Dean v Antunes

THE FACTUAL MATRIX

1. In proceedings on a claim for damages at common law, the plaintiff (who claims to have been a client) sues the defendant (a solicitor), in contract and tort, for negligent advice alleged to have been given by the defendant in connection with a project (for the acquisition, and sale, of land for development) in which the plaintiff was one of four investors, as was a corporate vehicle of the defendant herself.
2. The plaintiff alleges that on advice from the defendant as a solicitor: 1. the investors acquired ownership and control (as shareholders and directors) of Overdean Group Pty Ltd ("the Company") - a company incorporated under the Corporations Act 2001 Cth - the plaintiff acquiring one quarter of the Company's issued shares; 2. the Company, owned and controlled by the investors, became trustee of 15 unit trusts, with one quarter of the units in each trust issued to the investors or their nominees (as trustees of their own discretionary trusts) respectively; and 3. the Company became the legal entity through which the land for development was acquired, using legal services provided by the defendant as solicitor for the project.
3. Plausibly, this legal structure is said to have been driven by tax advice.
4. As project vehicle, the Company (with finance provided by the ANZ Bank as secured creditor) acquired three of four parcels of land required for the development envisaged by the investors, and an option to purchase the fourth parcel.
5. Before expiry of the option period the Company, as trustee and through the agency of the lay investors, negotiated a potential sale of the development land (including the land under option) for a sale price of approximately $30 million.
6. The plaintiff alleges that the defendant advised the directors of the Company (and, hence, the investors in whatever capacity, including the plaintiff) that the option was available, unconditionally, to be exercised whereas, in fact, it could only be exercised if and when the Company had acquired development approval from government.
7. The potential sale of the land is alleged by the plaintiff to have been lost - the prospective purchaser did not proceed to an exchange of contracts - because, contrary to negotiated terms, the Company did not have an unconditional right to exercise the option.
8. The prospective sale collapsed, the option lapsed and the project failed.
9. Owing money to the ANZ Bank, the Company was placed under external administration (on 15 November 2011) before being wound-up (on 2 February 2012). Upon deregistration (on 10 August 2013), all property that the Company held on trust immediately before deregistration vested in the Commonwealth of Australia: Corporations Act 2001, section 601AD(1A).
10. By virtue of the Corporations Act, the Commonwealth takes only the same property rights that the Company itself held (section 601AD(3)); the Commonwealth has, subject to its obligations as trustee, all the powers of an owner over property vested in it by the Act (section 601AD(3)); the Commonwealth is empowered to continue to act as trustee or to apply to a court for the appointment of a new trustee (section 601AE(1)); and the Commonwealth may do an act on behalf of the Company if satisfied that the Company would be bound to do the act if the Company still existed (section 601AF).
11. The trust deeds of the 15 unit trusts (respectively named "The Overdean One Trust", "The Overdean Two Trust" and so on through to "The Overdean Fifteen Trust") are in a common form.
12. Clause 16.1 of the trust deed(s), with emphasis added, provides that "[the] Trustee [separately defined as the trustee or trustees for the time being] may be removed, and a new Trustee appointed in its place, by a written or oral resolution agreed to by all Unit Holders or by a Deed executed by all the Unit Holders."
13. The unitholder associated with the defendant has declined to join in appointment of the plaintiff as trustee of the unit trusts. Consequently, clause 16.1 is not an available means for effecting a change of trustee.
14. The Australian Securities and Investment Commission (ASIC), acting on behalf of the Commonwealth, has formally advised the Court (through correspondence with the solicitor for the plaintiff) that the Commonwealth has no knowledge about the circumstances surrounding the current proceedings and, therefore, it will not bring the claim against the defendant on behalf of the unit trusts; the Commonwealth has no objection to being joined as a defendant provided that no orders are sought against it; and, if it is joined as a defendant, then, provided no orders are sought against it, ASIC (on behalf of the Commonwealth) does not wish to be heard in the proceedings, and it will not file an appearance.
15. In effect, by adopting this stance the Commonwealth accepts that it may be a necessary party to any proceedings commenced "on behalf of the trusts", and it is to be taken (in its capacity as trustee) to have foreshadowed a submitting appearance. By this means, the Commonwealth (as trustee) is implicitly prepared, passively to lend its name to the plaintiff's trust claim against the defendant; it will take no active part in the proceedings but, by its joinder, facilitate the plaintiff's conduct of them. This focuses attention on the plaintiff's proceedings as presently constituted and as they may be reconstituted.
16. By a statement of claim filed within, but arguably just within, the six year limitation period prescribed by section 14 of the Limitation Act 1969 NSW for a cause of action in contract or tort, the plaintiff, in his own right, sued the defendant in negligence. The potential contract the loss of which is the subject of his cause of action was lost on or about 12 March 2008. These proceedings were commenced by the filing of the original statement of claim on 14 January 2014.
17. The land purchased by the Company was not sold until after the Company went into administration on 15 November 2011 and, indeed, not until after the Company went into liquidation on 2 February 2012. If the plaintiff's cause(s) of action against the defendant did not commence to accrue until after losses on resale of the land were realised (as suggested by Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 527) the limitation period for which section 14 of the Limitation Act 1969 provides has not yet expired.
18. By her defence, the defendant contends that the plaintiff was not her client. She contends that the Company was her client, not the plaintiff. To what extent, if at all, the commercial relationship between the parties or their different manifestations as co-investors complicates identification of "solicitor" and "client" (or impacts upon the existence, nature and scope of any duty of care owed to the plaintiff either as a client or as a stranger to the defendant's retainer as a solicitor) has not been explored on the hearing of the motions before the Court. If the principal proceedings proceed to trial, one of the central questions for determination will be the existence, nature and scope of the defendant's retainer and any professional obligations she may have owed beyond her retainer.
19. The parties have resolved questions about the form of the plaintiff's proposed pleading so that, if leave to amend is granted, disputes about the terms in which the proposed statement of claim have been drafted, and about whether allegations expressed to be particulars should be separately pleaded as facts, can be put to one side.

THE DEFENDANT'S GROUNDS OF OBJECTION TO THE CASE SOUGHT TO BE ADVANCED BY THE PLAINTIFF

1. The defendant takes three objections to the plaintiff's proposed statement of claim and continuation of the proceedings against her.
2. The first ground of objection is that "the derivative claim" (a convenient, but not altogether apt, label to describe a claim that may require joinder of the trustee and all beneficiaries) which the plaintiff seeks to make "on behalf of the unit trusts" is futile because, the defendant contends: (a) the ANZ Bank is a secured creditor of "the trusts", still owed about $2.7 million; (b) as a solicitor, she claims the protection of a limitation of liability scheme under the Professional Standards Act 1994 NSW, sections 28-29, and her maximum liability under that scheme is $1.5 million; (c) by reason of that protection, the maximum amount for which any judgment could be entered against her by the plaintiff is $1.5 million; and (d) as the whole of any judgment recovered against her would go to the ANZ Bank as secured creditor, the plaintiff cannot recover any benefit from the proceedings.
3. The defendant's second ground of objection is a contention that the plaintiff's "derivative" claim (or "trust" claim, it might be called) is "statute barred" (or, having regard to section 63 of the Limitation Act 1969, more accurately "extinguished") because it will have been made, by an amendment to the plaintiff's existing statement of claim, outside the six year limitation period.
4. Implicit in this ground is a dispute between the parties (of a type commonly debated by reference to Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 527) about whether any cause of action in negligence against the defendant accrued at the time the potential sale of the project land was lost or at a subsequent time when an actual loss was incurred upon sale of the land held by the Company.
5. Whereas the defendant's first two grounds of objection strike at the plaintiff's derivative (trust) claim, the third ground strikes at his "personal claim", not entirely but substantially. She contends that particular heads of damage claimed by the plaintiff in his existing statement of claim ought to be struck out of any pleading he is allowed to maintain because, she contends, they amount to a claim by a beneficiary in a trust for loss that is "reflective" of the loss of the trust and (following a decision of the English Court of Appeal in Webster v Sandersons Solicitors (A firm) [2009] EWCA Civ 830 at [31], it is said) the Court should hold that, if there is a cause of action against a third party for causing loss to a trust fund, the cause of action is vested in the trustee for the time being (to the exclusion of a beneficiary), and that a beneficiary of the trust has no direct cause of action against the third party in respect of such a loss.
6. The observations in Webster upon which the defendant relies were made upon a contestable supposition that "similar principles apply" to a trustee and beneficiary as apply to a corporation and shareholder.
7. An established principle of corporations law (grounded in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) [1982] Ch 204 at 222-223, confirmed in Johnson v Gore Wood & Co [2002] 2 AC 1 at 62 and described by Gibbs CJ in Gould v Vaggelas (1985) 157 CLR 215 at 219-222 as elementary) is that a shareholder of a company cannot recover damages merely because the company has suffered damage, and cannot recover damages that are merely a reflection of a loss suffered by the company, but can only recover damages for loss suffered personally that is separate and distinct from the loss of the company.
8. In describing the principal as "elementary", Gibbs CJ cited the following passage from Prudential at [1982] Ch 210: "… A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested."
9. The Prudential principle as it is sometimes called has been authoritatively confirmed by the NSW Court of Appeal in Chen v Karandonis [2002] NSWCA 412 at [35]-[44]. More recent, local applications of it can be found in Ballard v Multiplex Ltd [2008] NSWSC 1019; (2008) 68 ACSR 208 at [32]-[41] and Vplus Holdings Pty Ltd v Bank of Western Australia Ltd [2012] NSWSC 1327; 91 ACSR 545 at [27]-[45].
10. If (as the English Court of Appeal supposed) this principle, or something comparable, applies in the law of trusts in a manner analogous to its application in corporations law, it is apparently distinct from the principle found in trust law that a beneficiary may sue a third party in his or her own name, joining as defendants the trustee and other beneficiaries, but only where there are special circumstances; absent special circumstances, a beneficiary's remedy is to sue the trustee for execution of the trust and then apply for leave to sue in the name of the trustee (or, if a receiver and manager of the trust property is appointed, in the name of the receiver): JD Heydon and MJ Leeming (eds), Jacobs' Law of Trusts in Australia (LexisNexis Butterworths, Australia, 8th ed, 2016), paragraph [23-03].
11. The observations in Webster on which the defendant relies are the following (with emphasis added), which follow on the Court of Appeal's discussion of the principles enunciated in Prudential in the context of the law of corporations: [31] The pension fund is not a corporate body but a trust, whose assets are vested in the trustees for the time being. Similar principles apply. If there is a cause of action against a third party for causing loss to the trust fund, it is vested in the trustees for the time being. It can be asserted by them and, normally, only by them. … Exceptionally, if the trustees fail to pursue such a claim, it may be open to a beneficiary to assert the claim in proceedings to which the trustees are also parties as defendants: see Hayim v Citibank [1987] AC 730. This has some similarity to a derivative action in company law, but it does not require further consideration here, since the claimant does not say that the trustees have failed to bring proceedings, and indeed he has in fact brought separate proceedings in his capacity as one of the trustees, together with the other trustee. A beneficiary under a trust does not have a direct cause of action in negligence against a person who may be liable to the trustees: see Parker-Tweedale v Dunbar Bank PLC (No. 1) [1991] Ch 12. [32] The present proceedings, as originally constituted, did not allege any payment by the pension fund, and therefore the claimant was not said to be suing in his capacity as a trustee of the pension fund. … He cannot claim the pension fund losses as such in these proceedings because he does not sue in his capacity as a pension fund trustee, he has not joined the other trustee as a party, and he has not alleged (and could not do so) that the trustees have failed to bring their own proceedings. …"
12. A key to understanding, or misunderstanding, these observations may be the Court of Appeal's use of the words "similar" and "similarity": "Similar principles apply…. This has some similarity to a derivative action in company law…" Significantly, the key expression is "similar", not "the same". Corporations law may provide an analogy for understanding trusts law but, given juristic differences between a corporation and a trust and the location of property rights referable to them, the analogy is imperfect and doubt attends the utility of the analogy.

THE HEADS OF DAMAGE CLAIMED BY THE PLAINTIFF

1. In pursuing his claims for relief against the defendant, the plaintiff has amended his original statement of claim twice before the present, proposed amendment. All three forms of the pleading, and that presently proposed, arise out of the same facts, or substantially the same facts, as those giving rise to the causes of action pleaded in the original statement of claim.
2. By progressive amendments of his pleading, the plaintiff has acquired an appreciation that, to enable the substance of his claims to be advanced, he needs not only to sue the defendant personally, but to do so in proceedings in which the trustee and all beneficiaries (unitholders) in the trusts are joined, in accordance with customary equity practice.
3. The heads of damage particularised in the plaintiff's proposed statement of claim (with some overlap in earlier versions of the statement of claim), under the rubric of an allegation that the plaintiff "suffered loss and damage as a result of the negligence of the… defendant in her provision of… legal services for the plaintiff", are in the following form (here edited and renumbered): 1. Had the defendant disclosed in a timely manner the contractual term of the option deed that the option could not be exercised until all necessary development application approvals had been received, the Company would have: 1. sought and obtained the necessary development approvals in a timely manner in order to permit the exercise of the option; 2. provided timely notice of that term to the prospective purchaser in order to permit the prospective purchaser to negotiate with its financier a variation of the terms of the finance approval; 3. negotiated in a timely manner a variation of the terms of the option deed with the grantor of the option to substitute an alternative term or security acceptable to the grantor, including a variation of the term so as to require only the lodgement of all necessary development applications; and/or 4. obtained in a timely manner any alternative security or compliance with any alternative term including the lodgement of all necessary development applications, 5. and the sale to the prospective purchaser would not have been lost. 1. The plaintiff lost the sum of $210,000 pursuant to a personal guarantee which he gave to the ANZ Bank to assist the Company to pay its costs of the project. 2. The sum of $276,374 which the plaintiff lent to the Company to assist it to pay its costs of the project was lost when it was placed under external administration, and later into liquidation, by the ANZ Bank. The plaintiff remains an unpaid creditor of the Company. 3. The plaintiff paid interest to the Company's bank on behalf of the Company, which was unable to be recovered. 4. The plaintiff lost the opportunity to profit from the plaintiff's investment in the project, and expenses which the plaintiff met on behalf of the Company were lost to him. 5. The plaintiff drew on his superannuation interests in order to assist the Company with its costs of the project, and thereby suffered loss and damage in that his superannuation interests, and the income from them upon which he relied, were reduced.
4. The heads of damage challenged by the defendant on her strike out application as an impermissible claim for "reflective loss" are those here described in sub-paragraphs 43(c) - (f) inclusive. Characterisation of them as reflective loss is supported, in particular, by reference to Vplus Holdings Pty Ltd v Bank of Western Australia Ltd [2012] NSWSC 1327; (2012) 91 ACSR 545.
5. The defendant accepts that the first head of damage - that here presented in subparagraph 43(a) - is not liable to be struck out summarily because, she says, there are contrary authorities as to whether or not it is a reflective loss.
6. The defendant also accepts that the second head of damage (here subparagraph 43(b)) is a personal, rather than reflective, loss and, accordingly, is beyond challenge.
7. For the purpose of this judgment, I accept the defendant's characterisation of the heads of damage under challenge as reflective loss. However, in light of my proposed disposition of the motions before the Court, I do not pause to make an independent assessment of what might or might not be a "reflective loss" that might constrain debate at a final hearing affecting parties not now present.

THE CORPORATIONS LAW PRINCIPLE AGAINST SHAREHOLDER "REFLECTIVE LOSS" CLAIMS

1. Central to each of the defendant's grounds of objection is her contention (based upon Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) and Webster v Sandersons Solicitors (A firm)) that the plaintiff cannot on his own account assert a claim for reflective loss, coupled with an objection to him being permitted to join the trustee and co-beneficiaries so as to overcome objection to his standing to sue on behalf of the trusts.
2. A convenient summary of the prohibition on reflective loss claims by shareholders in the law of corporations can be found in the judgment of Stevenson J in Vplus Holdings Pty Ltd v Bank of Western Australia Ltd [2012] NSWSC 1327; (2008) 91 ACSR 545 at [28]-[34] and [38]-[42]: "28. The relevant principle is that a shareholder of a company cannot recover damages merely because the company has suffered damage, and cannot recover damages that are merely a reflection of a loss suffered by the company. A shareholder may only recover damages for loss suffered personally that is separate and distinct from the loss of the company: Chen v Karandonis [2002] NSWCA 412 at [34]-[53] (per Beazley JA, with whom Heydon and Hodgson JJA agreed) and Ballard v Multiplex [2008] NSWSC 1019; (2008) 68 ACSR 208; per McDougall J at [32]-[41]. 29. In Chen Beazley JA cited with approval the following observations of the Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) [1982] 1 Ch 204 (at 222-223): - 'But what [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution of the value of the net assets of the company, in which he has...[a]...shareholding. The [shareholder's] shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property.' 30. In Johnson v Gore Wood & Co [2002] 2 AC 1 Lord Millett, at 62, explained the rationale of this principle: - 'If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.' 31. The principle is not confined to shareholders claiming the loss of value of their shares. It extends to all other payments that the shareholder might have obtained from the company if it had not been deprived of its funds (Ballard at [35]), including the recovery of loans made to the company (Chen at [53]). 32. The principle cannot be avoided by pleading a cause of action separate and distinct from the cause of action the company might have. The question is not whether the duties owed to the company and the shareholder are the same, but rather whether the loss claimed is truly reflective of the company's loss; that is a question of substance, not form: Thomas v D'Arcy [2005] 1 Qd R 666; (2005) 52 ACSR 609 at [18], [29]-[31], [37]; Ballard at [41]. 33. The principle applies regardless of whether the company in question is in liquidation - and, indeed, regardless of whether it has been de-registered: see Ballard at [47]-[48]. 34. The policy underlying the reflective loss rule (see [29] above) is as applicable in a liquidation as in the case of a solvent company. In a liquidation, a claim brought by a shareholder for a loss which in substance is the same as the company has suffered, will equally expose the company to double recovery, or allow the claimant shareholder to recover, to the exclusion or reduction of a claim brought by the liquidator in the interests of creditors or contributories as a whole… 38. The reflective loss rule is not to be equated with the rule in Foss v Harbottle. 39. The rule in Foss v Harbottle is the "proper plaintiff" rule. That rule is summarised in Austin & Black's Annotations to the Corporations Act, vol 1 at [2F.236] as follows: - 'According to the proper plaintiff rule of the general law, established by Foss v Harbottle (1843) 2 Hare 461; 67 ER 189, the company is the proper plaintiff to take proceedings to enforce its rights or to seek relief in respect of any wrong done to it, and an individual member of the company has no standing to do so.' 40. The rule has been abolished by s 236(3) of the Act. Part 2F.1A of the Act establishes a statutory derivative action permitting an applicant to apply to the Court (under s 237) for leave to bring or intervene in proceedings in the company's name, and for the company's benefit, in particular, defined circumstances. 41. So far as concerns the applicability of Part 2F.1A to a company in liquidation, Australian Corporation Law - Principles & Practice, vol 1 states at [3.2A.0165]: - 'An earlier conflict in the authorities as to whether Part 2F.1A is applicable to a company in liquidation has now been largely resolved, on the basis that it is not so applicable. In Chahwan v Euphoric Pty Ltd...the NSW Court of Appeal held that the context, as well as the extrinsic materials identifying the mischief which Part 2F.1A was intended to remedy, were indicative of an intention that the statutory derivative action was intended to apply only to a company as a going concern and not one under the control of a liquidator...' Part 2F.1A does not abolish the court's inherent power to permit proceedings to be taken in a company's name where it is in liquidation...In Chahwan v Euphoric Pty Ltd...Tobias JA (with whom the other members of the court agreed) held that the matters relevant to the exercise of the court's inherent jurisdiction to permit such proceedings were: - (1) whether the proceedings to be pursued had a solid foundation and reasonable prospect of success; (2) the liquidator's attitude; (3) whether practical considerations supported the initiation of proceedings, paying particular attention to protecting the liquidator's financial position and the company's estate; and (4) the discretionary nature of the jurisdiction.' (citations omitted) 42. The reflective loss rule is quite distinct. It is not a 'proper plaintiff' rule at all. It is the rule dealing with the entitlement of a shareholder or creditor to recover damage which is merely reflective of that suffered by the company: see Chen at [48] and [51]."

DOES SUCH A PRINCIPLE OPERATE IN TRUST LAW?

1. In Mercedes Holdings Pty Ltd v Waters (No. 2) (2010) 186 FCR 450 at [108]-[112] and Mercedes Holdings Pty Ltd v Waters (No. 3) [2011] FCA 236 at [37]-[56] Perram J, in dealing with interlocutory business in the Federal Court of Australia not unlike that presently before this Court, doubted whether the "reflective loss" principle has any material application in the law of trusts. For reasons to be elaborated, I share his doubts and, in substance, his reasons for them.
2. In Mercedes (No. 2) at [111]-[112] his Honour, by reference to Johnson v Gore Wood & Co. [2002] 2 AC 1 at 62, noted the emphasis in exposition of the Prudential principle on a perceived need to maintain the capital of a corporation, and observed that, to his mind, that emphasis distinguished the position of a corporation from that of a trust. He continued: "The requirement of company law that a capital reduction not take place except in specified and regulated circumstances protects creditors against the risk of the surreptitious removal of capital. No such necessity arises in the case of a trust. Because a trust does not have a separate legal personality about which creditors need be concerned and because it is the trustee who at all times remains liable, the removal of 'capital' from a trust does not affect the position of creditors as against the trustee. This is particularly so because the trustee's liability to creditors is not limited to his own entitlement to indemnity out of the trust assets… . In those circumstances the principle of 'reflective loss' does not have any application outside a context in which there exists a prohibition on an authorised capital reduction… ."
3. In Mercedes (No. 3) his Honour fielded criticism of the analysis he advanced in Mercedes (No. 2). He acknowledged policy debates about: (a) how, if "reflective losses" can be recovered by a beneficiary, trust law deals with a risk of double recovery, by a beneficiary and a trustee; (b) a risk to creditors of a trustee posed by permitting unit holders to recover reflective losses properly recoverable by the trustee; (c) a comparison between the constitution of a corporation and the terms of a trust; and (d) the potential for unfairness between beneficiaries if separate actions by a beneficiary and a trustee are permitted. Because his judgments were interlocutory, it was sufficient for him to notice the debatable character of competing arguments and to permit them to go to a final hearing.
4. In the event, the particular proceedings before Perram J were settled. In a judgment approving the settlement (required because the proceedings took the form of a class action) his Honour returned to the question whether the corporations law principle that prevents recovery of reflective losses by a shareholder has an analogous application in the law of trusts: Hodges v Waters (No. 2) [2015] FCA 264 at [9]-[15]. In doing so, he did not retreat from his earlier expressed doubts about operation of the analogy; but he did acknowledge that the case for its application was "not without force", and he located the justification for the corporations law principle, not so much in concerns about unauthorised reductions of capital, but in a desire to avoid double recovery. He did not dwell upon equity's own mechanisms for the avoidance of "double recovery" in the context of causes of action vested in a trustee.
5. Given the interlocutory character of the business before this Court, and the imperative (generally described by reference to General Steel Industries Inc. v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 130) to refrain from summary disposal of a case reasonably arguable, my acceptance of the general tenor of Perram J's reasoning is sufficient to stand in the way of the relief the defendant presently seeks.
6. That said, additional observations are warranted.
7. Questions about whether the Prudential principle can, and should, be applied in a trust law setting appear primarily to have arisen in deployment of a unit trust as a vehicle for investment, a context in which a commercial correspondence between a unitholder and a shareholder may naturally suggest itself. There is, however, a danger that allowing an absolute legal rule that serves a purpose in the law of corporations to migrate into the law of trusts may be, unnecessarily and counter-productively, to constrain the flexibility of the law of trusts that permits trusts to serve a greater variety of circumstances than those contemplated by a commercial investment.
8. A corporation is a legal person in its own right, separate and distinct from its members, who are bound to the corporation and each other by the terms of the corporation's constitution, governed by the Corporations Act.
9. Where a corporation deals with a third party in such a way as to give rise to a cause of action at common law against the third party, that cause of action is property of the corporation, not its shareholders, albeit that the corporation may have dealt with the third party through the agency of one or more of its shareholders.
10. A shareholder has no personal interest in the cause of action of the corporation or any judgment recovered on it. The property of the corporation does not flow through to a shareholder unless there is a declaration and distribution of profits, an authorised reduction of capital or (upon a winding up) a distribution of capital of the corporation.
11. Conversely, in the case of a company limited by shares, a creditor of the corporation has no recourse against a shareholder absent a winding up. The creditor's rights are generally limited to the corporation.
12. A trust is not a person, but a relationship (defined by a set of obligations and associated entitlements) that governs a trustee, beneficiaries and trust property in which the trustee and beneficiaries have a shared proprietary interest. The rights and obligations of parties to the relationship are generally governed by a trust instrument or, more generically, the terms of the trust.
13. Where a trustee deals with a third party in such a way as to give rise to a cause of action at common law against the third party, that cause of action is trust property, in which the trustee and beneficiaries have a shared interest demonstrative of an interplay between law and equity. The trustee holds legal title to a chose in action, subject to equitable obligations owed to (and enforceable by) the beneficiaries.
14. An engagement of the Court's equity jurisdiction brings with it a procedural flexibility not found upon an exercise of common law jurisdiction. In the present context, that can be seen in the common law approach adopted in elaboration of the Prudential principle in corporations law, and in equity's contemplation that a beneficiary can bring proceedings subject to joinder of the trustee and other beneficiaries. In Johnson v Gore Wood & Co. [2002] 2 AC 1 at 62, Lord Millett described the Prudential principle as one involving no discretion in its application. Equity's approach to parties is perhaps best illustrated by its acceptance of representative actions and its focus on property.
15. Witness Daniell's Chancery Practice (Stevens and Sons, London, 8th ed, 1914) at page 147 (omitting footnotes): "It was the aim of the Court of Chancery to do complete justice by deciding upon and settling the rights of all persons interested in the subject of the suit, so as to make the performance of the order of the Court perfectly safe to those who were compelled to obey it, and to prevent future litigation. For this purpose, it was necessary that all persons materially interested in the subject should generally be made parties to the suit, either as plaintiffs or defendants. The strict application of this rule in many cases created difficulties, which induced the Court of Chancery to relax it; and it became the established practice of that Court to allow a plaintiff to sue on behalf of himself and all the others of a numerous class of which he was one, and to make one of a numerous class (as the members of a joint-stock company) the only defendant as representing the others, on the allegations that they were too numerous to be all made parties."
16. The equitable jurisdiction of the Court to make representative orders was governed by "considerations of justice and convenience", and the management of proceedings by the Court "to ensure fairness" in the conduct of litigation: Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1 at 21-22 [6], citing Carnie v Esanda Finance Corporation Ltd (1995) 182 CLR 398 at 415-417 and 427-429.
17. The paradigm of a representative suit, upon an exercise of equitable jurisdiction, may not be determinative of debate about the application in trust law of a prohibition on a beneficiary's standing to claim against a third party a loss reflective of a loss recoverable by a trustee. However, equity's procedural flexibility is a factor that should be taken into account.
18. The "necessity" for joinder of the trustee and other beneficiaries in an action brought by a beneficiary against a third party arises from the property interest that the trustee and all beneficiaries have in such an action, a need to determine such an action in a way that is both convenient and procedurally fair to all interested parties, and a need to avoid a multiplicity of actions.
19. In a case scenario in which a trustee has a common law chose of action vested in it, equitable principles governing a trust, and property, are predicated on the principle that the trustee, as trustee, can sue the third party (holding any proceeds of a recovery on trust for the beneficiaries); but, if the trustee fails or refuses to do so, the trust can be enforced by a beneficiary in at least one of two ways. First, anticipating nothing, the beneficiary can sue the trustee to execute the trust (so as to compel the trustee to sue the third party), joining all other beneficiaries in the proceedings (or obtaining an order for their representation in lieu of joinder) as interested parties. Alternatively, in order to avoid a multiplicity of proceedings, the beneficiary can sue the third party, joining the trustee and all other beneficiaries (or obtaining a representative order in lieu of joinder of the beneficiaries) so that all questions in dispute can be determined in the one set of proceedings.
20. In these proceedings, the plaintiff seeks to pursue the second course. If he were to be met by opposition from the trustee (which, ASIC advises, will not happen) or from a unitholder (which, under the direction and influence of the defendant, may happen) that opposition can be dealt with, if necessary by an order (under rule 28.2 of the Uniform Civil Procedure Rules 2005 NSW) for the determination of a separate question, in these proceedings. If upon a successful recovery against the defendant, there is a dispute between unitholders as to disposition of the fruits of the judgment, that too can be accommodated procedurally without exposure of the defendant to a risk of double recovery. As parties to the proceedings, the trustee and unitholders can avail themselves of an opportunity to protect, or advance, their respective interests if and to the extent they diverge from those of the plaintiff. In theory, at least, they might support the plaintiff. In practice, they might file a submitting appearance.
21. Conversely, in stark contrast to the position of a creditor of a company limited by shares, a creditor of a trustee may be subrogated to the trustee's right of indemnity (if any) against a beneficiary who authorised the trustee to act in a manner that has given rise to a cause of action in the creditor as a third party.
22. It is not self-evident that there is a need, or room for operation, of a rule precluding a beneficiary from recovery of a loss recoverable by a trustee similar to the rule governing an action by a shareholder of a corporation. Equity has its own principles against double recovery without a need to borrow from the law of corporations. A plaintiff who recovers more than its entitlement might be held accountable, and a constructive trustee, for the excess.

THE DEFENDANT'S THIRD GROUND OF OBJECTION: "REFLECTIVE LOSS" AND WEBSTER v SANDERSONS SOLICITORS (A FIRM)

1. Addressing the defendant's third ground of objection first, I doubt the correctness of Webster v Sandersons Solicitors (A firm) if it is read (as the defendant would have it read) as suggesting a direct correlation between corporations and trust law or an absolute, universal bar on a beneficiary suing a third party stranger to the trust.
2. Given that it is not binding on this Court, but authoritative only if and to the extent persuasive (Sharah v Healey [1982] 2 NSWLR 223 at 227E-F; Cook v Cook (1986) 162 CLR 376 at 390), Webster serves as no foundation for striking out, or refusing leave to amend, the plaintiff's statement of claim in circumstances in which, as is the case, the plaintiff proposes to join the Commonwealth (as trustee) and all unitholders (as beneficiaries).
3. In circumstances in which: (a) the Company has been deregistered; (b) disclaiming knowledge of the case, the Commonwealth has declined (as statutory successor as trustee) to prosecute a claim against the defendant, but offered, in effect, to submit to the judgment of the Court; (c) the defendant's associated unitholder has declined to give its consent to the plaintiff's appointment as trustee of the unit trusts; and (d) there is no alternative means by which rights the plaintiff may have against the defendant in his capacity as a beneficiary (unitholder) in the trusts can be vindicated, there are "special circumstances" sufficient to grant the plaintiff such leave as may be necessary for him to sue the defendant on behalf of the trusts, subject to joining the Commonwealth and his co-unitholders.
4. The case for a grant of leave is reinforced by the fact that, from the outset of the proceedings, with his original statement of claim, the case sought to be advanced by the plaintiff consistently has been, as it remains, expressly engaged with accommodating the corporate and trust structure for the investors' development project serviced by the defendant as the project's solicitor. The same, or substantially the same, facts have remained the focus of each reformulated pleading. The plaintiff's allegation, and particulars, of damage have not distinguished between "personal" and "derivative (trust)" claims. Any point of distinction on that score has emerged from objections taken by the plaintiff, endeavouring to drive the proceedings towards greater precision (on turf of her own choosing) in definition of questions in dispute.
5. The plaintiff has consistently pleaded a cause of action in negligence. If their joinder be necessary (as I apprehend it is), what has been lacking so far has been joinder of other parties (the trustee and unitholders) in the proceedings in aid of the plaintiff's cause of action.
6. The "necessity" for their joinder arises not from a need to establish a cause of action in the plaintiff - the defendant concedes that he has an established cause of action, albeit that she disputes the heads of damage available to be claimed by him on that cause of action - but to allow the prospective parties an opportunity to be heard, and to bind them into the outcome of the proceedings so as to minimise (if not avoid) a multiplicity of proceedings.
7. In the interests of justice, for the more convenient determination of the plaintiff's claim, and so as to minimise the risk of a multiplicity of proceedings, leave to amend the statement of claim to address any deficiency in the plaintiff's case should, prima facie, be granted (that is, subject to due consideration of the defendant's first and second grounds of objection).
8. Prima facie, a condition of a grant to the plaintiff of leave to amend his statement of claim should be that he undertake to indemnify the Commonwealth against any costs it might incur in connection with the proceedings. However, that can be dispensed with in light of the Commonwealth's foreshadowed "submitting appearance" and the breadth of the Court's general jurisdiction (including jurisdiction under section 98 of the Civil Procedure Act 2005 NSW) to make orders for costs as the nature of the case may require.
9. The plaintiff's co-unitholders' entitlement, or exposure, to orders for costs might depend upon the nature and extent of their participation in the proceedings. They might, prudently, decide to file a submitting appearance, leaving any substantive contest to the plaintiff, the defendant and the defendant's professional indemnity insurer.

THE DEFENDANT'S FIRST GROUND OF OBJECTION: ALLEGED FUTILITY OF A TRUST CLAIM

1. The defendant's first ground of objection to the orders sought by the plaintiff (namely, a want of utility in the maintenance of a "derivative" or "trust" claim) must fail at the threshold.
2. Even if, by such an action, the plaintiff succeeded no more than in securing a reduction in a debt owed to the ANZ Bank as a secured creditor of the Company as trustee, it is not for the defendant to say that that would serve no useful purpose for the plaintiff or other unitholders on whose behalf a judgment might be recovered against the defendant. It might be commercially expedient for all concerned but for the defendant.
3. The plaintiff might also reasonably be expected to claim a lien for costs of the proceedings over any proceeds of a judgment recovered on behalf of the trusts.
4. The defendant's attempt to protect her own position by a suggestion that others than the plaintiff may, directly or indirectly, have a greater "entitlement" than has the plaintiff to any damages she may be liable to pay "the trusts" consequent upon a finding of negligence cannot divert attention away from an examination of any entitlements the plaintiff may have against her. The plaintiff's cause(s) of action, and the procedural framework in which they can be pursued, remain the focus of attention. Insofar as the plaintiff may recover damages against the defendant on behalf of the trusts (rather than personally) the fruits of his action will be a trust asset, the proper disposition of which is not the defendant's concern as a prospective judgment debtor.
5. In any event, the plaintiff relies upon the existence of factual disputes about propositions foundational to the defendant's allegation of futility. He does not concede that the ANZ Bank's claim as a creditor is necessarily of the order of $2.7 million. Nor does he accept that the defendant has satisfied preconditions necessary (by reference, particularly to section 33 of the Professional Standards Act 1994) for her to limit her liability to $1.5 million.
6. The defendant's first ground of objection ought to be rejected. It provides no foundation for a "summary disposal" of the case the plaintiff seeks by his proposed, amended statement of claim to pursue.

THE DEFENDANT'S SECOND GROUND OF OBJECTION: THE LIMITATION ACT 1969 NSW, SECTIONS 14 AND 63, THE CIVIL PROCEDURE ACT 2005 NSW, SECTIONS 64-65, AND THE UNIFORM CIVIL PROCEDURE RULES 2005 NSW, RULES 6.23 AND 6.24

Introduction

1. The defendant's second ground of objection (a contention that the plaintiff's "derivative" or "trust" claim is "statute barred") must fail for several reasons. First, properly understood, the plaintiff's application to join the trustee and co-unitholders in aid of his proceedings commenced within the six year limitation period for which section 14 of the Limitation Act provides does not, of itself, involve the addition or substitution of a new cause of action outside the limitation period; but, rather, correction of a procedural deficiency in a cause of action asserted from the outset. Secondly, even if the plaintiff's application does involve the addition or substitution of a new cause of action, he is entitled to rely upon section 65(2)(c), or section 65(2)(a), of the Civil Procedure Act to override the Limitation Act. Thirdly, it is in any event reasonably arguable, by reference to Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 527 and 533, that any limitation period that might constrain the plaintiff's proceedings, however constituted, has yet to expire.

Legislative Context

1. In order to provide the context in which these findings are made, I here set out the provisions of the Limitation Act, sections 14 and 63, so far as presently material: "14 General (1) An action on any of the following causes of action is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims: (a) a cause of action founded on contract (including quasi contract) not being a cause of action founded on a deed, (b) a cause of action founded on tort, including a cause of action for damages for breach of statutory duty. …" 63 Debt, damages etc (1) Subject to subsection (2), on the expiration of a limitation period fixed by or under this Act for a cause of action to recover any debt damages or other money, the right and title of the person formerly having the cause of action to the debt damages or other money is, as against the person against whom the cause of action formerly lay and as against the person's successors, extinguished. (2) Where, before the expiration of a limitation period fixed by or under this Act for a cause of action to recover any debt damages or other money, an action is brought on the cause of action, the expiration of the limitation period does not affect the right or title of the plaintiff to the debt damages or other money: (a) for the purposes of the action, or (b) so far as the right or title is established in the action. …"
2. Sections 64 and 65 of the Civil Procedure Act are in the following terms: "64 Amendment of documents generally (1) At any stage of proceedings, the court may order: (a) that any document in the proceedings be amended, or (b) that leave be granted to a party to amend any document in the proceedings. (2) Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings. (3) An order under this section may be made even if the amendment would have the effect of adding or substituting a cause of action that has arisen after the commencement of the proceedings but, in that case, the date of commencement of the proceedings, in relation to that cause of action, is, subject to section 65, taken to be the date on which the amendment is made. (4) If there has been a mistake in the name of a party, this section applies to the person intended to be made a party as if he or she were a party. (5) This section does not apply to the amendment of a judgment, order or certificate. 65 Amendment of originating process after expiry of limitation period (1) This section applies to any proceedings commenced before the expiration of any relevant limitation period for the commencement of the proceedings. (2) At any time after the expiration of the relevant limitation period, the plaintiff in any such proceedings may, with the leave of the court under section 64 (1) (b), amend the originating process so as: (a) to enable the plaintiff to maintain the proceedings in a capacity in which he or she has, since the proceedings were commenced, become entitled to bring and maintain the proceedings, or (b) to correct a mistake in the name of a party to the proceedings, whether or not the effect of the amendment is to substitute a new party, being a mistake that, in the court's opinion, is neither misleading nor such as to cause reasonable doubt as to the identity of the person intended to be made a party, or (c) to add or substitute a new cause of action, together with a claim for relief on the new cause of action, being a new cause of action that, in the court's opinion, arises from the same (or substantially the same) facts as those giving rise to an existing cause of action and claim for relief set out in the originating process. (3) Unless the court otherwise orders, an amendment made under this section is taken to have had effect as from the date on which the proceedings were commenced. (4) This section does not limit the powers of the court under section 64. (5) This section has effect despite anything to the contrary in the Limitation Act 1969 . (6) In this section, "originating process" , in relation to any proceedings, includes any pleading subsequently filed in the proceedings."
3. Section 58 of the Civil Procedure Act, to which section 64(2) refers, directs that the Court, in making case management decisions, must seek to act in accordance with the dictates of justice.
4. Rules 6.23 and 6.24(1) of the Uniform Civil Procedure Rules 2005 NSW are in the following terms: "6.23 Effect of misjoinder or non-joinder of parties Proceedings are not defeated merely because of the misjoinder or non-joinder of any person as a party to the proceedings. 6.24 Court may join party if joinder proper or necessary (1) If the Court considers that a person ought to have been joined as a party, or is a person whose joinder as a party is necessary to the determination of all matters in dispute in any proceedings, the Court may order that the person be joined as a party… "
5. Nothing in rules 6.28 and 19.2(4) of the Civil Procedure Rules, relied upon by the defendant, stands in the way of the plaintiff's conduct of the proceedings. Those rules are directed to the date of commencement of the proceedings against the parties proposed to be joined. That date is of no consequence to the plaintiff's cause(s) of action against the defendant. The new parties' joinder at any time before the entry of judgment would be sufficient for the plaintiff's purposes. In any event, rules 6.28 and 19.2(4) must be read subject to the Civil Procedure Act, section 65.

Analysis

1. Upon a consideration of the operation of sections 14 and 63 of the Limitation Act, sections 64-65 of the Civil Procedure Act and the Uniform Civil Procedure Rules, a starting point is the defendant's concession that, on any view of the facts, the plaintiff commenced these proceedings, within the time period prescribed by section 14 of the Limitation Act, with a (personal) cause of action that was available to him.
2. The proposition that the plaintiff's cause(s) of action against the defendant did not commence to accrue until after losses on resale of project land were realised, and that the limitation period for which section 14 of the Limitation Act provides has yet to expire, is fairly arguable. That being so, on the authority of Wardley Australia Ltd v Western Australia alone, the defendant's second ground of objection to the plaintiff's case (including his joinder of the trustee and unitholders) must be dismissed.
3. In any event, the plaintiff does not accept that joinder of the trustee and his co-unitholders in the proceedings as defendants would, of itself, involve the addition or substitution of a new cause of action. I agree.
4. The defendant's objection that the plaintiff has no standing to claim heads of damage recoverable by the trustee, without joinder of the trustee, does not necessarily mean that, in joining the trustee (or, for that matter, other unit holders) in the proceedings, the plaintiff is asserting a new cause of action. He is essentially joining parties who have a material interest in the proceedings, allowing them an opportunity to be heard, binding them to the outcome of the proceedings and minimising (if not avoiding) a risk of a multiplicity of proceedings: Fried v National Australia Bank Ltd (2001) 111 FCR 322 at [185]. No substantive relief is sought against those parties. Procedurally, it is of no consequence whether their joinder be as plaintiffs or defendants. Either way, they are bound by the Court's determination. If there be any deficiency in the "title" of the plaintiff to sue absent joinder of the trustee and other beneficiaries, their joinder remedies that, feeding the plaintiff's "title" and making it good.
5. If (contrary to this analysis and upon an assumption that the section 14 limitation period has expired, so that) the plaintiff must have resort to section 65 of the Civil Procedure Act: insofar as joinder of the trustee and co-unitholders is characterised as the addition or substitution of a new cause of action, it is one that, in my opinion, "arises from the same (or substantially the same) facts as those giving rise to an existing cause of action and claim for relief set out in the originating process" within the meaning of the Civil Procedure Act, section 65(2)(c).
6. Alternatively, the plaintiff is entitled to rely upon the Civil Procedure Act, section 65(2)(a). The continuing refusal of the trustee (latterly, the Commonwealth of Australia) to commence or maintain proceedings against the defendant is sufficient both to provide the "special circumstances" that permit the plaintiff to sue her in the right of the trusts, and to satisfy the time constraint in section 62(2)(a): Chawan v Euphoric Pty Ltd [2009] NSWSC 805; (2009) 73 ACSR 252 at [28].
7. The operation of sections 65(2)(a) and (c) is, of itself, sufficient to overcome the defendant's objection based upon the Limitation Act. By subsection 5, section 65 has effect despite anything to the contrary in the Limitation Act.

CONCLUSION

1. Subject to allowing the parties an opportunity to be heard as to the form of the orders to be made, and as to costs, I propose to make orders to the following effect: 1. ORDER that the defendant's notice of motion (for an order that the statement of claim be struck out) be dismissed. 2. ORDER that (on his notice of motion) the plaintiff be granted leave to amend his statement of claim, including leave to join in the proceedings as defendants the Commonwealth of Australia (statutory trustee of the unit trusts in which the plaintiff has an interest) and the plaintiff's co-unitholders. 3. ORDER that any statement of claim to be filed pursuant to that grant of leave be filed no later than a specified date. 4. ORDER that the defendant pay the costs of the plaintiff on the two motions before the Court. 5. ORDER that the proceedings be listed for directions before Lindsay J on a specified date.

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: 21 December 2016