Did the 50 shares vest in the trustees in bankruptcy?
2 The answer is that they did not although the evidence is sparse. A document filed at ASIC by Mrs Kapp on 27 November 2020 records that on 26 November 2020, Mr Kapp's shareholding in Embedded Claims was increased from 0 to 50 shares and that these shares were beneficially owned by him. The same document also records that Mrs Kapp had held 50 shares in the company but that this balance was, on the same day, reduced to nil. Ordinarily, it might be inferred that Mrs Kapp had simply transferred her shares to her husband. The matter is complicated, however, because the same document also records that Mrs Kapp did not own the shares beneficially.
3 The instrument of transfer is not in evidence. There is evidence that explains at least the rationale for what the records at ASIC of 27 November 2020 seem to suggest. This evidence concerns efforts on the part of Mr Kapp and a Mr Patrick Dale to open a bank account with the National Australia Bank ('NAB' or 'the Bank') for Embedded Claims. Embedded Claims appears to have been an incorporated joint venture vehicle for Mr Kapp and Mr Dale to investigate, and if thought appropriate, to pursue one or more class actions. The potential class actions involved the allegation that retail lessors had overcharged their tenants for electricity.
4 Mr Kapp's interest in the joint venture initially consisted of 50 shares in Embedded Claims which were held by an entity known as Litigation Finance (Australia) Pty Ltd ('Litigation Finance'), the First Defendant. Mr Dale's interest in the joint venture consisted of shareholdings in Embedded Claims held by various entities associated with him.
5 Embedded Claims was incorporated on 23 March 2020. According to Mr Dale, in around October 2020 Embedded Claims applied to NAB to open a bank account. Obstacles were encountered. Mr Dale says that he spoke with a bank officer, Mr Shrenik Bhandary, on or around 5 November 2020, who told him that the process of opening the account for Embedded Claims was being delayed because there were compliance issues arising from the Bank's 'know your customer' policies.
6 It is unclear what the Bank's precise concerns were but it may be inferred that they related to Mr Kapp's role in the joint venture and not Mr Dale's. Why? Mr Kapp sent an email to Mr Dale on 9 November 2020. He also sent it to Mrs Kapp. It may be inferred from the email that Mr Dale had informed Mr Kapp of the problem sometime between the time of his conversation with Mr Bhandary and 9 November 2020 when the email was sent. The email said this:
Patrick,
Hi spoke to the NAB re what they need to get our account open. I can't fix Litigation Finance in time, so:
1. I have transferred the 50 shares to the James Trust (the ultimate holding trust)
2. Maryann is one of the trustees of the James Trust; accordingly she owns the shares non‐beneficially (as trustee)
3. I have managed to update the ASIC records accordingly ‐ so company records and ASIC records are correct
4. I moved the registered office of EC to 50 Clarence Street and have updated records
5. NAB wants a copy of the James Trust Share Certificate. Attached for your signature!! I will get M to sign before we go to NAB.
…
7 There is no evidence which explains what the 'James Trust' was, but from this email it may be inferred that Mr Kapp was unable to satisfy the Bank's requirements in relation to Litigation Finance in a timely fashion. It may also be inferred that the perceived solution was to transfer the 50 shares then held by Litigation Finance to Mrs Kapp as trustee for the James Trust.
8 Mr Kapp's email suggested, and the evidence confirms, that he had updated the company records accordingly. The evidence consists of a Form 484 lodged with ASIC dated 9 November 2020 which records a reduction in Litigation Finance's holding of shares in Embedded Claims from 50 shares to nil on 6 November 2020. It also records that Litigation Finance owned the shares beneficially and that Mrs Kapp's holding of shares increased from nil to 50 shares on the same day, and that they were not held beneficially.
9 In the email of 9 November 2020, Mr Kapp had requested Mr Dale to sign the new share certificate issued to Mrs Kapp which he had included for that purpose as an attachment to the email. Mr Dale did as he was asked and returned it. Although the transactions giving rise to the adjustments to the share register of Embedded Claims apparently took place on 6 November 2020, the share certificate issued to Mrs Kapp was dated 9 November 2020. This is unsurprising since Mr Dale was not asked to sign the certificate until Mr Kapp sent his email to Mr Dale on that day. Mr Kapp's email was sent within two hours of the lodgement of Form 484 with ASIC which is also consistent with this chronology.
10 These steps do not appear to have assuaged the Bank's concerns. On 26 November 2020, Mr Bhandary again spoke with Mr Dale and informed him that the Bank was still having problems opening the account. The problem was that it could not verify the ultimate beneficial ownership of the 50 shares in Embedded Claims now held by Mrs Kapp in her capacity as the trustee of the James Trust: Dale Affidavit at s25.
11 Having received this unwelcome news, Mr Dale on the same day sent Mr Kapp an email in the following terms:
Philip,
NAB's KYC team has pulled up the EC account opening based on inconsistencies in the EC corporate records vs the James Trust docs.
In order for NAB to approve the account they are saying that it is OK for Maryann to not beneficially hold the EC shares (as it is currently) however the James Trust would need to be amended to reflect her as the sole trustee - at the moment the James trust has three trustees.
Alternatives would be to amend the trust to show Maryann as the sole trustee or to change the EC shareholding to simply be in Maryann's name as the beneficial owner (the easy and quick option IMO).
Regardless it is probably best you and Maryann speak directly with the NAB - Shrenick at 255 George St on 02 9237 9167.
My bit of the KYC process has been approved. So we're 50% of the way there.
…
12 'KYC' stands for 'Know Your Customer'. At this point, it would appear that the Bank needed to be satisfied that the persons it was dealing with behind Embedded Claims were its beneficial owners. Mr Kapp was displeased by this development. He replied to Mr Dale on the same day in these terms:
Patrick,
Hi that's really irritating- the James Trust has had a number of amendments since 2013, including removing the then 3 trustees. I gave them a bound copy of the trust deed and a separate copy of amendments. The (idiots/ morons) have not read the amendments!
I will call and try and fix!
…
13 This email suggests that, at least when the email was sent, Mr Kapp had not grasped that the more significant problem was not the number of trustees but rather the anonymity of the beneficiaries of the James Trust. Mr Kapp's reply was sent at 2.28 pm. It was sent not only to Mr Dale but once again also to Mrs Kapp. At 2.29 pm Mr Dale replied tersely that Mr Kapp needed to speak to the Bank and Mr Kapp acknowledged this ('Yup') at 2.34 pm. Again this email was also sent to Mrs Kapp.
14 Later in the afternoon, Mr Kapp and Mr Dale spoke by telephone which is established by Mr Dale's call log. Mr Dale says that he told Mr Kapp that he did not mind whether 'you transfer the shares to Maryann or you provided that it gets the bank account opened as soon as possible': Dale Affidavit at s30.
15 Later that day, at 5.58 pm, Mrs Kapp sent an email to Mr Kapp suggesting that the easiest solution might simply be to amend her shareholding in Embedded Claims 'to be just in my name' which I infer was a suggestion that she should own the shares beneficially.
16 This suggestion does not appear to have been taken up. Instead, the transaction alluded to at the start of these reasons occurred. On 26 November 2020, Mrs Kapp's non-beneficial ownership of the 50 shares was reduced to nil and Mr Kapp's apparently increased from nil to 50. Although Mrs Kapp's ownership of the shares was said not to have been a beneficial ownership, the records lodged with ASIC now said that Mr Kapp's shares were held beneficially. This was recorded in a Form 484 lodged with ASIC on the morning of 27 November 2020.
17 A series of emails after 2 December 2020 between Mr Dale and Mr Kapp are consistent with the steps which had been taken being regarded by the Bank as sufficient to address its concerns.
18 Leaving aside for now the legalities, it is clear that the NAB bank account could not be opened unless the Bank knew the identity of the beneficial owner of the 50 shares. From Mr Kapp's perspective, he could not solve the problem with which he was confronted without putting up a person who beneficially owned the 50 shares. If intention be a relevant issue in the legal analysis, it is clear that both Mr Kapp and, if necessary, Mrs Kapp knew and intended that whoever ultimately held the shares would need to do so beneficially. I am satisfied this was so in Mrs Kapp's case because she was copied into the emails and because in her email of 26 November 2020, she volunteered herself to be the beneficial owner.
19 Turning then to the legalities, what actually occurred is not directly known. The evidence consists of:
(a) the changes to the share register of Embedded Claims; and
(b) the intention of Mr Kapp and Mrs Kapp that on 26 November 2020 the designated owner of the 50 shares should also be their beneficial owner.
20 The Plaintiffs did not seek to rely on provisions of the Corporations Act 2001 (Cth) which relate to the evidentiary effect of ASIC records.
21 There are three possibilities for what in fact occurred:
(a) Mr Kapp was unconcerned by legal formalities and simply adjusted the corporate records to meet his convenience so that the alterations to the share register do not reflect any underlying reality;
(b) Mrs Kapp, as trustee of the James Trust, renounced the trust's interest in the 50 shares and, having done so, transferred them to Mr Kapp; or
(c) Mrs Kapp, as trustee of the James Trust, transferred the shares to Mr Kapp without limitation.
22 Other conceivable transactions which could have led to the same outcome may be discounted. For example, a reduction in capital followed by a fresh issue of shares might result in the same recordings on the share register. So too a transfer to an unidentified third party followed by a second transfer to Mr Kapp could bring about the same result. However, there is no evidence to suggest that transactions of this kind took place.
23 Which of (a)-(c) occurred? As to (a), there is evidence that Mrs Kapp had previously used the corporate records of Embedded Claims to effect changes which did not reflect any actual transactions. The evidence includes the reasons for judgment of Ward CJ in Eq in Re Embedded Claims Pty Ltd [2021] NSWSC 969 ('Re Embedded Claims'). At [7]-[9] her Honour concluded that Mrs Kapp had lodged forms with ASIC which did not reflect events which had actually occurred including, relevantly, a form notifying ASIC that Mr Dale had resigned as a director of Embedded Claims. This does not prove that Mr Kapp is unconcerned by such formalities, however.
24 As to (b), I think this is unlikely to be the case although it is possible. The tenor of Mr Kapp's correspondence is inconsistent with this level of attention to the law of trusts.
25 As to (c), if this were the case the transfer would not have resulted in Mr Kapp owning the shares beneficially. Since he would have been fully on notice of the interests of the James Trust, he would have been bound by that interest. On this view, the recording that he held the shares beneficially would be wrong in law.
26 In my view, it is more likely than not that one of (a) or (c) is correct. One does not need to determine which for present purposes. This is because they both lead to the same conclusion. That conclusion is that Mr Kapp was never beneficially entitled to the 50 shares. If he (or perhaps Mrs Kapp) simply adjusted the share register to meet his need to identify a beneficial owner of the 50 shares without actually transacting the transfer to which he was purporting to give effect, then the reduction to Mrs Kapp's shareholding never happened and Mr Kapp likewise never received the 50 shares which the register suggests he did.
27 If, on the other hand, a transfer was completed then it was not possible for Mrs Kapp to transfer her 50 shares in Embedded Claims, encumbered as they were by the interests of the James Trust, without Mr Kapp being fully on notice of that fact. In that circumstance, he could not own the shares beneficially.
28 Consequently, whichever way one views the evidence, Mr Kapp could not have been beneficially entitled to the 50 shares on 26 November 2020.
29 There are two footnotes to this conclusion. First, it leaves unresolved whether the 50 shares are actually in Mr Kapp's name. Secondly, it is not necessary to determine whether the anterior transfer from Litigation Finance to Mrs Kapp on 6 November 2020 took place. In its case, the share register is consistent with two possibilities:
(a) Mr Kapp or Mrs Kapp was unconcerned with legal formalities and simply adjusted the share register to meet Mr Kapp's own needs; or
(b) a transfer was actually executed which transferred the shares from Litigation Finance to Mrs Kapp.
30 In my view, (a) is probably more likely than (b) but it does not matter. If (a) be the case, then the conclusion that the 50 shares did not vest in Mr Kapp's trustees in bankruptcy on 26 November 2020 remains in place. On that view, Mrs Kapp could not transfer the shares to Mr Kapp because they had never been transferred to her in the first place. If, on the other hand, (b) is the case, then the shares were transferred to Mrs Kapp on 6 November 2020 and the register is correct. However, if Mrs Kapp as trustee of the James Trust owned the 50 shares on 26 November 2020 (as indeed she would on this hypothesis) that leaves in place the earlier conclusion that the 50 shares could not have vested in Mr Kapp's trustees in bankruptcy on that day since Mr Kapp would have taken the shares with notice of the interests of the James Trust. The events of 6 November 2020 are therefore irrelevant.
31 Accordingly, the correct conclusion is that the 50 shares do not form part of Mr Kapp's bankrupt estate. At the hearing, the plaintiffs (who are both Mr Dale's companies) sought declarations to the contrary and orders amending the share register of Embedded Claims. I decline to make those orders. Whilst it is clear that the 50 shares are not part of the bankrupt estate, the most likely outcome is that the owner of the 50 shares is Litigation Finance. However, the Plaintiffs have not been afforded an opportunity to make submissions about that proposition and it would procedurally unfair to act upon it by now declaring that to be so without notice to the Plaintiffs. It follows that I also decline to order that ASIC amend its records to give effect to this contention.