Gusdote Pty Limited v North Queensland Land Development Pty Limited

REASONS FOR JUDGMENT 1 This proceeding arises out of circumstances dealt with in an earlier proceeding in the Court (see Demetriou v Gusdote Pty Limited [2010] FCA 581). The earlier proceeding was concerned with the affairs of Gusdote Pty Limited (Gusdote), the applicant in the present proceeding, which was a respondent in the earlier proceeding. Before dealing with the issues raised in the present proceeding, it is necessary to say something about the earlier proceeding. 2 The applicants in the earlier proceeding, Mr Emilios Demetriou, Mrs Georgina Demetriou, and Mrs Janette Ashley, made claims concerning the conduct of Mr Donald Matheson in relation to the affairs of Gusdote. The facts set out below are taken largely from the reasons of Cowdroy J published on 11 June 2010 in the earlier proceeding. 3 Prior to August 2003, Mr Matheson was the only director of Gusdote and his wife, Mrs Susan Matheson, was the only shareholder of Gusdote. Until that time, Gusdote was the registered proprietor of land situated in Townsville in Queensland (the Land). Part of the Land was used as a golf course known as Willows Golf Course (the Disputed Parcel). The balance of the Land was undeveloped (the Undeveloped Land). 4 At a meeting held in Townsville on 29 August 2003, an agreement was reached between Mrs Ashley's husband, Mr Robert Ashley, and Mr Demetriou, on the one hand, and Mr Matheson, on the other hand, concerning the subdivision and development of the Undeveloped Land. The agreement was wholly oral. Under the agreement, each of Mr Demetriou and Mr Ashley was to lend $250,000 to Gusdote and each of them was to guarantee an outstanding liability of Gusdote to National Australia Bank Limited (the Bank) of approximately $960,000. Mr Matheson was to arrange for the appointment of Mr Ashley and Mr Demetriou as directors of Gusdote and for shares to be issued in the capital of Gusdote so that each of Mrs Ashley and Mrs Demetriou would hold 25 percent of the issued capital and Mrs Matheson would hold 50 percent of the issued capital. Mr Matheson was to attend to the lodgement with Australian Securities and Investments Commission (the Commission) of all documentation necessary to record the change in directors, the increase in the share capital and the allotment of shares to Mrs Ashley and Mrs Demetriou and to Mrs Matheson. 5 On 29 August 2003, each of Messrs Ashley and Demetriou signed a form of consent to act as a director of Gusdote, and each paid the sum of $250,000 to Gusdote. On 1 September 2003, each of Messrs Ashley and Demetriou signed a guarantee to the Bank in respect of Gusdote's liability to the Bank. However, no documents were ever lodged by Mr Matheson with the Commission recording the appointment of Messrs Ashley and Demetriou as directors, and neither of them has ever been recorded as a director of Gusdote. While share certificates were issued to Mrs Ashley and Mrs Demetriou, the Commission was never notified of the changes in the share capital and shareholding in Gusdote. 6 In April 2004, a second agreement was made in Townsville between Messrs Ashley, Demetriou and Matheson. Under the second agreement, a new company, to be known as Madeas Pty Limited (Madeas), was to be formed for the purpose of developing the Undeveloped Land in the capacity of a trustee. The beneficial interest in the trust was to be held, as to 50 percent, by interests associated with Mr Matheson and, as to 25 percent, by each of Mrs Ashley and Mrs Demetriou. The directors of Madeas were to be Messrs Matheson, Demetriou and Ashley. Madeas was duly incorporated, Messrs Ashley, Demetriou and Matheson were appointed directors, and the trust was established. As contemplated by the second agreement, the Undeveloped Land was transferred to Madeas and was subsequently subdivided. All the lots in the subdivision were sold, generating a profit of $387,000. However, at the time of the commencement of the earlier proceeding, while the profit had been distributed to Mrs Ashley and Mrs Demetriou as beneficiaries, so as to constitute income in their hands for tax purposes, the distributions were not actually paid to them. 7 In or around May 2004, a third agreement was entered into between Messrs Ashley, Demetriou and Matheson. Under the third agreement, each of Messrs Ashley and Demetriou was to invest a further $75,000 in Gusdote and the shareholding of each of Mrs Demetriou and Mrs Ashley in Gusdote was to be increased to one third. Each of Messrs Ashley and Demetriou paid $75,000 to Gusdote in performance of the third agreement. Mr Matheson again failed to notify the Commission of any variation in the share capital or shareholding of Gusdote. 8 Mr Ashley died on 23 December 2005. Mrs Ashley is now his legal personal representative. 9 The conduct relevant to the present proceeding occurred in May 2007. On 17 May 2007 Mr Matheson, on behalf of Gusdote, executed a transfer of the Disputed Parcel to the respondent in the present proceeding, North Queensland Land Development Pty Limited (North Queensland). Mr Matheson is the sole director of North Queensland. Each of Mr Matheson and Mrs Matheson holds 50 percent of the share capital of North Queensland. The transfer of the Disputed Parcel was registered and North Queensland became registered as the proprietor of an unencumbered fee simple in the Disputed Parcel, which is now Lot 400 on SP 184500. The transfer to North Queensland was expressed to be for a consideration of $3 million, of which $200,000 was stated to have been paid in cash. The balance of $2,800,000 was to be paid to Gusdote on 17 May 2009 and was to be secured by a mortgage to Gusdote over the Disputed Parcel. North Queensland was to pay interest at the rate of 8 percent per annum on the balance of the price unpaid. 10 Mr Ashley was not consulted during his lifetime about any proposal to transfer the Disputed Parcel to North Queensland. Neither Mrs Ashley nor Mr and Mrs Demetriou had any knowledge of the transfer of the Disputed Parcel by Gusdote to North Queensland. There was no evidence that the sum of $200,000 referred to in the transfer was actually paid. Further, at the time of commencement of the earlier proceeding, no mortgage had been granted and the sum of $2,800,000 had not been paid. 11 The operation of the Willows Golf Course on the Disputed Parcel was managed by Mr Matheson for some time following the transfer to North Queensland. Subsequently, the golf course was operated under some form of licence agreement to a third party. It appears that income was generated by the operation of the Willows Golf Course. 12 The earlier proceeding was commenced on 27 August 2009. Mr Demetriou and Mrs Ashley were the applicants. The respondents were Gusdote, Madeas, North Queensland, Don Matheson Golf Course Construction Pty Limited, Mr Matheson and Mrs Matheson. By their original application, the applicants in the earlier proceeding claimed an order that they were each entitled to a one third interest in Gusdote, and an order that Gusdote was the legal and beneficial owner of the Disputed Parcel. An amended application was filed on 25 February 2010, in which Mrs Demetriou was joined as an applicant. By the amended application, the applicants claimed some 15 declarations concerning the affairs of Gusdote and Madeas, together with orders for rectification of the register of Gusdote and of the records kept by the Commission in respect of Gusdote. 13 Relevantly for the purposes of the present proceeding, the amended application in the earlier proceeding also claimed a declaration that North Queensland holds legal title to the Disputed Parcel upon a constructive trust for Gusdote, and an order that North Queensland account to Gusdote for all benefits and moneys received by North Queensland as a consequence of the transfer of legal title to the Disputed Parcel. In their statement of claim filed on 25 February 2010, Mr and Mrs Demetriou and Mrs Ashley relevantly made the following allegations: 23. In or about 2008 Mr Matheson caused legal title to [the Disputed Parcel] to be transferred to [North Queensland]. 24. At the time of the transfer to [North Queensland] Mr Matheson: (a) had no authority to cause Gusdote to make such transfer, (b) knew that he had no authority to cause Gusdote to make such transfer, (c) was a director of North Queensland. 25. The transfer by Gusdote to [North Queensland] constituted a breach by Mr Matheson of [the agreement made on 29 August 2003 between Messrs Matheson, Ashley and Demetriou] 26. In the circumstances referred to in paragraph 24 [North Queensland] received legal title to [the Disputed Parcel] upon a constructive trust for Gusdote. 14 In their defence filed on 30 March 2010, all of the respondents in the earlier proceeding admitted: that Mr Matheson caused the legal title of the Disputed Parcel to be transferred to North Queensland, that Mr Matheson was and is a director of North Queensland, and that North Queensland received legal title to the Disputed Parcel. However, the respondents otherwise denied the allegations made in paragraph 24, 25 and 26 of the statement of claim. The basis of the denial was that the first agreement, made on 29 August 2003, was limited to the Undeveloped Land and did not relate to the Disputed Parcel. The stance taken by the respondents seems to have been that it was never contemplated by the first agreement that Mr and Mrs Ashley or Mr and Mrs Demetriou would have anything to do with the Disputed Parcel. 15 On 1 April 2010, Mr Ian Jessup and Ms Moira Carter (the Administrators) were appointed voluntary administrators of North Queensland. There was no evidence as to the circumstances of their appointment. 16 On 7 April 2010, the earlier proceeding was fixed for hearing for the week commencing 24 May 2010. On the same day, an email was sent to the Administrators, enquiring as to the position they would take in the proceeding. They responded on 13 April 2010 to the effect that they had no funds and would not be in a position to pay for any legal advice or representation for North Queensland. On 17 May 2010, leave was granted under s 440D(1) of the Corporations Act 2001 (Cth) (the Corporations Act) for the earlier proceeding to be continued against North Queensland. 17 When the earlier proceeding was called on for hearing on 24 May 2010, counsel appeared for all of the respondents other than North Queensland. After affidavits relied on by Mr and Mrs Demetriou and Mrs Ashley were read and exhibits were tendered, the proceeding was adjourned briefly. Upon resumption of the hearing, counsel who was appearing for the respondents other than North Queensland announced that the relief claimed, in so far as it affected his clients, would not be opposed, other than any claim for costs. The proceeding was then adjourned to 25 May 2010 to enable the parties to formulate the orders that they wished the Court to make. 18 In the afternoon of 24 May 2010, a communication was received by the Court from Mr Tim Dobinson, a solicitor in Cairns, Queeensland, indicating that he had received instructions to appear for North Queensland. When the proceeding resumed at 10.15 am on 25 May 2010, Mr Dobinson appeared for North Queensland by telephone. Mr Dobinson informed the Court that he was unaware that the Administrators had previously indicated that North Queensland had no funds and that they would not be appearing at the hearing. Mr Dobinson applied for an adjournment for 14 days to enable North Queensland to make written submissions. The adjournment was opposed by the applicants and the adjournment was refused by Cowdroy J. However, the hearing was adjourned briefly to enable Mr Dobinson to obtain instructions, confer with the legal advisers for the other parties and formulate any submissions that North Queensland wished to make at the hearing. 19 On resumption at about 12 noon on 25 May 2010, Mr Dobinson informed the Court that, following discussions with the legal advisers for the other parties, North Queensland did not oppose the granting of the relief claimed against it in the proceeding. However, Mr Dobinson also informed the Court that North Queensland had no knowledge of the facts and circumstances and was not in a position to consent to the grant of any such relief. Mr Dobinson did not suggest that any creditor of North Queensland might be prejudiced by the granting of the relief claimed against North Queensland. Cowdroy J reserved his decision. 20 On 4 June 2010, the Administrators were appointed liquidators of North Queensland under a creditors' voluntary winding up. There was no evidence as to the circumstances of their appointment. 21 Cowdroy J published reasons for judgment in the earlier proceeding on 11 June 2010. His Honour found that at no time did Mr Ashley or Mr Demetriou have any knowledge of the transfer by Gusdote of the Disputed Parcel to North Queensland. His Honour also found that the position of Mr Matheson, as a director of Gusdote, rendered him a fiduciary of Gusdote and that, when he executed the transfer of the Disputed Parcel to North Queensland, his actions were clearly in breach of his duty as a fiduciary, because he was acting in his own interest instead of acting in the interests of Gusdote. 22 His Honour concluded that, a breach of fiduciary duty having been established, there was no reason why the Court should not grant a declaration that North Queensland, having received property to which it was not entitled, held that property as a constructive trustee for the aggrieved party, namely Gusdote. His Honour also concluded that an order for an account of the benefits and moneys received by North Queensland arising out of the transfer of the Disputed Parcel should be made in consequence of the Court's findings. Accordingly, his Honour: declared that North Queensland held legal title to the Disputed Parcel upon constructive trust for Gusdote, and ordered that, within 28 days, North Queensland account to Gusdote, in accordance with Division 6 of Part 5.6 of the Corporations Act, for all benefits and moneys received by North Queensland as a consequence of the transfer by Gusdote to North Queensland of legal title to the Disputed Parcel. Division 6 of Part 5.6 of the Corporations Act is concerned with the proof and ranking of claims in a winding up. The ownership of the Disputed Parcel was a benefit received by North Queensland as a consequence of the transfer. Accordingly, it would be required, in accordance with the orders, to account for the value of that benefit, after allowing for expenses and outgoings reasonably incurred in maintaining and preserving the Disputed Parcel. A question might arise as to whether that benefit included the legal estate in the Disputed Parcel. In any event, the Administrators have declined to re-convey the legal estate to Gusdote. 23 In the present proceeding, Gusdote seeks: 1. an order under s 471B of the Corporations Act granting leave to begin and prosecute this proceeding; 2. an order that North Queensland, upon demand by Gusdote, execute all documents, deliver such documents duly executed to Gusdote, and do all such other acts and things that may be necessary or desirable to transfer to Gusdote the fee simple estate in the Disputed Parcel so that Gusdote may become registered as proprietor of the Disputed Parcel. 3. an order that North Queensland pay Gusdote's costs of and incidental to the proceeding; and 4. in the event that North Queensland fails to comply with a demand made by Gusdote as provided in order 2, an order that the Registrar execute all documents as may be necessary or desirable to cause the fee simple in the Disputed Parcel to be transferred to Gusdote so that Gusdote may become registered as the proprietor of the Disputed Parcel. 24 North Queensland opposed the grant of the substantive relief claimed. North Queensland asserted that, given the terms of the final orders made on 11 June 2010, further orders in the terms now sought are no longer available to Gusdote. 25 The parties in the present proceeding made written submissions respectively in support of and against the orders claimed by Gusdote in its application. They invited the Court to decide the proceeding on the basis of those written submissions. However, for the reasons following, I do not consider that the proceeding is presently constituted in a fashion that would fairly dispose of the issue as between Gusdote and North Queensland. The only evidence proffered on behalf of Gusdote consists, in substance, of the orders made in the earlier proceeding and the reasons of Cowdroy J for making those orders. No other evidence is before the Court concerning the circumstances of the transfer of the Disputed Parcel by Gusdote to North Queensland. 26 On one view, a constructive trust is not created by an order of a court. Rather, such a trust arises immediately, when circumstances exist in respect of which equity would construe a trust. Thus, there does not need to have been a curial declaration or order before a court of equity will recognise the prior existence of a constructive trust. The trust attaches upon the acquisition of the relevant property (see Attorney-General (Hong Kong) v Reid [1994] 1 AC 324 at 331). Nevertheless, the constructive trust is predominantly remedial, in that it is an in personam remedy attaching to property. Accordingly, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date (Muschinski v Dodds (1985) 160 CLR 583 at 615). For example, care must be taken to avoid undermining the principles of pari passu distribution that underlie the policy of insolvency laws (see Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371 at 379). 27 There are well-recognised categories of cases in which a constructive trust arises. The categories are not uniform, in the sense that the incidents of the trusts vary. Thus, in one category, the obligation is to account for a profit. In another, the obligation is to hand over specific property. In another, the obligation is to effect restitution for a loss. 28 One category consists of cases in which the defendant holds the legal title to property on trust for the plaintiff because it was acquired under a transaction liable to be set aside in equity, for example, by reason of fraud, mistake, undue influence or as a catching bargain (see Meagher, Heydon and Leeming, Equity: Doctrines and Remedies, chapters 12-16). In such cases, equity regards the plaintiff as having retained an equitable interest in the subject property, being an interest that is transmissible and assignable and not a bare cause of action (Meagher, Gummow and Lehane, paragraphs 4-150 to 4-175). Thus, where there is a contract for the sale of property by A to B and the contract was made in breach of a fiduciary duty owed to A by C, in whose breach B knowingly participated, and, pursuant to that contract, the legal title to the property has been transferred from A to B, the transaction is voidable at the instance of A, who may, if necessary, obtain an order for rescission, setting the transfer aside. However, unless and until A effectively avoids the transaction and, if necessary, obtains an order for rescission, B's property rights remain unaffected. If, on the other hand, A effectively avoids the transaction and, if necessary, obtains an order for rescission, the parties will be treated in equity as if the transaction had never been effected. Thus, equity will treat B as if B holds the property on trust for A, that is to say, as a constructive trustee, ab initio (see Greater Pacific Investments Pty Limited v Australian National Industries Limited (1996) 39 NSWLR 143 at 153). 29 In the earlier proceeding, there was technically no issue as between Gusdote and North Queensland. It might have been possible for the applicants in the earlier proceeding to have sought an order rescinding any contract between Gusdote and North Queensland and the transfer of 17 May 2007. However, that is not the relief that was claimed. Rather, the relief claimed was a declaration, as between the applicants, on the one hand, and North Queensland, on the other. Thus, as between the applicants and North Queensland, North Queensland cannot be heard to deny that it holds the Disputed Parcel on a constructive trust for Gusdote. However, there was no claim in the earlier proceeding for the contract and the transfer of the Disputed Parcel from Gusdote to North Queensland to be set aside and for legal title to be re-conveyed by North Queensland to Gusdote. 30 Clearly enough, the conclusion reached by Cowdroy J must have been that the contract for the sale of the Disputed Parcel by Gusdote to North Queensland was made in breach of a fiduciary duty owed to Gusdote by Mr Matheson, and that North Queensland knowingly participated in that breach of fiduciary duty. In those circumstances, it would have been open for Gusdote to seek an order for rescission of the contract, setting it aside, and an order requiring North Queensland to re-convey legal estate in the Disputed Parcel to Gusdote. No such relief was claimed in the earlier proceeding, unless, perhaps, it could be said that that was encompassed in the claim for an account. 31 Further, no such relief has been claimed in the present proceeding. It may be that the course that should have been adopted by Gusdote was to make its own claim against North Queensland along the lines of that alleged in the statement of claim in the earlier proceeding. That is to say, Gusdote would allege in this proceeding, between itself and North Queensland, that North Queensland, in receiving the transfer of the Disputed Parcel, knowingly participated in a breach of fiduciary duty owed by Mr Matheson to Gusdote. It may be open to North Queensland to plead res judicata or issue estoppel by way of defence. However, because there was no direct issue in the earlier proceeding as between Gusdote and North Queensland, it is not entirely clear that any res judicata or issue estoppel defence could be raised in the present proceeding by North Queensland in response to any claim by Gusdote for an order for rescission and re-conveyance of the Disputed Parcel. If there were such a pleading, it would then be necessary to enquire into those matters, unless, of course, North Queensland sought to re-invigorate the answer that had been foreshadowed in the defence filed in the earlier proceeding. That is to say, North Queensland might seek to establish that, under the terms of the first agreement, the Ashleys and the Demetrious were to have nothing to do with the Disputed Parcel. A question might then arise as to whether Gusdote, in a reply, could rely on an issue estoppel or res judicata argument, arising out of the earlier proceeding. 32 On the basis of the proceeding as it presently stands, I would have been disposed to dismiss it. However, I considered that it was appropriate to invite the parties to reconstitute the proceeding, if they were so advised, as a claim between Gusdote and North Queensland in which Gusdote would ask the Court to set aside the transfer of the Disputed Parcel and any contract relating to it and for an order that North Queensland reconvey the Disputed Parcel to Gusdote. Such a proceeding would proceed on pleadings in order to throw up all relevant issues for determination. 33 After the parties had considered my provisional conclusions as outlined above, it became apparent that there may have been a significant misapprehension on each side as to the stance being adopted by the other. It now appears that the Administrators do not dispute Gusdote's entitlement to an account for the value of the beneficial interest in the Disputed Parcel. The Administrators assert an entitlement, however, to an allowance for their costs and also for the amount of any unsecured debts arising in connection with the maintenance and preservation of the Disputed Parcel. Those costs have not been quantified. Gusdote, for its part, does not now insist upon re-conveyance of the legal estate in the Disputed Parcel but would apparently accept an accounting in respect of the beneficial interest received by North Queensland. It appears that the expenses and outgoings that would be claimed by the Administrators are insignificant in relation to the unencumbered value of the Disputed Parcel. 34 It also appears that there has been some purported hypothecation of the Disputed Parcel by North Queensland. Gusdote and the Administrators would have a common interest in setting aside such hypothecation. That is not an issue in this proceeding. 35 In the circumstances, I considered that it was appropriate to grant leave to Gusdote to commence and prosecute this proceeding and to file a statement of claim, if it was so advised, along the lines outlined above. The proceeding should be listed for directions after the parties have had an opportunity of discussing the real issues between them with a view to resolution without further curial intervention. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.