Haycraft v AF1 Services Pty Ltd

THE COURT ORDERS THAT: 2. The second defendant's application for security for costs (prayers 2-5 of his interlocutory application) be dismissed, the costs incidental to which be costs in the cause. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The plaintiff, Mr Haycraft, applies for orders under s 461(1)(k) of the Corporations Act 2001 (Cth) to wind up the first defendant, AF1 Services Pty Ltd, on just and equitable grounds. Mr Haycraft also seeks consequential relief in respect of succession to AF1 Services' personal equitable obligations as trustee of two trusts under ss 70 and 71 of the Trustee Act 1925 (NSW). The two directors of AF1 Services, and the two principals standing behind the corporation whose shares are owned equally by their respective family trusts, are Mr Haycraft and the second defendant, Mr Pearson. Mr Haycraft's case is, in effect, that he and Mr Pearson have fallen out with the result that there is a stalemate in the governance and conduct of the business of AF1 Services. 2 AF1 Services is the trustee of two units trust, the AF1 Business Trust and the AF1 Property Trust. The former owns and operates a number of Nike stores in and around Sydney and the latter owns a number of residential properties, also in and around Sydney, and a quantity of gold and silver. The units in each of the trusts are held equally by each of Mr Haycraft and Mr Pearson's family trusts. 3 By interlocutory application, Mr Pearson seeks: (1) an order that the whole of the proceeding be stayed unless and until Mr Haycraft obtains written consent from National Australia Bank Ltd (NAB) to the removal and replacement of AF1 Services as trustee of the AF1 Property Trust, and provides a copy of that consent to Mr Pearson; and (2) an order for security for costs against Mr Haycraft, and other related orders. 4 It is convenient to deal first with the application for a stay.

The stay application 5 Mr Pearson relies on a written undertaking by him and Mr Haycraft as trustees of their respective family trusts addressed to NAB dated 2 July 2014. The undertaking is in the following terms: We, PAUL HAYCRAFT and CHRIS PEARSON of [redacted], Mosman NSW 2088 being UNIT HOLDERS in the AF1 PROPERTY UNIT TRUST, do hereby: 1. confirm that the Trust Deed dated 10/04/2014 has not been amended or altered in any way; a) undertake not to take any action or propose to take any action to terminate the AF1 PROPERTY UNIT TRUST without obtaining prior written consent from the National Australia Bank Limited; b) undertake not to take any action or propose to take any action to remove AF1 SERVICES PTY LTD as trustee for the AF1 PROPERTY UNIT TRUST without obtaining prior written consent from the National Australia Bank Limited. 6 It is not in dispute that in bringing the proceeding Mr Haycraft has not obtained the prior consent of NAB notwithstanding that the effect of the proceeding, if successful, would be to remove AF1 Services as trustee of the AF1 Property Trust. That would be as a result of the winding up of AF1 Services which would then form the basis for the consequential orders for its replacement as trustee of both the business trust and the property trust. 7 Mr Pearson submits that, properly construed, the undertaking constitutes not only a joint undertaking to NAB, but also an undertaking by Mr Haycraft and Mr Pearson to each other. He accordingly submits that if the proceeding were to continue without the written consent of NAB, Mr Haycraft would be in breach of his obligations under the undertaking to both NAB and Mr Pearson. That is the first basis upon which he seeks a stay of the proceeding until such time as NAB furnishes the requisite written consent, ie, to enforce his rights under the undertaking. 8 Alternatively, Mr Pearson seeks a stay on the basis that failure to obtain the consent of NAB will enable NAB to take action under finance facilities that it has extended to the two family trusts that will be commercially prejudicial to Mr Pearson's interests. For example, under the facilities the failure to obtain NAB's consent to the removal of AF1 Services as trustee of the property trust is an event of default which will enable NAB to call in the outstanding balances. In the case of Mr Pearson's family trust, as with Mr Haycraft's, that is approximately $6 million. On this basis, Mr Pearson submits that he has sufficient interest in enforcing the undertaking by having the proceeding stayed pending NAB giving consent. 9 Mr Pearson submits that a stay of the proceeding, if granted, would not be permanent and would not shut the plaintiff out from ultimately seeking the relief that he seeks. The stay would only operate until Mr Haycraft complies with the terms of the undertaking, thereby alleviating any significant commercial risk. He submits that NAB would likely grant the necessary written consent subject to reasonable conditions to protect its interests, such as to the identity of the new trustee. 10 The undertaking to NAB was given as a requirement by NAB prior to it advancing funds for the purchase by AF1 Services of residential property in Rose Bay to be held in the AF1 Property Trust. The funds were advanced under two loan facilities, one to each of the family trusts. They were each guaranteed by a guarantee and indemnity given by AF1 Services as trustee of the AF1 Property Trust, a general security agreement over AF1 Services as trustee of the AF1 Property Trust and a first mortgage over the Rose Bay property. 11 The trust deed of the AF1 Property Trust provided that by the written resolution of the holders of 75% of the units in the trust the trustee may be removed and a new trustee appointed. Thus, AF1 Services could not be removed as trustee of the AF1 Property Trust without the agreement of Mr Haycraft and Mr Pearson. I infer that this was a fact or circumstance objectively known to the parties at the time that the NAB undertaking was given, particularly noting the express mention of the trust deed in the undertaking. 12 In those circumstances, the purpose of the undertaking is readily apparent. The two people who have the power to remove AF1 Services as trustee of the trust under the terms of the governing trust deed were required to undertake that they would not take such an action as that would prejudice the interests of NAB as lender. The undertaking was therefore a joint undertaking by Mr Haycraft and Mr Pearson as trustees of their respective family trusts. The undertaking was given as a requirement of NAB and it is addressed to NAB. There is no justification for construing the undertaking as also an undertaking by Mr Haycraft and Mr Pearson to each other. 13 It follows that it is only NAB that may be able to enforce the undertaking, and there may be other contractual consequences that flow from any breach of the undertaking. However, the undertaking provides no basis to stay the proceeding at the instance of Mr Pearson in order to protect his contractual rights. 14 I also do not accept that the failure by Mr Haycraft to obtain the written consent of NAB necessarily prejudices the commercial interests of Mr Pearson. It is an event of default under the finance facility if a "Security Provider" is wound up. AF1 Services is a "Security Provider" because it gave security under the facility. Thus, in the event that AF1 Services is wound up, that will be an event of default by Mr Pearson's family trust, but such a winding up is not itself an action that removes AF1 Services as trustee of the property trust and is therefore not a breach of the undertaking to NAB. The removal of AF1 Services as trustee of the property trust would also constitute an event of default, but since that would occur only if AF1 Services was wound up, it would not of itself cause any prejudice to Mr Pearson's family trust vis-à-vis NAB. That is because NAB would already have the same rights under the winding up event of default. The stay is therefore not justified on the basis of protecting Mr Pearson's commercial interest in Mr Haycraft observing his contractual obligations to NAB. 15 Further, and in any event, for discretionary reasons I would not grant the stay. That is because to do so would put NAB in the position of being able to stymie Mr Haycraft's recourse to statutory relief made available to him, if he can establish the necessary circumstances, under s 461(1)(k) of the Corporations Act and s 70 of the Trustee Act. Those are important statutory provisions which are available for the public good, not only for private interests. It would be quite inequitable if the undertaking to NAB had the effect that Mr Haycraft's recourse to court for the protection of his and others' interests was stymied in that way. 16 Also, the argument based on the undertaking to NAB applies only to the property trust - there is no equivalent undertaking in respect of the business trust. It would clearly be contrary to the proper and efficient administration of justice, and would produce inefficiency, duplication and the risk of conflicting findings, for the proceeding to be split up between those aspects dealing with the property trust and those dealing with the business trust. Mr Pearson submits that that is why the whole proceeding should be stayed on the basis of the undertaking in respect of the property trust, but in my view the contrary applies with greater force. That is to say, it counts heavily against the staying of the whole proceeding that it is based on an undertaking given only in relation to the property trust. 17 Mr Haycraft also makes submissions to the effect that the undertaking does not cut across the power of the Court to remove a trustee under s 70 of the Trustee Act, and that such removal would not be a breach of the undertaking because the removal would be at the instance of the Court rather than by Mr Haycraft. Mr Haycraft points to the public interest in the proper administration of trusts in support of those submissions. He also submits, with reference to Leerac Pty Ltd v Garrick E Fay [2008] NSWSC 1082 at [22]-[27], that if the undertaking to NAB has the meaning and consequence contended for by Mr Pearson it would be invalid as contrary to public policy as ousting the jurisdiction of the Court. However, given my conclusions above with regard to not ordering a stay of the proceeding, it is not necessary to decide those questions. 18 In the circumstances, the application for a stay must be dismissed. The parties accepted that costs follow the result.

Security for costs 19 Mr Pearson indicated that he would not pursue his application for security for costs in the event that two undertakings to the Court were given. The first is that Mr Haycraft undertake not to resign or otherwise cause his removal as the trustee of the Haycraft Family Trust without first providing Mr Pearson 21 days' notice. The second is that Mr Haycraft's mother, Pauline Haycraft, who is the appointor of the Haycraft Family Trust, undertake not to exercise any rights as appointor without first providing Mr Pearson with 21 days' notice. 20 Without conceding any need to do so, Mr and Mrs Haycraft have proffered the required undertakings. In the result, it is agreed that against those undertakings being given the security for costs application should be dismissed. 21 On the costs of that application, Mr Pearson submits that the proffered undertakings have come late in the piece notwithstanding that he indicated before the application for security for costs was filed that he would be satisfied with such undertakings. 22 The difficulty is that the merits of the security for costs application have not been determined, and it would be an unjustified use of the Court's resources to now enter upon that question given that the need for the application has fallen away. In such an event, a court might nevertheless make a costs order if one of the parties has acted so unreasonably as to justify a costs order against it, or if one party would almost certainly have succeeded if the matter had been tried: Bridging Capital Holdings Pty Ltd v Self Directed Super Funds Pty Ltd (Costs) [2022] FCA 361 at [16]. Neither of those circumstances applies, with the result that the proper order for costs in the security for costs application is that they be costs in the cause in the principal case. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.