Dominic Iacullo and Lillian Iacullo v Luigi Iacullo & Ors

Judgment 1In these proceedings, the Cross-Claimants have brought an extensive Cross-Claim against Mr Luigi Iacullo, Badminton Investments Pty Ltd (an entity associated with Mr Luigi Iacullo) ("Badminton"), Mr Michael Murr and various entities associated with Mr Murr. The relief claimed in the Cross-Claim comprises some twenty six orders, including: a declaration that Badminton holds monies or property received from the development of a property at Hogben Street, Kogarah on trust for the Cross-Claimants, an order for the administration of that trust and an order for an account; an order for the administration of a trust known as the IMS Unit Trust; an order for an Associate Justice to inquire into funds or assets received by Homeline Constructions Pty Ltd from IMS Developments Pty Ltd; further orders for an accounting in respect of trusts known as the Pacificon Unit Trust, the Hogben Unit Trust, the Engadine Unit Trust, and the Gladstone Unit Trust; equitable compensation; and such further or other order as to the Court deems fit. 2By way of background, the earliest of the unit trusts in issue in the Cross-Claim, the IMS Unit Trust, was established in 1997. Its trustee was IMS Development Pty Ltd. The trust was initially established to carry out a single property development at Sutherland but was extended to additional developments in 1999. Further unit trusts were later established to carry out other property developments or, the Cross-Claimants suggest, in one instance to take over a development initiated through IMS Development. 3Orders were made by Bryson AJ in September 2010 in relation to the production of documents for some of the unit trusts. The Cross-Claimants contends that limited documentation was produced in answer to those orders. The evidence before me does not allow me to assess the adequacy of the documentation which was produced. 4The Cross-Claimants contend in the Cross-Claim that they are entitled to administration relief in respect of the various trusts, including an accounting. A practical issue arises as to how the issues in dispute in the Cross-Claim are best addressed so as to seek to secure a just, quick and cheap determination of the Cross-Claim, so far as it is practicable to do so given the breadth of the issues in dispute. On 14 June 2011, Bergin CJ in Eq addressed that practical issue by making orders under Pt 20 r 14 of the Uniform Civil Procedure Rules 2005 (NSW) referring questions arising in the Cross-Claim in respect of broadly, an account of the transactions, assets and liabilities of the relevant trusts to Dr Rodney J Ferrier ("referee") for inquiry and report and made various directions in respect of the conduct of the reference. 5The time for submission of the referee's report was initially extended from 28 October 2011 to 20 January 2012. The initial account created by the referee in respect of the IMS Unit Trust is a detailed spreadsheet comprising 25 pages and a revised version of that document has been produced by the referee. It appears that that account has been derived from information reflected in MYOB records of the IMS Unit Trust and the trustee of that trust has adopted the accounting of the transactions of the trust prepared by the referee. 6By an interim report dated 7 February 2012, the referee indicated matters giving rise to delays in preparation of his report and the date for delivery of that report was further extended to 30 June 2012. Those delays appear to have largely resulted from the manner in which the parties have conducted the reference, involving matters such as debates as to confidentiality undertakings, delays in inspection of documents and correspondence as to the adequacy of documentation that had been produced. The referee noted that it has taken a period of nearly six months to reach the stage where an initial account for the IMS Unit Trust has been produced, whereas five trusts are in issue in the reference, but also observed that he considered that an appropriate process has been developed for the preparation of accounts for each of the trusts. 7By Notice of Motion filed on 16 February 2007, the Cross-Claimants now seek an order that the reference be terminated and the accounting be returned to an Associate Justice or taken by a Judge and directions be made that require the accounting parties to bring in statements of the account. The Cross-Claimants' criticisms of the approach adopted in the reference 8The Cross-Claimants rely on an affidavit of Mr Richard John Allsop, the Cross-Claimants' solicitor, dated 16 February 2012, which sets out various communications between the Cross-Claimants, Mr Murr's legal representatives and the referee as to the procedure to be adopted in the reference. The Cross-Claimants contend that source documents do not now exist, or at least have not been produced by the trustee of the IMS Unit Trust, to establish relevant expenditures were proper expenditures of the trust. On the other hand, the Cross-Defendants contend that many documents have been produced and others were not retained given the lapse of time since the projects were completed. 9The Cross-Claimants complain that the referee has declined to make various directions sought by them and has determined not to make orders requiring an affidavit from the Cross-Defendants setting out the circumstances relating to the existence or otherwise of electronic copies of certain MYOB files in respect of the IMS Unit Trust. The Cross-Claimants also complain that the referee has not required the trustee of the IMS Unit Trust, Mr Murr and Mr Luigi Iacullo to prepare an account for the IMS Unit Trust setting out individual transactions and assets and liabilities of the IMS Unit Trust and that it is necessary that the trustee of the IMS Unit Trust should apply itself to the task of stating its own transactions where it has not retained some of the relevant records. 10The Cross-Claimants submit that the IMS Unit Trust involved a series of property developments, including the acquisition of land, construction of units, subdivision and sale, but there is no differentiation of the building costs between the properties; vouchers are not identified and progress claims are not produced; there is an incomplete set of short form invoices in the documents produced and building contracts are not produced. 11It appears that issues have also arisen as to certain payments made by the trustees of the various trusts, including construction costs paid to a company associated with Mr Murr and consultancy payments made to Mr Murr, Mr Luigi Iacullo and their associated entities which, the Cross-Claimants contend, have not been substantiated. The Cross-Claimants contend that the trustee was authorised by cl 14.9 of the trust deed to contract with Mr Murr only within certain limitations as to the permitted terms of engagement. To the extent that the Cross-Claimants contend that this impeaches the trustee's account of the transactions, it is open to them to put that proposition to the referee. The Cross-Claimants also point to substantial consultancy fees paid to Mr Murr or companies associated with Mr Murr and to Mr Luigi Iacullo or Badminton and note that these payments are not itemised and their purpose is not stated, and that vouchers for these payments are not identified. 12The Cross-Claimants contend that, as a result of these matters, the referee is unwilling or unable to undertake the task defined by the orders for reference made by Bergin CJ in Eq on 14 June 2011; that the accounting will involve questions of fact and law for which no particular accounting expertise is required; that the procedures undertaken by the referee will return the matter to the Court without clear answers; and that the procedures are likely to deprive the Cross-Claimants of an accounting. 13The Cross-Defendants respond to the application by seeking to establish that it seeks to reagitate matters which were raised before Bergin CJ in Eq at the time her Honour ordered the reference. It is plain that the Cross-Claimants contended for an accounting before the Court when the matter was referred to the referee by Bergin CJ in Eq. However, the proposition that the Cross-Claimants had previously sought such an accounting would not be an answer to the application to terminate the reference if I were satisfied that the reference had miscarried or the manner in which it was being conducted now lacked utility. Assessment of the utility of the reference 14In my view, the process adopted by the referee will ultimately produce an accounting for the trusts by which the respective trustees are bound which should narrow the issues in dispute in the balance of the Cross-Claim. The referee has decided that he will prepare a list of transactions of the trusts by reference to available accounting records (which are the MYOB records in the case of the IMS Unit Trust) although he will not confirm the accuracy or otherwise of those records by source documents; he will provide that account to the Cross-Defendants and require them to indicate whether they adopt it; he will provide it to the Cross-Claimants together with the documents on which the account has been based, so that they may indicate whether they agree it is an accurate account of the transactions; and will then undertake a further round of submissions as necessary. As noted above, the trustee of the IMS Unit Trust has adopted the referee's initial account in respect of the IMS Unit Trust and that adoption amounts to its statement as to the relevant transactions. 15The extent to which issues as to the availability of documents will adversely impact on the reference as a whole, as distinct from the IMS Unit Trust, is unclear on the evidence before me. The position in respect of the IMS Unit Trust, which was the earliest of the trusts, is not necessarily indicative of the position as to the later trusts which are the subject of the reference, where the parties accept that a greater volume of documentation is available. I accept that, to the extent that the trusts do not produce documents or other evidence to substantiate that the payments were proper payments and the referee merely notes the absence of such documents in his report, that process will not finally determine the position in that regard. The extent to which that issue will remain unresolved will depend in part upon the scope of the contested hearing that the referee has already indicated he will hold if matters are otherwise not resolved, to which I will refer below. 16In my view, the referee's findings will at least narrow the issues in dispute. If, for example, the accounting identifies substantial consultancy payments to persons associated with the trustees and the referee notes that they are not supported by contemporaneous records or otherwise justified by evidence led before him, that will highlight a matter which may well need to be further addressed by the Court in determining whether the referee's report should be adopted or varied so far as those payments are included in the accounts which are prepared for the trusts. Equally, if the referee identifies transactions which are supported by appropriate evidence before him, that should narrow the scope of the remaining dispute between the parties. 17As noted above, the referee has indicated that if, after completion of submissions, matters remain in dispute which can only be resolved by a contested hearing, he will then hold such a hearing. In my view, the application to vacate the reference is premature where it is by no means clear that the issues about which the Cross-Claimants have indicated concerns will not be addressed by the process which the referee has proposed. 18I consider that the approach which has been adopted by the referee has particular utility where, it appears, the Cross-Claimants are presently maintaining the position that they dispute "all of the expenses" of the IMS Unit Trust and all of the accounts in the expenses of each trust. There is a significant question whether that position is consistent with the obligations imposed upon the Cross-Claimants and their legal advisers by s 56 of the Civil Procedure Act 2005 (NSW), which require a party to a civil dispute or civil proceedings to take reasonable steps to seek to narrow the issues in dispute in a way that is consistent with the overriding purpose. To the extent that the Cross-Claimants seek to maintain their present position, there seems to me to be more rather than less reason to maintain the reference so as to seek to achieve a review of the trusts' accounts so as to narrow the issues in dispute. 19The Cross-Claimants contend that they are being required to falsify and surcharge the account with the benefit of the trustees' own statement of the transactions, vouching or cross-examination. In my view, that misapprehends the task which the referee is undertaking. It will be open to the Cross-Claimants to respond that a transaction is not relevantly supported by documentation; the referee has made clear that he will record that position in his report; and the resulting dispute, including any inferences to be drawn from the trustee's failure to produce supporting documents or other evidence to support transactions in the course of the inquiry before the referee, is a matter to which the Court can have regard in determining whether to adopt or vary the referee's report and in dealing with remaining issues in the Cross-Claim. The Cross-Claimants also express an apprehension that they will be denied justice because of the principles of restraint in respect of findings of a referee, and that the Cross-Defendants are likely to assert that the Cross-Claimants are "stuck with the outcome". I do not regard this as a realistic possibility. I would not expect the referee to reach an affirmative view that accounts are properly stated if significant transactions recorded in them are not supported by appropriate source documentation and I see no significant risk that the Cross-Defendants will be bound by such a view. 20I am therefore not satisfied that the referee's approach is without utility and it seems to me that that approach is preferable to relisting the matter before the Court without the benefit of the account of the transactions undertaken by the trusts which are established by the documents held by the trusts. 21I should add that, had I otherwise accepted the Cross-Claimants' contention that the reference should not proceed, I would not have accepted their submission that an accounting should now take place before an Associate Justice. The Cross-Claimants contended that the Cross-Defendants had "volunteered for an accounting". I do not consider that to be the case. As I understand events before Bergin CJ in Eq, the Cross-Defendants agreed to a reference which it was hoped might narrow the issues in dispute, and did not concede the order for an account sought by the Cross-Claimants in the substantive proceedings. 22There has also been no substantive determination by the Court as to the basis for any accounting. If an accounting were to take place in a traditional form, then it would be necessary for a determination to be made as to whether it would occur in common form, so that the trustees accounted for what had actually been received and disposed of and the Cross-Claimants could challenge the accounting by asserting that more was received or less was disposed of, or should take place on the basis of wilful default so that the trustees must also account for what should have been received if their duties had been properly discharged: Glazier Holdings Pty Ltd v Australian Men's Health (No 2) [2001] NSWSC 6 at [37]-[39]; Meehan v Glazier Holdings Pty Ltd (2002) NSWCA 22; [2002] 54 NSWLR 146 at [65]-[66]; Re Estate of Northey (dec'd); Northey v Jull [2005] NSWSC 933; White v Thompson [2011] NSWCA 161 at [44]ff. So far as the Cross-Claimants sought to establish a right to an account on the basis of wilful default, it would have been necessary for them to establish the matters that they contend amount to such a default. 23The consequence of an order vacating the reference would therefore have been, not that an accounting was ordered without the Cross-Claimants having established their entitlement to it, but instead that the question of their entitlement to such an accounting would have had to be determined together with the other issues in dispute between the parties. Amendment of order of reference 24A further possibility raised in the course of oral submissions before me was the amendment of the order for reference to the referee so as to confine the reference in a manner which reflects the task which the referee has indicated he will undertake, namely the preparation of an account of transactions based on available documentary material. That course was supported by the Cross-Claimants, as a fallback to their preferred course of vacating the reference entirely. It was resisted by the Cross-Defendants, who correctly noted that it would potentially reduce the discretion available to the referee in the conduct of the reference. 25On balance, it seems to me that that course has a significant advantage in allowing greater clarity as to the task which is in fact being performed by the referee and avoiding future dispute as to scope of the reference and what has and has not been determined by it. In my view, such an amendment can also be made in a manner which will not unduly limit the referee's discretion or prevent further inquiry which he may consider appropriate. 26It seems to me that the orders made on 14 June 2011 referring the matter to Dr Ferrier for inquiry and report should be amended by inserting a new paragraph 1A as follows: 1A The report to be delivered by Dr Ferrier is to comprise a schedule, listing or other report of transactions, assets and liabilities of each trust prepared by Dr Ferrier in such form as he considers appropriate, by reference to the documents which are made available to him in the course of the reference in respect of each trust, and each such schedule is to identify any entry, transaction, asset or liability where adequate supporting or source documents were not available to Dr Ferrier to substantiate or support an entry, transaction, asset or liability. That report may include such additional materials as Dr Ferrier considers appropriate to explain his views. The intent of this order is to confirm the process which the referee has already indicated he will adopt, without excluding any further inquiry or report which he considers appropriate. I should, however, hear the parties further as to the wording (as distinct from the substance) of this proposed order. I direct that any submissions in that regard (not exceeding two pages) be sent to my Associate and served by 4pm on 2 April 2012. 27The Cross-Claimants have not been successful in obtaining the orders sought in the motion. They have, however secured a measure of success in clarifying the matters before the referee. The costs of the motion should be costs in the cause in the Cross-Claim.