Drinkwater v Nadinic

Fraud Unravels Everything

1. Based on those findings of fact, I reached the following conclusions and made the following observations: [30] …The plaintiff may have been anxious to finalise the negotiations [for the deed of settlement] but she did not expect perfidy and crookedness. She could not have anticipated that an apparently dishonest scheme had been created involving Brooks and both Maxstra companies; a scheme that appears to have perpetrated a fraud on the Australian Taxation Office. [31] The matter clearly required investigation. If revealed to the plaintiff, let alone to her husband and her solicitor, the complexion of the negotiations would have changed. The outcome would probably have been different. The stench of dishonesty would have corroded the plaintiff's trust in the defendant. Fraud, as Lord Denning, once said, 'unravels everything … it vitiates judgments, contracts and all transactions whatsoever': Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712.
2. I also made reference to the well-known observations concerning the effect and consequence of non-disclosure in Brickenden v London Loan & Savings Co [1934] 3 DLR 465 at 469 by Lord Thankerton: When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, it cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constitutent, on disclosure, would have taken is not relevant.
3. See also Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at [435]-[439] (CA).
4. Because the nature and legal effect of fraud are central to the question of the relief which the plaintiff seeks, I have added two further decisions that contain pithy observations pertinent to the subject. In Farley (Aust) Pty Ltd v J R Alexander & Sons (Qld) Pty Ltd (1946) 75 CLR 487, Williams J said at 493: Fraud is conduct which vitiates every transaction known to the law. It even vitiates a judgment of the court. It is an insidious disease, and if clearly proved spreads to and infects the whole transaction (Jones v Beard (1930) AC 298).
5. And in Reddaway v Banham [1896] AC 199 at 221, Lord Macnaghten said: But fraud is infinite in variety; sometimes it is audacious and unblushing; sometimes it pays a sort of homage to virtue, and then it is modest and retiring; it would be honesty itself if it could only afford it. But fraud is fraud all the same; and it is the fraud, not the manner of it, which calls for the interposition of the Court.

Remedy of Rescission

1. The question on which I have now heard further evidence and submissions is whether, in the circumstances, the plaintiff is entitled to have the deed of settlement and the mortgage set aside in whole or in part. The principles governing the grant of such a remedy were cogently expressed by Lord Wright in Spence v Crawford 1939 SC (HL) 52 at 76-7: On the basis that the fraud is established, I think that this is a case where the remedy of rescission, accompanied by restitution in integrum, is proper to be given. … The remedy is equitable. Its application is discretionary, and, where the remedy is applied, it must be moulded in accordance with the exigencies of the particular case. … The court must fix its eyes on the goal of doing 'what is practically just.' How that goal may be reached must depend on the circumstances of the case, but the court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of innocent misrepresentation. … The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff. Restoration, however, is essential to the idea of restitution… Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly enriched, as he would be if he both got back what he had parted with and kept what he had received in return. The purpose of the relief is not punishment, but compensation. The rule is stated as requiring the restoration of both parties to the status quo ante, but it is generally the defendant who complains that restitution is impossible.
2. To that classic statement of principle, I should add reference to Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102 at 115 in which the Court (Deane, Dawson, Toohey, Gaudron and McHugh JJ) stated, after making reference to the traditional concern of equity to mould relief between the parties 'to prevent, nullify, or provide compensation for, wrongful injury', that 'If it appears that the other party would not have entered into the contract at all if the true position were known, the contract may be set aside in its entirety …'.

Practical Justice

1. Although there are some complications in this case - none of which is, in my view, insurmountable - I have concluded that, as between the plaintiff and the defendant, the deed of settlement and the mortgage should be set aside. In support of the relief for which the plaintiff contends, her counsel pointed to the following factual features of this case: 1. There are no third parties who have acquired rights under the Deed of Settlement or the Mortgage for valuable consideration and without notice of the Defendant's conduct, which might otherwise bar rescission: Orix Australia Corporation Ltd v M Wright Hotel Refrigeration Pty Ltd (2000) 155 FLR 267 at 275. 2. Maxstra NSW ceased being the builder under the Deed, and is now in liquidation in any event. The relevant provisions applicable to Maxstra NSW are not of such importance that substantial restitution cannot be achieved. 3. The mutual releases of Brooks Parade and Maxstra NSW under the Deed are subsidiary matters and are unlikely to be significant if the Deed and the Mortgage are rescinded, given that Maxstra NSW is now in liquidation. 4. The construction is now complete, and no new builder is required. 5. Many of the units have now been sold, leaving units 8, 9, 19 and 13 as remaining unsold. Of those, unit 8 is due to settle 16 November 2016. 6. Of the sales that have taken place, the proceeds of sale of those units have been applied to discharge the mortgage in favour of the ANZ Bank. The loan and first mortgage to the ANZ Bank was required to be discharged in any event, whether it be under the Joint Venture Agreement or the Deed. 7. The net proceeds of sale, after the discharge of the first mortgage to the ANZ Bank, are currently held in a controlled monies account in the joint names of Phil Hewitt and Paul Reece (the solicitors for the parties). 8. The Defendant has not received payment of any part of the sum of $2,050,000.00 under the Deed or the Mortgage. Further, no action has been taken under the Deed or the Mortgage that might otherwise make it impossible to rescind each transaction. 9. Under the Joint Venture Agreement, which is between Brooks Parade and the Plaintiff, Schedule B of that agreement sets out the distributions that are to be made. Now that the Project financier, ANZ, is 'out of the picture', there is no reason why the distributions set out in Schedule B to the Joint Venture Agreement cannot be substantially or wholly achieved. 10. If the Deed is rescinded in equity, the Defendant's resignation as a director of Brooks, and the share transfer, must be reversed. This can be achieved with orders that the Defendant be reinstated as a director and a shareholder of Brooks Parade.
2. These are all valid and important points, which tend to support the appropriateness of some form of rescission, at least as between the plaintiff and the defendant. A significant question in the particular circumstances of this case, is whether such an order will operate unfairly to the defendant. If the defendant is to be returned to the status quo ante, will he be unfairly prejudiced? I have concluded that he will not and that it is appropriate, as against him, to set aside the deed of settlement and the related mortgage. One way of looking at that question is to compare the defendant's position immediately before the deed of settlement with the position in which he will be placed if the deed is set aside as between himself and the plaintiff. For that purpose, it is necessary to return to the facts.

Deed of Settlement

1. The parties to the deed of settlement are the plaintiff, the defendant, Brooks Parade Pty Ltd (Brooks) and Maxstra NSW Pty Ltd (Maxstra NSW). Maxstra NSW was the builder. Brooks was the developer. The plaintiff was the owner of the land. Neither Brooks, which is now owned and controlled by the plaintiff, nor Maxstra NSW, which is in liquidation, are parties to these proceedings. The central effect of the deed of settlement was to remove the defendant from the development project, for a price, and to give control of the project and of Brooks to the plaintiff.
2. The mechanism by which this was achieved was that the defendant agreed to resign as a director of Brooks and transfer his one share to the plaintiff. The plaintiff was thus given sole control of the developer. In return, the plaintiff, the defendant and Brooks gave mutual releases to each other and the plaintiff agreed to give a second mortgage over her land to secure the payment of $2,050,000 to the defendant. In addition, the builder Maxstra NSW agreed to withdraw its progress claim No 21; terminate the building contract; make no further claims on Brooks; and release Brooks from future claims.
3. The price that the defendant negotiated for his exit was $2,050,000. The plaintiff's decision to enter into the deed of settlement, and agree to the payment of this sum, was induced by the defendant's deliberate concealment of the dishonest scheme by which the sum of $923,589 in GST refunds was transferred to Maxstra Constructions.

Brooks & the Maxstra Companies

1. The parties to the joint venture agreement were the plaintiff and Brooks. At the time of entry into the joint venture agreement, Brooks was owned and controlled by the defendant and he and the plaintiff were the effective joint venturers. She was the 'Owner' and he was, in reality, the 'Developer'. If the deed of settlement had not been entered into, the financial return to the plaintiff and the defendant would have been governed by the terms of the joint venture agreement.
2. In July 2013, when it seems that the bank was not satisfied with a personal guarantee from Brooks or the defendant, the plaintiff agreed to give a guarantee and the defendant agreed to allow the plaintiff to become an equal shareholder and director of Brooks. This had the effect of allowing the plaintiff an equal share of the net proceeds under the joint venture agreement to which Brooks was otherwise entitled. The defendant however maintained control of Brooks and the plaintiff did not have access to its books and records until November 2015 when the deed of settlement was entered into and the defendant ceased his involvement. He did not formally resign as a director until April 2016.
3. Separate from the joint venture agreement, but destined to play important roles in connection with its operation, were Maxstra NSW and Maxstra Constructions. They were Nadinic family companies established in 2010. The defendant and his father were the directors and controlled their operations. The companies were wholly owned by other Nadinic family companies. At the date of the hearing, one was owned by the defendant's father and the other by his mother. The defendant had previously been a shareholder, at least of one of them. The defendant resigned as a director of Maxstra Constructions and Maxstra NSW in March 2015 and his father resigned in June and November 2015 respectively. Both companies went into liquidation within months of the entry into the deed of settlement.

Financial Outcome - Joint Venture Agreement

1. Schedule B of the joint venture agreement provides that the income from the sale of units in the development project is to be distributed as follows: Net proceeds (eg. gross proceeds less sales commissions, taxes, conveyancing costs, etc) from sales of the completed lots will be applied in the following orders of priority: (a) To discharge the construction loan provided by the Project financier; (b) To pay the sum of $430,000.00 to the Developer [Brooks]; (c) To pay the sum of $1,570,000.00 to the Owner [the plaintiff]; (d) To pay the total sum of $2,000,000.00 in equal shares to the Owner [the plaintiff] and the Developer [Brooks]; (e) To reimburse the Project Costs to the venturers (to the extent that they have not been previously reimbursed) proportionate to the contributions of the total Project Costs made by each venture; and (f) Any balance to the Developer [Brooks].
2. The project has now all but completed. The majority of units have been sold. Unit 1 remains unsold. Units 8, 9, 12 and 13 are under contract and the construction finance loan from the ANZ Bank has been paid out. The evidence demonstrates satisfactorily, and certainly on the balance of probabilities, that the ultimate financial outcome of the project is likely to be as follows: The gross sale proceeds will be approximately $12,500,000. The net sale proceeds after deduction of sales commission ($227,677), conveyancing costs ($60,000) and GST on sales ($982,893) are likely to be approximately $11,229,430. From that net figure there should be deducted the items specified in paragraphs (a) to (d) in Schedule B to the joint venture agreement as follows: 1. $7,200,000 in discharge of the ANZ loan; 2. $430,000 to Brooks; 3. $1,570,000 to the plaintiff; 4. $2,000,000 to the plaintiff and Brooks ($1 million each).
3. The sum of $1,570,000 represents the agreed value of the plaintiff's land. The sum of $430,000 appears to represent a payment supposedly made by Brooks at the outset of the project to get clear title. And the sum of $2 million appears to represent an initial takeout 'profit' for the parties, before reimbursement of Project Costs and the payment of any balance to Brooks.
4. It is apparent that there is no reasonable possibility of any significant reimbursement of Project Costs to the venturers, as contemplated by paragraph (e) of Schedule B to the joint venture agreement. And the payment of any balance to Brooks pursuant to paragraph (f) is a distant dream. Subject to a further payment required by Addendum dated 4 April 2013, it appears likely that only approximately $29,430 will be available for distribution pursuant to paragraphs (e) and (f) of Schedule B.
5. During the lengthy and bitter negotiations between the plaintiff and the defendant culminating in the deed of settlement, the latter's contributions to Project Costs were naturally emphasized by him as part of the price for his exit from the joint venture. He was considerably experienced in the construction and property development industry, while the plaintiff was not. Recital E of the joint venture agreement stated that Brooks 'is in the business of developing property for sale at a profit and proposes to contribute certain building works, funds and its expertise to the joint venture'. On the other hand, I formed the impression that the plaintiff was quite commercially naïve. She was clearly inexperienced. And she was certainly no match for the defendant.
6. On 25 March 2015, the defendant stated that 'significant and substantial contributions in the amount of $863,076.65 have been made by or on behalf of Brooks'. By 30 October 2015, he contended that 'As we discussed last week, my contribution totals c.$1,500k'. On 8 November the plaintiff offered him $1.31 million, to which the defendant responded by saying that he was entitled to $2.332 million. I summarized the course of the remaining negotiations in paragraphs [12]-[14] in my earlier judgment as follows: [12] The defendant suggested that his figures and his analysis represented the 'only workable solution'. He added that the matter needed to be resolved by 9 November because Brooks would be in default on 10 November. Mr Drinkwater's reply on behalf of the plaintiff included the already-mentioned remark about 'the main difference [being] the cost to complete, which we could disagree on forever'. On 9 November, he made an increased counter-offer on behalf of the plaintiff of $1.65 million but added - 'We can argue over CTC and the defect list which is growing and I think you would be shocked at the extent of the defects'. [13] The amount that the plaintiff was prepared to pay continued to increase. By 13 November, a draft mortgage had been prepared providing for payment of the sum of $2,075 million by the plaintiff. Further correspondence and negotiations ensued. On 18 November, the defendant's solicitor complained that 'the original amount was reduced to $2.1 million and now your clients want a further $75k'. On 19 November, the plaintiff and her husband appeared to reach breaking point. The plaintiff sent a text to the defendant at 5.30 am that said 'All we want is never to revisit this again - we are over the whole thing'. The ANZ Bank was made aware of the situation. It was considering the appointment of a receiver and informed the parties that it required 'a solution acceptable to the Bank (and executed) … by 5 pm tomorrow'. [14] The parties continued to negotiate for a few more days - through their solicitors - over the amount to be paid by the plaintiff to the defendant. On 23 November, the plaintiff's solicitor stated that 'the amount should remain $2,025,000'. On 24 November, the defendant's solicitor responded with $2.050 million. He implored the plaintiff's solicitor 'Please ask your client to reconsider her position so that we can conclude this agreement today'. She apparently did so; the deed of settlement was executed; the final figure was $2.050 million.
7. The significance of those matters is that, not only was the plaintiff's entry into the deed of settlement induced by the defendant's concealment of the dishonest GST scheme in which Brooks, Maxstra NSW and Maxstra Constructions were involved, but the amount for which the defendant demanded payment was predicated on his presumed entitlement to reimbursement of a substantial sum for his contributions to the Project Costs.
8. As events have turned out, it is apparent that if the deed of settlement had not been entered into, neither party would have received any signifcant reimbursement of contributions to the Project Costs. For her part, the plaintiff's evidence indicated that, in addition to providing the land and incurring the expense of obtaining the development approval, she made contributions to the Project Costs of $550,000 (March 2015) and $600,000 (December 2015). And in April 2016, she caused a further sum of $600,000 to be paid, which was characterized in a contemporaneous note as some sort of advance to the project by the plaintiff's husband. These payments were made to enable the project to reach completion and will be almost wholly irrecoverable.
9. If the deed of settlement is set aside as between the plaintiff and the defendant, and the defendant is restored to the position in which he found himself prior to entry into the deed of settlement, including as an equal shareholder of Brooks, he will be entitled to receive his proportionate share of the amounts to which Brooks is entitled pursuant to paragraphs (b) and (d) of Schedule B to the joint venture agreement. I do not see any injustice in this, in the circumstances of this case.

Defendant's Contentions

1. Counsel for the defendant did his best for his client but his first point was procedural rather than substantive. He objected to the affidavit of the plaintiff's solicitor, Mr Hewitt, dated 4 November 2016 (a month before the further hearing) and complained that the plaintiff herself should have given evidence of the amounts paid pursuant to the joint venture agreement and its likely financial outcome. However, the information put forward by Mr Hewitt had its source in business records and other documents already in evidence and there was no realistic prejudice to the defendant. He had the opportunity to put any countervailing evidence if there was any utility in doing so. There was no good reason for rejecting the affidavit or any part of it. I allow it.
2. The defendant's other points went to the essential requirement of the remedy of rescission that it achieve 'what is practically just' between the parties. However, as Lord Wright noted wryly in Spence v Crawford at 77, 'it is generally the defendant who complains that restitution is impossible'. One apparent complication raised by the defendant is that Maxstra NSW, the builder which is now in liquidation, was a party to the deed of settlement but is not a party to these proceedings.
3. I cannot, of course, make orders against Maxstra NSW. By the deed of settlement, it withdrew its progress claim No 21, terminated the building contract and agreed not to make further claims on Brooks pursuant to the building contract. Those obligations will not be affected by the orders I propose to make, which will be confined to an adjustment of rights as between the plaintiff and the defendant. As a result, there will be no injustice to the defendant.
4. Several other points raised by the defendant related to his position vis à vis Brooks. Brooks is also not a party to these proceedings and I cannot make orders against it. The orders I propose to make as between the plaintiff and the defendant will have the effect that the defendant will resume ownership of his half-interest in Brooks. He will therefore be entitled as a shareholder to a half-share of the monies from the project to which Brooks is entitled. The releases given by Brooks pursuant to the deed of settlement in favour of the plaintiff, the defendant and Maxstra NSW will not be affected. I see no injustice to the defendant from that outcome.
5. One of the least persuasive submissions of counsel for the defendant was that, if the defendant were to become a director of Brooks once again, he might be liable for any insolvent trading by Brooks. This is entirely speculative. There was no evidence which supports the likelihood that Brooks might have traded while insolvent. In any event, I do not propose to make an order that compels the defendant to consent to his re-appointment as a director of Brooks. He may not wish to do so and I doubt that it is essential.
6. I will order the plaintiff to transfer to the defendant one of the two issued shares in Brooks held by her since the deed of settlement. If she remains the sole director, she will have a statutory and fiduciary obligation to ensure that the defendant receives, as a shareholder, his proportionate share of the net proceeds to which Brooks is entitled pursuant to the joint venture. From the defendant's perspective, the issue is money not responsibility. I doubt that he wants or needs the burden of once again becoming a director of Brooks. However, if he is willing to consent to his re-appointment, he should be entitled to do so. I see no injustice to the defendant in those circumstances.
7. Counsel for the defendant also contended that it was not practically just to impose on the defendant the consequences of events that took place after he ceased to be involved in the project following execution of the deed of settlement. Implicit in this submission was the contention that the project might possibly have been brought to completion at less cost if the defendant had not ceased his involvement. On this slender hypothesis, which was not developed and not supported by evidence, the net proceeds available for reimbursement of Project Costs might have been greater.
8. The object of the orders that I propose to make is to restore the plaintiff and the defendant to the position in which they were - vis à vis each other - immediately before the deed of settlement, without disturbing the rights and obligations which Brooks and Maxstra NSW have assumed pursuant to the deed. The fact that the evidence revealed that, if the deed of settlement had not be entered into, the defendant is unlikely to have received any significant reimbursement of his contributions to Project Costs, tends to fortify my conclusion that there is no unfairness to the defendant in making the orders that I propose, but it is not determinative.
9. In any event, there is no evidentiary basis for assuming that the financial outcome of the project would have been different if the defendant had remained involved. No such forensic enquiry was conducted. Nor was any application made to enable the defendant to pursue such an enquiry, let alone prove the relevant facts to enable such a conclusion to be reached. The defendant's complaint on this issue is theoretical, it rests on supposition and there was no factual substance to support it. Absence a hint of any cogent evidence to the contrary, there is no reason for me to assume that the financial outcome of the project that now appears likely, is anything other than the natural and inevitable consequence of the state of affairs that existed at the time of the deed of settlement.

Conclusion

1. The defendant has only himself to blame. He negotiated a handsome financial benefit to himself and caused the plaintiff to agree to it by his concealment of material facts relating to the dishonest scheme in which he participated. His dishonesty in his dealings with the plaintiff was twofold - both in relation to the conduct of the GST scheme involving Brooks, Maxstra NSW and Maxstra Constructions and in relation to his concealment of that scheme during his negotiations with the plaintiff leading to the deed of settlement.
2. The effect of my orders will be to set aside the plaintiff's obligations to the defendant pursuant to the deed of settlement, to set aside and cancel the mortgage and to restore both parties to the position - vis à vis each other - in which they found themselves immediately before the deed. The effect of such restoration to the status quo ante will be to deprive the defendant of a valuable benefit but the benefit is one which he procured by fraud - by his deliberate dishonesty intended to conceal and deceive. Instead, he will receive the benefits to which he is entitled pursuant to the joint venture agreement. There is no unfairness in such an outcome. Nor is there a good basis for contending that it is not practically just in the circumstances.
3. Finally, I should observe that this is not a case of 'rescission' in the strict sense. My orders are intended to operate personally as between the parties, without there being any collateral effect on third parties. I have moulded what I consider to be appropriate orders in accordance with the exigencies of this particular case. As Lord Wright said in Spence v Crawford at 77: '… in the case of fraud, the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff'.

Orders

1. I make the following orders: 1. Order that Mortgage No AK57948J dated 24 November 2015 between the plaintiff as mortgagor and the defendant as mortgagee be set aside, cancelled and delivered up. 2. Order that, as between the plaintiff and the defendant, the deed of settlement dated 24 November 2015 be set aside, with the intent that the plaintiff be relieved of her obligations to the defendant pursuant to clauses 5(b), (c), (e), the second (g) and (h), 6, 7 and 9 of the deed. 3. Order the plaintiff to: 1. transfer to the defendant one issued ordinary share in Brooks Parade Pty Ltd; and 2. take all reasonable steps to facilitate the re-appointment of the defendant as a director of Brooks Parade Pty Ltd, if he is willing to consent to such appointment. 1. Order the defendant to pay the plaintiff's costs of the proceedings. 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: 12 December 2016