The background to the present proceedings is not uncomplicated. It involves a corporate and trust structure conceived by Mr Crossman, a financial adviser, and implemented by Mr Seller, a solicitor, to put in place a securitised investment scheme involving the acquisition of various service station properties. There has been a protracted history of litigation between those involved in the investment scheme, including various members of the family of the property developer, Mr Sid Londish. Reference to some of that litigious history will be made in these reasons, as necessary.
The underlying tax benefit sought to be obtained through the investment scheme (described at [16] of the primary judge's reasons) was for tax losses of the investor company to be offset against income. Valofo was the investor in the scheme. The sole shareholder of Valofo was Londish Nominees Queensland Pty Ltd, which the parties in the subject proceedings accepted held its interest in Valofo as trustee of trusts the underlying beneficiaries of which were Mr Sid Londish, Mr David Bowman (his son-in-law) and Mr Peter Londish (his son) (see [37] of the primary judge's reasons).
The structure of the underlying commercial transaction involved the establishment in 1995 of three separate trusts: the PILT Trust, of which PILT Nominees was the trustee at the relevant time; the Baltarna Trust (sometimes referred to as the Baltarna Unit Trust), of which Baltarna Pty Ltd (Baltarna) was the trustee at the relevant time; and the Baltarna Class Trust, of which first Baltarna and then later Sanabu Pty Ltd (Sanabu) was the trustee. Both Baltarna and Sanabu were companies controlled by Mr Seller. Neither was a party to the subject proceedings.
Baltarna was the sole unitholder of the PILT Trust (in its capacity as trustee of the Baltarna Trust). Valofo was the sole unitholder of the Baltarna Trust. The "Baltarna Class Trust" was nominated as a general beneficiary of the Baltarna Trust. Until March 2008, the class A general beneficiaries of the Baltarna Class Trust (as to one-third of the trust fund) were Mr Seller and persons or entities associated with him and the class B general beneficiaries of the Baltarna Class Trust (as to two-thirds of the trust fund) were Mr Crossman and persons or entities associated with him. A diagram (provided by the New Trustees with their submissions) setting out the structure of the trusts in a simplified form is annexed to these reasons.
In around 1996, PILT Nominees (as trustee of the PILT Trust) acquired a number of service station properties, which were or were to be the subject of a lease (initially for a 12 year period) to a major oil company. The borrowings to finance the acquisition of those properties were refinanced though the issue of bonds.
Mr Crossman's return for his "sweat equity" was, according to his closing submissions to the primary judge (see [16] of his Honour's reasons) to be the receipt of one-third of the distributed net proceeds from the ultimate sale of the service station properties (described as a "free-carried promoter's equity") with the balance to be divided equally between Valofo and Mr Seller.
Nevertheless, as has been emphasised by the New Trustees in the present litigation, Mr Crossman was not himself a beneficiary of the PILT Trust. Rather, until March 2008, he was a discretionary beneficiary of the Baltarna Class Trust. The structure of the scheme was such that, even as a beneficiary of the Baltarna Class Trust, Mr Crossman had no entitlement to any payment out of the trust funds. Under the scheme, the only way that Mr Crossman would receive funds was through a distribution to him as a class B general beneficiary, under the terms of the Baltarna Class Trust Deed, on the vesting of the Baltarna Class Trust. Moreover, under that deed the class A and B general beneficiaries would be entitled to payment of a distribution out of trust funds only if Valofo had first been paid a specified amount (agreed, in the events which transpired, to be a minimum of $7.5 million) and the trustee of the Baltarna Trust had then exercised a discretion to pay residual funds to the general beneficiaries (pursuant to what was described by Senior Counsel for the New Trustees as the "cascading waterfall" under cl 4.2 of the relevant trust deed - see T56.50 28/4/16).
The establishment of the various trusts and relevant provisions of the respective trust deeds are described in more detail below.
[2]
PILT Trust
The PILT Trust was established by deed dated 5 December 1995. The initial trustee of the trust was Australian Securitisation Corporation Holdings Ltd (ASCH), a company incorporated in the Australian Capital Territory. The initial manager of the trust was Australian Gilt Securities Ltd (AGS), a company incorporated in New South Wales, whose name was later changed to RMB Australia Ltd (RMB) (see Supplemental Deed dated 17 December 1996). Mr Crossman was employed, at the time the investment scheme was put in place, as a senior executive of RMB (see [16] of the primary judge's reasons).
Recital C of the PILT Trust Deed recorded the intention that the trustee would progressively acquire a portfolio of "Designated Properties" (defined as including land the subject of a lease or agreement to lease to a company whose business included the sale of petroleum products; in effect, the service stations) and would fund those acquisitions by borrowings that were to be refinanced by the issue of bonds, if so directed by the manager following the acquisition of the portfolio.
Pursuant to cl 9.1 of the PILT Trust Deed, read with the definitions in cl 1.1, the only authorised investments of the trust were the Designated Properties, cash and "Short-Term Authorised Investments". The primary investment policy of the trust (cl 9.2) was to acquire, and hold for the "Consent Period" (defined as the period from the date of the deed until the manager issued a notice of intended trust termination), the Designated Properties.
The beneficial ownership of the PILT Trust was, pursuant to cl 3, divided into units of two classes (consent units and ordinary units). Clause 4 made provision for the issue of bonds and for the principal and interest entitlements of bondholders.
As at December 1996 (according to the Supplemental Deed dated 17 December 1996), the only bondholder was the AMP and there were two unitholders (Baltarna and AGS; the latter being the only "consent unitholder") (Recital E). It was accepted in the present proceedings that the sole unitholder of the PILT Trust as at the relevant time was Baltarna (in its capacity as trustee of the Baltarna Trust) (see [20] of the primary judge's reasons).
Under the PILT Trust Deed, the trustee had, in addition to the general power in respect of trust assets conferred by cl 13.1, certain specific powers conferred by cl 13.2. Those included the power to execute instruments (cl 13.2(n)), the power to settle and compromise legal proceedings (cl 13.2(o)), and the power to do all things incidental thereto or necessary or convenient to be done for or in connection with the trust or the trustee's functions under the PILT Trust Deed (cl 13.2(v)).
Clause 23 of the PILT Trust Deed contained the following relevant provisions, the first three of which I will refer to as the exoneration clauses:
23.9 Powers, Authorities and Discretions
Except insofar as herein otherwise expressly provided and in the absence of fraud, negligence or wilful default, the Trustee and the Manager shall not be in any way responsible for any loss (whether consequential or otherwise), costs, damages or inconvenience that may result from the exercise or non-exercise of any powers, authorities and discretion vested in it.
…
23.13 No Liability except for Negligence etc.
In the absence of fraud, negligence or wilful default, the Trustee and the Manager shall not be liable personally in the event of failure to pay moneys on the due date for payment to any Bondholder, any Unitholder, the Manager (in the case of the Trustee), the Trustee (in the case of the Manager) or any other person or for any loss howsoever caused in respect of the Trust or to any Bondholder, any Unitholder, the Manager (in the case of the Trustee), the Trustee (in the case of the Manager) or other person.
23.14 Further Limitations on Trustee's Liability
Subject to clause 23.3, the Trustee shall not be liable:
(a) (For Loss on its Discretions): for any losses, costs, liabilities or expenses arising out of the exercise or non-exercise of its discretion or for any other act or omission on its part under this Deed, any other Transaction Document or any other document except where the exercise or non-exercise of any discretion, or any act or omission, by the Trustee, or any of its officers, employees, agents or delegates, constitutes fraud, negligence or wilful default;
…
Nothing in this clause 23.14 alone (but without limiting the operation of any other clause of this Deed) shall imply a duty upon the Trustee to supervise the Manager in the performance of the Manager's functions and duties, and the exercise by the Manager of its discretions, hereunder.
…
23.19 Conflicts
Nothing in this Deed shall prevent the Trustee, the Manager or any Related Body Corporate or Associate of either of them or the directors or other officers thereof or any other person (all being included unless the context otherwise requires in the expression the "Trustee and the Manager" where hereafter used in this clause) from subscribing for purchasing, holding, dealing in or disposing of any Units or Bonds or from otherwise at any time contracting or acting in any capacity as representative or agent or otherwise or entering into any financial, banking, development, insurance, agency, broking or other transaction with, or providing any advice or services for the Trust or from being interested in any such contract or transaction or otherwise and the Trustee and the Manager shall not be in any way liable to account to any Unitholder or Bondholder or any other person or any of them for any profits or benefits (including but without limiting the generality thereof any profit, bank charges, commission, exchange, brokerage and fees) made or derived thereby or in connection therewith and the Trustee and the Manager shall not by reason of any fiduciary relationship be in any way precluded from making any contracts or entering into any transactions with any such person in the ordinary course of the business or from undertaking any banking, financial, development, agency or other services and without prejudice to the generality of these provisions it is expressly declared that such contract and transactions may include any contract or transaction in relation to the placing of or dealing with any investment and the acceptance of any office of profit or any contract of loan or deposits or other contract or transaction which any person or company not being a party to this Deed could or might have lawfully entered into if not a party to this Deed and the Trustee and the Manager shall not be accountable to Unitholders, Bondholders or any other person for any profits arising from any such contracts, transactions or offices.
[3]
Baltarna Trust
The Baltarna Trust was established by deed dated (it would seem erroneously) 5 December 1996. The year "1996" is a typographical error for 1995 (see minutes dated 5 December 1995 of the meeting of directors of Baltarna at which the appointment of that company as trustee of the Baltarna Trust was noted; see also the Unit Certificate dated 28 November 1996 subsequently issued in favour of Valofo).
The Baltarna Trust Deed contemplated the issue of units to registered holders (see cl 6). The sole unitholder (or registered holder of ordinary units) was Valofo. It applied for the issue of 10 units in the trust on 5 December 1995. The resolution to issue 10 units to Valofo was passed at a meeting of directors of Baltarna on the same day. A Unit Certificate was issued in relation to Valofo's registered holding of $344,651 units in the Trust Fund of the Baltarna Trust subject to and with the benefit of the deed.
Clause 20.1 of the Baltarna Trust Deed made provision for the trustee, with the consent in writing of the appointor, at any time before the Vesting Day, to nominate one or more individuals, corporations, trusts or entities having separate legal identity to be a member or members of the class of General Beneficiaries. That term was defined in cl 1.1 to mean persons who from time to time until the Vesting Day are named in or come within those categories as defined in Items 2 and 4 respectively of the schedule to the deed. Item 4 was there stated to be "Nil". Item 2, on the other hand, headed General Beneficiaries, referred to such individuals, corporations, trusts or other entities having separate legal identity (exclusive of certain named persons or entities) as may be nominated pursuant to cl 20 of the deed. The appointor was identified in Item 5 as "[a]s nominated by the Trustee".
Clause 20.4 of the Baltarna Trust Deed made provision for the trustee (with the consent of the appointor) also to declare any individual or entity to be removed as a beneficiary, whether by resolution, deed or deed poll.
At a meeting of the directors of Baltarna on 31 July 1996, it was noted that, in its position as trustee of the trust and pursuant to cl 17(d) of the Baltarna Trust Deed, Baltarna was the appointor of the trust. The minutes then recorded Baltarna's resignation as appointor of the trust and its notification that its successor was to be Mr Seller. The minutes also recorded that, pursuant to the power under cl 20 of the Baltarna Trust Deed, the trustee (with the written consent of Mr Seller) nominated the Baltarna Class Trust as a member of the General Beneficiaries of the Baltarna Trust. A resolution was passed to that effect as and from 31 July 1996. Mr Seller signed a letter dated 31 July 1996 confirming the said appointment. (Presumably the nomination should be understood as being a nomination of the trustee of the Baltarna Class Trust, as the "trust" is not a legal entity.)
Clause 4.2 (the "cascading waterfall") of the Baltarna Trust Deed made provision for the order of application of the trust fund on the Vesting Day (that being the date specified in Item 3 of the schedule - the 79th anniversary of the date of the deed - or such earlier date as the trustee might, with the consent of the appointor, appoint). Relevantly, after the payment of taxes, trustees' fees and expenses, amounts due to lenders in relation to any borrowings, and undistributed income including unitholders' income pursuant to cll 2.3 or 3, the fund was to be distributed in the following order:
(e) A repayment of Unit Holders capital paid on the Ordinary Units to the greater of:
(i) $7,500,000; or
(ii) 55% of the total Capital paid up (whether as bonus Ordinary Units or otherwise) on all Ordinary Units ever issued, less any amounts already paid pursuant to Clause 8 as a Redemption of such Units. No premium is payable on these Units.
(f) An amount determined by the Trustee pursuant to his discretion and or power of appointment as contained in this deed, to be paid or payable pursuant [sic] to any General Beneficiary out of the Trust Fund, provided that such amount is not to exceed the sum of the amounts determined under 4.2(e) plus any amount paid or payable to the Ordinary Unitholders upon redemption pursuant to Clause 8.
(g) The balance of the capital on the Ordinary Units in existence at the vesting date without any premium payable.
(h) Any remaining balance of the Trust Fund in trust for those of any remaining Unitholders, General Beneficiaries for those interests and in those proportions and for one to the exclusion of the other as the Trustee may in its absolute discretion appoint on or before the Vesting Day revocable at any time earlier than the Vesting Day unless expressed to be otherwise.
Clause 4.3 provided that, in default of the Trust Fund or any part of it vesting absolutely pursuant to cll 4.1 and 4.2, the trustee was to stand possessed of it (or part thereof) for the Unitholders and General Beneficiaries jointly living or in existence on the Vesting Day in equal shares absolutely.
[4]
Baltarna Class Trust
The Baltarna Class Trust was established by deed dated 5 December 1995, with Baltarna as its trustee. This Trust Deed made provision for two classes of general beneficiaries (Class A General Beneficiaries and Class B General Beneficiaries) as well as Remainder Beneficiaries.
Pursuant to cl 2 of the Baltarna Class Trust Deed, the trustee held one-third of the trust fund and income of the fund in trust for the Class A General Beneficiaries (cl 2.2) and the remaining two-thirds for the Class B General Beneficiaries (cl 2.3). Clause 4 dealt with the application of the said funds as from the Vesting Day for the respective classes of general beneficiaries. As already noted, in effect, the Class A General Beneficiaries identified in Item 2 of the schedule, relevantly, were Mr Seller and persons or entities related to or associated with him; the Class B General Beneficiaries identified in Item 3 were Mr Crossman and persons or entities related to or associated with him.
[5]
Position as at March 2008
To recap, the position in relation to the respective trusts prior to the events in 2008 which led to the Crossman proceedings was, in summary, that: Baltarna was the sole beneficiary under the PILT Trust; it held its interest under the PILT Trust as trustee of the Baltarna Trust, the sole unitholder of which was Valofo and the nominated general beneficiary of which was the Baltarna Class Trust; and Baltarna was also the trustee of the Baltarna Class Trust, the two classes of general beneficiaries of which were, in effect, Mr Seller (as to one-third of the trust fund) and Mr Crossman (as to two-thirds of the trust fund). The Baltarna Class Trust (or more precisely Baltarna, as trustee of that trust) had a prospective entitlement, on the future vesting of the Baltarna Trust, to an amount (which the parties accept was not to exceed $7.5 million) assuming the prior repayment of $7.5 million to Valofo and a favourable exercise of Baltarna's discretion.
Relevantly, Mr Seller, the appointor under the Baltarna Trust Deed, had the power under that Trust Deed at his discretion to remove any general beneficiary appointed for the purposes of the Baltarna Trust. Therefore, leaving aside the question whether in so doing he was acting properly in the exercise of his discretion as appointor, in practical terms Mr Seller was able to remove the Baltarna Class Trust as general beneficiary of the Baltarna Trust, thus severing the nexus between the Baltarna Class Trust and the Baltarna Trust, which is precisely what he subsequently did and about which Mr Crossman complained in the Crossman proceedings.
[6]
Subsequent events
As foreshadowed above, in March 2008, Mr Seller exercised his power as appointor as defined in the Baltarna Trust Deed to remove the Baltarna Class Trust as a general beneficiary of the Baltarna Trust. The effect of this was to remove the potential for the class A and, more relevantly, the class B general beneficiaries of the Baltarna Class Trust to obtain a distribution of capital or income out of the Baltarna Class Trust on the future vesting of the Baltarna Trust.
The timing of the removal of the Baltarna Class Trust as a general beneficiary of the Baltarna Trust coincided with the then imminent cessation of the securitisation arrangement. The AMP loan, which was secured over the service station properties, was due to come to an end on or about 15 March 2008 (see letter dated 3 March 2008 written by the solicitors acting for Mr Crossman to Mr Seller).
At around this time, Mr Crossman had unsuccessfully sought confirmation from Mr Seller that the service station properties would be sold and that the Baltarna Trust would vest at the expiration of the initial 12 year lease period; a state of affairs that he contended had been contemplated when the investment scheme was initially put in place. Mr Seller's response to the queries which had been raised on 3 March 2008 by Mr Crossman's solicitors in this regard, was to deny that Mr Crossman had any interest in, or was a beneficiary of, the PILT Trust or the Baltarna Trust; to state that Mr Crossman "may have an interest in the proper administration of the BC Trust [Baltarna Class Trust] only"; and to state that the Baltarna Class Trust had no assets or liabilities and that there had been no resolution by the trustee to terminate the Baltarna Trust.
It was the following day that Mr Seller, in his capacity as a director of Baltarna and as the appointor under the Baltarna Trust Deed, signed the document headed "[r]esolution of directors of Baltarna Pty Limited as trustee of the Baltarna Unit Trust 6 March 2008", recording the resolution that the Baltarna Class Trust be removed as a beneficiary of the "Baltarna Unit Trust" effective immediately; and containing an irrevocable declaration that Mr Crossman was "expressly excluded from ever being entitled to benefit under the Baltarna Unit Trust or any trust created under its deed".
The formal resolution so recorded was preceded by reference in the document to a discussion between Mr Peter Londish (as director of Valofo, the sole unit holder in the Baltarna Class Trust) and Mr Seller (as sole director of Baltarna) as to the formation of the Baltarna Class Trust and as to a perceived conflict of interest on the part of Mr Crossman at that time (as to him 'taking on' "a position of profit under the BC Trust" when he was in the employ of RMB, the manager of the PILT Trust). The document also included reference to "a more significant problem with the terms of Part 4 A of the NSW Crimes Act regarding payment of commissions, including the offence of aiding and abetting". The document stated the conclusion that the Baltarna Class Trust should be removed as a beneficiary of the Baltarna Unit Trust effective immediately.
Also at that time, Baltarna was replaced as trustee of the Baltarna Class Trust, and as appointor of that trust, by Sanabu (see resolutions dated 6 March 2008).
By letter dated 12 March 2008 to Mr Seller, Mr Crossman's solicitors (who at that stage had not been made aware of the resolution passed to remove the Baltarna Class Trust as general beneficiary of the Baltarna Trust nor of the replacement of Baltarna as the trustee and appointor of that trust) asserted Mr Crossman's interest in the proper administration of the Baltarna Trust. The letter stated that using the assets of the Baltarna Trust to "fund" a "payout" to Valofo was not permitted under the Baltarna Trust Deed and could prejudice the interests of both the Baltarna Class Trust and Mr Crossman. The commencement of proceedings was foreshadowed.
On 18 March 2008, Mr Seller, as beneficiary, signed a document repudiating any interest in the Baltarna Class Trust "so that none of the beneficiaries mentioned as a part of the Part A Beneficiaries of the Baltarna Class Trust may benefit under that trust ever".
Still unaware of what had occurred on 6 March 2008 (see [73]-[74] above), by letter dated 4 April 2008, Mr Crossman's solicitors wrote to Mr Seller raising Mr Crossman's concern (based on information said to have been received from Mr Peter Londish) that Mr Seller was then in the process of arranging with the trustee of the PILT Trust to retire and had mandated BankWest to raise approximately $11.5 million using the land the subject of the PILT Trust as security, such finance to be repayable over a 10 year period (and $7.5 million of which was to be used to pay a distribution to Valofo).
At least part of that concern seems to have been well-founded. By Deed of Retirement and Appointment of Trustee and Manager dated 17 April 2008, the then trustee and manager of the PILT Trust (ASCH and RMB, respectively) retired from their positions. PILT Nominees and PILT Managers Pty Ltd were appointed as the new trustee and manager, respectively, with effect from the date of the deed, subject to compliance by the new trustee with cl 6 of the deed (relating to final payments of the retiring manager's fee, legal fees and an obligation to pay default interest on any amount not paid when due).
By "at least" May 2008, the service station properties were unencumbered (see the parties' joint chronology in the present proceedings,).
[7]
Commencement of Crossman proceedings
The Crossman proceedings were commenced by Mr Crossman by way of summons filed on 20 May 2008. Mr Crossman sought urgent interlocutory relief to restrain PILT Nominees, Baltarna and Mr Seller in effect from borrowing money (other than to finance the acquisition or holding of a designated property as defined in the PILT Trust Deed) or from taking any step in furtherance or for the purpose of any transaction in which the designated property was used as security for borrowings other than borrowings to finance the acquisition or holding of a designated property.
Mr Crossman's application was heard by Hamilton J on 27 May 2008. His Honour concluded (Crossman v PILT Nominees Pty Ltd [2008] NSWSC 557) that there were serious questions to be tried and that if Mr Crossman's rights were as he claimed them to be they could be seriously compromised by the raising at that stage of the proposed loan of $11.5 million ([6]; [8]). His Honour appeared to accept that Mr Crossman had an arguable case and that he had standing to maintain the claim for relief sought in the principal (i.e., Crossman) proceedings ([6]-[7]). His Honour concluded that it was appropriate to grant interlocutory relief, indicating that leave would be granted to the defendants to apply to the court to discharge or vary the injunction in relation to a proposal for borrowing different from the proposal for an $11.5 million borrowing "that is the proposal in the evidence before me".
The orders that were then made, on the usual undertaking as to damages proffered by Mr Crossman through his legal representatives, included that:
1. Each of the first defendant [PILT Nominees], the second defendant [Mr Seller] and third defendant [Mr Peter Londish] whether by itself or himself, his or its officers, employees, agents or otherwise be restrained until further order from:
(a) entering into any agreement pursuant to which any money is borrowed by the first defendant otherwise than to finance the acquisition or holding of a Designated Property (as defined in the Prime Indexed Lease Trust deed); and
(b) entering into any transaction whereby any or all of the Designated Property (as defined in the Prime Indexed Lease Trust Deed) is used as security for any borrowings other than by the trust of the Prime Indexed Lease Trust to finance the acquisition or holding of a Designated Property
Notwithstanding these orders, and within days of their making, the directors of PILT Nominees (Mr Seller and Mr Peter Londish) resolved (subject, among other things, to receipt of legal advice) to accept what was described in the company's minutes as "an offer of funding" from the ANZ Bank. That offer was, in terms, an offer of an interchangeable facility with a facility limit of $11.3 million, comprising a variable rate commercial bill acceptance and discount facility and a fixed rate commercial bill facility. The letter of offer stated that the facility was to be made available in three separate tranches (though only two tranches were identified in the body of the letter) with the combined balance not to exceed the total facility limit. The facility was to be advanced against specified security properties (the five service station properties). The loan to value ratio over the term of the facility was not to exceed 71%, from which the appellants argue it can be inferred that, as at the relevant date (presumably either the date of acceptance of the bill facility or at least by the time of drawing down of the second tranche), the service stations must have been valued (or ANZ must have accepted valuations) at a figure in excess of $11.3 million.
The 3 June 2008 PILT Nominees' minutes noted that legal advice had been sought "about the ability of the company to accept the offer in view of the recent litigation caused by Mr Phillip Crossman". That advice must have been given promptly because the signed acceptance of the facility offer appears to be dated that same day. However, there may have been some delay in communication of the acceptance of the facility since, in a position paper prepared for PILT Nominees, Mr Seller and Mr Peter Londish for a mediation in May 2009, reference is made to an opinion dated 6 June 2008 from counsel to the effect that a bill acceptance facility agreement was not a loan and would not infringe the injunction ([78]) and it is asserted that entry into the facility was on 9 July 2008 after receipt of legal advices ([83]). Nothing turns on this discrepancy.
On 4 June 2008, in apparent ignorance of what had occurred the day before, Mr Crossman filed his statement of claim in the Crossman proceedings. As part of the relief claimed, Mr Crossman sought a declaration that both the purported removal and exclusion of the Baltarna Class Trust as a beneficiary of the Baltarna Trust and his exclusion from being a beneficiary of the trust, by the resolution of 6 March 2008, were void and of no effect. Mr Crossman also sought the removal of the existing trustees and the appointment of new trustees to each of the PILT Trust, Baltarna Trust, and Baltarna Class Trust. Vesting orders were sought in respect of each of those trusts, consequential upon the appointment of new trustees. (Had the Baltarna Trust vested, the cascading effect of the distribution provisions in cl 4.2 of the Baltarna Trust Deed would then have come into play.)
On 16 June 2008, solicitors then acting for PILT Nominees (Johnson Winter & Slattery) wrote to Mr Crossman's solicitors (Allens Arthur Robinson) advising them that PILT Nominees was "proposing" to "raise funds" through a bill discount facility (without disclosing that the offer of such a facility had already been accepted by PILT Nominees) and that PILT Nominees proposed to use the funds to pay debts incurred in the administration of the PILT Trust. They sought confirmation that there was no objection to the proposed financing arrangements and, in particular (though this could not on any view have been determinative of the question), that the "proposed financing arrangements" did not breach the orders made by Hamilton J on 27 May 2008. In the alternative, they sought confirmation that Mr Crossman would not object to such an order being obtained from the court (and that he would accept that it was purely a matter for the court). No such confirmation was provided by Mr Crossman or his solicitors. Instead, information was sought by Mr Crossman's solicitors from PILT Nominees' solicitors as to various matters relating to the "proposed" bill discount facility and its proposed use.
From June 2008, PILT Nominees proceeded to draw down from the ANZ bill facility for which the service station properties were security (see joint chronology; see also affidavit sworn by Mr Seller on 29 April 2009 in the Crossman proceedings).
On 9 April 2009, Mr Crossman filed two notices of motion in the Crossman proceedings. The first sought, among other things, orders that Mr Seller and Mr Peter Londish file and serve affidavits identifying the date, amount and recipient of any payment from the ANZ facility; that a receiver and manager be appointed to the property owned by PILT Nominees as trustee for the PILT Trust; and freezing orders in relation to each of PILT Nominees and Baltarna.
The second (the contempt motion) sought declarations that each of Mr Seller, PILT Nominees and Mr Peter Londish had committed contempt of court, for alleged breach of the orders made by Hamilton J. Mr Crossman sought orders that each be punished for such contempt.
On 21 and 23 April 2009, White J heard the first of those applications. His Honour accepted undertakings given by each of PILT Nominees, Baltarna and Mr Seller that, until further order, each would not, except with the consent in writing of Mr Crossman, dispose of, deal with, or diminish the value of any of the assets of PILT Nominees or Baltarna and would not cause any assets of those companies to be removed from Australia. His Honour also made an order restraining Mr Seller from taking any step to transfer or otherwise deal with all or any part of the money transferred from PILT Nominees to Baltarna, or so transferred to Baltarna and then to another entity, except with the consent in writing of Mr Crossman. Orders were made for the filing of affidavits in respect of various matters. Mr Crossman's application for the appointment of a receiver (which his Honour considered the balance of convenience heavily favoured) was stood over so that the necessary arrangements by reference to the ANZ bank charge could be completed (see Crossman v PILT Nominees [2009] NSWSC 393;).
On 29 and 30 April 2009, respectively, affidavits were filed by each of Mr Seller and Mr Peter Londish in the Crossman proceedings (as had been ordered by White J). Those affidavits disclosed the amounts that had been paid out of the funds raised by the ANZ bill facility, including amounts totalling approximately $3.9 million to Radio Nominees Pty Ltd (Radio Nominees), an entity associated with Mr Seller; and amounts totalling approximately $5.5 million to Davlon Management Pty Ltd (Davlon), an entity associated with Mr Peter Londish (joint chronology). (Presumably, Valofo's administrators were not privy at that stage to those affidavits, not being party to the Crossman proceedings.)
The matter came back before White J in June 2009 on which occasion PILT Nominees sought judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) as to whether it was a proper exercise of its powers as trustee to defend the proceedings instituted by Mr Crossman and as to whether it was entitled to use the assets of the trust to recoup its expenses in so doing. His Honour accepted that the trustee would be acting properly in defending the proceedings brought by Mr Crossman and considered that, prima facie, the trustee was entitled to be recouped its expenses incurred when acting bona fide in the execution of the trusts in defending the proceedings. His Honour gave judicial advice substantially as sought (PILT Nominees Pty Ltd v Baltarna Pty Ltd [2009] NSWSC 656).
[8]
Settlement of the Crossman proceedings
On 23 June 2009, following two unsuccessful attempts to resolve the dispute by way of mediation, the solicitors acting for PILT Nominees/Baltarna (by then Chang, Pistilli & Simmons) forwarded to Mr Crossman's solicitors a without prejudice offer for their clients to pay to Mr Crossman the sum of $2.2 million in full and final settlement "of all his claims". It is clear from the text of this communication that this offer was one of a series of offers and counter-offers that had passed between the parties; and that what had also been discussed between the lawyers by that stage was the structure of any settlement. The amount of the 23 June 2009 offer appears to have been pitched as the mid-point of the respective parties' most recent offers ($1.8 million offered by the PILT Nominees' side; $2.5 million by Mr Crossman). The email by which the without prejudice offer was communicated further stated that:
The terms of settlement with your client must be strictly confidential and must not be disclosed to third parties including Valofo. The stipulation set out in the Settlement Proposal [sent to Mr Crossman on 3 June 2009] regarding your client obtaining Valofo's consent to the proposal is not pressed.
The terms of settlement are to be recorded in a Deed to be finalised before the matter is before the Court again this Friday and will include provision for all existing orders to be vacated and for your clients to discontinue the proceedings and all motions.
On 25 June 2009, Mr Crossman's solicitors (having the day before forwarded a draft settlement deed) sent to PILT Nominees'/Baltarna's solicitors an amended statement of claim that they said they would "hold off" filing until a response was received to their earlier email. In that amended statement of claim, five additional defendants were named as parties. The additional relief claimed included orders that the various defendants restore the PILT Trust by paying into it particular sums and orders that there be an equitable charge in favour of the trustee of the PILT Trust over such of the property held by various of the defendants into which it was determined that any of a number of specified payments could be traced. The amended statement of claim was not ever filed, presumably because the settlement sum offered by PILT Nominees on 23 June 2009 was acceptable to Mr Crossman and led to the resolution of the proceedings.
[9]
The Settlement Deeds
Two separate settlement deeds prepared by Mr Crossman's solicitors were signed, each dated 8 July 2009. The primary judge, not surprisingly, considered that a forensic decision had been made to enter into separate deeds.
The Main Settlement Deed, entitled "Settlement Deed - main proceedings", was entered into by Mr Crossman, PILT Nominees, Baltarna, Sanabu, Mr Seller, Davlon, and Mr Peter Londish. The Contempt Settlement Deed, entitled "Settlement Deed - Contempt Motion", was entered into by Mr Crossman, PILT Nominees, Mr Seller and Mr Peter Londish.
Both deeds contained entire agreement clauses in identical terms (cll 8 and 9 of the respective deeds):
This Deed contains the entire agreement between the parties with respect to its subject matter. It sets out the only conduct relied on by the parties and supersedes all earlier conduct and prior agreements and understandings between the parties in connection with its subject matter.
[10]
Main Settlement Deed
By cl 2 of the Main Settlement Deed it was agreed that, in consideration of the payment of $1 by PILT Nominees to Mr Crossman (receipt of which was acknowledged by Mr Crossman), Mr Crossman would, as soon as practicable after the Mortgage Date (being the date on which the registered mortgages referred to in cl 2.4(a) of the Contempt Settlement Deed were granted to Mr Crossman), take all steps necessary to discontinue his claim in the Crossman proceedings and have all orders made, and undertakings given, in those proceedings vacated and/or discharged (cl 2(a)).
Clause 2(b) provided that each of the other parties would consent to the discontinuance of the proceedings and the vacation of all orders and discharge of all undertakings given in the proceedings, on the basis that each party was to pay his or its own costs. Clause 2(c) provided that, as soon as practicable after the Second Payment Date (that being the date on which the Second Payment was required to be made under the Contempt Settlement Deed), Mr Crossman would provide written notice to the trustee of the Baltarna Class Trust of his consent to the vesting of that trust in accordance with its terms.
Clause 3 contained mutual releases from each of the parties to the deed in similar terms. I will consider those in more detail in due course. Mr Crossman emphasises that the operation of the two deeds was linked in that the releases and covenants not to sue in the Main Settlement Deed only took effect from the Second Payment Date. Clause 4 contained mutual covenants not to sue, again in similar terms.
[11]
Contempt Settlement Deed
This Deed recited (Recital D) the parties' agreement to settle their differences regarding the contempt motion on the terms set out in the deed "expressly without admission".
Clause 2, headed "[p]ayment", obliged PILT Nominees to pay two sums to Mr Crossman: the first ($600,000) by no later than five business days from the date on which Mr Crossman or his solicitors nominated in writing the bank account to which payment of the funds was to be made (First Payment) (cl 2.2); the second ($1,600,000) by no later than 16 November 2009 (Second Payment) (cl 2.3).
Pursuant to cl 2.4(a), PILT Nominees, Mr Seller and Mr Peter Londish were obliged, no later than four weeks from the date on which the nomination referred to in cl 2.1 of the bank account was made (or within such further period as might be permitted by Mr Crossman in writing), to cause registered mortgages over the Designated Properties to be granted to Mr Crossman to secure the Second Payment. On receipt of the Second Payment, Mr Crossman was to take all necessary steps to consent to the discharge of the said registered mortgages (cl 2.4(b)).
Each of Mr Seller and Mr Peter Londish unconditionally and irrevocably guaranteed to Mr Crossman the due and punctual performance of PILT Nominees' obligations under cll 2.2 and 2.3 (cl 2.7).
Mr Crossman agreed, as soon as practicable after the registered mortgages were granted to him in accordance with cl 2.4(a), to take all steps necessary to discontinue his claim in the contempt motion (cl 3); and the remaining parties agreed to consent to the discontinuance of that claim on the basis that each party pay his or its own costs. Thus the deed made provision for the contempt motion to be discontinued in advance of actual payment of the settlement sum.
Again, there were mutual releases (cl 4) and mutual covenants not to sue (cl 5).
[12]
First Payment under Contempt Settlement Deed
On 16 July 2009, PILT Nominees made the First Payment due under the Contempt Settlement Deed, as directed by Mr Crossman to Metro Finance NZ.
[13]
Valofo administration
On the same day as the making of the First Payment, Valofo was placed into voluntary administration by resolution of its directors (Mr Peter Londish and Mr Bowman) (see letter of 27 July 2009 from the administrators' solicitors to Mr Crossman's solicitors advising of the voluntary administration). The New Trustees were appointed as Valofo's administrators.
The primary judge noted (at [38]) that this followed the purported removal in February 2009 by Mr Bowman and Mr Sid Londish of Mr Peter Londish as a director of Valofo and his replacement by Mr Sid Londish.
By their solicitors' 27 July 2009 letter to Mr Crossman's solicitors, the New Trustees, in their capacity as Valofo's administrators, indicated their wish to participate in the Crossman proceedings to protect Valofo's "beneficial interest in the Trust's assets" and raised their concern that any settlement of Mr Crossman's claims relating to the PILT Trust might involve the improper application or charging of the trust property of the PILT Trust.
The letter advised that Valofo's position was that the proceeds of the ANZ Bank loan "continue to be impressed with a trust in favour of PILT". The administrators' solicitors sought information as to the terms of any settlement discussions. That request was declined on the stated basis of confidentiality obligations owed by Mr Crossman (see emails of 31 July and 29 July 2009, respectively).
On 2 October 2009, the appointment of the New Trustees as Valofo's administrators was declared invalid by Brereton J, on Mr Peter Londish's application (Londish v Sheahan [2009] NSWSC 1175). That decision turned on the conclusion that Mr Sid Londish had never been validly appointed as a director of Valofo. His Honour did not deal with the second basis on which the appointment was challenged by Mr Peter Londish, namely that the administrators were appointed for an improper purpose. His Honour ordered that the purported administration of the company end on 2 October 2009.
[14]
October 2009 Deed of Amendment
By Deed of Amendment dated "October 2009" (seemingly not before 28 October 2009, having regard to the footer on the document), the date for the Second Payment was amended to "no later than 15 December 2009" and provision was made for interest to be payable by PILT Nominees from 15 December 2009.
[15]
Reappointment of administrators to Valofo/notification of proposed Second Payment to Mr Crossman
It appears that between 20 October 2009 and 8 December 2009 steps were taken to reappoint the New Trustees as joint administrators of Valofo. By letter dated 9 December 2009 from PILT Nominees' lawyers to the New Trustees' solicitors (in which reference was made to a summons for interim relief that had been filed by Valofo on 8 December 2009), Valofo's administrators were put on notice that PILT Nominees intended to make, among other payments, payment to Mr Crossman of the "final instalment of a payment in relation to the settlement of [the Crossman proceedings]" and that this would result in the discharge of registered mortgages/releases of caveats held or lodged by Mr Crossman.
The letter noted that the injunctive relief sought in Valofo's summons would limit the manner in which the proceeds of sale from the properties (presumably the service station properties) may be disbursed and sought advice as to whether Valofo objected to the payment being made to Mr Crossman. The solicitors noted that the sale of three of the properties was unlikely to occur until early the following week (most likely no earlier than 14 December 2009) and that the sale of the fourth property was scheduled to occur on 6 January 2010. The letter also noted the writer's instructions that the directors of Valofo had filed affidavits in support of the orders sought by Mr Crossman in the Crossman proceedings, which asserted that he and/or related entities were beneficiaries of the Baltarna Trust.
On 15 December 2009, PILT Nominees' solicitors again wrote to the New Trustees' solicitors. Reference was made to certain discussions that had occurred on 10 December 2009. On a without prejudice basis, information was provided as to the proposed distribution of the proceeds of sale of the properties, including the payment of $1,610,000 to Mr Crossman. The letter indicated that the bulk of the sum to be paid to Mr Crossman would be paid out of the proceeds of the intended sale of the fifth property, which had not been finalised and was not expected to be finalised before Christmas that year. The letter sought advice as to whether Valofo objected to the payments proposed to be made to Mr Crossman.
As at 17 December 2009, as well as the Crossman proceedings, there were two other sets of proceedings on foot: the proceedings commenced by Valofo for injunctive relief, which had been stood over to 23 December 2009 (see [115] above) (the Valofo proceedings), and proceedings commenced by Mr Peter Londish challenging the reappointment of the New Trustees as administrators of Valofo, which had been listed for hearing on 22 December 2009 (the Londish proceedings). By letter dated 17 December 2009 to the administrators' solicitors, PILT Nominees' solicitors sought advice as to whether Valofo intended to seek interlocutory relief in the Valofo proceedings in relation to the proposed Crossman payments.
The administrators' response, by their solicitors' letter of the same date, was that Valofo would not proceed with its application for interlocutory relief on 23 December 2009 because the vast majority of the remaining moneys from the assets of the PILT Trust "are wrapped up in the sale of the 5th property". However, the letter expressly reserved Valofo's rights in relation to any payments made from the assets of the PILT Trust and/or the Baltarna Trust.
[16]
Valofo liquidation
Valofo was placed into liquidation on 5 January 2010, the New Trustees being appointed as its liquidators.
[17]
Second payment under Contempt Settlement Deed
As at 24 February 2010, the fifth service station property had still not been sold. Mr Crossman's solicitors advised PILT Nominees' solicitors that, unless certain events occurred in relation to the sale of the property by 9 April 2010, Mr Crossman intended to exercise his powers of sale as second mortgagee in respect of the property.
Arrangements were then made for the Second Payment to be funded (rather than by the sale of the fifth property) out of a loan facility obtained from NAB (see letter of offer from NAB dated 5 March 2010 signed by Mr Seller and Mr Peter Londish accepting the offer as directors of PILT Nominees on 10 March 2010).
The Second Payment was made to the trust account of Mr Crossman's solicitors in April 2010 (a sum of $1,660,020.27, that amount including interest payable under the amended settlement arrangements). On 28 April 2010, Mr Crossman's solicitors transferred the amount of $1,523,139 80 from their trust account to Metro Finance NZ, being the Second Payment less their fees. By letter dated 21 May 2010, the New Trustees (by then in their capacity as Valofo's liquidators) were advised by Chang, Pistilli & Simmons that, among other things, the final instalment owing to Mr Crossman had been paid from the NAB facility of $2.4 million.
[18]
Discontinuance of Crossman proceedings
Meanwhile, on 4 March 2010, Mr Crossman filed a notice of discontinuance in respect of the Crossman proceedings.
[19]
Consent to vesting of Baltarna Class Trust
On 10 May 2010, Mr Crossman consented to the vesting of the Baltarna Class Trust, in compliance with cl 2 of the Main Settlement Deed.
[20]
Outcome of challenges to the administrators' appointment
In due course, Palmer J dismissed Mr Peter Londish's challenge to the reappointment of Valofo's administrators (Londish v Sheahan - In re Valofo Pty Ltd [2010] NSWSC 337). For completeness, though nothing turns on this, I note that on 21 October 2010, the decision of Brereton J in relation to the challenge to the original appointment of Valofo's administrators was overturned on appeal (Sheahan v Londish [2010] NSWCA 270; (2010) 244 FLR 64), thus retrospectively validating their initial appointment.
[21]
Application for removal of PILT Nominees and Baltarna as trustees
In 2011, an application was made by the New Trustees (in their capacity as the liquidators of Valofo) in the name of Valofo for the removal of PILT Nominees and Baltarna as trustees of the PILT Trust and Baltarna Trust, respectively, and for the appointment of the New Trustees as trustees in their place. That application was supported by the Deputy Commissioner of Taxation, the Australian Taxation Office being the major creditor of Valofo. The application was heard by Rein J.
When Valofo's application came before the Court, the then trustees of the PILT and Baltarna Trusts agreed unconditionally to retire as trustees (though seeking to be heard on the question of the identity of the new trustees to be appointed) (Valofo Pty Ltd (Administrators Appointed) v PILT Nominees Pty Ltd [2011] NSWSC 134 at [6]). Hence, there was ultimately no contest as to the removal of the then trustees of those trusts.
Addressing the existing trustees' wish to be heard as to the identity of the new trustees to be appointed, his Honour said (at [9]-[10]):
The Court does not usually invite or permit submissions from parties who have no interest in the outcome of the application before the Court. In this case, Mr Raphael's clients [the existing trustees] have a reason to be interested in the outcome, and that is, it is abundantly clear from the material put before the Court (see Exhibits A1, A2, A3, C and D) and Mr Gleeson's submissions, both written and oral, that the liquidators of Valofo believe that there are significant aspects of the administration of the trusts by the retiring trustees which could lead to substantial claims against them and other persons.
There is an exceedingly obvious conflict of interest between the interest of the retiring trustees and that of the beneficiary, in a context where the Valofo liquidators have outlined a series of concerns about the management of the trusts and quite specifically enumerated those concerns, and where, as I understood it, the essential factual matters asserted are not disputed, but only the conclusions to be drawn from them. This is precisely the reason why resignation was sought from the retiring trustees and was surprisingly resisted, but finally, as I have noted, was proffered. It is in the interests of Mr Raphael's clients that there be no investigation of the claims or potential claims, and that there be no proceedings brought against them. This interest does not, in my view, provide the retiring trustees with a legitimate basis to be heard, and as I have noted, Mr Raphael did not in the end assert that they did, and I saw no reason to hear from them through their counsel.
His Honour went on (at [11]) to summarise the reasons advanced by the New Trustees in support of their appointment and said at [12] that he accepted "these submissions made on behalf of the liquidators", namely the submissions as to why the New Trustees (as opposed to some other persons) should be appointed; not their submissions as to why it was that the existing trustees should be removed (that no longer being in contest at that stage). His Honour concluded that there was no practical or even theoretically discernible basis of conflict between the New Trustees' role as liquidators of Valofo and their proposed role as trustees of the PILT and Baltarna Trusts and proceeded to make the orders that had been sought.
[22]
Commencement of subject proceedings by the New Trustees/recusal application
It was not until May 2013 (over two years after their appointment) that the subject proceedings were commenced by the New Trustees. It is not necessary to say anything about the conduct of those proceedings leading up to the hearing other than to note that it was not until the first day of the hearing (4 May 2015) that an application was made by the appellants, by notice of motion made returnable instanter, for the primary judge to recuse himself on the ground of apprehended bias. That application was made having regard to his Honour's determination of the February 2011 application for the appointment of the New Trustees. The application was refused for reasons published by his Honour on 6 May 2015.
At [13] of the primary judge's reasons on the recusal application, his Honour indicated that he was approaching the matter, by reference to Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 244 CLR 427, by asking "could a fair minded lay observer reasonably apprehend that [he] might not bring an impartial and unprejudiced mind to the resolution of the questions which [he was] called on to decide in this matter" (my emphasis).
The primary judge set out (at [14]) various matters in connection with the 2011 application, including the last minute abandonment by the then trustees of the condition placed by them on their withdrawal and the questions which he had determined on that application, and noted that no factual or credit findings had there been made.
Having accepted (at [15]), by reference to the written submissions made by counsel for the Valofo liquidators in 2011, that the transaction in issue in the subject proceedings was part of what had been put as one of the matters which was the subject of allegations by the liquidators of Valofo in the earlier application, the primary judge went on to say that he did not accept the proposition that he had passed judgment on the propriety of the transaction the subject of complaint in the subject proceedings or that anyone aware of the Valofo judgment could think that he had done so ([16]). The primary judge noted that the identification of a conflict on the part of the then trustees did not entail a conclusion that the trustee had in fact acted inappropriately and that it would have been quite unnecessary to have so decided.
His Honour concluded (at [17]) that:
I do not accept that by reason of my conclusion in the Valofo proceedings it could be thought that in determining the dispute between the New Trustees and the Crossman defendants I would in some way be inhibited or impeded in determining on the evidence to be put before me in these proceedings the issues both factual and legal to be identified, and would not approach the matter with an entirely unbiased mind free of any preconceptions about any of the matters in issue. (my emphasis)
[23]
Subject proceedings
The primary judge's refusal to accede to the recusal application is the first ground of appeal. However, before dealing with that ground it is convenient to set out the substantive issues identified by the primary judge (at [48]) as arising for determination:
Issue 1 - Whether the settlement with Mr Crossman was a breach of trust by PILT Nominees and Baltarna, involving the subsidiary question whether the provisions of the trust deeds permitted what otherwise would not be permitted.
Issue 2 - Whether the beneficiaries of the PILT Trust and the Baltarna Trust consented to the breach so as to preclude the New Trustees from relying on the breach of trust, involving the further question of whether there was consent and whether it was fully informed consent.
Issue 3 - Whether, if the Crossman settlement was a breach of trust by PILT Nominees, Mr Crossman received payments by virtue of the breach of trust.
Issue 4 - Whether, if the answer to (3) is yes, Mr Crossman had knowledge of the breach of trust.
Issue 5 - Whether, if the answer to (4) is yes, the Crossman corporations had knowledge of the breach of trust.
Issue 6 - Whether Mr Crossman was a volunteer.
Issue 7 - Whether, if Mr Crossman and the Crossman corporations were otherwise liable to repay the money received by them from the PILT Trust Assets, the release clauses of the Contempt Settlement Deed and the Main Settlement Deed precluded the New Trustees from recovering these moneys from Mr Crossman or the Crossman corporations (involving the following sub-issues):
1. the nature of relief that could be granted;
2. whether the New Trustees were bound by the terms of the Main Settlement Deed and the Contempt Settlement Deed;
3. whether the answer to whether relief could be granted was dependent on whether the New Trustees had set aside the Contempt Settlement Deed and the Main Settlement Deed (his Honour there referring to the assertions by the defendants that, since the New Trustees had not sought to rescind the Main Settlement Deed, they could not rescind only the Contempt Settlement Deed; and that they could not obtain an order for rescission of the Contempt Settlement Deed for various reasons even assuming that rescission of the Main Settlement Deed was not required);
4. whether the releases of either of the Main Settlement Deed or the Contempt Settlement Deed, if binding on the New Trustees, were in term sufficiently wide to preclude the New Trustees' claims against (i) Mr Crossman and (ii) the Crossman corporations.
Issue 8 - Whether the defendants could rely on acquiescence, delay or laches.
Issue 9 - Whether the defendants could run the "Baltarna consent is determinative" point and, if so, whether it was an answer to the plaintiffs' claims.
Broadly, his Honour determined each of those issues in favour of the New Trustees (although it does not appear that his Honour addressed part of issue 2, namely that relating to Baltarna's consent to the settlement with Mr Crossman). There is no challenge to the conclusions his Honour reached on issues 3-6 and no challenge to the conclusion as to Valofo's lack of knowledge/consent to the settlement (issue 2).
[24]
Appeal proceedings
The appellants have raised a number of grounds of appeal, which may conveniently be grouped as follows: apprehended bias (ground 1); denial of procedural fairness relating to a finding that the Main Settlement Deed was entered into in breach of trust (ground 2); the proper construction of the release clauses in the respective settlement deeds and the import of the release in the Main Settlement Deed viz a viz the breach found (grounds 3, 4 and 5); issues relating to the necessity and/or availability of the remedy of rescission (grounds 5-7); findings in relation to breach of trust (grounds 8-12); and issues relating to laches, acquiescence and delay (grounds 13-14).
The New Trustees' notice of contention in turn raised issues (a) as to the capacity in which PILT Nominees entered into the respective settlement deeds (grounds 1 and 2); (b) that the releases in the respective deeds were not engaged on the facts (grounds 3-5); and (c) that none of the exoneration clauses was engaged because PILT Nominees had engaged in dishonest conduct or "wilful default" within the meaning of those clauses (ground 6).
[25]
Summary
For the reasons set out below, I am of the view that the appeal should be allowed and the relief sought by the appellants granted.
I consider that the primary judge did not err in refusing the appellants' application that he recuse himself on the ground of apprehended bias. However, I consider that his Honour did err insofar as his ultimate conclusion as to the appellants' liability to pay equitable compensation to the New Trustees was informed by a finding that the Main Settlement Deed was entered into in breach of trust, in circumstances where no such breach of trust was pleaded nor was the case conducted by the New Trustees on the basis that entry into that deed was in breach of trust or that the Main Settlement Deed should be set aside.
Since the finding of breach in relation to that deed was the basis for the primary judge's conclusion that, even if otherwise applicable, the appellants could not place reliance on the release clause contained in the Main Settlement Deed to resist the New Trustee's claim, that conclusion was also in error.
Viewing the Contempt Settlement Deed in isolation from the Main Settlement Deed (as the primary judge did, accepting the submissions of the New Trustees, and subject to the "Baltarna consent" issue - ground 12), there was in my opinion no error in the primary judge's conclusion that the entry by PILT Nominees into the Contempt Settlement Deed, and performance of its obligations thereunder, amounted to a breach of trust. There was an obvious conflict of interest on the part of PILT Nominees in resolving the serious contempt of court charges made against it by Mr Crossman by way of payment out of trust assets to or at Mr Crossman's direction.
I do not accept that cl 23.19 of the PILT Trust Deed, properly construed, extended to permit entry into a settlement deed in breach of PILT Nominees' fiduciary duty to avoid such a conflict. That clause is directed to what might be described as commercial transactions in the ordinary course of business, which the trustee might otherwise be prohibited as a fiduciary from entering into by reason of a conflict. Nor do the other provisions of the PILT Trust Deed relied upon as a source of power by the appellants (such as the power to enter into or compromise legal proceedings) expressly permit the trustee to exercise those powers where to do so would be in breach of trust.
Furthermore, whether or not PILT Nominees as trustee was relieved from liability for such a breach of trust (under one or more of the exoneration clauses), that does not alter the characterisation of that entry into, and performance of, the Contempt Settlement Deed, as a breach of trust (and one of which the appellants were aware).
However, the position with the Main Settlement Deed, viewed in isolation from the Contempt Settlement Deed, is significantly different.
First, as already noted, the New Trustees did not (and do not now, subject to a qualification to which I will shortly refer) contend that entry into this deed by PILT Nominees was in breach of trust and did not seek to have that deed set aside, which gives rise to the procedural fairness issue raised by ground 2 of the notice of appeal (and which I consider has been established). Therefore, even though PILT Nominees was in a position of conflict of interest in entering into that deed (in that what was being settled included allegations of personal wrongdoing by it), it is not now open to the New Trustees to raise any such complaint.
The qualification to which I have referred is that the New Trustees now appear to submit that, if the release contained in the Main Settlement Deed operates (as the appellants contend) on its proper construction to release PILT Nominees from a claim of breach of trust in relation to the Contempt Settlement Deed, then the entry by PILT Nominees into the Main Settlement Deed was in breach of trust for that reason. However, again, that was not pleaded and for the reasons given in relation to ground 2 below, it is not open to the New Trustees on that basis to maintain an entitlement to the relief granted by the primary judge.
Second, I do not accept the New Trustees' contention that the Main Settlement Deed was of no benefit at all to the beneficiaries of the PILT Trust. Under that deed, the trustee (and its successors) not only obtained the benefit of releases in relation to existing costs orders made against PILT Nominees in those proceedings (which could potentially have been enforced against trust assets); but also the prospect of further trust assets being expended to fund the continuing costs of defending the Crossman proceedings was brought to an end, as was the exposure to further adverse costs orders; in consideration for the payment of the sum of $1 to Mr Crossman.
As to the operation of the release clauses in the respective settlement deeds, the interpretation clause in each of those deeds (cl 1.2(d)) expressly extended references to a party to the deed (relevantly, here, PILT Nominees) to that party's successors. I do not accept the New Trustees' contention that, objectively construed, the releases given by PILT Nominees did not bind PILT Nominees' successors. I accept that the claims made against PILT Nominees were of personal wrongdoing by it (in its position as trustee). Nevertheless it was in the interests of the beneficiaries of the PILT Trust to obtain a release in favour of the trustee (and successor trustees) at least in respect of the existing costs orders and to avoid the prospect of further costs being payable out of trust assets in the defence of such claims.
Therefore, I see nothing to preclude the release in the Main Settlement Deed, if otherwise applicable, from operating to release Mr Crossman from the claim by the New Trustees for the payment of equitable compensation in respect of a breach of trust by PILT Nominees in entering into, or making payment under, the Contempt Settlement Deed. The claim by the New Trustees against the appellants fell squarely within the terms of the release clause (cl 3.2) in the Main Settlement Deed. The claim for equitable compensation was a claim "arising from" and "connected to" the claims in the Crossman proceedings, in that (a) it was a claim arising out of the settlement of the Crossman proceedings and (b) it was a claim connected with the circumstances or allegations giving rise to the Crossman proceedings. The making of the allegations and their denial were the basis on which the settlement deed was entered into. The claim by the New Trustees was a prospective claim that was or could reasonably have been known to PILT Nominees as at the date of the deed, whether or not arising from or connected with the proceedings, since the issue as to whether it was a proper exercise of trust power to make payments out of the trust funds was one that had squarely been raised in the Crossman proceedings, albeit in relation to payments made to Radio Nominees and Davlon.
The presence of the entire agreement clauses in the respective settlement deeds did not operate to confine the operation of the releases so as to preclude a release in the one deed operating in relation to a claim for breach in respect of the other. Nor does the New Trustees' argument that the deeds deeds should be viewed in isolation assist it in this regard. It is apparent from the surrounding circumstances known to the parties at the time the deeds were entered into that they were both a part of an overall settlement of the litigation. In those circumstances, there is nothing surprising in the parties seeking broad releases in each to cover potential claims that might also be caught by the other deed. Accordingly, as the Main Settlement Deed has remained on foot (there being no application for its rescission), I consider that it precluded the New Trustees' claim for equitable compensation against Mr Crossman.
Further, the only construction that could give a meaningful operation to the express extension of the release in that deed to Mr Crossman's "related entities" is that the release clause also operated for the benefit of such corporate entities as were controlled by Mr Crossman or in which he had a substantial shareholding (by analogy with the definition of a corporation's related entities). Hence the release clauses also applied for the benefit of the Crossman corporations. It follows that the appeal must be upheld.
Ground 7 does not arise in light of the conclusion reached as to ground 2. Were it necessary to determine, I would have held the view that, in circumstances where the primary judge accepted (and as is clearly the case) that Mr Crossman could not, as at the date of the primary judgment, be put back into the position where, in practical terms, substantial restitution was possible, the primary judge's discretion miscarried (in the House v The King sense - House v The King [1936] HCA 40; (1936) 55 CLR 499) when equitable compensation was ordered in favour of the New Trustees without any adjustment to take into account the value of that which Mr Crossman had given up by entry into the respective settlement deeds. The chose in action that Mr Crossman had given up was found by the primary judge to be no longer of any practical worth as at that date. However, it was not established that as at the date of entering into the settlement deeds the chose in action was of no worth (even if not worth the amount paid in settlement of the proceedings). True it is that Mr Crossman, if successful in the proceedings, would not have been entitled to payment of any particular sum out of the assets of the PILT Trust. However, the orders he had sought included orders for the appointment of receivers and for the vesting of the trusts, as well as his reinstatement as a class B general beneficiary. If successful in obtaining orders of that kind, there was a prospect that he could ultimately have obtained some distribution out of the trust. As at the date of the settlement deeds, and as at the date of the making of the second payment under the Contempt Settlement Deed, the fifth service station had not yet been sold. Mr Crossman had given up both his claim to have an order for the vesting of the respective trusts and his claim to have receivers appointed to the trust and for relief to prevent further moneys being disbursed out of the trust assets. He had given up the benefit of costs orders in his favour. No account was taken of those matters in the order for equitable compensation that was made.
I am also of the view that the lengthy (and unexplained) delay in the commencement of the proceedings, in circumstances where Mr Crossman's ability to be restored to the position in which he would have been but for the settlement of the litigation must thereby have been seriously compromised, was a factor that should have weighed heavily against the rescission of the respective deeds and the order for equitable compensation. I therefore have difficulty with the proposition that it was not unjust in the circumstances for him to be left in that position.
Finally, on the so-called "Baltarna consent is determinative" point, I consider that the issue of Baltarna's consent was sufficiently raised on the pleadings for his Honour to have been required to determine it. Although not necessary to determine in light of the conclusion I have reached on the above matters, I consider that Baltarna's knowledge of the entry by PILT Nominees into the Main Settlement Deed (and implicit consent thereto, since it was a party to that deed and did not raise any objection) should have been determinative in the appellants' favour of any claim based on the Main Settlement Deed being in breach since in those circumstances the fully informed consent of the sole beneficiary of the Baltarna Trust should have been sufficient to preclude an argument that there was a breach of trust by PILT Nominees in entering into that deed. The primary judge correctly rejected the New Trustees' submission that the knowledge of Mr Seller could not be attributed to Baltarna.
The following are, in more detail, my reasons for those conclusions. I have not attempted exhaustively to set out the competing submissions on each issue (which to some extent overlapped), though I have had regard to all of those submissions.
[26]
Appeal ground 1 - apprehended bias
The appellants' argument on their first ground of appeal (as to the refusal by the primary judge to recuse himself for apprehended bias) focussed largely on the acceptance by the primary judge, when the application for removal of the then trustees of the PILT Trust was made before him in February 2011, of the submissions made by the New Trustees on behalf of Valofo. Those submissions had addressed specific concerns raised by the New Trustees as to the conduct of the then trustees, one of those being in relation to the payments totalling $2.2 million made by PILT Nominees to Mr Crossman to settle the contempt motion.
The appellants note that those submissions had described that conduct (and other conduct) of the existing trustees as being "inimical to the interests of Valofo as beneficiary, the protection of trust assets and the efficient and satisfactory execution of the trusts" ([43]). Valofo had further submitted ([73]) that the payments to Mr Crossman were not in the interests of the beneficiaries of the PILT and Baltarna Trusts and that Mr Seller and Mr Peter Londish were "hopelessly conflicted in being able to determine whether to allow PILT Nominees to make the payments". The appellants point out that the issues raised in those submissions were central issues in the proceedings later to be determined by the primary judge. They also point to the fact that the primary judge referred in his ex tempore reasons to the written and oral submissions from Valofo (at [9]) and said (at [10]):
There is an exceedingly obvious conflict of interest between the interest of the retiring trustees and that of the beneficiary, in a context where the Valofo liquidators have outlined a series of concerns about the management of the trusts and quite specifically enumerated those concerns, and where, as I understood it, the essential factual matters asserted are not disputed, but only the conclusions to be drawn from them. This is precisely the reason why resignation was sought from the retiring trustees and was surprisingly resisted, but finally, as I have noted, was proffered. It is in the interests of Mr Raphael's clients [PILT Nominees, Mr Seller and Mr Peter Londish] that there be no investigation of the claims or potential claims, and that there be no proceedings brought against them. (emphasis as in the appellants' submissions)
In summary, the appellants argue that the present case is one in which the test in Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 (which I set out in due course below) was satisfied in circumstances where the primary judge had received, in the 2011 proceedings, submissions highly critical of the propriety of the settlement deeds and the payments to Mr Crossman and had acceded to those submissions in language that did not admit of doubt. The appellants accept that the conflict of interest characterised by his Honour (at [10]) as "exceedingly obvious" was a conflict between PILT Nominees, as trustee, and Valofo, as beneficiary. However, they submit that the existence of that conflict was directly connected to the criticisms made by Valofo of PILT Nominees' conduct as contained in its written submissions on that application, and the breach of trust that was central to the subject proceedings. They argue that there is thus a logical connection between the determination of the 2011 application for the appointment of the New Trustees and the issues to be determined in the later proceedings.
The appellants submit that the fact that the trustees of PILT Nominees did not ultimately wish to be heard in opposition to the relief sought in 2011 would serve to convey to a fair minded lay observer the impression that the facts underpinning Valofo's allegations were not disputed. They argue that the fact that Mr Crossman was not a party to those proceedings exacerbated the position because he was not able to make submissions on that occasion.
The New Trustees, in response, emphasise that the only issue that the primary judge was ultimately called upon to decide in 2011 was whether they, or some other unidentified person(s), should be appointed as replacement trustees. They contend that his Honour did not determine anything in his 2011 judgment that could give rise to a reasonable apprehension of bias on the ground of prejudgment; and note that his Honour made no finding of fact on an issue arising in the later proceedings. They submit that the primary judge's recognition of the conflict of interest on the part of PILT Nominees, which was obvious, could not be said to sustain an apprehension of bias; particularly where his Honour heard no oral evidence, made no findings of fact and made no findings of misconduct or wrongdoing.
The New Trustees point to the other matters raised by the appellants in this appeal and argue that those do not raise any issue that arose in the 2011 hearing before the primary judge. Further they point out that there is no challenge in these proceedings to the underlying factual or credit findings made by the primary judge or as to the conclusion that, but for the contended for operation of particular clauses in the PILT Trust Deed, the payments to Mr Crossman were in breach of trust. They note that there is also no challenge to the primary judge's conclusion as to Mr Crossman's awareness of the relevant factual matters going to the question of liability or as to quantum. The appellants, however, argue that the issues must be determined by reference to the state of affairs that existed at the commencement of the hearing, at which time there was a contest between the parties on all issues.
The New Trustees also argue that the rule against bias is directed to prejudgment incapable of being altered by evidence or argument (referring to Minister for Immigration and Multicultural Affairs v Jia Legeng [2001] HCA 17; (2001) 205 CLR 507 at [71]-[72]) and submit that a reasonable bystander would not entertain a reasonable fear of prejudgment in circumstances where the primary judge did not form any conclusion on the relevant issues in the 2011 judgment (referring to what was said in Laws v Australian Broadcasting Tribunal [1990] HCA 31; (1990) 170 CLR 70 at 100). In that regard, the New Trustees note that the appellants have made no attempt to identify any aspect of the trial below on which the primary judge is said to have formed an opinion by reason of his earlier judgment or how that opinion may have been applied to the issues in the hearing, such as to explain why the primary judge would not consider the matter afresh in light of the facts and arguments relevant to the hearing below.
The appellants respond that the above submission conflates the tests for actual and apprehended bias, pointing out that Jia Legeng was, unlike the present, a case where actual bias was alleged. They maintain that it is not necessary to demonstrate that the reasonable apprehension of bias to which they pointed below was shown to be justified by the primary judge's conduct of the hearing or the reasons ultimately delivered.
The New Trustees finally submit that even if this ground of appeal were made out, it could not lead to the relief claimed in the notice of appeal and, in light of Uniform Civil Procedure Rules 2005 (NSW) r 51.53, should not lead to an order for a new trial. In response, the appellants point to what was said in Nicholls v Michael Wilson & Partners Ltd [2010] NSWCA 222; (2010) 243 FLR 177 at [316] and Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 229 CLR 577 at [1]-[3], [117] to the effect that, where there is an appeal on the ground of bias or reasonable apprehension of bias, that ground should be dealt with first since, if upheld, it undermines the trial and the remedy must be a retrial, irrespective of the result on other grounds of appeal.
[27]
Determination
The applicable test where there is an allegation of apprehended bias is that stated by the plurality in Ebner (at [6]), namely whether "a fair minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide".
As I read the primary judge's reasons in the present case, that is the test by reference to which his Honour understood he was to approach (and said he was approaching) the recusal application (see [13]). However, when the primary judge expressed his ultimate conclusion on the issue at [17] he did so in somewhat different terms: namely as to whether it "could be thought" (the first part of the "double might" test) that he "would in some way be inhibited or impeded … and would not approach the matter with an entirely unbiased mind …" (my emphasis). In so applying the "double might" test, the primary judge misstated it; converting the "might not bring an impartial mind to the relevant question" to "would not bring an impartial mind …". Ultimately, however, nothing turns on this because, for the reasons set out below, the conclusion that there was no reasonable apprehension of bias was correct.
The application of the Ebner test requires two steps: first, the identification of what it is said might lead the decision-maker to decide a question other than on its merits; and, second, the articulation of the logical connection between the matter identified and the feared deviation from the course of deciding the question other than on its merits (Ebner at [8], [16], confirmed in Michael Wilson at [31]; [63]).
All the relevant circumstances of the particular case may be taken into account in applying the test, though only such knowledge of matters of legal or other specialist practice and process as can reasonably be attributed to the lay observer (including, perhaps, matters of which the observer would inform him or herself before reasonably forming any firm apprehension) will be taken into account (Vakauta v Kelly [1989] HCA 44; (1989) 167 CLR 568 at 584-585 per Toohey J; Najjar v Haines (1991) 25 NSWLR 224 at 240 per Clarke JA). The hypothetical observer is taken to be a rational person who is neither complacent nor unduly sensitive or suspicious; and is aware of the oath or affirmation taken by judges and their judicial obligations more generally.
I accept, as the appellants emphasise, that the test of apprehended bias does not focus on whether or not there is actual prejudgment. That is made clear by the plurality in Michael Wilson (Gummow ACJ, Hayne, Crennan and Bell JJ) at [67]):
... An allegation of apprehended bias does not direct attention to, or permit consideration of, whether the judge had in fact prejudged an issue. To ask whether the reasons for judgment delivered after trial of the action somehow confirm, enhance or diminish the existence of a reasonable apprehension of bias runs at least a serious risk of inverting the proper order of inquiry (by first assuming the existence of a reasonable apprehension). … And, no less fundamentally, an inquiry of [that] kind moves perilously close to the fallacious argument that because one side lost the litigation the judge was biased, or the equally fallacious argument that making some appealable error, whether by not dealing with all of the losing side's arguments or otherwise, demonstrates prejudgment. (emphasis in original)
In the present case, the appellants argue that the express acceptance by the primary judge, in his reasons on the 2011 application, of the submissions made on behalf of the liquidators (which included submissions as to Valofo's concerns as to the "inimical" conduct of the then trustee) is that which might lead his Honour to decide a question in the later hearing other than on its merits; and the connection between that matter and the feared deviation is the centrality of the question of breach of trust to the determination to be made in the later proceedings.
However, it is clear that the particular submissions that his Honour accepted (at [12] of the 2011 reasons) were the submissions advanced by the liquidators in support of their own appointment (relating to their extensive involvement in the affairs of Valofo; their grasp of the affairs of the PILT and Baltarna Trusts; the time and costs savings anticipated to arise from their appointment; the lack of a conflict of interest on their part; the support of the major creditor of Valofo; and that the opposition of the former trustees was based on self-interest).
Acceptance of those submissions (going to the question whether the liquidators of Valofo were appropriate persons to be appointed as replacement trustees of the PILT Trust) does not logically involve the acceptance of other submissions made by Valofo as to the impugned conduct of the former trustees. It could not reasonably give rise, in my opinion, to the possibility that a fair-minded lay observer might reasonably think the primary judge might not bring an unbiased and impartial mind to the resolution of questions going to whether there had been a breach of trust by the retiring trustee (PILT Nominees), i.e., to determine the quite separate issues of breach of trust which, on Valofo's 2011 submissions, called for investigation. There is no logical connection between the two matters such as might give rise to an apprehended deviation from the course of determining the subsequent proceedings on their merits.
Similarly, there is no logical connection between the fact that his Honour considered it surprising that PILT Nominees had (initially) resisted the application for its removal (and had referred in his reasons to its conflict of interest as being exceedingly obvious) and the question that his Honour was later required to determine as to whether there had been a payment of moneys out of the assets of the PILT Trust in breach of trust by PILT Nominees. Recognition of the existence of a conflict of interest on the part of trustees in defending allegations of breach of trust on their part says nothing about the merits of the allegations of breach of trust themselves; nor in my opinion is it something that might lead a fair-minded lay observer reasonably to apprehend that the primary judge might not later bring an unbiased mind to the question whether the allegations of breach of trust were established.
Ground 1 of the grounds of appeal is not made out.
[28]
Notice of contention grounds 1 and 2 - capacity in which PILT Nominees entered the settlement deeds
As the first two grounds of the notice of contention raise a relatively discrete point, I will deal with those before turning to the balance of the grounds of appeal. The New Trustees contend that:
1. The trial judge should have found that the Settlement Deed - Main Proceedings (Main Deed) was entered into by the fourth respondent (PILT Nominees) in its personal capacity and not as trustee of the PILT Trust.
2. The trial judge should have found that the Settlement Deed - Contempt Proceedings (Contempt Deed) was entered into by PILT Nominees in its personal capacity and not as trustee of the PILT Trust.
The New Trustees rely on the primary judge's observation (at [111]) that neither of the settlement deeds was expressed to have been entered into by PILT Nominees as trustee for the PILT Trust. They argue, particularly in the context of their submission as to the construction of the release clauses in the Main Settlement Deed, that PILT Nominees did not enter into the respective deeds so as to bind the PILT Trust.
Apart from the fact that PILT Nominees is not described in the settlement deeds as trustee for the PILT Trust, the New Trustees point to the recitals in the respective deeds, including those which record the denial by PILT Nominees of all allegations made in or in connection with the Crossman proceedings or contempt motion (as the case may be), and to the recitals and provisions relating to the settlement of the claims on the terms of the deeds (see for example Recitals C, D and cll 2 and 3.1 in the Main Settlement Deed). They argue, in effect, that there is no reason why the settlement of those claims would require the trustees to obtain a release binding successor trustees. They emphasise that the claim made against PILT Nominees in the Crossman proceedings was a personal claim against PILT Nominees, with no claim by Mr Crossman to be paid any money out of the trust.
Nevertheless, what was alleged against PILT Nominees in the Crossman proceedings was breach of trust by it in its capacity as trustee. That this was the case is evident from the fact that PILT Trustees was able to seek, and obtain, judicial advice relying on the Court's power to give such advice to trustees pursuant to s 63 of the Trustee Act 1925 (NSW). That advice went to the appropriateness of PILT Nominees defending the claim and the propriety of its use of trust assets to pay the costs of defending the claim.
The respective deeds make clear an intention to bind successors to the parties thereto (see cl 1.2(b)). Insofar as these grounds of contention are raised in support of an argument that the release clauses did not bind successor trustees, such a contention is thus inconsistent with the provisions of the deeds themselves. Grounds 1 and 2 of the notice of contention are not made good.
[29]
Appeal ground 2 - denial of procedural fairness
Ground 2 of the notice of appeal relates to the findings made by the primary judge (at [133]) that entry into the Main Settlement Deed constituted a breach of trust:
2. The trial judge erred in finding that the Main Proceedings Settlement Deed (Main Settlement Deed) was entered into in breach of trust in circumstances where: (a) that allegation was neither made nor contended for by the respondents; and (b) the Main Settlement Deed was not sought to be set aside by the first and second respondents.
In the subject proceedings, issue 1, as framed by the primary judge, focussed on "the settlement" without separately addressing the particular deeds by which the overall settlement of the Crossman proceedings (which included the discontinuance of the contempt motion) was achieved.
The primary judge's conclusion as to breach, as expressed at [76] (and at [77] insofar as it follows on from [76]), appears directed to the entry by PILT Nominees into the Contempt Settlement Deed alone. However, later, when considering issue 7 (i.e., the nature of the relief that could be granted) his Honour said (at [133]) that he was satisfied that entry into both deeds constituted a breach of trust by PILT Nominees (with the knowledge of Mr Crossman). This is the finding about which complaint is made in ground 2 of the grounds of appeal.
Two points may be noted about this part of his Honour's reasons. First, the conclusion that entry into the Main Settlement Deed constituted a breach of trust seems to be one that his Honour considered followed almost axiomatically from the conclusion that entry into the Contempt Settlement Deed was a breach of trust. Perhaps, though this is not expressed, this was based on the conclusion that the Main Settlement Deed was entered into for the same "ulterior purpose" as the Contempt Settlement Deed, though on one reading of [134] his Honour's conclusion may also have related to the fact that the deed contained a release that it was suggested could operate to "sanitise" a breach of trust. Second, it was premised on acceptance (see the prefatory words "accepting for present purposes") of the appellants' contention that the two deeds were to be viewed as part of the same transaction (a premise that his Honour elsewhere rejected - see [156]).
[30]
Submissions
The appellants point out that the New Trustees did not allege that entry into the Main Settlement Deed involved a breach of trust; made no submissions to that effect; and did not seek to set aside the Main Settlement Deed. Rather, the relief sought by the New Trustees in the Crossman proceedings was confined to the Contempt Settlement Deed (see in particular [14]-[15] of the further amended commercial list summons; [177]-[178] of the further amended commercial list statement).
It is submitted that, because of the way in which the New Trustees chose to run their case at trial, the appellants were given no opportunity to argue against the adverse findings that the primary judge ultimately made in respect of the Main Settlement Deed; and that these findings were highly prejudicial to the appellants because they precluded reliance upon a central feature of their defence (see [83(d)]), namely the operation of the release clause in the Main Settlement Deed. The appellants further argue that the New Trustees, having made the forensic decision not to impugn the Main Settlement Deed at trial (and having the benefit of the releases given in that deed by Mr Crossman), cannot now assert that the terms of the Main Settlement Deed are to be read down to avoid what they say would be a further (unpleaded) breach of trust by PILT Nominees in executing the Main Settlement Deed.
The New Trustees do not point to any relief claimed in the further amended commercial list summons or any claim in the further amended commercial list statement to gainsay the procedural unfairness complaint made by the appellants, nor do they point to any submissions made by them to the primary judge to the effect that the Main Settlement Deed was entered into in breach of trust and should be rescinded.
Rather, the New Trustees submit that what the primary judge should be understood as having done, when making the observations he did at [133] as to the Main Settlement Deed, was to reject arguments that had been advanced by the appellants in relation to the Main Settlement Deed - in particular, the contention that the release in that deed could apply "because it was part of the one transaction that included the impugned payments" (see [76]-[81]).
[31]
Determination
It is clear, by reference to the commercial list documents, that the New Trustees did not contend that entry into the Main Settlement Deed was in breach of trust; nor did they seek to set it aside. Indeed, the New Trustees accept that, viewed as a separate deed with a release clause limited in its scope to the subject matter of that deed, the Main Settlement Deed does not involve a breach of trust (submissions at [75(2)]). Although that submission implicitly suggests that entry into the Main Settlement Deed with a release clause extending to cover any breach by reason of entry into or performance of, the Contempt Settlement Deed would be a breach of trust, a submission later made explicitly by the New Trustees (submissions at [76]), no such breach was pleaded.
To the extent that (at [133]) his Honour did make a finding that entry into the Main Settlement Deed constituted a breach of trust and then proceeded to rely on that finding to conclude that the appellants could not rely on provisions in that deed to preclude the New Trustees' claim (as his Honour seems to have done in the second half of [133]), then I consider that ground 2 has been made good.
I say "to the extent that" because it is not wholly clear to me that the primary judge was in fact making a finding at [133] that the Main Settlement Deed was entered into in breach of trust. That is because, as expressed, any such "finding" was dependent on acceptance of the stated premise that the two deeds were to be viewed as part of the same transaction, and elsewhere, the primary judge rejected the appellants' contention to that effect (see [156]).
Given that the question of breach of trust was dealt with by his Honour in issue 1, and the conclusion was there expressed only by reference to the Contempt Settlement Deed, I would have been inclined to think that the primary judge was not intending (at [133]) later to make a separate finding of breach on an issue not raised or argued by the parties; but was simply expressing an obiter observation to the effect that, whether or not the Main Settlement Deed formed part of the same transaction, the trustees could not give to themselves an effective release from a breach of trust constituted by entry into a settlement (the Contempt Settlement Deed) under which they agreed to make payment in consideration of discontinuance of the proceedings against them (an issue I consider further in the context of the challenge based on the release clause findings).
That said, the conclusion at [156] does in terms seem to proceed on the basis of both deeds having been entered into in breach of trust. Similarly, at [159], the primary judge expressed the opinion that the New Trustees were not bound by "deeds" (in the plural) entered into by PILT Nominees in breach of trust.
Insofar as the conclusion that reliance could not be placed by the appellants on the release clause in the Main Settlement Deed was based on a determination that entry into the Main Settlement Deed was a breach of trust, the making of such a finding in my opinion did cause procedural unfairness to the appellants. Logically, the consequence of viewing each settlement deed as a separate transaction, which the New Trustees emphasise is what the primary judge found, is that if (as the appellants contend and the New Trustees largely do not dispute) there was no breach of trust by PILT Nominees in entering into one of the deeds (the Main Settlement Deed), then there should be no reason not to give its terms full effect notwithstanding that the other (the Contempt Settlement Deed), viewed in isolation, was found by the primary judge to have been entered into in breach of trust. That has significant consequences for the appellants' position having regard to the issues raised in ground 3 as to the operation of the release clause in the Main Settlement Deed as well as to the question raised by ground 7 (relating to the asserted need for rescission of the Main Settlement Deed, if relief were to be granted in favour of the New Trustees in respect of a breach of trust relating to the payments agreed to be made, and made, under the Contempt Settlement Deed).
I would therefore uphold ground 2. For the reasons that follow this is determinative of the appeal.
[32]
Appeal grounds 3, 4 and 5 - release clauses
Grounds 3 and 5 mirror each other and can conveniently be dealt with together. Ground 4 was dealt with by the appellants compendiously with ground 3 and in a practical sense follows on from the conclusions reached in relation to grounds 2 and 3. Therefore, I also include it for consideration with the grounds relating to the release clauses.
3. The trial judge erred in failing to find that the Main Settlement Deed precluded the first and second respondents from bringing the proceedings against the appellants or, in the alternative, the first appellant.
4. The trial judge erred in failing to find that the rescission of the Main Settlement Deed, which relief was neither sought not made, was a necessary precondition to the relief sought by the first and second respondents.
5. The trial judge erred in failing to find that the Contempt Proceedings Settlement Deed (Contempt Settlement Deed) precluded the first and second respondents from bringing the proceedings against the appellants or, in the alternative, the first appellant.
These grounds of appeal go to the findings made by the primary judge when considering issue 7, namely whether the releases in the respective deeds precluded the New Trustees' claims. The relevant release clauses are in similar but not identical terms.
Clause 3.2 of the Main Settlement Deed provides as follows:
On and from the Second Payment Date, each of PILT Nominees, Baltarna, Sanabu, Mr Seller, Davlon and Mr Peter Londish releases Mr Crossman and each of Mr Crossman's Related Entities from:
(a) any Claim arising from or connected with:
(i) the Proceeding;
(ii) the circumstances or allegations giving rise to or referred to in the Proceeding; and
(b) any other Claim which is or could reasonably have been known to a party as at the date of this Deed, whether or not the Claim is or could be known to a party, and, whether or not the Claim arises from or is connected with the Proceeding.
"Proceeding" is defined in cl 1.1, by reference to the relevant suit number, as the Crossman proceedings. "Claim" is defined in that clause as including "any claim or liability of any kind (including one which is prospective or contingent and one the amount of which is not ascertained) and costs (whether or not the subject of a court order)".
"Related Entity" is defined as meaning:
… in relation to a party, any Related Body Corporate of the party and any past or present officer, employee or agent of the party or one of its Related Bodies Corporate (but does not include a party), and in relation to Mr Seller includes Radio Nominees Pty Limited and A.T.Lawyers Pty Limited.
"Related Body Corporate" has the meaning given to that term in the Corporations Act 2001 (Cth).
The corresponding release clause in the Contempt Settlement Deed (cl 4.2) was as follows:
On and from the Second Payment Date, each of PILT Nominees, Mr Seller and Mr Peter Londish releases Mr Crossman and each of Mr Crossman's Related Entities from:
(a) any Claim arising from or connected with:
(i) the Contempt Motion;
(ii) the circumstances or allegations giving rise to or referred to in the Contempt Motion.
The definitions of "Proceeding" and "Claim" were the same in the Contempt Settlement Deed. However, the definition of "Related Entity" in that deed did not include reference to entities related to Mr Seller.
There were corresponding covenants not to sue in respect of any matter the subject of the releases. It is not necessary here to set out the terms of those covenants not to sue.
[33]
Primary judgment
The primary judge commenced his consideration of the release clauses at [159] under the heading "rescission", noting that there had been detailed submissions concerning the ambit of those clauses. His Honour disposed of those submissions very briefly on the basis that:
I do not think that the present claims are claims "arising from or connected" with the Crossman proceedings which were concerned with the dissipation of the other assets, not the $2.2 million paid to Crossman or the contempt proceedings but I am of the view that the claim that the payments to Crossman involved a breach of trust was known to Nominees and Baltarna at the time of the deeds.
The first part of that sentence is apparently directed to sub-cl 3.2(a)(i) of the Main Settlement Deed, since the conclusion is expressed by reference to whether the claims were claims "arising from or connected with" the Crossman proceedings. However, since reference is there also made to the "contempt proceedings" it may be that this finding also addresses the application of cl 4.2(a)(i) of the Contempt Settlement Deed.
The primary judge's conclusion in this regard seems to be based on a characterisation of the Crossman proceedings as being "concerned with the dissipation of other assets", not the amount paid in settlement (of the contempt motion). The primary judge does not address in terms the second limb of sub-cl 3.2(a) or sub-cl 4.2(a) in the respective deeds.
The second part of the sentence extracted above appears to follow the wording of sub-cl 3.2(b) of the Main Settlement Deed (which has no counterpart in the Contempt Settlement Deed), since his Honour is there addressing whether the present claim was known to a party at the time of the deed. His Honour there accepted that the claim that the payments to Mr Crossman involved a breach of trust was known to PILT Nominees and Baltarna at the time of the deeds. In that context, the primary judge went on to pose the question whether that knowledge was to be "imputed to the trusts in the sense of binding any future trustees" ([159]). His Honour answered that question in the negative, on the basis that the successors to PILT Nominees (the New Trustees) were not bound by deeds entered into by PILT Nominees in breach of trust ([159]) (a finding necessarily affected by the conclusion reached in relation to ground 2 above).
The primary judge referred to the reasons he had earlier given (on my reading this must be a reference to the reasons at [133]-[136]) for the conclusion that the appellants could not rely on the respective deeds to resist the New Trustees' claims.
The fundamental principle articulated by his Honour at [134] was that a trustee, having agreed for its own benefit to pay out trust money to a third party in breach of trust, ought not be able to give an effective release to the third party to whom the money had been paid "since the release is itself a breach of trust if it were otherwise binding on the trustee and by implication a burden on the trust fund". His Honour referred to American authority to the effect that, though an obligor gives value for a release, the obligor is not protected from further liability if it has notice that the trustee is committing a breach of trust in giving the release (citing Scott and Ascher on Trusts (ML Ascher, A Wakeman Scott, WF Fratcher, 5th ed, 2008, Aspen Publishers) and authorities referred to therein).
The primary judge (at [160]) accepted the New Trustees' contention that even if the release applied as a matter of construction to Mr Crossman it could not operate in favour of the Crossman corporations because the parties to whom the release was expressed to extend were "related entities", defined to mean holding companies and subsidiaries of the relevant party (Mr Crossman).
[34]
New Trustees' general submissions
The New Trustees make a number of general submissions as to the context in which the respective release clauses should be construed. They emphasise (as noted earlier) that the claims made by the appellants in the Crossman proceedings were personal claims of wrongdoing by PILT Nominees (and others) and in this regard they adopt the reasoning set out at [111] of the primary judge's reasons. They point out that no cross-claims had been made against the appellants in those proceedings. They argue that a deliberate choice was made to resolve the Crossman proceedings and the contempt motion in separate settlement deeds, each containing an entire agreement clause. They also note that the subject proceedings related to payments made after the date of deeds and liability arising on receipt of those payments (see [39]-[40]).
The New Trustees place weight on the general common law principle recognised in Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112 (at 123/124) to the effect that general words of a release should be restrained by the particular occasion, or by reference to the particular recital, or by reference to the particular thing or things which were specially in the contemplation of the parties at the time release was given. They also note the observation by the High Court in that case (at 128-129) that, if the circumstances make it inequitable for a releasee to set up the general words of a release as applicable to some particular liability which the releasor seeks to enforce against the releasee at law, the Court of Chancery might be expected to intervene to restrain a plea; equity proceeding on the principle that a releasee must not use the general words of a release as a means of escaping obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances.
The New Trustees argue that when regard is had to: the recitals in each of the deeds, the entire agreement clauses, and the purpose of each deed, the general words of the release in each deed are to be confined to the subject matter of that particular deed and, further, that equity will not permit the appellants to rely on the general words of the release clauses in this case as a means of escaping obligations falling outside the true purpose of the relevant deed in question (submissions at [44]).
The appellants counter this by pointing to the broad drafting of the release in sub-cl 3.2(b) of the Main Settlement Deed (which extends to a claim whether or not the claim "is or could be known to a party") and to cll 7 and 8 of the respective deeds (which acknowledge that the parties may subsequently discover facts different from or in addition to the facts it then knows or believes to be true), as indicating an intention to preclude the operation of the principle in Grant v John Grant & Sons.
The New Trustees also argue that, even if the releases prima facie appear wide enough to be engaged, they ought not be interpreted or permitted to apply to sanction receipt of a future payment in breach of trust (see [52]-[53]), and that this conclusion can be reached as a matter of the proper construction of the release on the basis that a release given by a trustee in its capacity as trustee so as to bind the trust should be construed so as not to operate to have the result that giving the release would itself be a breach of trust (submissions at [54]-[55]).
[35]
Sub-clauses 3.2(a)(i) and (ii) of the Main Settlement Deed/4.2(a)(i) and (ii) of the Contempt Settlement Deed
As to sub-cl 3.2(a)(i), the appellants argue that the subject proceedings constituted a "Claim", as defined in cl 1.1, "arising from or connected with" the Crossman proceedings. They emphasise that the expression "arising from or connected with" is one of wide import and submit that it should be construed as excluding only claims entirely unrelated to the Crossman proceedings (referring to the reasoning in cases such as Amcor Packaging (Australia) Pty Ltd v Baulderstone Pty Ltd [2013] FCA 253 at [29]; Incitec Ltd v Alkimos Shipping Corporation [2004] FCA 698; (2004) 138 FCR 496 at [31]-[32]; Lightsource Technologies Australia Pty Ltd v Pointsec Mobile Technologies AB [2011] ACTSC 59 at [132] and Rinehart v Welker [2012] NSWCA 95 at [114]-[118]). The appellants point out that the New Trustees' claims in the subject proceedings concerned the propriety of the manner in which the Crossman proceedings were settled between the parties and were a sine qua non to the litigation subsequently commenced against Mr Crossman. Hence, they submit that the claims in the New Trustees' proceedings cannot be said to be entirely unrelated to the Crossman proceedings.
As to sub-cl 3.2(a)(ii), to which the primary judge did not expressly refer, the appellants maintain that the subject proceedings constituted a "Claim" arising from or connected with the circumstances or allegations giving rise to or referred to in the Crossman proceedings. They point to the circumstances giving rise to the Crossman proceedings that were set out in detail in the further amended commercial list statement (at [11]-[24]).
The New Trustees argue that neither limb of sub-cl 2(a) was engaged. They rely on grounds 3 and 4 of their notice of contention in this regard, namely that:
3. The trial judge should have found that the release in clause 4.2 of the Contempt Deed was not engaged on the facts because the proceedings below brought by the New Trustees against the appellants did not involve a Claim arising from or connected with:
(i) the Contempt Motion; or
(ii) the circumstances or allegations giving rise to or referred to in the Contempt Motion.
4. The trial judge should have found that the release in clause 3.2(a) of the Main Deed was not engaged on the facts because the proceedings below brought by the New Trustees against the appellants did not involve a Claim arising from or connected with:
(i) the Proceedings; or
(ii) the circumstances or allegations giving rise to or referred to in the Proceedings.
The New Trustees argue in essence that there was no connection between the future receipt by Mr Crossman of trust funds by payments in breach of trust and the claims made in the Crossman proceedings (or contempt motion itself) or the circumstances and allegations giving rise thereto.
In response to this, the appellants point to the fact that the release in cl 4.2(a) of the Contempt Settlement Deed is expressly made conditional upon receipt of the Second Payment provided for under the Contempt Deed.
[36]
Sub-clause 3(b) of the Main Settlement Deed
As to the release in sub-cl 3.2(b), the appellants argue that the sole basis for the primary judge's finding on this aspect of the release clause was that the New Trustees were not bound by the "deeds" (i.e., both the Main Settlement Deed and Contempt Settlement Deed). They submit that if ground 2 succeeds (and there is no finding that the Main Settlement Deed was entered into in breach of trust) then there was no basis to preclude them from relying on the release in cl 3(2)(b) of the Main Settlement Deed and hence there is no need for consideration of the American authorities identified by the primary judge (at [134]-[135]).
The New Trustees place emphasis on the words "any other Claim which is or could reasonably have been known to a party as at the date of this Deed…". They argue that, as at the date of entry into the Main Settlement Deed, no claim could have been brought against Mr Crossman because he had not received any payments in breach of trust; and therefore they maintain that cl 3.2(b) was not engaged. They rely upon ground 5 of their notice of contention on this issue:
5. The trial judge should have found that the release in clause 3.2(b) of the Main Deed was not engaged on the facts or otherwise because the proceedings below brought by the New Trustees against the appellants was not a Claim that was known or could reasonably be known.
The New Trustees also dispute the correctness of the appellants' assertion (in their submissions at [44]) that the primary judge accepted that cl 3.2(b) was engaged on its terms. They argue that for cl 3 2(b) to bind the New Trustees the Claim would have to be known to the releasing party (PILT Nominees) in its capacity as trustee. They argue that knowledge by PILT Nominees' directors that the payments involved a breach of trust would not be attributed or imputed to the "PILT Trust" (referring to Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 46, Duke Group (in liq) v Pilmer [1999] SASC 97; (1999) 73 SASR 64 at [633]-[634] and Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; 2 WLR 1168 at [7]). Further, they argue (by reference to what is said by the authors of Meagher, Gummow & Lehane's Equity Doctrines and Remedies (JD Heydon, MJ Leeming and PG Turner, 5th ed, 2015, LexisNexis) at [37-035]) that a releasing party must know that it has an equitable remedy for any release to be operative. Hence they argue that PILT Nominees should not be taken to have the relevant knowledge in its capacity as trustee.
In response, the appellants point to the definition of "Claim" as including a claim that "is prospective or contingent and one the amount of which is not ascertained". They argue that the fact that the Contempt Settlement Deed operated to impose an obligation on PILT Nominees to make the payments provided for under that deed to Mr Crossman was, or could reasonably have been, known to a party to the Main Settlement Deed and, as a result, they argue cl 3.2(b) of that deed is engaged.
The appellants submit that no question of attribution of knowledge "to the PILT Trust" arises where PILT Nominees has entered the Main Settlement Deed in its capacity as trustee but that, even if that question did arise, the denial of attribution of knowledge is restricted to cases in which the relevant director or agent had knowledge of a fraud (pointing out that, here, no allegations of fraud were made).
As to the passage in Meagher, Gummow & Lehane's Equity Doctrines and Remedies at [37-035], the appellants say this is misplaced as the editors were there concerned with the equitable defence of release, which is not dependent upon the execution of a deed or of an agreement for valuable consideration (referring to [37-030]). The appellants say that no reliance need be placed by them on the equitable defence of release in the present case because they have the benefit of the Main (and Contempt) Settlement Deeds, each of which was executed and delivered as a deed.
The appellants also note that although the parties sought to carve-out the "Contempt Motion" from the defined "Proceeding" in relation to some aspects of the Main Settlement Deed (see cl 2(a)(i)), no such carve-out is contained in cl 3. They argue that this further undercuts the construction for which the New Trustees contend.
[37]
Extension of releases to the Crossman corporations
As to the application of the releases to the Crossman corporations, the appellants acknowledge that the definition of the term "related body corporate" under the Corporations Act does not sit easily with a natural person. However, they argue that the deed is to be construed by reference not only to the language used by the parties, but also to the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract; and is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience" (adopting the words used in Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at [35]). The appellants submit that, read in context, the definition of "related entity" in cl 1.1 extends to entities owned or controlled by a party, since otherwise the application of the extension of the cl 3.2 release to Mr Crossman's "related entities" makes no sense.
The New Trustees in response complain that the surrounding circumstances argument (that the definition of "related entities" should be construed by reference to the surrounding circumstances known to the parties) was not one that was put to the primary judge. They submit that this argument should not be permitted to be raised for the first time on appeal (in circumstances where there was no cross-examination, in the context of the entry into the settlement deeds, as to why Mr Crossman had moved funds through his various corporate entities) but submit that, in any event, the argument should be rejected as there was no evidence that at the time of the deeds, it was known to the parties that the subsequent payments would be "routed" by Mr Crossman to the Crossman entities.
The New Trustees point to the fact that the definition of "Related Entity" in the Main Settlement Deed identified in terms certain of Mr Seller's corporate vehicles (namely, Radio Nominees and A.T. Lawyers Pty Ltd) but that no such specification was made in respect of any company connected to Mr Crossman. They point out that the Crossman corporations had not been involved in any of the relevant events up to that time. They also note that there was no attempt by Mr Crossman to seek rectification of the Main Settlement Deed if he contended that it had wrongly recorded the intent of the parties.
It is suggested by the New Trustees that the definition of "Related Entity" demonstrates that the releases were drafted so as to protect PILT Nominees, Mr Seller and Mr Peter Londish; no real consideration being given to the drafting of a release in favour of Mr Crossman other than that he obtain a reciprocal release.
[38]
Determination
The general submissions put forward by the New Trustees do not lead me to conclude that the release clauses were not engaged in the present case.
As the High Court noted in Grant v John Grant & Sons, the question whether a general release is constrained by the particular recitals in a deed is a matter of construction and, to the extent that reliance is placed on equity's intervention, the true purpose of the transaction is to be ascertained from the nature of the instrument and the surrounding circumstances (see the passages referred to earlier and at 129-130).
The release clauses clearly extend beyond the actual claims made in the Crossman proceedings (or, in the case of the Contempt Settlement Deed, the contempt motion). They extend, for example, to prospective or contingent claims "arising from" the proceedings/contempt motion (sub-cl 2(a)(i) of both deeds) and to claims which are or could reasonably be known to a party whether or not arising from or connected to the proceeding (in the case of cl 3.2(b) of the Main Settlement Deed). The recitals to the respective deeds do not indicate an intention to confine or read down the express terms of the releases to the particular claims made in the Crossman proceedings/contempt motion. Moreover, the expressed link between the operation of the release in the Main Settlement Deed and the making of the second payment by way of consideration provided for in the Contempt Settlement Deed makes it difficult to conclude that reliance on the general words of the release in either deed would be a means of escaping obligations falling outside "the true purpose of the transaction". The overall context of the respective deeds was the settlement of the entirety of the proceedings between the parties. As to the New Trustees' argument noted at [217] above, again the difficulty for the New Trustees is that nowhere in the commercial list documents was it contended that the giving of the release was a breach of trust.
In my opinion, the claims brought by the New Trustees in the subject proceedings, relating as they did to the manner in which the claims in the Crossman proceedings (including the contempt motion) were settled, clearly fell within sub-cl (a)(i) and (ii) of the respective releases, being claims "arising out of" and connected with the settlement of those proceedings and, in the case of the second limb of sub-cl (a), since the claim was connected with the circumstances giving rise to the Crossman proceedings. Grounds 3 and 4 of the notice of contention are thus not made good.
The claims also fell within sub-cl 2(b) of the release in the Main Settlement Deed, since a prospective claim as to the payments being in breach of trust was (as his Honour found) something that was or could reasonably to have been known to the then trustee as at the date of the Main Settlement Deed.
The clause speaks of knowledge of a "party" (here, PILT Nominees). It does not require that the knowledge be held or attributed to that party in any particular capacity. Once that knowledge is found, the release applies and it then binds successor trustees given that the Main Settlement Deed in terms operates to bind successor trustees.
As to the attribution to PILT Nominees of knowledge of its directors (see [225] above), what is required for the purpose of the release clause is not knowledge that there was a breach but that there was or could reasonably have been a prospective claim in relation to the payments. Here, the relevant knowledge is that of PILT Nominees (not any knowledge of a non-legal entity, i.e., the PILT Trust). The knowledge in question is that there might be a claim in relation to or arising out of the settlement of the proceedings. There was no error in his Honour concluding that this requirement was met.
As to the argument made by the New Trustees based on the equitable defence of release (see [225] above), that seems to me to be misplaced in circumstances where, as here, the release is contained in a deed and the appellants did not seek to rely on any such equitable defence.
Even though (as I accept it was) the Contempt Settlement Deed, taken in isolation, was entered into in breach of trust such that it might be set aside and the release therein rendered inoperative, that does not in my opinion gainsay the operation of the release in the Main Settlement Deed. The entire agreement clauses do not operate to confine the scope of the releases contained in each agreement to the claim that was settled in that deed alone. It is relevant in this regard to note that cl 3.2(b) of the Main Settlement Deed itself makes reference to the Contempt Settlement Deed.
The New Trustees' contention in relation to the respective entire agreement clauses in the respective deeds with respect also misconceives the operation of an entire agreement clause. In The Construction of Commercial Contracts (2013, Hart Publishing) at [10-21] Professor JW Carter describes such a clause as an example of an express integration clause, the purpose of which is to make the document to which the clause relates an exhaustive statement of the bargain. At least one objective of an entire agreement clause is, as expressed by Lightman J in Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd's Rep 611 at 614, to stop a party "finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim".
As Leeming JA observed in Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633 at [130], "[a]n "entire agreement" clause cannot prevent regard being had to context". There, an entire agreement clause did not operate to exclude consideration of earlier meetings sought to be relied upon as a matter of "surrounding circumstances" and as containing contractual terms.
In the present case, the entire agreement clause in each of the settlement deeds makes clear that the parties were agreeing that that particular deed encompassed all the relevant terms of their bargain as to the settlement of, respectively, the Crossman proceedings and the contempt motion. However, it does not in my opinion provide a basis for concluding that a release given in the one deed could not, on its proper construction, apply to claims for breach of trust arising by the entry into or performance of obligations under the other deed. In other words, there is no reason that the parties' bargain as to the basis on which the Crossman proceedings (or, conversely, the contempt motion) was to be settled could not have encompassed agreement as to a range of matters outside the scope of the actual claims or allegations the subject of the proceedings/motion as the case may be. Giving an "extended" operation of the release in one deed to claims that might in the future be made in relation to matters connected with the settlement contained in the other deed (and vice versa) does not conflict with the entire agreement clause. It simply acknowledges that each agreement was expressed to encompass a very broad release that might overlap or be co-extensive with the release in the other deed.
Finally, as to the application of the release clauses to the Crossman entities, the difficulty I have with the New Trustees' submissions (and the findings of the primary judge) is that they give no room for any operation at all of the references in cll 3.2 and 4.2 of the respective deeds to the "related entities" of Mr Crossman. The parties must be taken to have meant something by that reference. The only way to give a sensible operation to those words is that included in those persons or entities having the benefit of the release in favour of Mr Crossman are companies or entities with whom he was associated or connected in a sense akin to the notion of corporate relationship encompassed by the definition of "related entities" as a matter of corporations law. It does not in those circumstances matter that there was no knowledge at the time of entry into the deeds that Mr Crossman might direct payment to one or more of those entities; nor that they had not had any relevant involvement in the matter to that point. Indeed, those matters may well explain the lack of specific reference to those companies compared with the particular references to the Seller companies. Similarly, it is not to the point to say that if Mr Crossman held shares in, say, Westpac, the release would operate in its favour and that this would be an absurd outcome that could surely not have been intended. First, there would have to be an applicable context in which a claim relating to the Crossman proceedings or contempt motion might apply to that entity before any release would be operative. Second, the clause must be given some practical operation. Hence, I consider that the primary judge erred in holding that the releases did not apply to the Crossman corporations.
Once the conclusion that the release in the Main Settlement Deed extends to release a claim relating to payments made under the Contempt Settlement Deed is accepted, then the conclusion reached in relation to ground 2 above means that ground 4 of the grounds of appeal should be upheld.
Grounds 3, 4 and 5 of the grounds of appeal are therefore made good.
[39]
Appeal grounds 6-7 - complaint as to issues relating to rescission
The next group of challenges to the primary judge's decision relates to the findings made in relation to rescission of the Contempt Settlement Deed:
6. The trial judge erred in failing to find that the rescission of the Contempt Settlement Deed was a necessary precondition to the relief sought by the first and second respondents.
7. The trial judge erred in ordering the rescission of the Contempt Settlement Deed and Deed of Amendment dated 28 October 2009 in circumstances where: (a) the first and second respondents had not offered to do, and were not prepared to do, equity as a condition of the relief sought; (b) neither complete nor partial restitutio in integrum was possible; (c) the Court did not fashion the relief so as to make an allowance to the first appellant for that which he gave up as a result of entering into the Contempt Settlement Deed; and (d) it was not otherwise appropriate, in Equity's discretion, for the Deeds to be rescinded.
[40]
Primary judgment
The primary judge first addressed (from [142]-[145]) the question whether, in order to obtain the return of trust money paid to a third party by a trustee or fiduciary under a contract or to claim equitable compensation, the party asserting breach of trust must seek to rescind the contract as a precondition to relief. His Honour noted that the New Trustees had put their claims as claims in personam and that they did not seek proprietary relief. At [145], his Honour accepted the contention of the New Trustees that, since they did not seek the imposition of a constructive trust, they did not need to seek rescission of either the Contempt Settlement Deed or Main Settlement Deed, drawing support for that contention from Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 (at [253]-[254]) and Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455; (2013) 305 ALR 687 (at [177]) and referring to Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 (at 153E-154).
His Honour accepted (at [150]) that Mr Crossman had incurred substantial legal fees in pursuing PILT Nominees and Baltarna ($395,000) and that he gave up the possibility of recovery of those fees and any costs order that he had or might obtain as against the defendants to the Crossman proceedings. His Honour also accepted that, had Mr Crossman succeeded in obtaining the orders he sought in those proceedings, Mr Crossman would have had very strong grounds to have his costs paid out of the trust assets. However, his Honour concluded that the outcome Mr Crossman achieved by the settlement deed was entirely detrimental to the trust's assets and that the loss by Mr Crossman of his right to claim reimbursement for bringing the proceedings that he did not pursue produced no benefit to the PILT Trust.
At [146], his Honour said, seemingly in obiter, that, were it necessary to set aside the Contempt Settlement Deed in order to permit the New Trustees to obtain equitable compensation, it would be appropriate to do so because the Contempt Settlement Deed involved PILT Nominees in a clear breach of trust. In fact, when the final orders were made, his Honour did set aside that deed. (Ground 6 therefore seems to be of only academic interest.)
The primary judge rejected the appellants' argument to the effect that, even for equitable relief, the benefits obtained by the trust through the Main Settlement Deed (namely, the giving up by Mr Crossman of his chose in action to have the PILT and Baltarna Trusts properly administered and the giving up of the possibility of recovery of costs and fees in the Crossman proceedings) would need to be taken into account ([148]-[150]), on the basis that (apparently looking at the position at the time of the judgment in May 2015) the chose in action was worthless ([149]) and that, as to the loss of the right to claim reimbursement for bringing the proceedings, this had produced no benefit to the PILT Trust and thus did not require any adjustment ([150]).
[41]
Submissions
The appellants accept that there is authority to the effect that rescission is not necessary where in personam relief in the form of equitable compensation is sought against a knowing recipient of trust property (there referring to Greater Pacific Investments). However, they seek to distinguish the cases relied upon by the primary judge as not concerning a situation in which trust property had been transferred in consideration for the giving of releases and covenants not to sue that stood to the enduring benefit of the trust. The appellants further argue that, in any event, the grant of equitable compensation remains within the discretion of the court; that it was open to the primary judge to require rescission to be obtained as a condition of any compensatory relief (referring in this context to Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 at 561); and, in effect, that his Honour erred in the exercise of his discretion in not doing so in the present case.
The appellants emphasise that the consequence of the execution of the settlement deeds and the making of the payments was that PILT Nominees was no longer: liable to the adverse costs orders obtained by Mr Crossman in connection with the contempt motion; faced with incurring costs in defending the Crossman proceedings and contempt motion (which costs were permitted pursuant to White J's orders to be paid out of the PILT Trust); or exposed to the risk of adverse costs orders being made on the determination of the Crossman proceedings and contempt motion (orders which the appellants submit would also likely have been paid from the assets of the PILT Trust).
They also point to the recognition that cases in which rescission of a contract is sought "call for special promptitude" (referring to Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17 at [640], the Court there adopting with approval what was said to that effect in Meagher, Gummow & Lehane's Equity Doctrines & Remedies (4th ed, 2002, LexisNexis at [36-030]; 5th ed at [38-045]). The appellants submit that the unexplained delay in the commencement of the subject proceedings should have disentitled the New Trustees to relief of that kind in the present case.
The New Trustees maintain that the primary judge was correct in concluding that rescission of the Contempt Settlement Deed was not a necessary precondition to the grant of equitable compensation. They argue that the factual basis on which the appellants seek to distinguish the authorities relied on by the primary judge is not correct, since the receipt of trust property by the appellants was in consideration for the release in the Contempt Settlement Deed, which related to the personal claims against PILT Nominees, Mr Seller and Mr Peter Londish to be punished for contempt. They argue that such a release was of no benefit to the trust (see [84]). They maintain that no error in the House v The King sense was established.
[42]
Determination
In Grimaldi at [254], the Full Court of the Federal Court questioned the correctness of the requirement for the relevant transaction to be avoided before a proprietary claim could be brought against a knowing recipient under the rule in Barnes v Addy, though accepting that this was the position in accordance with Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 and Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 at [173]-[206]. The Full Court then proceeded to review the authorities as to whether rescission was a requirement for the use of the constructive trust as a remedy (at [277]-[282]), having noted Greater Pacific Investments as authority for the proposition that rescission was not essential for an award of equitable compensation. In that context, the Full Court extracted the following passage from Mason P in Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286 (at [73]-[74]):
…rescission is essential for cases (like the present one) where the loan transaction is at best voidable for breach of fiduciary duty or an analogous statutory duty: Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143; Halifax Building Society v Thomas [1996] Ch 217 at 228; Hancock Family Memorial Foundation Ltd v Porteous (2000) 22 WAR 198 at 210 ff. Affirmation, delay, intervention of third party rights and inability to give counter-restitution may cause any right to rescission to be lost.
In some situations, an order for rescission will be at least a practical necessity (Greater Pacific at 153). If such an order is sought independently or as a step towards a remedial constructive trust based upon the process of tracing the "trust" money into the hands of the recipient or into the property acquired by the recipient with that money, the remedy is discretionary. In general, the court will need to be satisfied that a remedial constructive trust (or charge if that suffices) is necessary to protect the legitimate rights of the plaintiff and does no injustice to the rights of third parties, such as creditors: see Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371; Australian Securities Commission v Melbourne Asset Management Nominees (Receiver and Manager Appointed) (1994) 49 FCR 334 at 358-9; Giumelli v Giumelli (1999) 196 CLR 101 at 113-4. (my emphasis)
The Full Court noted that Daly's case was not one where the recipient took property with knowledge/notice of another's fiduciary wrongdoing (citing the majority judgment at 378) and that the extension of the rescission requirement to knowing receipt cases stemmed from Greater Pacific Investments, which involved, among other things, transfer of legal title to property under a contract of sale made in breach of fiduciary duty owed to the vendor by one of its directors, the purchaser knowingly participating in that breach. The Full Court suggested that, as the understanding of the constructive trust as a remedy had evolved (referring to Bathurst City Council v PWC Properties Pty Ltd [1998] HCA 59; (1998) 195 CLR 566 at 585), it might be that there would be a review of the rescission requirement, speaking there in the context of a claim for a constructive trust over the property in question.
Relevantly, for present purposes, the Full Court (at [280]) stated that the function of Barnes v Addy was "simply to provide a personal remedy to compensate for loss suffered".
Accepting that rescission is not a precondition to an order for equitable compensation against a knowing recipient of trust property, that nevertheless does not address the question whether (as happened in the present case) an order setting aside a deed entered into in breach of trust (the Contempt Settlement Deed) should have been made in circumstances where restoration of the parties to their previous position was not possible and no relief was moulded which would accomplish "an approximate restoration that will be just" (in the words of Rich, Starke and Dixon JJ in AH McDonald & Co Pty Ltd v Wells [1931] HCA 24; (1931) 45 CLR 506 at 513; and see also Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216 per Dixon CJ, Webb, Kitto and Taylor JJ at 223).
The object of equitable compensation is to place the parties in the positions they would respectively have held had the relevant breach not happened (see O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272; Re Dawson (dec'd) [1966] 2 NSWLR 211 at 214, where the obligation of the defaulting trustees was said by Street J, as his Honour then was, to be essentially one of effecting restitution to the estate). Where, as the primary judge considered was the position in this case, it is not possible as a practical matter to restore the parties to the approximate positions they were in prior to the breach, that must be a powerful factor weighing against the exercise of the discretion to award equitable compensation. In the present case, the fact that the chose in action was of no practical value at the time of the hearing was thus a factor that counted against the relief the primary judge granted and made it necessary for consideration to be given to how any such relief could be moulded to effect a just result. While the New Trustees point out that they made clear at the hearing that the order that the Contempt Settlement Deed be set aside was sought subject to any terms that the court considered appropriate, that does not assist them in circumstances where no such terms were considered or imposed by the court.
The real issue raised on this aspect of the appeal is whether the primary judge erred in the exercise of his discretion in determining that, where neither complete nor partial restitution was possible, it was nevertheless appropriate to make an order for equitable compensation. Had it been necessary to determine, I would have concluded that the discretion whether to order rescission of the Contempt Settlement Deed miscarried to the extent that the primary judge appears to have assessed the value of that which was given up (and hence the lack of utility in restoring Mr Crossman to the position he would have been in had that not been given up) by reference to the state of events as at the date of the primary judgment and not as at the time at which Mr Crossman gave up the benefit of the chose in action and the existing costs orders in his favour.
In the Crossman proceedings, what was being sought by way of relief included orders for the removal of the trustees of the PILT and Baltarna Trusts and their replacement by court appointed trustees and receivers; the vesting of the PILT Trusts and Baltarna Trusts; and costs. By settling the Crossman proceedings, Mr Crossman gave up the prospect of having receivers and replacement trustees appointed to the relevant trusts and hence lost the prospect both that any further dissipation of trust property might then have been prevented and that recovery actions could have been expeditiously pursued at that time. He also gave up the possibility that an order for the vesting of the relevant trusts might be made, hence the potential for a distribution under the cascading waterfall provision of the Baltarna Trust.
The primary judge's conclusion appears to have been influenced by the fact that, had Mr Crossman been successful in the proceedings brought by him, that would not have resulted in a payment out to him of moneys from the trust. That is correct in the sense that any distribution of trust funds to Mr Crossman under the Trust Deed was dependent on the vesting of the relevant trust (something he was seeking in the proceedings) and the value of the trust assets at that time exceeding $7.5 million as well as the exercise of the trustee's discretion in his favour. However, had the settlement deeds not been entered into and the proceedings been pursued to a final hearing, there must have been the very real prospect that the trust assets would not have been further diminished at least from that to which they had already been diminished as at July 2009. This was after the drawing down from the loan facility of the sums paid out to Radio Nominees and Davlon (and at a time when the service station properties had already been encumbered as security for the ANZ bill facility) but it was also at a time more proximate to the time at which the valuations of the secured properties on which the loan facility was granted were based. There must have been at least a prospect of recovery of moneys disbursed out of the trust which, if Mr Crossman had been reinstated as a claims beneficiary and the Baltarna Trust then vested (as Mr Crossman sought to have effected) could have formed the basis of a distribution in his favour out of trust funds.
The New Trustees appear to argue in their written submissions that restitution was possible because no countervailing benefit had been received by the PILT Trust (submissions at [95]), referring to his Honour's conclusions at [147]-[150]). This does not in my opinion take into account that what Mr Crossman gave up in entering into and performing his obligations under the settlement deeds (including the discontinuance of his chose in action and the benefit of the costs orders) did have some value for which account should have been taken.
As to the giving up of the costs orders made in Mr Crossman's favour, the New Trustees note that the only order to which the appellants pointed at trial was that made by White J in April 2009 in the context of the making of freezing orders against PILT Nominees, Mr Seller and Mr Peter Londish and for an affidavit to be provided disclosing the expenditure of PILT Trust assets. They point out that no attempt was made by the appellants at trial to identify what costs were referable to that occasion. Moreover, they submit that, to the extent that costs orders were made against PILT Nominees by White J, there was no basis for concluding that such orders would, in the ultimate result, lead to any payment from the PILT Trust assets. They argue that, most likely, in the circumstances of the breaches of trust, any costs burden would be a personal liability of PILT Nominees; and that any exposure to future costs orders that would be able to be enforced out of trust assets is speculation. So, however, is the submission made by the New Trustees as to who would ultimately have been liable to meet the existing costs orders. The relevant fact is that Mr Crossman gave up the benefit of favourable costs orders (and the potential of a favourable outcome in relation to the vesting of the respective trusts). No account was taken of that in the fashioning of the relief awarded by way of the order for equitable compensation.
In the circumstances, had it been necessary to decide, I would with respect have concluded that the primary judge's discretion miscarried and that error in the House v The King sense was established insofar as the primary judge did not take into account, in fashioning the order for equitable compensation, that which Mr Crossman gave up when he granted the releases in favour of PILT Nominees and ceased to pursue the court proceedings against it by entry into the Settlement Deeds in consideration of the payments for which provision was made in the respective deeds.
In my opinion, in circumstances where Mr Crossman was unable to be restored substantially to the position he was in prior to the execution of the settlement deeds, rescission of the Contempt Settlement Deed ought to have been refused. As the conclusion reached in relation to ground 2 is determinative it is not necessary further to consider grounds 6-7.
[43]
Appeal grounds 8-12 - breach of trust
It is relevant to consider the primary judge's findings in relation to the allegation of breach of trust in the context of the broad picture that his Honour considered had emerged from the evidence as to the position by the time of the payment of the $2.2 million (that time being derived from point (4) of the items listed at [61]). The primary judge described that broad picture as follows:
(1) Baltarna, which was to receive the assets of the PILT Trust on vesting has not been shown to have received any amount from the PILT Trust as trustee of the Baltarna Trust
(2) Valofo, which was to receive a minimum of $7.5 million as a unitholder in the Baltarna Trust, has not been shown to have received any amount from the Baltarna Trust
(3) Crossman who, by the terms of the Baltarna Trust Deed and BCT, was entitled, at best, to an amount after payment of the $7.5 million to Valofo received $2.2 million of which at least $1.6 million, it is agreed, came out of PILT Trust assets and both of which payments were secured by trust assets
(4) Crossman received the amount of $2.2 million in settlement of the Contempt Proceedings. In neither of the Crossman proceedings or the Contempt Proceeding, if he had been successful, would Crossman have been entitled to any payment whatsoever since if entitled to relief the only relief sought and which could have been ordered required Seller, Londish, Nominees, Sanabu and or Davlon to pay monies back to the PILT Trust and a declaration that the BCT had been wrongly removed as a general beneficiary of the Baltarna Trust or to be punished for contempt by fine or otherwise
(5) Crossman who, by the Crossman Proceedings, sought to prevent erosion of PILT Trust assets settled those proceedings not by Nominees and Seller, Londish and the companies they controlled agreeing to make payment of money back to the trust but by payment of $2.2 million of trust monies to him.
The primary judge considered that, on the face of the above matters, there could be "no warrant" for PILT Nominees and Baltarna (and Sanabu as trustee of the Baltarna Class Trust) agreeing to pay out any money to Mr Crossman "until Valofo was paid the $7.5 million due to it or at the very least consented to the payment of the $2.2 million in priority to it" ([62]).
Pausing there, although the point of time which his Honour was there addressing seems to have been the time of payment out of the sums under the Contempt Settlement Deed, elsewhere the primary judge spoke of a breach by entry into the relevant deed(s) (which was obviously a time before the payment of $2.2 million was made (see [76]). Second, insofar as the primary judge spoke at [62] of an amount "due" to Valofo, under the structure of the investment scheme Valofo had no entitlement to any such amount until the vesting of the Baltarna Trust, as explained earlier. Third, the language used ("there could be no warrant") suggests that the primary judge may have considered that there could never be any circumstances in which an agreement to pay any money to Mr Crossman in advance of payment to Valofo would not be in breach of trust. That proposition is so broad (insofar as it allows for no possible circumstance in which such a decision might properly be made in the exercise of the trustee's powers) that I cannot accept this is what the primary judge there intended.
His Honour considered and rejected an argument for the appellants to the effect that cl 23.19 of the PILT Trust Deed (set out at [58] above) permitted entry by PILT Nominees into the settlement deeds. His Honour did so for two reasons. First, that as a matter of construction, cl 23.19 only permitted entry into contracts or transactions "in the ordinary course of the business or from undertaking any banking, financial, development, agency or services" (his Honour stating the settlement deeds did not fall into that category). Second, that clauses permitting conflict (of interest/duty on the part of a trustee) are to be strictly construed and are to be read down if they purport to avoid the core obligations of a trustee ([65]).
At [67], the primary judge said:
To the extent that Nominees used PILT Trust assets to pay money to Crossman the payments were in breach of trust because the payments were not made to the beneficiaries of the PILT Trust and not made for a purpose of the PILT Trust but made solely for the benefit of Crossman, Nominees, Seller and Londish.
(I interpose to note that the primary judge later found that the moneys paid under the Contempt Settlement Deed were paid out of PILT Trust assets ([110]-[113]) and there is no challenge to that finding.)
As to the power given to the trustee to compromise legal proceedings and execute documents in respect thereto (cll 13.2(n), (o) and (v)), his Honour said that that power, and the protection of cl 23.19, was subject to the trustee's obligations and the provisions of the Trust Deed and was not to be used for an ulterior purpose (by which his Honour appears to be referring back to his earlier conclusion at [67] that the payments were not made for a purpose of the PILT Trust) ([68]).
The primary judge did not consider it necessary to express a view as to the exceptions to the exoneration clauses (presumably there referring to at least cll 23.9 and 23.13) but said that, had it been necessary to do so, the payment of moneys to Mr Crossman out of trust assets was a clear case of negligence since there was no benefit to the trust in so doing ([69]).
At [73], the primary judge expressed the opinion that where entry into a deed is itself a breach of trust the trustee could not rely on terms of the deed to sanitise the breach of trust.
At [74], his Honour noted a controversy between the parties as to whether, in respect of questions of breach of trust, the Contempt Settlement Deed should be viewed in isolation from the Main Settlement Deed. His Honour considered that there was in a sense an artificiality in separating out the key elements of the transaction (by which all aspects of the proceedings were brought to an end by a mechanism by which moneys "could be paid out of trust assets without adherence to and compliance with the necessary requirements for vesting and distribution for both the PILT Trust and the Baltarna Trust") but went on to say:
… I do not think it is open to [Crossman] to insist that the Main Deed be rescinded as a condition to the plaintiffs' relief of rescission of the Contempt Deed, particularly since both deeds contain a whole agreement clause and what was agreed in the Contempt Deed was that Crossman was to be paid $2.2 million for abandoning the Contempt Motion.
At [75] his Honour said:
… the question is was the payment to Crossman a breach of trust and I accept that the onus of establishing that it was is on the New Trustees. It could not, in my view, be a legitimate purpose of the Trust for the Trustee accused of wrongfully removing trust assets and accused of breaching a freezing order made by the Court to pay $2.2 million to the person asserting those breaches in order for those claims to be terminated, which is how the Contempt Deed is framed. This is even more obvious since Crossman had made no claim in the proceedings that Nominees was obliged, either in law or equity, to make any payment to him. Even looking beyond the Contempt Deed does not assist Crossman since he was not even a beneficiary of the PILT Trust but a potential beneficiary of another trust ranking behind the unitholder in that second trust (namely Valofo). (my emphasis)
His Honour thus concluded (at [76]) that the Contempt Settlement Deed was entered into in breach of PILT Nominees' obligations and that similar considerations applied to Baltarna as trustee of the Baltarna Trust, since "it was clearly acquiescing in the arrangements in breach of its duty to protect the assets to which it as unitholder of the PILT Trust was entitled for the benefit of its unitholder Valofo".
Later, at [115(p)], his Honour referred to a conflict of interest/duty on the part of Mr Peter Londish when entering into the Contempt Settlement Deed, in that Mr Peter Londish and Mr Seller wished to resolve the Crossman proceedings and the contempt motion to avoid investigation by the court as to the payment made by PILT Nominees and their duties as directors of PILT Nominees and possible criminal sanctions by virtue of the statements of charges (see also [77]). His Honour said that the Crossman proceedings were founded on a conflict of that type, which he noted had been discussed on 9 December 2008 at a meeting with Mr Sid Londish, Ms Linda Bowman and Mr Bowman and which was referred to in Mr Crossman's position paper at the mediation. The primary judge considered that the threat of sanctions for contempt of Court and the requirement that PILT Nominees, Mr Seller and Mr Peter Londish might have to refund all of the money removed from the trust was an effective "lever" on them to enter into the Contempt Settlement Deed, saying:
I also think that it is clear not only that what the Deeds entailed was a complete departure from the requirements of the trust deeds but that Crossman, notwithstanding his denial at T266.25, was fully aware of this fact.
Thus the primary judge seems to have found that there was a breach of trust on the part of PILT Nominees by reason of the entry into the Contempt Settlement Deed both because of the conflict of interest on the part of PILT Nominees in so doing and because the payment of the moneys under that deed was not made or to be made to the beneficiaries of the PILT Trust and was not for a purpose of the PILT Trust (but, rather, was one made solely for the benefit of Mr Crossman, PILT Nominees, Mr Seller and Mr Peter Londish) ([67]).
His Honour also referred to the making of the payments under the Contempt Settlement Deed as having been in breach of trust, which suggests that he found a further breach of trust separate from the breach involved in entering into the deed in the first place (see [111] and at [116] where there was a finding of awareness by Mr Crossman of the breach of trust by PILT Nominees "in making the payments of $2.2 million to him").
His Honour rejected the assertion by Mr Crossman that Valofo had consented to Mr Crossman settling with PILT Nominees, Mr Seller and Mr Peter Londish and receiving the payments from the PILT Trust ([109]). His Honour also rejected Mr Crossman's denials as to his knowledge of the breach of trust ([115(p)]). (There is no challenge to either of those conclusions.) However, as will be considered in relation to the "Baltarna consent" issue (ground 12), there was no separate consideration as to whether Baltarna had consented to the settlement and, if so, the consequences that flowed therefrom.
As noted earlier, the primary judge concluded not only that the entry by PILT Nominees into the Contempt Settlement Deed ([77]) was a breach of trust but also, seemingly, that entry into the Main Settlement Deed ([133]) was a breach of trust.
[44]
Challenge to findings of breach of trust
The appellants challenge the findings of breach of trust on the following grounds:
8. The trial judge erred in finding that the execution of the Main Settlement Deed and Contempt Settlement Deed, and the payment of funds pursuant to them, by PILT Nominees Pty Ltd were not authorised by the PILT Trust Deed and were in breach of trust.
9. The trial judge erred in failing to find that the exemption clauses in the PILT Trust Deed (cll 23.9, 23.13, 23.14(a) and 23.19) operated to exempt PILT Nominees Pty Ltd from any breach of trust which it might otherwise have committed in executing the Main Settlement Deed and Contempt Settlement Deed and complying with its obligations thereunder.
10. The trial judge erred in finding that PILT Nominees Pty Ltd engaged in a negligent breach of trust in executing the Main Settlement Deed and Contempt Settlement Deed and complying with its obligations thereunder.
11. In finding a breach of trust, the trial judge misapplied the principle in Jones v Dunkel (1959) 101 CLR 298 in relying upon the absence of Messrs Seller and Peter Londish from the witness box in circumstances where neither person could be said to be in the appellants' camp.
12. The trial judge erred in failing to permit the appellants to argue, and the trial judge erred in failing to find, that the execution of the Main Settlement Deed and Contempt Settlement Deed, and the payment of funds pursuant to them, by PILT Nominees Pty Ltd was not a breach of the PILT Trust in circumstances where the only beneficiary of that trust (namely, Baltarna Pty Ltd) was aware of, and consented to, that conduct and no steps had been taken by the first and second respondents to impugn that consent.
[45]
Submissions
The submissions on these grounds go to the issues as to: whether entry into and performance of the obligations under the relevant deeds was authorised; whether the exoneration clauses exempted PILT Nominees from any breach of trust; the Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 issue; and the impact of Baltarna's entry into the Main Settlement Deed (and its implied consent to the settlement of the Crossman proceedings).
[46]
Authorisation - ground 8
The primary judge was of the opinion that, leaving aside any exculpatory terms of the PILT Trust Deed, PILT Nominees "could not use assets of the trust to pay monies to a prospective beneficiary of the Baltarna Trust" and that PILT Nominees was unable, without court approval, to settle a claim against it for breach of trust by using assets of the PILT Trust ([58]). I note that in the course of oral argument in the present proceedings the New Trustees expressly disavowed any suggestion that there was a breach of trust by PILT Nominees in entering into the Main Settlement Deed by reason of the fact that it had not obtained judicial advice that it was appropriate to do so.
The primary judge held that the clauses of a trust deed could not mould the duties of a trustee in such a way that the "core obligations of a trustee" were avoided ([65]) (referring to Armitage v Nurse [1998] Ch 241) and said that the "core obligations of a trustee" included the obligations to adhere to the terms of the trust, to pay and transfer trust property to the persons entitled thereto, and not to deal with trust property for a personal benefit (see [66]).
The appellants rely on the express power given to PILT Nominees to "defend, settle and compromise legal proceedings or administrative proceedings of any nature whatsoever …" (cl 13.2(o)). They submit that this necessarily assumes that the settlement (or compromise) of legal proceedings may involve the payment by PILT Nominees, in its capacity as trustee of the PILT Trust, of amounts of money in order to facilitate the settlement or compromise but that if there were any doubt about that the power under cl 13.2(v), which permits PILT Nominees to "do all such things incidental to … or necessary or convenient to be done for or in connection with the Trust or the Trustee's functions under this Deed" would apply.
Reliance on the powers under cl 13.2(o), (n) and (v) does not in my opinion assist the appellants.
As the New Trustees point out, there is a fundamental difference between the existence of a power and its proper exercise. Thus, the power to settle proceedings, and the fact that a payment might be required to do so, is not to the point. The relevant question is whether there was a breach of trust in so doing (or in the manner of so doing). Similar observations apply to the other provisions of cl 13.2 on which the appellants rely.
[47]
Clause 23.19 - ground 9
The appellants argue that the primary judge incorrectly construed cl 23.19 of the PILT Trust Deed (set out at [58] above), which exempted PILT Nominees from the "no conflict" rule. They argue that it was accepted in Armitage v Nurse that the "no conflict" rule can be abrogated by the contract or other instrument defining the fiduciary's duties or powers.
The appellants argue that cl 23.19 abrogates the "no conflict" rule in respect of any "other contract or transaction which any person or company not being a party to this Deed could or might have lawfully entered into if not a party to this Deed" and that the said phrase is not confined by the earlier reference in the clause to the making or entry into contracts "in the ordinary course of the business or from undertaking any banking, financial, development, agency or services".
The appellants submit that the proper construction of cl 23.19 is that it deems any contract or transaction, which a person or company not being a party to the deed could lawfully enter, to be a contract or transaction executed in the ordinary course of business (which the trustee is permitted to enter into notwithstanding that it may be in a position of conflict in so doing). That submission reads the words emboldened above (commencing "other contract or transaction") as being the subject of an express deeming (by reference to the words "it is expressly declared that such contract and transactions may include"). The appellants submit that, properly construed, cl 23.19 precluded any breach of fiduciary duty arising on the execution of the settlement deeds by reference to the conflict of interest identified by the primary judge; and hence that there was no basis on which the "knowing receipt" limb of liability under the rule in Barnes v Addy could be engaged.
It is also submitted that the evidence before the primary judge and findings of fact made by his Honour did not justify a finding that the Contempt Settlement Deed was executed, and payments thereunder were made, for a purpose ulterior to the operation of the PILT Trust.
The New Trustees argue that cl 23.19 does not abrogate the "no conflict rule" and permit the trustee to act in its own self-interest in any and all respects; rather, it allows the trustee to enter into various kinds of contracts or transactions in the ordinary course of business. The New Trustees submit that the references by the primary judge (at [65]-[66]) to the core obligations of the trustee and to Armitage v Nurse were supportive rather than determinative of his Honour's construction of cl 23.19.
They further submit that even if the power in cl 23.19 was engaged, there was no legitimate basis on which PILT Nominees could have exercised the power to make the payments to the appellants, referring to the proposition in Jacobs' Law of Trusts (JD Heydon and MJ Leeming, 7th ed, 2006, LexisNexis) at [1620] that a trustee cannot necessarily always exercise such a power with impunity but must exercise it in the interests of the trust and without imperilling the safety of trust assets.
I am unable to accept the construction that the appellants seek to place on the phrase "other contract or transaction which any person or company not being a party to this Deed could or might have lawfully entered into if not a party to this Deed and the Trustee" in cl 23.19.
The structure of cl 23.19 is important. First, the clause provides that nothing in the deed shall prevent the trustee from entering into certain transactions or being interested in "any such contract or transaction". That part of the clause is clearly limited to what I might term "commercial" or "business" transactions (subscribing for bonds, for example). Second, it provides that the trustee shall not be liable to account for any profits or benefits made or derived thereby or in connection therewith. This clearly relates to the commercial or business transactions so authorised. Third, it makes clear that, notwithstanding its fiduciary position, the trustee is not precluded from doing two things: first, making contracts or entering into any transactions with "any such person" in the ordinary course of the business; and, secondly, "undertaking any banking … or other services". The reference to "such person" seems to be a reference to the "any other person" to whom the trustee is not required to account for the purposes of the second of the three matters dealt with so far in the clause.
To this point, the clause would not on its face authorise entry into the settlement deeds whether or not there was a conflict of interest in so doing, since they could not be said to be a transaction of the kinds there specified and would not be in the ordinary course of business.
What then is the effect of the express declaration, which is the fourth feature of the clause? The formulation "without prejudice to the generality …" makes clear that what is being introduced is something for more abundant caution, i.e., to make clear the intent of the foregoing. What is referred to by the phrase "such contract and transactions" must be those contracts and transactions the subject of the third feature I have identified in the structure of the clause. What the clause is saying is that, included in the contracts or transactions which the trustee is not precluded, by reason of any fiduciary relationship, from entering into (in the ordinary course of the business) are other contracts or transactions which any person or company who is not a party to the deed might lawfully have entered into "if not a party to this Deed". Whatever the words "if not a party to this Deed" add to the concept of lawful entry into a transaction by someone who the clause presupposes is not a party to the deed, the emboldened words do not in my opinion remove the qualification that the relevant contract or transaction must be one entered into in the ordinary course of the business. The purpose of the "deeming" is to make clear that the fact of a fiduciary relationship is not something that preludes entry into the relevant contract or transaction.
In other words, I would read the clause as the primary judge did, as making clear that what is not precluded, relevantly, is the entry (in the ordinary course of the business) into contracts or transactions with a unitholder or bondholder or other person to whom the trustee might otherwise be liable to account (i.e., "such person"), notwithstanding that there is a fiduciary relationship in place and that such contracts or transactions may include any that a person or company (being not party to the deed) could or might lawfully have entered into if not party to the deed. Clause 23.19 does not in my opinion wholly abrogate the no-conflict rule. Hence this part of ground 9 is not made good.
[48]
Did the exoneration clauses apply? - grounds 9-10
The appellants rely on three exemption or exoneration clauses: cll 23.9, 23.13 and 23.14(a) in this respect. They note that the primary judge did not expressly address the operation of the latter two clauses in his reasons and submit that, while referring (at [63]) to cl 23.9, his Honour did not go on to address its operation, instead analysing the position by reference to cl 23.19 (see [65]).
The New Trustees, to the contrary, maintain that the primary judge implicitly dealt with the exemption clauses (at [65]-[68]), insofar as his Honour accepted that exemption clauses cannot operate to avoid the core obligations of a trustee ([65]) and said that those core obligations were as set out at [162] of the further amended commercial list statement (see [66]). The obligations that his Honour accepted as being core obligations included the obligation to pay and transfer trust property to the persons entitled thereto and not to deal with it for personal benefit; and to exercise reasonable care and skill; act honestly and in good faith; and exercise diligence and prudence in the performance of the trustee's duties and exercise of its discretions (see [66]).
The New Trustees submit that, the primary judge having held that the payments were not made for a purpose of the PILT Trust and were for an ulterior purpose, a fair reading of that part of the judgment is that the primary judge concluded that the facts established a breach of core obligations which would have the consequence that the exemption clauses could not operate even if they were otherwise engaged and therefore that it was not necessary to deal with them more specifically. That may well be the explanation for the lack of specific reference to the particular exoneration clauses on which the appellants rely. That is supported by the reference to "exoneration clauses" in the plural at [69] and to the typographical error at [70] (where the reference to cll 29.1 and 13 may well have been intended to be cll 23.9 and 23.13 as the New Trustees submit).
However, not all of the obligations referred to at [66] and pleaded at [162] of the further amended commercial list statement fall within what have been described as the "irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust" (see Armitage v Nurse at 253 per Millett LJ; language adopted in Jacobs' at [1620]). In particular, in Armitage v Nurse, Millett LJ (at 253) expressly rejected the submission that the trustee's core obligations included the duties of skill and care, prudence and diligence (this being one of the obligations that the primary judge appears to have accepted as being a "core" obligation).
In Armitage v Nurse, the minimum necessary to give substance to the trusts was said to be the duty of the trustee to perform the trusts honestly and in good faith (at 253-254). That, and the duty to adhere to the terms of the trust (see Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484 at [32]), can readily be accepted as falling within the "irreducible core of obligations" of the trustee. However, it does not necessarily follow that a payment out of trust assets made to someone other than the beneficiaries of the PILT Trust would be a breach of that core obligation.
The power to compromise legal proceedings, for example, must surely carry with it a power to utilise trust assets for that purpose. The real question, it seems to me, when considering whether the application of the exoneration clauses would be repugnant to the trust and hence whether the clauses should be read down in the present case, is whether the entry into the settlement deeds was in breach of the duty to perform the trusts honestly and in good faith. The primary judge reached the conclusion that the payments were in breach of trust "because the payments were not made to the beneficiaries of the PILT Trust and not made for a purpose of the PILT Trust but made solely for the benefit of Crossman, Nominees, Seller and Londish" ([67]). However, there does not appear to have been a finding that the payments were made dishonestly or not in good faith by PILT Nominees (though his Honour suggested that it might have been open so to conclude, he did not find it necessary to do so - [77]). Rather the relevant findings were that the payments could not have been made for a legitimate purpose of the trust ([75]) and were made in breach of the trustee's fiduciary obligations by preferring its interests and those of the directors to those of the Baltarna Trust and its unitholders ([77]).
Absent a finding of dishonesty or lack of good faith on the part of PILT Nominees in entering into the settlement deeds and making the payments, I would not have concluded that the principle articulated in Armitage v Nurse required a finding that the exoneration clauses were inapplicable (assuming that they would otherwise have applied to excuse liability).
Apart from the submission that the clauses cannot operate to avoid the core obligations of the trustee, the New Trustees' response to the reliance sought to be placed by the appellants on cll 23.9, 23.13 and 23.14 of the PILT Trust Deed is that: the clauses only apply in the absence of fraud, negligence or wilful default; the clauses were not engaged on the facts; and that the clauses in their terms do not operate to provide a defence to Mr Crossman in relation to having received moneys in breach of trust (rather, they speak only to the position of the trustee).
The New Trustees also argue that, on the appellants' own argument at the hearing before the primary judge (to the effect that the payments in question were not mandated by the Contempt Settlement Deed to be paid out of trust assets) there was no warrant for the use of trust funds to satisfy personal obligations and the clauses could have no application (there adopting the primary judge's reasoning at [111]). That last argument has already been disposed of by the conclusion I have reached that PILT Nominees entered into the deeds in its capacity as trustee.
[49]
Were the exoneration clauses engaged?
Turning first to the question whether the respective clauses were engaged on the facts, the appellants' reliance on cl 23.13 can be disposed of relatively shortly. In its opening words this clause addresses the question of personal liability for a failure to pay moneys on the due date for payment. No such issue arises in the present case. Thus the New Trustees argue that this clause has no operation in the present case. I agree. I accept that the clause does go on to refer to personal liability "for any loss howsoever caused in respect of the Trust … or to any other person". However, that is expressed in terms of liability for loss. It would not in terms seem apt to me to exempt the trustee from, say, its liability to account as trustee where there has been an unauthorised disbursement of trust assets (i.e., the obligation to make good the trust). The remedy of equitable compensation in those circumstances is not dependent on any "loss" being established beyond the fact of the unauthorised disbursement (see the analysis adopted by the High Court in Youyang and by Edelman J in Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102); i.e., substitutive compensation.
As to the reliance placed by the appellants on cl 23.14, the New Trustees submit that in its context this clause relates to the circumstance where the trustee is acting on the advice of the Manager, which did not occur on this occasion. They submit that there was no relevant discretion exercised or not exercised and nothing occurred "under this [the PILT Trust] Deed...". Again, I agree. The entry into (or making of payment under) the settlement deeds is not readily seen as the exercise of a discretion or an act or omission on the part of the trustee "under this Deed, any other Transaction Document or any other document" (my emphasis). Rather, it was an exercise of the power to enter into a compromise of legal proceedings.
As to cl 23.9, this is a broad provision exempting the trustee from responsibility for any loss, costs, damages or inconvenience that may result from the exercise of any powers and discretions vested in the trustee, provided that there is an absence of fraud, negligence or wilful default.
The appellants argue that cl 23.9 was engaged in the present case in circumstances where the New Trustees were seeking compensation for loss or damage suffered as a result of the exercise of the power on the part of the then trustee to settle legal proceedings conferred by cl 13.2(o) of the Trust Deed. On one view, acceptance of that submission requires one to treat the claim for equitable compensation as a claim for reparative compensation; i.e., for actual loss, rather than substitutive compensation, i.e., to make good the trust (the "loss" being the disbursement of trust funds itself, to adopt the taxonomy used in much of the academic writing in this area (and see Agricultural Land Management). I am by no means persuaded that a claim against the trustee (PILT Nominees) for equitable compensation in relation to the (on this hypothesis) unauthorised disbursement of part of the trust fund would be a claim for "loss" within the meaning of cl 23.9 (on the analysis in Youyang). The remedy of equitable compensation in its substitutive sense is available when the breach itself constitutes the "loss"; the beneficiaries may have suffered no immediate or other readily identifiable loss. It is in that sense a substitute for specific relief - to keep trustees up to their duty or to vindicate the duties owed by a fiduciary, rather than to recoup loss (see also Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 where the remedy of equitable compensation was available in lieu of rescission). However, this issue was not raised in oral argument on this appeal and it is not necessary to determine it because of the conclusion I have reached on the relevance of the exoneration clauses to the claim made against the appellants in any event (see [338] below).
[50]
Did the fraud/wilful default/negligence exceptions apply?
Assuming, for present purposes, that cl 23.9 would otherwise have been engaged in respect of a claim for equitable compensation against PILT Nominees on the facts of the present case, the appellants contend that no allegations of fraud or wilful default were made by the New Trustees (and no findings were made by the primary judge to that effect). They challenge the finding of negligence (at [69]) on the basis that the finding was premised on there being "no benefit to the trust" in the making of the payments to Mr Crossman. The appellants argue that the finding of negligence cannot stand in light of the benefits that the PILT Trust obtained from entering into the settlement deeds, as earlier explained.
The appellants also argue that the conclusion that a payment of trust moneys conferred no benefit to the trust does not of itself demonstrate negligence on the part of the trustee. The appellants submit that the primary judge elided negligence with a breach of trust and, in so doing, deprived the exoneration clauses of any real operation, given that they arise for consideration only if a liability for breach would otherwise exist.
The appellants submit that even if the conduct of PILT Nominees in executing the Contempt Settlement Deed and making the payments thereunder constituted a breach of trust, there was insufficient material before the primary judge to demonstrate negligence for the purposes of the applicability of the exoneration clauses in the PILT Trust Deed.
On the question of the fraud/wilful default exception, the New Trustees cavil with the proposition that they did not plead matters equating to fraud or wilful default (referring to [162]-[167] of the further amended commercial list statement) and rely on ground 6 of their notice of contention, arguing that:
6. The trial judge should have found that none of the clauses in clauses 23.9, 23.13 and 23.14 of the PILT Trust Deed were [sic] engaged because PILT Nominees had engaged in dishonest conduct or "wilful default" within the meaning of those clauses.
I do not accept that at [162]-[167] of the further amended commercial list statement there was a pleading of fraud or wilful default. Those paragraphs contain allegations as to: the duties owed by PILT Nominees in its capacity as trustee of the PILT Trust (including to act honestly and in good faith ([162])); the duties Mr Seller and Mr Peter Londish owed as directors ([163]); the knowledge of PILT Nominees, Mr Seller and Mr Peter Londish as to particular matters ([164]); and the contention that, by reason of the matters in [164], as at July 2009 there was no or no proper basis under the PILT Trust Deed for PILT Nominees to enter into the Contempt Settlement Deed, to agree to or make payments to Crossman or the Crossman corporations, and to assert any power under the PILT Trust Deed to do so ([165]). At [166], the New Trustees then allege the conflict of interest on the part of PILT Nominees; at [167], that PILT Nominees engaged in breaches of trust; and at [168] that, by reason of the matters in [167] a constructive trust arose in favour of the trustee of the PILT Trust at the time of the respective payments.
Relevantly, the knowledge asserted on the part of PILT Nominees and its directors (at [164]) was to the identity of the sole unitholder of the PILT Trust (Baltarna); that Mr Crossman could only claim an interest if the Baltarna Class Trust had been validly nominated and was not later removed as a general beneficiary of the Baltarna Trust (and that the Baltarna Class Trust had been removed as a beneficiary of the Baltarna Trust); the commencement of the Crossman proceedings and contempt motion raising allegations of contempt of court; and that Mr Bowman as director of Valofo had notified Mr Seller that Valofo had no interest in Davlon and had not consented to the Davlon payments. Those matters broadly go to the contention, on which the New Trustees placed much weight, that Mr Crossman was not a beneficiary of the PILT Trust and would only have an entitlement to a distribution of trust assets out of that trust in the event that the cascading waterfall provision of the Baltarna Trust was triggered; that he was reinstated as a general beneficiary of the Baltarna Class Trust; and that the conditions provided for in the cascading waterfall provision were satisfied.
None of those matters goes to an allegation that PILT Nominees knew that, or was recklessly indifferent to, the settlement deed payments being in breach of trust or not being made in good faith. Certainly, PILT Nominees must have been aware of the position of conflict in which it stood when entering into the Contempt Settlement Deed, but I am not persuaded that the allegations contained at [162]-[167] in the further amended commercial list statement squarely (or even implicitly) raised an allegation of fraud or dishonesty.
The New Trustees point to a submission said to have been made before the primary judge on behalf of Mr Crossman to the effect that "whilst dishonesty has been pleaded and - if proved - would trump each exemption clause …". However, I struggle to see where any such pleading is to be found in the further amended commercial list statement.
To the extent that the New Trustees point to the primary judge's observation that, although it might be open to conclude that the breach was fraudulent or dishonest, it was not necessary to do so ([77]), it is apparent from what his Honour said that no such finding was made. It is not open in my opinion for the New Trustees to argue that the exoneration clauses were inapplicable due to fraud, where none was pleaded. I am not persuaded that a finding of dishonesty should have been made. Ground 6 of the New Trustees' notice of contention is not made good.
As to the appellants' challenge to the finding of negligence (at [69]), the New Trustees submit that a reasonably prudent trustee would not cause trust funds to be paid away to remove the threat of sanctions for contempt and the requirement that it might have to refund money already wrongly removed from trust; and argue that the findings of the primary judge support the conclusion that there was negligence (as well as establishing dishonesty and wilful default), there referring to [61]-[62], [75], [77], [112] and [115(p)]. In large part this submission appears to be premised on the assertion that there was no benefit to the PILT Trust (as opposed to PILT Nominees, Mr Seller and Mr Peter Londish personally) in the settlement.
In my opinion, there is force to the appellants' challenge to the finding of negligence. Insofar as the finding of negligence is based on the lack of benefit to the PILT Trust, that ignores the benefit obtained from the overall settlement of the litigation (including the release of adverse costs orders). There was a benefit in bringing to an end ongoing funding of the costs of the litigation and a release from the existing costs orders. There may well have been an issue as to whether the amount paid under the Contempt Settlement Deed was out of proportion to the value of the chose in action being given up under the Main Settlement Deed but that is another issue. If the finding of negligence is based on the conclusion that there could be "no warrant" for the payment out of trust assets, that again focusses only on the personal benefit gained by PILT Nominees and its directors from settlement of the claims, without taking into account that there might be benefit from the settlement of the litigation as a whole.
Not every breach of trust will constitute negligence. For there to be a finding of negligence it would be necessary to assess whether the conduct of PILT Nominees in entering into the deed was such that it failed to exercise the standard of care required of it in its position as trustee in determining to enter into the overall settlement of the litigation and the two settlement deeds in particular. That exercise was not carried out, or at least it does not emerge from the reasons of the primary judge.
In any event, it is not necessary to determine this because I consider that the final argument put forward by the New Trustees in this regard (see below) is fatal to the appellants' reliance on the exoneration clauses.
The New Trustees argue that the exoneration clauses at best limit the liability of PILT Nominees in its capacity as trustee for breaches of trust; they do not have the consequence that there was no breach of trust. They argue that, on their face, the clauses do not operate for the benefit of persons in the position of the appellants. Reference is made to the language used by Millett LJ in Armitage v Nurse at 248F-G of exemption from liability for breach of trust; as distinct from the breach itself.
Both the New Trustees and the appellants put forward arguments as to why (or why not, as the case may be) the effect of an exoneration or exemption clause such as that contained in cl 23.19 should be construed as simply relieving the trustee from liability as opposed to negativing a breach of trust. The New Trustees point to unforeseen consequences in relation to the other duties of the trustee (namely, the duty to get the trust assets under control) such as would arise if the fact that the trustee had no liability for a mistaken payment made to a third party out of trust property meant that there could be no recovery of that property from the third party. The appellants argue that the distinction sought to be drawn by the New Trustees between a breach of trust and liability for that breach should not be accepted where, as here, the New Trustees rely on a principle of accessorial liability, since accessorial liability depends upon the existence of a primary liability on the part of principal. They argue that, in the same was as a beneficiary who consents to a breach of trust lacks any right to take action against a third party in respect of the conduct of the applicable trustee, the defences that would be enjoyed by PILT Nominees to any claim by the New Trustees are defences that should equally apply in favour of the appellants in the present case. They argue that it would be both illogical and unfair if a knowing recipient of trust property could be rendered liable notwithstanding the absence of any liability on the part of the principal wrongdoer.
The appellants' argument fails to distinguish between a provision that has the effect that there is no breach of trust (such as cl 23.19 assuming it were here applicable) and a provision that exonerates the trustee from liability for a breach of trust. The latter is predicated on there being a breach of trust. It does not negate it. As noted in Jacobs' at [1702], defaulting trustees may be required, notwithstanding their own wrongdoing, to institute proceedings against those who participated in the wrongdoing to make good the loss (the authors there referring to Young v Murphy [1996] 1 VR 279). Such an obligation seems inconsistent with the proposition that, if the trustees are not personally liable to account for or make good the breach or any loss sustained by the breach, then a third party who has knowingly received trust property in breach of trust cannot be sued to recover that property or for equitable compensation in relation thereto.
Although not referred to in the course of argument, recent authorities seem to indicate, at least implicitly, that the respondents' proposition on this issue is correct. In Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156; (2015) 89 NSWLR 431, this Court considered a trustee exemption clause in the following terms:
WHILE acting or purporting to act in the execution of the trusts or to exercise any of the powers in this Deed hereof a Trustee shall not be liable for any loss neglect default or breach of trust unless the same is attributable to its his or her own wilful neglect or dishonesty it being the intention of the Settlor that the Trustee shall have the widest possible powers and discretions in the administration investment and management of the Trust Fund and the execution of the trusts contained in this Deed without being liable for the consequences of exercising those powers and discretions or executing or administering any of those trusts.
Gleeson JA found that there was no breach of duty by the trustee but went on to express his views on the exemption clause and in doing so described the clause as an "exemption from liability" (at [25] and [144]; Meagher and Leeming JJA agreeing).
Similarly, in Leerac Pty Ltd v Garrick E Fay [2008] NSWSC 1082, Brereton J said, of the exemption clause there being considered (at [26]) that:
… if the construction of cl 17 which I have preferred is correct, then it does not offend against public policy. It would not prevent actions to secure due administration. It would only deter actions asserting liability for breach of trust against the trustees, other than those for wilful default. Armitage v Nurse shows that liability for such breaches may permissibly be excluded, and it must follow that a provision which has the effect of deterring a party from approaching the Court to assert such a liability, where that liability has already been permissibly excluded by another clause in the deed, is not contrary to public policy.
Here, as in Segelov, it is the liability for breach of trust that is the focus of the operation of cl 23.9 in the PILT Trust Deed.
In those circumstances, whether or not cl 23.9 would have operated as a defence by PILT Nominees to a claim against it for recovery of the moneys paid out to the appellants, I do not consider that it operates to change the character of the conduct in question.
Hence I do not consider that ground 10 (or the balance of ground 9) has been made good.
[51]
Jones v Dunkel - ground 11
At [77], the primary judge, having recorded his satisfaction that PILT Nominees was in breach of its fiduciary obligations as trustee by preferring its own interest and those of its directors to those of the Baltarna Trust and the unitholders of that trust and that the breach was a very obvious one, said that the absence from the witness box of Mr Seller and Mr Peter Londish to explain and seek to justify their conduct and that of the companies which they controlled "only strengthen[ed]" the view to which his Honour had come.
The appellants submit that neither Mr Seller nor Mr Peter Londish was alleged by the New Trustees, or found by the primary judge, to have been in the appellants' camp and therefore that the conditions necessary to be established for any adverse Jones v Dunkel inference to be drawn against the appellants in this regard were not met.
As is well known, the rule in Jones v Dunkel permits, in appropriate circumstances, an inference to be drawn that the uncalled evidence would not have assisted the case of the party who might be expected to have called that evidence. It has been said that it typically applies to strengthen or weaken an inference otherwise available on the evidence for the benefit of the party not in default. It does not permit the court to infer that the uncalled evidence was in fact damaging to the case of the party who did not call that evidence.
As noted by McColl JA in RHG Mortgage Ltd v Rosario Ianni [2015] NSWCA 56 (at [75]), the rule cannot be applied unless it would be natural for the party to call the witness or the party might reasonably be expected to call the witness (her Honour there citing Cross on Evidence (JD Heydon, 10th ed, 2014, LexisNexis) at [1215]; O'Donnell v Reichard [1975] VR 916 at 729 per Newton and Norris JJ).
In the present case it can readily be accepted that the directors of PILT Nominees might be expected to have been able to elucidate the considerations that led the company to enter into the settlement deeds and that the absence of their evidence was unexplained (the second and third of the conditions for the operation of the principle or rule, as explained by Glass JA in Payne v Parker [1976] 1 NSWLR 191 (at 201)). However, it cannot be said in my opinion that the first of the conditions was satisfied; i.e., that it would be natural for the appellants to produce those witnesses or that they would reasonably be expected to be available to the appellants rather than to the New Trustees. The appellants were clearly not in the same "camp" at the time of the Crossman proceedings. They were the very parties against whom the appellants had commenced proceedings and had made serious allegations. The fact that they subsequently joined in the settlement of those proceedings does not relevantly alter the position. Nor is there anything to suggest that they later became part of the appellants' camp.
Therefore, I accept the appellants' submission that the conditions necessary for the application of the rule in Jones v Dunkel were not satisfied (see RPS v The Queen [2000] HCA 3; (2000) 199 CLR 620 at [28]; Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 at [254]).
[52]
The "New" Baltarna consent ground - ground 12
The appellants contend that a further difficulty in the claim made by the New Trustees is that Baltarna, the only unitholder in the PILT Trust, was aware of and consented to the execution by PILT Nominees of the settlement deeds and the making of the relevant payments. They maintain that this should have been determinative of the issue since it amounted to fully informed consent of the sole beneficiary to the conduct alleged to have been in breach of trust.
The primary judge dealt with this issue on two bases. First, his Honour accepted that the issue as to whether the Baltarna consent was determinative had not been raised "as such" until submissions in reply for the appellants ([181]) and that it was not obvious from the appellants' commercial list statement that they would be relying on the point ([182]). His Honour concluded that new contentions should not be permitted to be raised in reply "whether pleaded or not" ([183]).
However, against the possibility that to exclude argument on that issue was not permissible, his Honour proceeded contingently to deal with the substantive point. His Honour appears to have accepted the appellants' submission that, because Mr Seller was not seeking to defraud or take advantage of Baltarna, the knowledge of Mr Seller was to be attributed to Baltarna ([185]). However, his Honour considered that there was a clear breach of trust on Baltarna's part, as trustee of the Baltarna Trust, in permitting assets to be dissipated from the PILT Trust and in not ensuring that the assets were available for distribution to Valofo (the Baltarna Trust unitholder). The primary judge therefore concluded that the appellants could not rely on Baltarna's conduct as a defence to the claim by the New Trustees. The appellants complain that this finding was made in the absence of allegations of a breach to that effect.
The appellants point out that the New Trustees did not allege that the consent given by Baltarna to the transfer of PILT Trust property to Mr Crossman should be impugned, nor that it constituted a breach of the Baltarna Trust, and that they did not join Baltarna as a party to the proceedings. In those circumstances, the appellants argue that there was no prohibition on reliance by them on an argument that no breach of the PILT Trust had occurred in circumstances where its only unitholder was aware of, and had consented to, both the settlement of the contempt motion and the making of the relevant payments.
As to the procedural issue (i.e., the refusal by the primary judge to permit the appellants to raise the "Baltarna consent is determinative" point) the New Trustees argue that the primary judge was correct to refuse to permit the new contention to be raised in reply but they submit that, in any event, that decision was an exercise of a discretion in relation to the conduct of the trial and it is necessary for the appellants to establish error in the sense referred to in House v The King at 505.
The New Trustees further submit that the obiter view expressed by his Honour (at [185]) was correct. They point to the submissions made by them to the primary judge in this respect. In those submissions they emphasised that Baltarna was not a party to the Contempt Settlement Deed and that there was no minute or corporate record evidencing that it consented to entry into that deed. They argued that Mr Seller's knowledge and awareness did not become the consent "in fact" of Baltarna; i.e., that it did not amount to a corporate act in its capacity as trustee. It was submitted that had Mr Seller wished to cause Baltarna to consent, it would have required some act in his capacity qua director of Baltarna and that the fact that Baltarna was a party to the Main Settlement Deed but not the Contempt Settlement Deed demonstrated that there was no consent to the latter.
Further, the New Trustees argue that Mr Seller's knowledge could not be imputed to Baltarna in such circumstances because Mr Seller was acting improperly. The New Trustees argue that, as a matter of principle, conduct of a director acting improperly vis a vis the relevant corporation is not to be imputed as against that corporation. They rely on Beach Petroleum NL v Johnson and Duke Group Ltd v Pilmer at [634]. In Beach Petroleum, von Doussa J said at 46:
As a matter of law Beach had no knowledge of the fraud because, being the victim, it was not imputed with the knowledge of those acting on its behalf. Notice of the true position, if it were to be effective notice, would have to be given to someone other than the parties to the fraud. As the only directors of Beach in June 1989 were Messrs Fuller, Cummings and Main, notice could not be given effectively to a director. The only organ of the company to whom effective notice could be given would be the shareholders. Had the shareholders been told the true position, it is beyond doubt that the transactions would not have occurred. (references omitted)
The New Trustees submit that it was not possible to impute to Baltarna as trustee an improper act through the knowledge of Mr Seller and that this applied with even more force in relation to the respective payments since there was no evidence identified as to the position of Baltarna at the time of those payments.
They also submit that the position of the appellants during the hearing was that Baltarna's consent could not be sufficient. This was based on the fact that they had asserted a case based upon Valofo's consent. Accordingly, the New Trustees argue that if in fact the consent of Baltarna in its corporate and trustee capacity was established, that would still not be determinative.
[53]
Determination
In my opinion, it is incorrect for the New Trustees to assert that the issue of Baltarna's consent was not raised on the appellants' commercial list documents.
At [83(c)(i)] of their commercial list response to the further amended commercial list statement, in further answer to [169]-[175] of the New Trustees' contentions (which related to the allegation that the appellants had received the payments as volunteers and subject to a trust in favour of the trustee of the PILT Trust or were knowingly in receipt of payments in breach of trust and liable to account therefor), the appellants, among other things, set out various matters of which they said the controlling minds of the PILT Trust "and all other beneficiaries of the PILT Trust, the Baltarna Trust and the Baltarna Class Trust" were aware as at the time of entry into the settlement deeds. They further asserted (at 83(i)(F)) that those controlling minds considered that there was commercial value for the PILT Trust and all other beneficiaries of the respective trusts in allowing the transactions there referred to proceed.
At [83(c)(ii)] the appellants stated that the said controlling minds were aware that the PILT Trust proposed to make a payment to Mr Crossman "from the assets of the PILT Trust in settlement of the proceedings" and at (iii) that Mr Crossman entered into the settlement deeds in circumstances where "he was entitled to assume that he was settling with the PILT Trust and with the consent or knowledge of all other beneficiaries of the PILT Trust, the Baltarna Trust and the Baltarna Class Trust".
At [83(d)(i)] it is stated that, for those reasons and as a consequence of execution of the Contempt Settlement and Main Settlement Deeds, the New Trustees were estopped from denying the effect of the Deeds; (at (ii)) that the PILT Trust by its trustees released Mr Crossman and his related entities; and (at (iv)) that the New Trustees were bound by the releases and covenants not to sue.
The order in which oral submissions had been made was that Senior Counsel for the appellants addressed first, followed by Senior Counsel for the New Trustees, and then Mr Thomas addressed in reply for the appellants. The New Trustees objected to the matter being raised in those reply submissions.
In the reply submissions what was said by Mr Thomas, junior counsel appearing for the appellants, was this:
THOMAS: ... The key point to bear in mind is this, the only person with a beneficial interest in the PILT Trust was Baltarna. There can be no dispute. We expected to hear submissions from my friend on this, there was none. Baltarna was aware of the execution of the settlement deed and the making of the two payments. [It] was the only, and any person with a beneficial interest in the PILT Trust and had clearly consented to that transaction, and it is a party to the main settlement deed in which the very payments are referred to.
HIS HONOUR: Because they're a trigger date for things to happen.
THOMAS: Because they're a trigger date and because obviously Mr Seller was the controller of Baltarna. We pleaded this point in our Commercial List response at para 83C(i) and we have heard nothing, so while we have concentrated our evidence on consent by Valofo, the consent of Baltarna is determinative because the only person or entity with a beneficial interest in the PILT Trust consented it would be open to the successor trustee to impugn, or Valofo to impugn that consent in proceedings and so the consent should be set aside or ignored by a court of equity because it was given in bad faith. They have not done that. Baltarna is not a party to the proceedings, no it's very significant, it's not a party to the proceedings, so they are completely ignoring the fact that a consent was given by the only person with a beneficial interest in the PILT Trust to the payments out from that trust. That is the end of it.
At the end of the hearing, his Honour gave leave to the New Trustees to provide a supplementary note dealing with the issue that had been raised in the appellants' submissions in reply and the New Trustees availed themselves of that leave.
It appears from the supplementary submissions provided to the primary judge by the New Trustees dealing with this point that the complaint by the New Trustees was not that there had been no pleading as to the consent of Baltarna but, rather, that there was no allegation in the commercial list response that the consent of Baltarna was determinative of the issue or that it alone operated as a defence to the claim.
The primary judge seems to have accepted that there was at least an argument that the Baltarna consent point had been raised on the commercial list documents when he said at [183] "whether pleaded or not". His Honour's ruling therefore seems to go to whether the appellants should be permitted to make (and ultimately have determined by the court) submissions "in the reply" by junior counsel on that issue if, as the New Trustees asserted, it was not obvious to them until then that the appellants would be relying on that point.
The appellants argue that the Baltarna consent point was not only pleaded but that it was raised by counsel in response to oral submissions made by the New Trustees. They note that the New Trustees were given the opportunity to provide detailed written submissions to the primary judge as to why the argument ought not be accepted. It is submitted that in this way the substance of the argument was fully ventilated before the primary judge and that no prejudice was suffered by the New Trustees in the timing of the oral submissions on that point.
It is difficult to see any prejudice to the New Trustees in the issue being raised at the time it was in the appellants' oral submissions. It is not suggested, for example, that the case would have been conducted differently had the issue been raised in earlier submissions and the New Trustees had had the opportunity to ventilate the point at an earlier stage. Tthere is force in the complaint by the appellants that the primary judge should have permitted the point to be raised. Error in the House v The King sense is established to the extent that the primary judge's reasons proceeded on the basis that the point had not been pleaded. Unless it could be said that the parties had consensually departed from the pleadings in this regard (and the transcript does not suggest that they did), in my opinion the point was sufficiently raised in the commercial list statements to make it incumbent for the primary judge to deal with it. However, nothing turns on this because in effect that is what his Honour ultimately did, in the contingent fashion described above.
As to the conclusion that his Honour reached, the difficulty for the New Trustees on this issue is similar to that in relation to the finding of breach of trust by entry into the Main Settlement Deed. No breach of trust on the part of Baltarna was pleaded and it was not joined to the proceedings. It consented to and participated in the settlement of the proceedings on terms which included the giving of the releases in the Main Settlement Deed on which the appellants now rely.
As Brennan CJ, Gaudron, McHugh and Gummow JJ stated in Maguire v Makaronis at 466, "[w]hat is required for a fully informed consent is a question of fact in all the circumstances of each case and there is no precise formula which will determine in all cases if fully informed consent has been given". The requisite disclosure may be given at different times and in different ways, and sufficiency of disclosure can depend on the sophistication and intelligence of the persons to whom disclosure must be made (Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [107]; See also Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393 (Gummow J); Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 191 FCR 1 at [110] (Besanko J, with whom Finkelstein and Jacobson JJ agreed)). There is also the question whether, in all of the circumstances, it would be "fair and equitable" for the beneficiary to complain of the breach (Spellson v George (1992) 26 NSWLR 666 at 669 (Handley JA)).
For the reasons given by Payne JA (at [392]-[408] below), the New Trustees obtain no assistance from the authorities referred to at [351] above. In the absence of an allegation of fraud, Mr Seller's knowledge could be imputed to Baltarna. Whether or not, in so acting, Baltarna (which was not joined as a party to the proceedings) was in breach of duties owed by it to the beneficiary of the Baltarna Trust (Valofo), the giving by Baltarna (as beneficiary of the PILT Trust) of fully informed consent to the settlement by PILT Nominees of the Crossman proceedings on the terms set out in the Main Settlement Deed was sufficient to foreclose the later argument by the New Trustees that entry into that deed was in breach of trust. In those circumstances there is nothing to preclude the appellants relying on the release clause in that deed to resist the claim for recovery of the settlement payments made under the Contempt Settlement Deed. Hence the Baltarna consent point should have been determinative of the proceedings in the appellants' favour.
Ground 12 in that sense is therefore made good. It provides an alternative basis for the determination of the appeal in the appellants' favour.
[54]
Appeal grounds 13-14 - laches, acquiescence and delay
The remaining grounds of appeal relate to the appellants' argument that the relief sought by the New Trustees should also have been rejected on the grounds of laches, acquiescence and/or delay:
13. The trial judge erred in rejecting the appellants' defences of laches, acquiescence and delay in circumstances where: (a) the trial judge had found that the first and second respondents' delay in commencing the proceedings was lengthy and unexplained; (b) the first and second respondents, in their capacity as administrators of the third respondent, had failed to take any steps since July 2009 to impugn the payment of funds to the appellants pursuant to the Contempt Settlement Deed and which delay, as the trial judge found, was also unexplained; (c) the first and second respondents, in their capacity as administrators of the third respondent, had elected to take no steps to prevent the making of the second payment to the appellant pursuant to the Contempt Settlement Deed in April 2010; (d) the first and second respondents had an obligation to commence the proceedings with promptitude; (e) in executing the Contempt Settlement Deed, the first appellant had given up the benefit of extant costs orders in his favour and the opportunity to pursue relief against PILT Nominees Pty Ltd, Seller, Peter Londish, Baltarna Pty Limited and Sanabu Pty Limited with respect to the due administration of the PILT Trust, Baltarna Trust and Baltarna Class Trust; and (f) contrary to the reasons of the trial judge, the proceedings were not commenced well within any applicable limitation period specified in the Limitation Act 1969 (NSW).
14. The trial judge erred in finding that the appellants had suffered no prejudice by reason of the first and second respondents' delay in commencing the proceedings.
[55]
Primary judgment
The primary judge accepted that the delay of the New Trustees in bringing the proceedings (from February 2011, when the New Trustees were appointed, to May 2013) was a long one and that it had not been explained ([168]). His Honour also accepted that in February 2011, when they applied to be appointed as trustee of the PILT and Baltarna Trusts, the New Trustees (as liquidators of Valofo) were well aware of the facts that had led to the 2013 litigation, though those matters were not known to the New Trustees in their capacity as trustees of the PILT and Baltarna Trusts until their appointment as trustees of those trusts ([168]).
The primary judge said (at [169]) that similar considerations applied to the New Trustees in seeking rescission of the Contempt Settlement Deed (i.e., that they were well aware as at February 2011 of the facts on which rescission of the Contempt Settlement Deed could be sought). The primary judge also noted that Valofo had asserted in 2009 that the payments made under the Contempt Settlement Deed were a breach of trust ([171]), in the context of his Honour's observation that Mr Crossman was on notice of that assertion from as early as July 2009.
The primary judge was not persuaded that any prejudice had been established by reason of the delay from February 2011 to May 2013 in the commencement of the proceedings by the New Trustees ([168]); nor was he persuaded that there would be any inequity or unreasonableness in permitting the New Trustees now to propound their claims ([170]). Further, his Honour did not accept that the failure to take action to prevent the second payment to or at Mr Crossman's direction could be equated to acquiescence in the payment, referring in particular to the letter sent by Valofo's solicitors in July 2009 reserving its rights in relation to the payments to Mr Crossman.
Having referred (at [172]) to the different uses of the term "acquiescence" described in Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 (at 337-338 by Deane J, with whom Mason CJ concurred) the primary judge said (at [173]) that: there was no acceptance of the past acts; no representation that might have led PILT Nominees to believe that its past action in entering into the deeds or its present intention to pay the second payment was accepted; and no scope for inferral of consent. His Honour noted that Mr Crossman had given no evidence of having done something or abstained from doing something because of the failure of the New Trustees to take action against him earlier.
[56]
Submissions
The appellants maintain that the relevant question was whether the New Trustees had, by their inaction and by standing by and taking no action to enjoin the making of the second payment, placed the appellants in a situation in which it would be inequitable and unreasonable to place them if the remedy were afterwards to be asserted. They submit that both aspects of the doctrine of laches are applicable in the present case: i.e., delay implying acquiescence and assent; and delay involving prejudicial change of circumstances. The appellants again emphasise that cases where relief by way of rescission is sought are recognised as cases requiring special promptitude (citing Streeter v Western Areas Exploration Pty Ltd (No 2) at [640]).
The appellants contend that the prejudice they suffered from the New Trustees' delay was self-evident in that, by the New Trustees' inaction, Mr Crossman was permitted to discontinue the Crossman proceedings, give up the benefit of accrued costs orders, lose the opportunity to have misappropriated trust funds recovered, consent to the vesting of the Baltarna Class Trust and "generally organise his affairs on the basis that the Settlement Deeds were valid and binding" (submissions at [87]).
They emphasise that the circumstances in which laches, acquiescence and delay arise include where a situation has been permitted to arise which it would be unjust to disturb (Meagher, Gummow & Lehane's Equity Doctrines and Remedies at [38-005]).
In response, the New Trustees argue that the context in which the claim of delay and acquiescence was made must be viewed in the context of the finding by his Honour (at [115(p)]) that Mr Crossman was fully aware of the fact that what the settlement deeds entailed "was a complete departure from the requirements of the trust deeds"; a finding not challenged by the appellants.
Although the New Trustees also point in this context to what his Honour said at [176] as a finding that Mr Crossman "had knowledge of all matters relevant to [the] breach of trust including the source of the $2.2 million", it is apparent that his Honour was there referring to a contention that the New Trustees had made to that effect. What his Honour then said was that he was "unable to accept that Crossman was 'entirely innocent'" as the appellants had asserted. There was not a finding (as such) of knowledge of all matters relevant to the breach of trust.
Similarly, although the New Trustees also refer to the primary judge's conclusion (at [115(p)]) that it was obvious (notwithstanding Mr Crossman's denial of this in cross-examination) that the "threat of sanctions for contempt of Court and the requirement that Nominees, Londish and Seller might have to refund all the money removed from the trust was an effective 'lever'" on them (which his Honour inferred played a very significant part in their decision to have PILT Nominees and Baltarna enter into the deeds) it is not clear whether, in stating that this was obvious, the primary judge was there accepting the submission put by the New Trustees (and recorded at [56(14)]) to the effect that Mr Crossman appreciated that the contempt motion gave him a lever against Mr Seller and Mr Londish or was simply stating that it was obvious that it was such a lever. I would read the reasons as amounting to the latter.
The New Trustees submit that Mr Crossman could not establish that he had altered his position in reasonable reliance on the New Trustee's acceptance of the status quo (as articulated in Meagher, Gummow & Lehane's Equity Doctrines and Remedies at [38-005]). They argue that they never accepted the status quo and that the matters pleaded by Mr Crossman (at [88(b)(ii)] of the appellants' commercial list response to the further amended commercial list statement) all took place prior to their appointment in February 2011 and hence cannot have been done in reliance on anything done or not done by them (in their capacity as trustees of the PILT Trust).
The matters to which reference is made at [88(b)(ii)] of the commercial list response were the entry into the respective settlement deeds (in July 2009), the deed of amendment (in October 2009), the payments made under those deeds (in July 2009 and April 2010), and the discontinuance of the proceedings (which occurred in March 2010). The New Trustees note that there is no reference at [88(b)(ii)] to the loss of an opportunity of the kind referred to in the appellants' submissions nor to the general organisation of Mr Crossman's affairs.
The New Trustees point out that the commercial list response did not assert that Mr Crossman did any of the things itemised at [88(b)(ii)] in reliance on anything the New Trustees did or did not do; and that Mr Crossman gave no evidence that he did those things in reliance on anything the New Trustees did or did not do.
They point out that Mr Crossman was on notice, before receipt of the second payment, of the contention that it would be an improper application of trust property and chose nevertheless to proceed without approaching the Court for declarations or suggesting that PILT Nominees obtain judicial advice in respect to the payments in question. Hence the New Trustees submit that when Mr Crossman dealt with the first payment and pressed for the second payment he took the risk that the Court would later order that he restore the trust. The New Trustees further submit that it is irrelevant that Valofo did not take court action to enjoin the payments to the appellants because the claim against the appellants is a claim properly brought by the New Trustees.
The appellants submit that it was not necessary for Mr Crossman to give evidence as to the specific prejudice suffered by him as a result of the New Trustee's delay in commencing proceedings against him, since the prejudicial nature of delays in the commencement of legal proceedings are well-established and treated as self-evident (reference there being made to Brisbane South Regional Health Authority v Taylor [1996] HCA 25; (1996) 186 CLR 541 at 552-553; Jackamarra v Krakouer [1998] HCA 27; (1998) 195 CLR 516 at [526]).
[57]
Determination
The authors of Meagher, Gummow & Lehane's Equity Doctrine and Remedies explain at [38-005] that:
Laches is an equitable defences to an equitable claim. It is no answer to a claim at law. In its primary sense, laches requires a defendant to establish that a plaintiff has so delayed the institution or prosecution of an equitable claim that the defendant has altered his position in reasonable reliance upon the plaintiff's acceptance of the status quo, or otherwise permitted a situation to arise which it would be unjust to disturb. Mere delay, of itself, is not sufficient to establish the defence.
In Orr v Ford (at 341) Deane J expressed the principle as being whether the plaintiff has, by his inaction and standing by, placed the defendant or a third party in a situation in which it would be inequitable and unreasonable "to place him if the remedy were afterwards to be asserted". See also I Spry, Equitable Remedies (6th ed, 2001, LBC) at 435.
To establish a laches defence the defendant must demonstrate both unreasonable delay and prejudice to the defendant. As Doyle CJ observed in Duke Group Ltd (in liq) v Alamain Investments Ltd [2003] SASC 415 at [156]:
In connection with the defence of laches, two main issues arise. Has there been unreasonable delay by the plaintiff? Or putting it more broadly, what explanation is there for the time that has elapsed since the occurrence of the events giving rise to the claim, and since the liquidator was aware of the circumstances giving rise to the claim? Second, the impact of the passage of time on the defendants.
In the present case, there was a long delay and there was no explanation for that delay. However, the evidence does not establish any acquiescence on the part of the New Trustees in the breach of trust of which they later complained. The real question is whether there was error in the finding of lack of prejudice to the appellants. True it is that entry into the settlement deeds (though not performance of all the obligations thereunder) had been completed by the time of the New Trustees' appointment and cannot be said to have been done in reliance on any action or inaction by them. Payment of the final instalment under the Contempt Settlement Deed, which occurred after the New Trustees' appointment, was made in the knowledge of the New Trustees' reservation of rights and similarly cannot be seen as having been done with their acquiescence.
However, I have difficulty in accepting that the New Trustees' delay in bringing the proceedings did not leave the appellants in a position in which it was unjust or unreasonable to leave them. It was accepted by the primary judge that by the time the New Trustees did bring their claim for equitable compensation the chose in action that had been given up by Mr Crossman was no longer of any practical worth. Had substantial restitution been practicable, then I would have concluded that the defence of laches was not made out, since I agree that there was no acquiescence on the part of the New Trustees and there would then not have been a situation in which it was unjust or unreasonable to leave the appellants. As it is, I have difficulty with the conclusion the primary judge reached. That said, it is not necessary to determine the appeal on these grounds given the conclusion reached on grounds 2 and 12.
[58]
Conclusion
For the above reasons I would uphold the appeal and make the following orders:
1. Appeal allowed with costs.
2. Set aside the orders of Rein J made on 2 July 2013 and in lieu thereof order that:
1. The plaintiffs' Further Amended Commercial List Summons filed on 28 April 2014 be dismissed.
2. The first and second plaintiffs pay the costs of the third, fourth, fifth and ninth defendants.
PAYNE JA: I have had the benefit of reading the judgment of Ward JA in draft. I agree with her Honour's reasons and the orders that her Honour proposes.
I wish to make some brief additional observations about the Baltarna consent issue that her Honour deals with at paragraphs [354]-[368].
[59]
Consent by the only unitholder of the PILT Trust - Baltarna
At all relevant times Baltarna was the sole unitholder of the PILT Trust. ASIC records show that Mr Seller was the sole director and shareholder of Baltarna. It was also the New Trustees' case that Mr Seller controlled Baltarna at all relevant times: Baltarna was the alter ego of Mr Seller. His mind was its mind: Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89 at [128].
As Ward JA demonstrates, Baltarna's consent, as a defence to the claims pleaded against them, was pleaded by the appellants.
The primary judge found that, even if pleaded, the Baltarna consent issue should not be permitted to be raised. I disagree. There are cases where unfairness arises because a point which has been pleaded is only specifically raised by a party late in the proceedings. The present was not such a case.
The issue was specifically raised by the appellants when addressing the New Trustees' submission that Mr Crossman could not succeed in establishing consent as he did not have an interest in the Baltarna Trust and consent "would need to happen at the Baltarna Trust level as well". The determinative significance of Baltarna's consent was an issue clearly raised by the appellants at the trial. Following complaint by the New Trustees, both parties were given leave to address the issue in writing: Senior Counsel who appeared for the New Trustees very properly did not suggest that the New Trustees would have conducted their case any differently if the point had been raised earlier.
The question of substance that the parties addressed was whether Mr Seller's knowledge could be attributed to Baltarna as the sole beneficiary of the PILT Trust.
On the issue of substance, the New Trustees submitted that Mr Seller's knowledge could not be imputed to Baltarna Pty Ltd because Mr Seller was acting improperly. It was further submitted that as a matter of principle, conduct of a director acting improperly vis a vis the relevant corporation is not to be imputed as against that corporation. It was submitted this was demonstrated by demonstrated by the following cases:
In Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 46, von Doussa J held at 46:
As a matter of law Beach had no knowledge of the fraud, because, being the victim, it was not imputed with the knowledge of those acting on its behalf. Notice of the true position, if it were to be effective notice, would have to be given to someone other than the parties to the fraud. As the only directors of Beach in June 1989 were Messrs Fuller, Cummings and Main, notice could not be given effectively to a director ... The only organ of the company to whom effective notice could be given would be the shareholders. Had the shareholders been told the true position, it is beyond doubt that the transactions would not have occurred.
See also Duke Group Ltd v Pilmer (1992) 31 ACSR 213 at [634].
It was submitted that the Court should not infer consent of Baltarna in circumstances where Mr Seller was hopelessly conflicted in giving such consent on behalf of Baltarna and that it was "not possible to impute to Baltarna as trustee an improper act through the knowledge of Seller".
The primary judge addressed the issue at [184]-[185] as follows:
Against the possibility that to exclude argument on this point is not permissible I shall however deal with the substantive point. The submissions seemed to focus on the question of whether the knowledge of Seller concerning the Contempt Deed and Main Deed was to be attributed to Baltarna a question of a type considered in detail in Beach Petroleum NL v Johnson (1993) 43 FCR 1 and Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 [607]- [649].
I am inclined to the view that because Seller was not seeking to defraud or take advantage of Baltarna: see Duke [629] and [630], his knowledge is to be attributed to Baltarna. However if the knowledge of Seller can be attributed to Baltarna, as Mr Thomas contended, Baltarna was, as trustee, in breach of its fiduciary duty owed to the beneficiaries of the Baltarna Trust by permitting assets to be dissipated from the PILT Trust and without ensuring that the assets were available for distribution to the Baltarna Trust unitholder (namely Valofo). That was a clear breach of trust by both Nominees and Baltarna. In the case of Nominees, Seller and Londish were the human agents of the trustee and in the case of Baltarna (and if it be relevant as it might of Sanabu as well) Seller was the human agent. The conduct of Baltarna and Nominees through Seller (and Londish) was conduct which constituted a breach of trust and establishing that Baltarna knew that Nominees was acting in breach of trust is not a defence available to Crossman and the Crossman corporations as against the New Trustees.
Accordingly, at least on the contingent basis he was addressing the question, the primary judge rejected the New Trustees' submission that the knowledge of Mr Seller could not be attributed to Baltarna. The primary judge was correct to do so.
The authorities to which the New Trustees referred did not warrant a contrary conclusion. The passage from Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 46 referred to was concerned with the attribution of knowledge of a fraud.
No allegations of fraud were made in the present case against Baltarna or Mr Seller. As von Doussa J explained earlier in Beach Petroleum (at 31-32), knowledge of fraud has particular consequences under the law of attribution but, even then, the director must be acting totally in fraud of the company, that is, where all the director's activities are directed against the interests of the company, and not partly for the benefit of the company.
Duke Group Ltd v Pilmer takes the matter no further. The issue in that case was a contingent finding at [634] that, had it been necessary to do so, the Court would have reasoned as von Doussa J had in Beach to find that a company could sue to recover the proceeds of a fraud upon it, despite knowledge and participation by its directors in the fraud.
In circumstances where no allegation of fraud had been made by the New Trustees, the primary judge was correct to decline to depart from the ordinary rule that Mr Seller as the sole shareholder and director of Baltarna was an embodiment of the company and his mind was the mind of the company.
The basis of the primary judge's finding against the appellants on this issue was that there was a "clear breach of trust" by Baltarna.
Baltarna was not a party to the proceedings. The New Trustees did not submit that Baltarna acted in breach of trust, either before the primary judge or in this Court. No pleading was advanced by the New Trustees about this issue. No application to amend an existing pleading or file a new pleading was made by the New Trustees about this issue. In those circumstances, the finding that Baltarna acted in breach of trust was not open to the primary judge.
Baltarna, the only beneficiary of the PILT Trust, was a party to the Main Settlement Deed. As the primary judge found, Mr Seller's knowledge was properly imputed to Baltarna. In those circumstances it should be concluded that Baltarna knew all that there was to know about the entry into the Contempt Settlement Deed and the two payments to Mr Crossman, being the only matters alleged to be a breach of trust.
Baltarna's fully informed consent to the Main Settlement Deed, the Contempt Deed and the two payments under that Deed may readily be inferred where it had full knowledge of the entry into the Contempt Settlement Deed and the two impugned payments and in circumstances where it was a party to and took the benefit of the releases in its favour contained in the Main Settlement Deed which were contingent upon the two relevant payments being made pursuant to the Contempt Settlement Deed.
Thus, on this basis and the basis addressed by Ward JA at [367], the fully informed consent of Baltarna was a further ground upon which the appellants were entitled to succeed.
[60]
Endnotes
John Sheahan v Martin Thompson [2015] NSWSC 871.
John Sheahan v Martin Thompson [2015] NSWSC 535 ("recusal judgment").
Recusal judgment at [11].
Recusal judgment at [12].
Recusal judgment at [13].
Referring to Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [31]-[33].
Recusal judgment at [14(2)(a)].
Recusal judgment at [14(2)(b) and (3)].
Valofo Pty Ltd (Administrators Appointed) v PILT Nominees Pty Ltd [2011] NSWSC 134 at [10].
R v Watson; Ex parte Armstrong (1976) 136 CLR 248; Re Lusink; Ex parte Shaw (1980) 55 ALJR 12; 32 ALR 47; Livesey v New South Wales Bar Association (1983) 151 CLR 288; Re JRL; Ex parte CJL (1986) 161 CLR 342; Vakauta v Kelly (1989) 167 CLR 568; Webb v The Queen (1994) 181 CLR 41; Johnson v Johnson (2000) 201 CLR 488; [2000] HCA 48; (2000).
R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256 at 259, per Lord Hewart CJ.
Michael Wilson at [69]-[73]; Isbester v Knox City Council (2015) 255 CLR 135; [2015] HCA 20 at [21] (Kiefel, Bell, Keane and Nettle JJ); cf at [68] (Gageler J).
Michael Wilson at [33].
Michael Wilson at [68].
See, eg, Livesey v NSW Bar Association (1983) 151 CLR 288; British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283; [2011] HCA 2 at [126] and [140] (Heydon, Kiefel and Bell JJ).
(1986) 161 CLR 342 at 352.
Further Amended Commercial List Statement, par 166.
Ibid par 167.
Response, par 74.
Response, par 75.
Response, par 83(d).
Tcpt, 04/05/15, p 3(15)-(20).
Tcpt, p 15-16.
[2012] NSWCA 379.
Goodwin at [15]-[17].
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: 23 August 2016
ankruptcy [2000] HCA 63; (2000) 205 CLR 337
Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455; (2013) 305 ALR 687
Goodwin v Commissioner of Police [2012] NSWCA 379
Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112
Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296
Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198
House v The King [1936] HCA 40; (1936) 55 CLR 499
Incitec Ltd v Alkimos Shipping Corporation [2004] FCA 698; (2004) 138 FCR 496
Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd's Rep 611
Isbester v Knox City Council (2015) 255 CLR 135; [2015] HCA 20
Jackamarra v Krakouer [1998] HCA 27; (1998) 195 CLR 516
Johnson v Johnson (2000) 201 CLR 488; [2000] HCA 48
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Laws v Australian Broadcasting Tribunal [1990] HCA 31; (1990) 170 CLR 70
Leerac Pty Ltd v Garrick E Fay [2008] NSWSC 1082
Lightsource Technologies Australia Pty Ltd v Pointsec Mobile Technologies AB [2011] ACTSC 59
Livesey v NSW Bar Association (1983) 151 CLR 288
Londish v Sheahan - In re Valofo Pty Ltd [2010] NSWSC 337
Londish v Sheahan [2009] NSWSC 1175
Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633
Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 244 CLR 427
Minister for Immigration and Multicultural Affairs v Jia Legeng [2001] HCA 17; (2001) 205 CLR 507
Najjar v Haines (1991) 25 NSWLR 224
Nicholls v Michael Wilson & Partners Ltd [2010] NSWCA 222; (2010) 243 FLR 177
O'Donnell v Reichard [1975] VR 916
O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262
Orr v Ford [1989] HCA 4; (1989) 167 CLR 316
Payne v Parker [1976] 1 NSWLR 191
PILT Nominees Pty Ltd v Baltarna Pty Ltd [2009] NSWSC 656
R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256
R v Watson; Ex parte Armstrong 91976) 136 CLR 248;
Re Dawson (dec'd) [1966] 2 NSWLR 211
Re JRL; Ex parte CJL (1986) 161 CLR 342
Re Lusink; Ex parte Shaw (1980) 55 ALJR 12; 32 ALR 47
RHG Mortgage Ltd v Rosario Ianni [2015] NSWCA 56
Rinehart v Welker [2012] NSWCA 95
Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286
RPS v The Queen [2000] HCA 3; (2000) 199 CLR 620
Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156; (2015) 89 NSWLR 431
Sheahan v Londish [2010] NSWCA 270; (2010) 244 FLR 64
Sheahan v Thompson [2015] NSWSC 535
Sheahan v Thompson (No 2) [2015] NSWSC 871
Spellson v George (1992) 26 NSWLR 666
Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17
Vakauta v Kelly [1989] HCA 44; (1989) 167 CLR 568
Valofo Pty Ltd (Administrators Appointed) v PILT Nominees Pty Ltd [2011] NSWSC 134
Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544
Webb v The Queen (1994) 181 CLR 41
Young v Murphy [1996] 1 VR 279
Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484
Texts Cited: I Spry, Equitable Remedies (6th ed, 2001, LBC)
JD Heydon, Cross on Evidence (10th ed, 2014, LexisNexis)
JD Heydon and MJ Leeming, Jacobs' Law of Trusts (7th ed, 2006, LexisNexis)
JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane's Equity Doctrines and Remedies (5th ed, 2015, LexisNexis)
JW Carter, The Construction of Commercial Contracts (2013, Hart Publishing)
ML Ascher, A Wakeman Scott, WF Fratcher, Scott and Ascher on Trusts (5th ed, 2008, Aspen Publishers)
RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow & Lehane's Equity Doctrines & Remedies (4th ed, 2002, LexisNexis)
Category: Principal judgment
Parties: Phillip Crossman (First Appellant)
Seniors Provident Pty Ltd (Second Appellant)
Metro Finance Pty Ltd (Third Appellant)
Metro Finance (NZ) Pty Ltd (Fourth Appellant)
John Sheahan (First Respondent)
Ian Lock (Second Respondent)
Valofo Pty Ltd (in liq) (Third Respondent)
Ross Seller (Fifth Respondent)
Peter Londish (Sixth Respondent)
Representation: Counsel:
Dr AS Bell SC with DFC Thomas (Appellants)
JE Marshall SC with DR Sulan (First and Second Respondents)
Solicitors:
Corrs Chambers Westgarth (Appellants)
Clayton Utz (First, Second and Third Respondents)
File Number(s): 2015/221882
Publication restriction: Nil
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity - Commercial List
Citation: [2015] NSWSC 535; [2015] NSWSC 871
Date of Decision: 06 May 2015
Before: Rein J
File Number(s): 2013/127413
(e) consequence of conclusion as to bias
The next question is what follows from that conclusion. As considered in Goodwin v Commissioner of Police, [30] how grounds addressed to issues in dispute and grounds addressing an unsuccessful recusal application should be addressed is not without its difficulties. [31]
"[16] [I]n Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; 229 CLR 577, at [117] Kirby and Crennan JJ stated:
'An intermediate appellate court dealing with allegations of apprehended bias, coupled with other discrete grounds of appeal must deal with the issue of bias first. It must do this because, logically, it comes first. Actual or apprehended bias strike at the validity and acceptability of the trial and its outcome. It is for that reason that such questions should be dealt with before other, substantive, issues are decided.'
[17] These comments should be understood in the context in which they arose. The High Court was dealing with an appeal from a judgment of the Full Court of the Federal Court. The substantive issues involved a dispute between the parties as to copyright in architectural plans. As explained by Gummow ACJ at [2]:
'If the bias submissions were to succeed, the remedy would be a retrial. If the copyright submissions were to succeed, the Full Court would itself provide the orders which should have been made and there would be no occasion to order a retrial.'"
The logic of the position that bias should generally be dealt with first must be accepted; even if bias is upheld, however, the practical realities in a particular case may not preclude the appeal court disposing of the substantive issues. In circumstances where an appellant is entitled to a final judgment in its favour from the appeal court, it could constitute a substantial injustice to force the successful party to relitigate the whole claim before a single judge, possibly in circumstances where there will be no realistic likelihood of recovering the additional costs. That, in effect, might be to give the unsuccessful respondent a benefit from successfully opposing the recusal application at trial, but on a false basis. (That consideration was not engaged in the present case, the respondents not having opposed the recusal application.)
In my view, the appellants should succeed on their challenge to the refusal of the trial judge to recuse himself, but the final orders proposed by Ward JA should nevertheless be made.
WARD JA: In proceedings heard last year in the Equity Division of the Supreme Court, the first appellant (Mr Phillip Crossman) and certain entities controlled by him (Seniors Provident Pty Ltd, Metro Finance Pty Ltd (Metro Finance) and Metro Finance (NZ) Pty Ltd (Metro Finance (NZ)) - collectively, the Crossman corporations) were found liable to pay equitable compensation to the first and second respondents (the New Trustees) in their capacity as trustees of the Prime Indexed Lease Trust (the PILT Trust) (Sheahan v Thompson (No 2) [2015] NSWSC 871). They were held so liable on the basis that they had knowingly received moneys (paid in settlement of claims made by Mr Crossman in earlier proceedings) in circumstances amounting to a breach of trust by the former trustee of the PILT Trust, PILT Nominees Pty Ltd (PILT Nominees); in other words as knowing recipients under the first limb of the rule in Barnes v Addy (1874) LR 9 Ch App 244.
In the earlier proceedings (the Crossman proceedings), which were commenced in 2008, Mr Crossman had alleged that PILT Nominees had misappropriated trust moneys and that his interest in another trust (the Baltarna Trust) had been wrongly defeased. As will be explained shortly, Mr Crossman's "interest" in the Baltarna Trust was in fact limited to his interest in its proper administration, arising out of his position (until the events in question) as a discretionary beneficiary under a third trust (the Baltarna Class Trust), by which he was entitled, if certain events transpired, to a distribution out of the assets of the Baltarna Trust.
In the course of the Crossman proceedings, Mr Crossman filed a notice of motion (the contempt motion) alleging contempt of court by PILT Nominees and others by reason of their alleged breach of interlocutory injunctions that had been granted by the court to restrain, in effect, borrowings by PILT Nominees as trustee and the use of trust assets to secure any further borrowings. The sum of $2.2 million ordered by way of equitable compensation in the commercial list proceedings the subject of this appeal (the subject proceedings) represents the sum that Mr Crossman, or one or more of the Crossman corporations at his direction, received in consideration of the discontinuance of the contempt motion in the Crossman proceedings. As will be seen, that discontinuance occurred in the context of the settlement of the Crossman proceedings as a whole, albeit a settlement effected by two separate deeds.
In the present proceedings, the appellants raise at the outset a complaint as to the refusal of the primary judge to recuse himself from hearing the matter on the ground of apprehended bias (Sheahan v Thompson [2015] NSWSC 535). They next challenge the primary judge's findings in relation to various of the substantive issues determined in the subject proceedings (Sheahan v Thompson (No 2) [2015] NSWSC 871). They seek orders setting aside the orders made by the primary judge and, in lieu thereof, dismissing the further amended commercial list summons filed in the proceedings below. The New Trustees have filed a notice of contention in which they contend that the decision below should be affirmed on other grounds.
Named in the notice of appeal as the third respondent to the proceedings is Valofo Pty Ltd (in liq) (Valofo), the ultimate beneficiary of the PILT Trust, as will be explained shortly. As Valofo is in liquidation, the appellants filed a notice of motion seeking leave pursuant to s 471B of the Corporations Act 2001 (Cth) to proceed against it. The New Trustees (in their capacity as liquidators of Valofo) did not oppose leave being granted but contended that any leave should be subject to a condition that no costs orders or judgment obtained by the appellants be enforced against Valofo without further leave of the Court. The appellants were prepared to consent to a condition in those terms. It being appropriate in the circumstances to do so, at the outset of the hearing of the appeal such leave was granted nunc pro tunc.
The fourth named respondent (PILT Nominees) was de-registered some time prior to the hearing of the appeal and had already been removed as a party to the proceedings, by order of the registrar, by the time the appeal came to be heard.
The remaining respondents, Mr Ross Seller and Mr Peter Londish, were directors at relevant times of PILT Nominees. They played no part in the appeal proceedings. The role they played in the relevant events will be explained further below.