2031/05 Rhonda Dawson & 4 Ors v LNG Holdings Pty Ltd & 2 Ors
JUDGMENT
1 HIS HONOUR: This is a claim for damages to compensate the first and second plaintiffs (Mrs Rhonda Dawson and Mr Wayne Dawson) for losses suffered by them from their investment in a failed property development. They also seek damages for money they felt morally obliged to pay, and did pay, to other investors whom they introduced to the project.
2 The property in question was a development site at 140-148 Beattie Street, Balmain. On 15 July 2002, the first defendant, LNG Holdings Pty Ltd ("LNG"), and its joint venture partner, Property & Equity Developments Pty Ltd ("PED"), exchanged contracts to purchase the site for $2,200,000. The directors of PED were Mr Peter Dixon and Mr Matthew Kelly.
3 LNG and PED are both now in liquidation. On 30 May 2005, Barrett J granted leave to the plaintiffs pursuant to s 471B of the Corporations Act 2001 (Cth) to begin and proceed with the proceedings against LNG. There was no appearance for LNG at the hearing.
4 The second defendant, Mrs Christine Nash, was not a director, officer or shareholder of LNG. She was, and is, the de facto partner of the third defendant, Mr Graham Vaughan. Mr and Mrs Dawson allege that they were induced to invest in the project and to procure others to do so by misrepresentations made by Mrs Nash and Mr Vaughan, and by Mrs Nash and Mr Vaughan not disclosing to them that Mr Vaughan was an undischarged bankrupt.
5 Mr Vaughan had been made bankrupt on 4 August 2000. LNG was incorporated on 5 March 2002. Notwithstanding that he was an undischarged bankrupt, Mr Vaughan was appointed a director of LNG. The other director was Mr Lyall Gorman. He is Mrs Dawson's brother. There were two issued shares in LNG. One was held by Mr Gorman. Mr Vaughan was registered as the other shareholder. (His share was vested in his trustee in bankruptcy or in the Official Trustee (s 58 Bankruptcy Act 1966 (Cth)), but no step was taken by his trustee to take control of the share. I infer that his trustee did not know of the share.)
6 PED, Mr Gorman and Mr Vaughan were involved in other projects for the development of property at Chatswood, Manly Vale and Dee Why. In June 2002, Mr and Mrs Dawson invested $150,000 in the Chatswood development. They did so as a result of their discussions with Mr Gorman.
7 In March 2002, Mrs Nash provided $180,000 for the Manly Vale project. She was also an investor in a second Dee Why project, with which Messrs Dixon and Kelly were associated.
8 In July 2002, Mr Vaughan told Mr Gorman, Mr Dixon and Mr Kelly that he had come across a great possible development site in Balmain. At about that time, Mrs Nash told him that she had already committed more money into Manly Vale than she intended, and was committed to the development in Dee Why. She said she did not want any involvement in another property.
9 In about August 2002, LNG executed a trust deed for the establishment of a trust to be called the Benchmark Property, Beattie Street Balmain Development Trust. The trust deed is dated 3 April 2002, but this date is wrong. The deed relates specifically to the Balmain property and it was not identified as an investment opportunity by Mr Vaughan until July 2002. In an email dated 5 August 2002, Mr Gorman said that accountants were "setting up the trust entity as we speak."
10 The trust deed provided for two classes of unitholders. LNG itself was the initial unitholder, holding four A-Class units. B-Class unitholders were to be entitled to receive:
" ... an interest payment of 25% per annum if the First Business of the Trust (as defined in the first schedule) only proceeds with a minimum interest period of six months and repayment of the capital invested or an interest payment of 26% per annum if the Second Business of Trust [sic] (as defined in the first schedule) also proceeds with a further minimum interest period of six months and repayment of the capital invested. Such interest is to be in preference to any other payment made to unitholders of any other class and all B-Class units are to be fully redeemed by the Trustee upon payment of such interest and the capital for the issue for such unit or units is repaid to the unitholder or unitholders at the time of such redemption. "
11 The expression "First Business of the Trust" meant "the purchase of a development site being 140-148 Beattie Street, Balmain New South Wales and obtaining necessary consents and authorities for the re-development of the site by the trustee." The "Second Business of the Trust" was the "redevelopment of the site ... and the sale of such home units by the trustee."
12 The trust deed contained general conditions for the redemption of units and fixing the redemption sum for units to be redeemed. Those provisions were not consistent with the description of the rights and privileges attaching to B-Class units, but that is not material to the present case. Except in the case of fraud, dishonesty, or failure to exercise the degree of prudence and diligence required of a trustee, LNG was not bound to make any payment to unitholders except out of the Trust Fund and was not liable to unitholders to any greater extent than the moneys and assets of the Trust Fund.
13 Hence, a B-Class unitholder would be entitled to a high rate of interest and return of capital provided that the same could be paid out of the Trust Fund. The interests of all unitholders in the Trust Fund would be subject to the right of LNG to be indemnified out of the Trust Fund in respect of liabilities properly incurred by it in execution of the trust.
14 As I have said, contracts were exchanged for the purchase of 140-148 Beattie Street, Balmain on 15 July 2002 for $2,200,000. A five percent deposit of $110,000 was provided by LNG Global Enterprises Pty Ltd. This was a company associated with Mr and Mrs Gorman. The parties treated this money as having been provided by Mrs Gorman.
15 The contract of 15 July 2002 provided for completion after six weeks, that is, by 26 August 2002. By that stage, PED had obtained in principle approval of finance totalling $6,300,000 for the project. The finance was provided by two facilities: one for $5,000,000 and the other for $1,300,000. The lender was Guardian Trust Australia Ltd who, it may be inferred, were lending on behalf of McLaughlin's Financial Services Ltd ("MFS"). Just over $1,800,000 was approved as an advance for the acquisition of the property.
16 By 26 August 2002, LNG had not raised the balance of the finance needed to complete the purchase. A notice to complete was issued by the vendors on 9 September 2002.
17 According to Mr Dawson, in early September 2002, Mr Gorman said to him:
" I have got another investment opportunity. LNG Holdings Pty Ltd is the trustee for the Beattie Street, Balmain Benchmark Property Trust and is a separate entity to LNG Holdings Pty Ltd as trustee for the Chatswood Benchmark Property Trust. My joint venture partners have got an option to purchase another property and they require investors in order to complete the option and purchase some land in Beattie Street, Balmain. Would you be interested in meeting these people and looking at the opportunity? Liana [Mrs Gorman] has provided the option fees for around $110,000 for Beattie Street. "
18 As a result of this approach, Mr and Mrs Dawson met with Mr and Mrs Gorman, Mr Vaughan and Mrs Nash at a coffee shop called The Coffee Bean in Rozelle on the morning of Saturday 7, September 2002. During the meeting, Mr Dawson was shown, either by Mr Vaughan or by Mr Gorman, a feasibility study for the Beattie Street development prepared by PED. Two days after the meeting, Mr Vaughan took Mr Dawson to inspect the development sites at Manly Vale and at Dee Why. On 11 September, Mr and Mrs Dawson, Mr Vaughan and Mrs Nash had dinner at the Bayview Hotel in Gladesville.
19 In their amended statement of claim, Mr and Mrs Dawson allege that representations were made to them by Mr Vaughan and Mrs Nash during the meeting at The Coffee Bean on the morning of Saturday, 7 September 2002 and over dinner on 11 September 2002 which induced them to invest in the project. The amended statement of claim named five plaintiffs. The claims of the third, fourth and fifth plaintiffs were settled. The amended statement of claim contains the following allegation:
" Misleading or Deceptive Conduct
17. Further, or in the alternative, in and between about April and September 2002, the second and third defendants represented to the plaintiffs that ('the representations'):
17.1 investment in the development of the Beattie Street property was a safe investment;
17.2 the development of the Beattie Street property was a financially viable project;
17.3 there would be no undue difficulty in obtaining relevant consents for the development of the Beattie Street property from the local council;
17.4 any issues with obtaining relevant consents for the development of the Beattie Street property from the local council had been professionally considered and viable solutions had been arrived at;
17.5 the development of the Beattie Street property would be able to be proceeded with without any, or any undue, delay;
17.6 the initial unit holders in the trust for the development of the Beattie Street property would be able to redeem their initial investment within 12 to 18 months;
17.7 the return to the initial unit holders in the trust for the development of the Beattie Street property would be 25%;
17.8 investment in the development of the Beattie Street property would be a stand alone investment
...
17.9 the defendants were of sound commercial repute and were not impecunious, insolvent or bankrupt
Particulars:
...
To all the plaintiffs, by silence by failing to disclose that the first defendant was not solvent or that the third defendant was an undischarged bankrupt. "
20 It was alleged that the representations were misleading or deceptive because the investment was not safe, and there were numerous and long outstanding difficulties with satisfying the conditions of the development approval for the site and with obtaining a construction certificate from the Leichhardt Municipal Council. It was alleged that the development was unlikely to produce a return to unitholders of 25 percent, and it was unlikely that unitholders would be able to redeem their investment within 12 to 18 months because of the difficulties of satisfying the conditions of the development approval and obtaining a construction certificate. It was also alleged that the defendants engaged in misleading conduct by not disclosing the fact that Mr Vaughan was an undischarged bankrupt. The plaintiffs claimed that Mrs Nash and Mr Vaughan were both involved within the meaning of s 75B of the Trade Practices Act 1974 (Cth), in a contravention by LNG of s 52 of that Act, and also, that they both contravened s 42 of the Fair Trading Act 1987 (NSW). It was also alleged that the defendants owed a duty of care to Mr and Mrs Dawson in respect of the representations and breached that duty.
21 I will deal with the meetings of 7 and 11 September 2002 later in these reasons.
22 Mr Dawson received the feasibility statement which he had been shown at the meeting at The Coffee Bean on or about 9 September 2002. At about the same time, he received a copy of the trust deed and a document entitled "Benchmark Property Investments". He passed these documents on to other potential investors.
23 On 19 September 2002, Mr and Mrs Dawson transferred $150,000 to the account of LNG. Mr Dawson procured an investment of $150,000 from a Mr Brian O'Connor, and a further $150,000 from a Mr and Mrs Powter. The moneys from Mr O'Connor were transferred to LNG on 18 September 2002; the moneys from Mr and Mrs Powter were transferred to LNG on 19 September 2002.
24 On 24 September 2002, Mr Dawson signed the trust deed as a B-Class unitholder and was issued with a certificate addressed to Mr and Mrs Dawson that they were the holders of 150,000 B-Class units representing capital invested of $150,000. The certificate was signed by Mr Vaughan as a director of LNG.
Difficulties of the Development
25 The development proposal was for the construction of six terraces, two apartments and two townhouses, together with associated car parking. A previous proprietor had obtained development consent for such a construction, subject to conditions. The consent was last modified in 2001. The site was in a flood-prone area. The major issue concerned the management of stormwater run-off in the event of flooding. Leichhardt Council would not approve a design whereby the development would increase the flow of stormwater to adjoining properties.
26 LNG's consultants, Bowdens, were retained to devise a solution to the stormwater issue. On 2 August 2002, Bowdens outlined to the Council two alternative proposals for an appropriate stormwater system. On 27 August 2002, a meeting was held at the Council attended by Mr Hourigan of Bowdens, Mr Kelly and Mr Gorman, as well as by Council officers and the Council's consultants. The minutes record that the Council's representatives stated they were happy with the concept details provided, but additional issues needed to be addressed. One of the requirements for dealing with the stormwater issue was to acquire a drainage easement over an adjoining block of land.
27 On 10 September 2002, the adjoining landowners, Mr and Mrs Searle, signed a letter confirming that they agreed, in principle, to providing the required drainage easement for the sum of $100,000. A formal agreement was subsequently entered into. The money was paid on 30 October 2002.
28 On 23 September 2002, Bowdens provided a quote of $44,765 for providing a stormwater design including management of the project concerning the stormwater design.
29 The vendor agreed to an extension of a time for completion to 4 October 2002. It required payment of a further five percent of the deposit. A further five percent deposit of $110,000 was paid by LNG on 24 September 2002. Between 16 September and 19 September 2002, LNG had raised $825,000 from various investors who provided mezzanine finance by taking up B-Class units. The $110,000 was paid from the funds so raised.
30 The purchase was settled on 4 October 2002. Of the moneys raised from investors, about $560,000 was applied to complete the purchase and to pay stamp duty. Following the purchase, LNG held $194,000 of funds raised from investors. After paying other expenses and paying for the easement, LNG held $32,000 in its bank account.
31 The construction finance arranged by PED with MFS included $300,000 to be applied towards the costs of the stormwater management plan, $150,000 as PED's costs as project manager (which accrued at $15,000 per month), $310,000 for contingencies, and $3,000,000 for construction costs. The balance of the loan included $590,000 for capitalised interest and $146,000 for document establishment fees.
32 In 2003, LNG raised further finance. It raised $500,000 from a Mr Ferizis on 24 June 2003, and $400,000 from a Mr Frickier on 2 July 2003. To obtain these funds, LNG gave options to each of Mr Ferizis and Mr Frickier to acquire a unit in the development at a favourable price. If the option were exercised, the moneys paid as the option fee would be applied towards the purchase price. Mr Ferizis and Mr Frickier were also entitled after 11 months to give notice requiring repayment of the option fee together with interest whereupon the option would be surrendered.
33 LNG did not obtain a construction certificate. On 26 November 2002, Leichhardt Council advised Mr Kelly that, whilst it agreed in principle, with the philosophy behind PED's proposed drainage system, the Council required a detailed report outlining the operation of the system, giving details of the hydrology and hydraulic calculations used as a basis for sizing the system. The design was to cater for all events up to and including a 100-year flood event with the provision of a fifty percent blockage of the intake structure within Beattie Street.
34 All of this took considerable time. It appears that a completed proposal was delivered to the Council in the middle of December 2002. The Council's consultants (Lyall & Associates) were not satisfied. Correspondence ensued between Lyall & Associates and Bowdens during January and February 2003. Further reports were provided by a further consultant for PED relating to the proposed on-site detention system for stormwater in March 2003. On 22 April 2003, Lyall & Associates advised the Council that it needed further information, including the provision of a structural engineer's report to detail the staging and construction methodology for the proposed stormwater drainage system. Various other concerns were identified. A meeting was held with officers of the Council and the various consultants on 29 May 2003. The matters discussed included the construction of drains, a detention tank, the capacity and location of pipes and culverts, and structural reports on a proposed construction method for the buildings which was designed to provide the above-ground flow path across the site. The design involved suspending buildings on piers which, in turn, raised issues concerning the strength of the foundations and piers to support the buildings.
35 On 28 July 2003, LNG lodged its application for a construction certificate. The Council forwarded the design and models prepared by Bowdens to Lyall & Associates for review. On 6 November 2003, Lyall & Associates commented on the latest design and models. They advised that the applicant should be required to address risks in the event of a flood larger that a "100 year ARI design storm event" to quantify the impact of a probable maximum flood. There were other more detailed comments including adjustments to floor levels in the design of two of the units.
36 On 14 January 2004, the Council advised that it would be prepared to approve the construction certificate once certain revised architectural details had been submitted and outstanding fees, deposits, contributions and bonds had been paid. Even then, the Council advised that its drainage consultant and drainage engineer were still finalising drainage conditions and that the draft conditions attached to the Council's letter of 14 January 2004 might change. The draft conditions included that the development be implemented in accordance with reports and plans provided by LNG and PED's consultants from November 2002 to 22 December 2003.
37 These delays in obtaining Council's approval to a design to deal with the flood and stormwater issues had other consequences. The loans from MFS were repayable 12 months from the first drawing, that is, they were repayable on 4 October 2003. On 12 June 2003, MFS wrote to PED and advised that because of the delay in the project and the accrual of interest on the drawn loan amounts, the loan to value ratio was rapidly increasing. They required that interest payments be made on the loan commencing on 27 June 2003. Substantial costs were being incurred on the project.
38 Relations between PED and LNG had been strained from at least August to September 2002. This was largely due to PED's and Mr Vaughan's complaint that Mr Gorman had not satisfactorily carried out his role of procuring finance. As at September 2002, there were negotiations between Mr Kelly, Mr Dixon and Mr Gorman with the view to terminating their relationship. PED proposed that it take over the entire responsibility for the management of the Balmain project, but Mr Gorman did not agree to those terms. By July 2003, Mr Vaughan, Mrs Nash and Mr Gorman had reached an agreement on the terms for buying out Mr Gorman's share in LNG.
39 On 14 July 2003, Mr Dawson told Mr Gorman that he wanted to withdraw the Dawsons' investment in the Chatswood project. Mr Gorman responded by saying that he was in the process of arranging for his shares to be transferred to Mrs Nash, and for Mrs Nash and Mr Vaughan to be appointed as directors of LNG as part of an agreement for him to sell his shares in LNG. He said that while that was happening, he was no longer effectively involved with LNG.
Deed of 9 December 2003
40 Mr Vaughan was discharged from bankruptcy on 29 November 2003. On 9 December 2003, an agreement was made between PED, LNG, Mr Dixon, Mr Kelly, Mr Gorman, Mr Vaughan and Mrs Nash. The agreement dealt with the Manly Vale property, the Balmain property, and a property at Dee Why known as 2-10 Hawkesbury Avenue. It was agreed that Mr Vaughan, on behalf of PED, would pay LNG or its nominee $288,055.53 representing the entitlement of certain named investors in the Manly Vale project and a further $100,000 to Mr Gorman or his nominee. $250,000 was payable on the date of the deed and the balance on or before the "Settlement Date". The Settlement Date was 23 January 2004 or such other date as the parties might agree. Mr Vaughan also agreed on behalf of PED to pay a sum of $70,239.72 to each of LNL Global Enterprises Pty Ltd and Mr Gregory Gorman in relation to the Dee Why project. Under the deed, PED agreed immediately to transfer its interest in the Balmain property to LNG for nominal consideration. The agreement recorded that LNG, Mr Gorman and Mr Vaughan intended to enter into an agreement to discharge the existing loan agreement and securities in respect of the loans for the Balmain project on the Settlement Date and that the directorships, shareholding and control of LNG would then be changed.
41 By 21 January 2004, the loan to MFS was in default. The facility had been extended until 27 January 2004. Refinance was urgently needed. On 11 February 2004, a further deed was entered into between Mrs Nash, Mr Vaughan, Mr Gorman and LNG. It recited that Mrs Nash and Mr Vaughan had been unable to obtain the release of Mr Gorman and LNG from all obligations in respect of the loan and security documents in respect of the Balmain property. Mr Gorman and LNG agreed to release security apparently held by them against the Manly Vale property on payment of the balance of the moneys payable under the deed of 9 December 2003.
42 Mrs Nash provided the funds to make all of the payments due by Mr Vaughan (but which were to be made by him on behalf of PED), under the deed of 9 December 2003.
Failure of the Project
43 In 2004, Mr Frickier and Mr Ferizis lodged caveats on the titles of the Balmain property. Further valuations were obtained. On 24 June 2004, Landsburys valued the site as it then was in the sum of $3,000,000, although that valuation was based upon an assumption that the proposed development had a construction certificate. Offers of finance were made by Ray White Investments and Capital Finance Australia Ltd. It is unclear as to whether or not those offers would have been sufficient to discharge LNG's debts. In about November 2004, Capital Finance advised that they required that Mr Frickier be repaid from the proceeds of the advance. This effectively would have reduced the available finance by $500,000 plus interest.
44 A practical difficulty for Mr Vaughan and Mrs Nash was that they did not control LNG. Mr Vaughan had resigned as a director of LNG by a letter of 23 September 2002. Mr Gorman was the sole director of LNG and, as a fifty percent shareholder, would have been able to block any shareholder resolution for his removal as a director or for the appointment of another director. Mr Vaughan and Mrs Nash demanded that he transfer his shares and resign as a director because all of the payments under the deed of 9 December 2003 had been made. He declined. He had not been released from his obligations as a guarantor of the loan facilities provided by MFS in respect of the Balmain project. From Mrs Nash and Mr Vaughan's perspective, this was a catch 22. LNG could not enter into new finance facilities without Mr Gorman signing the agreements on behalf of LNG, but unless the refinance occurred, they could not enforce his removal as a director or obtain a transfer of his share.
45 On 8 November 2004, Mr Vaughan and Mrs Nash attended at the Australian Securities and Investments Commission. Mr Vaughan, with Mrs Nash's acquiescence, lodged a return which he signed purportedly as secretary of LNG, stating that Mr Gorman had ceased to hold office as a director and secretary of LNG on 3 November 2004, and had transferred his share to Mrs Nash. This was false. The form purported to show that Mrs Nash had been appointed a director of LNG, but this was also false. On the same day, they attended at the Land Titles Office and purported to lodge a withdrawal of a caveat which had been lodged by a solicitor on behalf of the investors in B-Class units in the Beattie Street trust. That purported withdrawal was ineffective.
46 In the result, no agreement was reached with Mr Gorman and with the B-Class unitholders, including Mr and Mrs Dawson. No agreements with the new financiers were entered into. Perpetual Nominees Ltd, which acted as agent for MFS on the loan transactions, served a statutory demand on LNG. The demand was made on 29 November 2004 and was for an amount of $2,011,500. The demand could not be satisfied. On 27 January 2005, Perpetual Nominees Ltd filed an application to wind up LNG in insolvency. A winding-up order was made on 29 March 2005. MFS exercised its power of sale of the Balmain property as mortgagee. The amount realised was insufficient to meet the mortgage debt.
The Issues
47 Mr and Mrs Dawson seek recovery of their investment. A claim that the defendants were liable for misapplying moneys raised for the Balmain project towards other ventures was not pursued. The sole questions were: