on to say: "It is said that the law only gives the underwriters the right to stand in the assured's shoes as to rights which arise out of, or in consequence of, the loss. I venture to think there is absolutely no authority for that proposition. The true test is, can the right to be insisted on be deemed to be one the enforcement of which will diminish the loss?": (1883) 11 QBD 380, 404 (emphasis added)."
18. In response to Ms Whittaker's reliance on Castellain Mr Braham described it as a case which establishes that the indemnifier is subrogated not just to the chose in action of the subrogated party but if the subrogated party succeeds in obtaining the funds due to it which reduce the loss, the insurer is entitled to those funds if it has already paid out the claim.
19. Although the pronouncements of all members of the Court of Appeal in Castellain were expressed in terms of subrogation, the High Court of Australia has pointed out the difficulties with the reasoning: Transport Accident Commission v CMT Construction of Metropolitan Tunnels [1988] HCA 46; (1988) 165 CLR 436 at 441 and see the detailed explanation of this topic in Denis SK Ong, Ong on Subrogation (The Federation Press, 2014) at 74-87. In short, the insured had suffered no loss as a result of the fire because the risk had passed to the purchaser and the insurer was entitled to recover what it had paid from the insured.
20. In British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 Kitto, Taylor and Owen JJ in a joint judgment commented on Castellain (at 94-95) as follows, having identified the difficulty that the insured in Monson were tenants of the property and yet were seeking to recover the full value of the house destroyed in the fire and not just their own property: "To that problem no approach can be valid which fails to accept as its first step that a policy showing, as the policy here shows unmistakably, that it is intended as a policy of fire insurance must be construed as a contract for indemnification only. The celebrated judgments in Castellain v Preston (1883) 11 QBD 380 show that that is the fixed and central point to which all else in the policy is subordinate. It could not be otherwise, for as Lord Cockburn CJ said in charging the jury in Chapman v Pole (1870) 22 LT 306, at p 307, the law will not allow of gambling in the form of insurance. It was said in the Supreme Court in the present case that Castellain v Preston was a case of subrogation, and that until the question of subrogation arises the principle that a contract of insurance is a contract of indemnity is wrongly invoked to diminish a lawful contract to something less than is provided for by its express terms With respect, we think this is a mistake. Castellain v Preston of course was not a case of subrogation in respect of an outstanding right of action and one might almost wish that some other word had been used as the label of a right which exists when it is too late for subrogation in the ordinary sense. The insured had been paid a sum of money under the policy on the footing that that was the amount of his loss. He had later received from a third party, under a contract with respect to the property, a payment which eliminated the loss. The judgments explain with care how large is the right of an insurer to be placed in the position of the insured in relation to both his rights against third parties and the fruit of those rights. The decision, following Darrell v Tibbitts (1880) 5 QBD 560, was that the insured was accountable to the insurer for the amount which the third party had paid him. This was because the insurer's obligation had been only to indemnify the insured against his loss, and the payment originally made to the insured had been made not because it was in fact required for indemnification but because of a mutual assumption, which had turned out to be erroneous, that it was required for indemnification. The money had to be brought to account by the insured because it diminished "the loss against which the insurance office merely undertook to indemnify them": (1883) 11 QBD, at p 397. "The policy", as Cotton LJ said, at p 393, "is really a contract to indemnify the person insured for the loss which he has sustained . . . and from that it follows, of course, that as it is only a contract of indemnity it is only to pay that loss which the assured may have sustained . . .". If the insured in that case had received the payment from the third party while still unpaid by the insurer, and had thereafter sued the insurer on the policy, we should be of opinion, notwithstanding the doubt suggested in MacGillivray on Insurance Law, 5th ed (1961) para 1798, that the fact of his having received the payment from the third party would have constituted a bar to his claim, as distinguished from affording the insurer a right by way of cross-action to have him account for the amount so received: see Morgan v Price (1849) 4 Ex 615; 154 ER 1360; Bruce v Jones (1863) 1 H & C 769; 158 ER 1094; Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd (1962) 2 QB 330." (Emphasis added).
21. In CMT Construction (supra) at 441 (Wilson, Dawson, Toohey and Gaudron JJ) adopted the opinion expressed by the plurality in Monson that in Castellain "the payment originally made [by the insurer] to [the vendors] had been made not because it was in fact required for indemnification but because of a mutual assumption, which had turned out to be erroneous, that it was required for indemnification."
22. This approach to Castellain is also picked up in Hon Justice M L Ball and D St L Kelly, Kelly & Ball Principles of Insurance Law (LexisNexis, 2019) at 9.0050 when the learned authors state that subrogation was "uncalled for" because "there was no subsisting right of action. The sole question was the insurer's equity based on unjust enrichment".
23. In Globe Church Inc v Allianz Australia Insurance Ltd (2019) 99 NSWLR 470, which concerned the time at which a cause of action against insurers of property risk accrues, Meagher JA (in dissent, but with whom Leeming JA concurred) at [243] described the following passage from Cotton LJ's judgment in Castellain at 393 as receiving the approval of Kitto, Taylor and Owen JJ in Monson: "The policy is really a contract to indemnity the person insured for the loss which he has sustained in consequence of the peril insured against which has happened, and from that it follows, of course, that as it is only a contract of indemnity, it is only to pay that loss which the assured may have sustained by reason of the fire which has occurred. In order to ascertain what that loss is, everything must be taken into account which is received by and comes to the hand of the assured, and which diminishes that loss. It is only the amount of the loss, when it is considered as a contract of indemnity, which is to be paid after taking into account and estimating those benefits or sums of money which the assured may have received in diminution of the loss." (Emphasis added).
24. For present purposes I summarise the two relevant rules as being first that the indemnified person is not entitled to double indemnity and second (as a consequence of the first) that, if as matters transpire, the loss for which the indemnifier has paid is, or can be, reduced wholly or partially, the indemnifier should obtain the benefit of that reduction.
25. In M.A. Clarke, The Law of Insurance Contracts (Informa, 6th ed, 2009) at 31-4A the learned author refers to the passages from Brett LJ and Cotton LJ's judgments and points out that they can be interpreted "in a way that is too literal and too wide" but the statement of principle by both Brett LJ and Cotton LJ express a qualification as to what it is that the insurer can have access. Brett LJ at 388 speaks of a right or condition by which "the loss against which the assured is insured, can be, or has been diminished": see the passage set out at [131] above, and Cotton LJ at 395 in the passage set out above in [125] above refers to "money or any other benefit received which ought to be taken into account in diminishing the loss or in ascertaining what the real loss is against which the contract of indemnity is given". So for example using A as the indemnified person, B as the person who caused A's loss and C as the indemnifier, A's loss is not "diminished" by a payment made to A by B pursuant to an obligation of B for reasons unconnected with the loss to A caused by B. Thus if B drives his car negligently into A's car and A claims on his policy of car insurance from C, C has no right to be subrogated to A's claim against B under a loan contract entered into between A and B. The monies due from B to A do not diminish the loss to A caused by the car accident.
26. Further, although in the passage set out at [125] above Bowen LJ has expressed "the true test" in wide terms, his use of the word "deemed" and his approval of the statement of Lord Cairns LC (set out at DCS 138 and included in [125] above) I think makes it clear that his approach is not different to that of Brett LJ and Cotton LJ.
27. Reference should also be made to the unanimous decision of the High Court in AFG Insurances Ltd v Brighton City (1972) 126 CLR 655 and the leading judgment given by Mason J (as his Honour then was). His Honour at 663-644 said: "The appellant sought to find some comfort in the remarks of Brett LJ in Castellain v Preston (1883) 11 QBD 380, at p 388, where his Lordship, in rejecting the notion that subrogation applied to rights of action only, said: "as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished." These remarks say no more than that there passes to the insurer such rights of the insured as may be necessary to ensure that he receives no more than a full indemnity in respect of the loss. They give no support to the notion that by virtue of the doctrine there passes to the insurer rights of the insured in and over the insured property when the continued enjoyment of those rights by the insured is not inconsistent with the principle of indemnity." (Emphasis added).
28. SIF relies on Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15; (2014) 252 CLR 307 [50] for the proposition that it is an established incident of contract of indemnity that the indemnifier has a right of subrogation.
29. In Atco a creditor Seeley had agreed to fund the liquidator of a company (Newtronics) and the liquidator brought a claim against Atco Controls Pty Ltd (in liq), another major creditor of Newtronics who had appointed receivers to Newtronics. The receivers settled with the liquidator which created a fund out of which the liquidators claimed entitlement to be paid their fees and expenses, including their liability to reimburse Seeley. Atco Controls, which had been found to be owed the debt it had claimed, asserted that it was entitled to the settlement sum as a secured creditor, and the Court unanimously held that the liquidator had an equitable lien to meet the indebtedness to Seeley. The Court observed: "[50] It has never been disputed in these proceedings that the agreement between Seeley and the liquidator took effect as an indemnity. It is an incident of such an agreement that an indemnifier has a right to reimbursement of all moneys paid under the indemnity. The indemnifier has a right of subrogation to all the rights and remedies of the party indemnified and any moneys recovered by that party (99). It follows that the liquidator was obliged to reimburse Seeley and that the equitable lien attached to the settlement sum as a charge to permit that indebtedness to be met."
30. Thus the liquidator had agreed to indemnify Seeley and it was entitled to a right to recover what it had paid to Seeley from the fund obtained by the work done. The footnote in the passage set out is a reference to Burnand and to Castellain. The real contest in Atco did not concern subrogation but whether the liquidator had a charge ranking in priority to the secured creditor's interest. I do not read Atco as establishing that an insurer can claim entitlement to amounts that do not diminish the loss for which the insured has obtained indemnity.
31. In Cochrane v Cochrane (1985) 3 NSWLR 403 Kearney J had to consider whether a third party who had paid off a mortgage debt of a husband (the Plaintiff) and wife (the Defendant) who jointly owned a property. The Plaintiff's mother had lent the Plaintiff and the Defendant $55K which loan was secured by a mortgage. The mother died and by her will she left the Plaintiff with a share in the estate and directed that his share was to be applied in payment of the mortgage debt. The executors followed the testatrix's directions and forwarded to the Plaintiff a discharge of mortgage and ancillary documents to enable the mortgage to be discharged. The Plaintiff did not attend to lodgement and his wife took the document with her on their separation and sought to have the mortgage discharged. The Plaintiff sought to injunct the discharge of the mortgage claiming that he had a right of contribution from his wife and that he was subrogated to his mother's mortgage rights. Kearney J at 405 rejected the claim to subrogation: "This principle is based on equity's concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out. As a corollary to this basis for the principle, there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or in equity sufficient to avoid an unconscionable result. In the light of these notions I am unable to accept that the doctrine of subrogation applies to the case of repayment of a mortgage debt by a co- mortgagor in the absence of a very clear reservation expressly or impliedly of such right. Each co-mortgagor being primarily liable for the whole debt, adequate justice is done between them if one has to pay the whole debt, by his entitlement to contribution. This is reinforced where the non-paying co- mortgagor is insolvent, and to give the paying co-mortgagor the added right of subrogation could have the effect of constituting him a secured creditor to the detriment of other creditors in the insolvency. Equity recognises the vital difference in cases of suretyship or assignment of leases, that although the liability is co-existent, the ultimate liability rests upon the principal debtor in the one case and upon the assignee being the current lessee in the other. The implied indemnity inherent in such relationships and creating the equity calling for subrogation does not exist in the relationship between co- mortgagors." (Emphasis added).
32. Although Cochrane is dealing with a very different situation to the present, Kearney J's reference to "the conscience of the mortgagor" and "unconscionability" is of relevance. Indeed, Ms Whittaker at T253.49 to T254.2 described "the overarching question" here as being "whether it would be unconscionable for CRC to retain…both the amounts paid under the indemnity and the withdrawal price."
33. Ms Whittaker submitted that the GLT Indemnity was closer to a contract of credit or loss of profit insurance than more general insurance citing J. Birds, B. Lynch and S. Milnes, MacGillivray on Insurance Law: Relating to all Risks Other than Marine (Sweet & Maxwell Ltd, 12th ed, 2012) at 32.024, which establishes that subrogation is available to an insurer in this type of insurance. Reference was made to the description in MacGillivray at 32.016 to credit policies by which the insurer will indemnify the insured if a debt is not paid at a particular date and at 32.021 to polices which quantify the liability of the insurer as the amount remaining after a final dividend is declared, which has some similarity to the position here. It should be observed, however, that (a) the GLT Indemnity is not predicated on a debt being due from GOT and not paid, nor on the inability of CRC to pay and; (b) the cases mentioned under subrogation deal with the right of the insurer to take over the rights of the creditor against the debtor in respect of the debt which the insurer has paid (or agreed to pay). If GOT is the debtor then it is rights against GOT to which subrogation, if otherwise available, are to be exercised.
34. In Meacock v Bryant & Co [1942] 2 All ER 661, a case in CRC's bundle of authorities, Atkinson J held that under what was described as a contingency policy - which was to pay a loss in the event that sums deposited by a bank in Spain on behalf of the insured were not received within 15 months of the date of deposit - should be treated as an indemnity policy rather than akin to a life policy and sickness and accident policy to which a right of subrogation is not an incident. The policy did use the word "loss" so it is not difficult to see why the Court held that it was an indemnity policy. The distinction between indemnity insurance and contingency insurance is dealt with at 22.1.200 of T.G. Seddon (ed), Laws of Australia: Insurance and Income Security (Thomson Reuters, 2014) and there cited is the following passage from the judgment of Sir Robert Megarry V-C in Medical Defence Union Ltd v Department of Trade [1980] Ch 82 at 89: "Indemnity insurance provides an indemnity against loss, as in a fire policy or a marine policy on a vessel. Within the limits of the policy the measure of the loss is the measure of the payment. Contingency insurance provides no indemnity but instead a payment upon a contingent event, as in a life policy or a personal injury policy … The contractual sum is paid if the life ends or the limb is lost, irrespective of the value of the life or the limb." See also Globe (supra) at [245].
35. SIF contends that since GLT has paid out CRC on the indemnity it is subrogated to all of CRC's rights against GOT, including CRC's right to the balance of the Withdrawal Amount and that Castellain and Atco support the widest ambit of rights against third parties that can be the subject of subrogation.
36. In relation to the question of loss, Mr Braham gave as contrasting examples the position of a father who promised his son that if in any month his son does not receive enough income from the son's employer to pay for the son's rent he, the father, will pay the money needed or the gap to meet the rent ("Rental Scenario A"). The second scenario ("Rental Scenario B") is that the father agrees to pay the son any shortfall in wages due to the son from the employer.
37. The difference between the two scenarios, CRC contends, is that the son has not in Rental Scenario A suffered a loss, but in Rental Scenario B he has suffered a loss as he has not been paid what is due to him. A second difference is that in Rental Scenario A the son has no rights against the employer - it not being a term of employment that the employer will pay him enough to rent a particular (or indeed any) flat. In Rental Scenario B, the son does have rights to enforce the contract of employment and recover wages due to him. Mr Braham contended that incurring a debt is not and cannot of itself be characterised as a loss - CRC had a loan from ANZ (and then Max) which it was obligated to repay.
38. It is necessary to focus on the terms of cl 2.2 of the GLT Indemnity by which, reduced to its essence, GLT promised to indemnity CRC "if and to the extent" that CRC did not receive by way of distribution from GOT sufficient monies to meet an amount due by CRC to Max. It was not couched as a promise to pay what GOT failed, in breach of its obligations to pay, but rather simply as a promise to pay the shortfall if what was paid by way of distribution did not meet CRC's obligations to its lenders.
39. It can be seen that cl 2.2 of the GOT Indemnity has the potential to operate in circumstances where GOT has breached its obligations to CRC (because it has not distributed all of the income which should have been distributed under cl 11 of the GOT Constitution) but also where, in fact, GOT is not in breach of its obligations at all. For example, the income derived from the lease and paid to GLT may have been substantially lower than expected or the expenses substantially higher and what GOT had distributed to CRC, whilst small, is not less than GOT was obliged to distribute. In the second situation, CRC has no claim against GOT for additional distributions because GOT is not in breach of cl 11 of the GOT Constitution. In the first situation, CRC has rights against GOT which it may decide not to exercise because it can call on the GLT Indemnity. Thus the promise in cl 2.2 of the GLT Indemnity can, depending on the circumstances, be akin to either Rental Scenario A or Rental Scenario B, using Mr Braham's example.
40. It is clear however that SIF is contending that the rights to which it asserts CIS, as trustee of GLT, is entitled to be subrogated are not the rights which CRC did not exercise for unpaid distributions (since on the hypothesis underlying this part of the case there are none) but rather another right unconnected with the distributions. That is to say that SIF says that because GOT owes CRC the balance of the Withdrawal Amount that is a fund which GLT is entitled to attach in order to recoup the indemnity it has paid out to CRC (on the assumption relevant to this part the case). The argument seems to embrace the proposition that any amount owing to CRC from any source is an amount which GLT can attach. Admittedly the fund to which SIF claims CIS as trustee of GLT could have access was a fund arising out of the Gosford scheme and the theme which I earlier referred at [68] above seemed to intrude here, namely that, since it was never intended that CRC would make a profit, the repayment by CRC of the amount paid by GLT out of the Withdrawal Amount produced no unreasonable result. As I have pointed out the underlying premise is not made out and in any event the question is not whether it would meet Residual Unitholders' expectations or CRC's expectations, but rather having regard to the relevant documentation what was CRC's entitlement and whether, if the principles of subrogation do apply, they extend to support SIF's claim.
41. There is to my mind considerable room for doubt that cl 2.2 is an indemnity against "loss" and generally indemnity is something given in respect of "actual ascertainable loss" (see Perry v Anthony [2016] NSWCA 56 at [40]), but I do not think it is necessary to form a concluded view on that aspect or in that connection to venture into the interesting question of whether the GLT Indemnity should be treated as akin to contingency insurance rather than indemnity insurance. This is because, in my view, the clear answer to SIF's claim is that, assuming in SIF's favour that the shortfall between distributions from GOT to CRC and what CRC owed Max constitutes a loss for which GLT agreed to indemnify CRC and that the principles of subrogation can apply as a consequence of payment to CRC, the amount to which CRC is entitled as the Withdrawal Price following the sale of the Property and redemption of B Units is quite discrete and separate from the right to receive distributions of income from GOT (which derive ultimately from what the tenant has paid GLT) as Ms Whittaker acknowledged at T244.31-32. The right to recover from GLT a shortfall in distributions is even more discrete and separate. The payment of the Withdrawal Amount for redemption of the units does not diminish or reduce the shortfall on distributions to CRC, and there is no double indemnity because CRC was entitled to both the shortfall on the distributions promised to be met by GLT and to the balance of the Withdrawal Amount payable by GOT. They are separate obligations imposed on different entities, and I can see no basis to conclude that it would be unconscionable or unjust for CRC to receive both the shortfall on distributions from GLT and all of the Withdrawal Amount from GOT.
42. The fact that CRC would (or might) have had to use part of the Withdrawal Amount to repay monies to Max if GLT had not met its obligations under the GLT Indemnity cannot support a right of subrogation in GLT any more than if A, the insured in the car insurance example at [133] above, would have had to access the loan monies to be repaid to him by B to repair his vehicle if the insurer (C) did not indemnify him under the policy. If GOT had, in breach of its obligations, not paid an amount due to CRC as a distribution and GLT had paid that difference then GLT might well be entitled to pursue GOT in CRC's name for the shortfall met by it but that is not the present situation because, as I have noted: 1. the foundation for the present subrogation claim is the assumption that GOT had paid everything required of it to CRC; and 2. GLT is not asserting a right against GOT to recover from GOT what GLT has paid to CRC.
43. In my view, cl 7 of the GLT Indemnity, of and by itself, excludes the subrogation claim and it also reinforces the conclusion that I have reached since it expressly provides that the indemnity is not to be adversely affected by "any other right or remedy to which CRC is entitled". The effect of SIF's contention, if accepted, would be to adversely affect the right of CRC and recover the full withdrawal amount. The clause is inconsistent with the right of subrogation claimed, and the effect of SIF's claimed right would be to render the GLT Indemnity of extremely limited value. I do not accept SIF's contention that the right to indemnity is unaffected because CIS will have already paid what is due under the indemnity before the right of subrogation accrues but in any event this does not address the impact of the indemnity (on SIF's case) on CRC's right to receive the full Withdrawal Amount. Nor do I accept that cl 7 is ambiguous and hence should be read down. It was not contended by either party that construction of cl 7 is affected by the terms of cl 8, and I do not think that it is. Clause 8 is dealing with rights prior to indemnification. Clause 7 is dealing more broadly with the protection of CRC's rights.
44. Turning now to the second limb of the subrogation argument I do not think that the situation is analogous to that of Ghana Commercial Bank or cases on subrogation where a surety has paid out a debt owed to a creditor for the following reasons: 1. In cases of surety the surety has an independent claim in his own name against the debtor because he has satisfied the debt owed to the creditor: see Morris v Ford (supra) at 800 per Lord Denning MR and at 807 per Stamp LJ, and see also J. O'Donovan & J. Phillips, Modern Contract of Guarantee (Thomson Reuters, 4th ed, online service) at 12.300. What the surety/ indemnifier is subrogated to is the security that the creditor held - usually, for example, a mortgage. GLT did not, on the foundational assumption for SIF's claim, pay out a "debt" owed by GOT to CRC - or even pay to Max a debt owed by CRC to Max. Instead GLT paid out to CRC money due on a contingency (i.e. a shortfall between the amount due from CRC to Max and the amount distributed by GOT). It will be observed that SIF's claim under the surety formulation is not simply another way of putting the claim based on its insurance formulation because under that head it is CRC's shoes that SIF claims CIS can step into, but under this head it is Max's shoes that it contends CIS can step into. 2. CRC was the party to be indemnified under the GLT Indemnity and it made a demand on GLT for GLT to make payments to it and directed that the monies be paid into the CRC Gosford Deposit Account: see the letter dated 7 May 2009 at CB4 1745. What SIF is asserting is in effect that CIS had a right against the indemnified person (i.e. CRC), not a third party. What GLT paid out was required to be paid to CRC not to Max, so it cannot claim therefore to take over securities held by Max not CRC. Theoretically payment to CRC could give CIS, as trustee of GLT, rights against GOT but CIS is not asserting any rights against GOT by reason of any security held by CRC but rather is asserting a right to funds held by itself that belong to CRC, as part of the Withdrawal Amount, because Max had rights over the Withdrawal Amount. 3. I agree with CRC's submission that it is difficult to conclude from the content of extensive documentation of rights that it was intended that GLT would be entitled to recover what it paid to CRC pursuant to the GLT Indemnity from CRC there being no mention of such a right in the GLT Indemnity. However, I do not think it is necessary to examine this further point because in my view SIF's claim (on behalf of GLT) is inconsistent with cl 7 of the GLT Indemnity. This is because if SIF's contention were accepted it would significantly impair CRC's right to the Withdrawal Amount, a right to which CRC is entitled pursuant to the GOT Constitution.
45. I therefore conclude that CIS has no right of subrogation in relation to the balance of the Withdrawal Amount held by CIS.

Funds held by the receivers (Issue 8)

1. The DCS accept that if issue 1 is answered favourably to CRC then CRC is entitled to the funds held by Ms Heesh (DCS 184). Given my conclusion on issue 1 CRC is entitled to those monies.

Liability to Max (Issue 9)

1. This concerns amounts allegedly still owing by CRC to Max and hence due under the security arrangement. Mr Braham conceded in opening that this claim is only open if CRC is unsuccessful in recovering the money it claims back from CIS because if CRC obtains those funds it can pay whatever amount it owes Max under the security arrangements: see T11.32-37. Given my conclusions on CRC's other claims, this claim by CRC falls away.

Conclusion

1. It follows that CRC is entitled to the balance of the Withdrawal Amount ($10,331,766.37) and to the $2,367,102.48 plus accrued interest held by Mr Heesh.
2. Consequent upon my determination of the issues I think that the orders sought in the POS at paragraph 174 and set out in paragraph [64] above are appropriate and should be made, save that I will alter the required time for payment to 14 days (from seven days) in both order (2) and (3) having regard to the exigencies of the current Covid-19 crisis and noting the slightly different amount held by Mr Heesh according to paragraph 17 of the Statement of Agreed Facts, i.e.: "(1) An order that CIS as trustee of the Gosford Ownership Trust be restrained from giving effect to its determination set out in its letter dated 7 December 2017; (2) An order that, within fourteen days of the date of the order, CIS as trustee of the Gosford Ownership Trust pay CRC the amount of $10,331,766.57 in further and final payment of the Withdrawal Price payable following its redemption of the [B Units] issued to CRC (plus CRCs proportional share of any interest that has accrued on that amount since the date of redemption); (3) An order that, within fourteen days of the date of the order, Timothy Heesh is to pay to CRC the amount of $2,367,102.48 plus accrued interest (a total as at 30 April 2020 of $2,382,074) which he is holding pending the resolution of the proceedings; (4) An order that SIF pay the Plaintiffs' costs of the proceedings as agreed or assessed."

Amendments 22 October 2020 - NOTE: The figure referred to in Order 3 in paragraph 157 of his Honour's reasons has been amended from $2,832,074 to $2,382,074. The original figure was provided to the Court by way of the Plaintiff's Opening Submissions and has been amended by consent of the parties to reflect the agreed correct figure. 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: 22 October 2020