Bendigo & Adelaide Bank Ltd v Elite Advertising Group Pty Ltd (2011) 84 ACSR 589
Source
Original judgment source is linked above.
Catchwords
Bendigo & Adelaide Bank Ltd v Elite Advertising Group Pty Ltd (2011) 84 ACSR 589
Judgment (27 paragraphs)
[1]
Introduction
The court has before it a notice of motion filed by the plaintiffs on 29 April 2014 in which they seek the court's leave under s 64 of the Civil Procedure Act 2005 (NSW) to file and serve a second further amended statement of claim. The pleading for which leave was originally sought was Annexure A to the notice of motion.
The proceedings were initially commenced by statement of claim filed by the plaintiffs on 4 February 2013.
It is sufficient for the purposes of the present application to note that the transactions that have led to the present dispute were entered into by the first plaintiff, Mr Hirshman, and the first defendant, Mr Dixon Smith, while they were respectively an employee and a partner in a prominent law firm, in which they both practised in the Sydney office.
I have been told that a close personal and professional relationship developed between Mr Hirshman and Mr Dixon Smith, which led them to enter into a number of property ventures. Because, as the plaintiffs would have it, the ventures were entered into in circumstances where Mr Hirshman and Mr Dixon Smith placed a high level of trust and reliance on each other, there was very little conventional documentation to record the terms of their agreements.
Eventually the relationship between Mr Hirshman and Mr Dixon Smith broke down, and they are now involved in litigation in which the plaintiffs claim that they are entitled to receive payments from the defendants arising out of the ventures in which Mr Hirshman and Mr Dixon Smith participated.
The second plaintiff is Mr Hirshman's wife, and the third plaintiff is a company that is the trustee of the Hirshman Family Discretionary Trust.
The second defendant, Townway Pty Ltd (Townway), as trustee for the Townway Investment Trust, is a company controlled by Mr Dixon Smith, but which the plaintiffs allege was the vehicle through which Mr Hirshman and Mr Dixon Smith acquired their interests in the venture that is relevant to the present application. The plaintiffs allege that Townway held interests in the venture on trust for Mr Hirshman or at his nomination one of the other plaintiffs, and Mr Dixon Smith.
The third defendant, Oriday Pty Ltd (Oriday), as trustee for the Townway Investment Unit Trust, is also a company controlled by Mr Dixon Smith. The plaintiffs seek leave to join Oriday by filing the second amended statement of claim. The plaintiffs allege that Oriday acquired shares in a number of companies, and units in a unit trust, with actual knowledge that the acquisition of those assets was a breach by Mr Dixon Smith of fiduciary duties that he owed to the plaintiffs.
Only one of the ventures entered into by Mr Hirshman and Mr Dixon Smith is relevant to the present application. That is a venture whereby, according to the plaintiffs, Mr Hirshman and Mr Dixon Smith acquired interests in the development of real property at Byron Bay, and the operation of a quarry business on that real property.
I was told that the plaintiffs' application to amend their pleadings by filing the second further amended statement of claim was prompted by the disclosure by the first and second defendants, in an affidavit served in April 2014, of the transactions which led to Oriday acquiring the shares and units to which I have referred above. The plaintiffs in substance allege that the acquisition, so far as its terms are presently known by the plaintiffs, had the effect of unjustifiably diluting the plaintiffs' interests in the Byron Bay venture, and that the underlying transactions were entered into in breach of obligations owed to the plaintiffs.
The plaintiffs' notice of motion came on for hearing on 30 June 2015.
After some debate between counsel for the parties, and certain observations made by the court, the plaintiffs elected not to pursue their application for leave to file the draft second further amended statement of claim in its then current form. They volunteered to amend the draft in order to accommodate a number of criticisms of the draft that had been made by counsel for the defendants, and also to accommodate a number of suggestions made by the court as to how the structure of the draft might be improved.
The plaintiffs have now propounded a new draft second further amended statement of claim, and sought the court's leave to file that document. I will call the new draft the "draft pleading".
It is not necessary to compare the draft pleading with its predecessor in any detailed way. It may be noted that a number of structural changes have been made, which have the effect that the facts are now pleaded in a more chronological way than the original draft pleading, and without the device of pleading by making cross references to other pleadings. Aspects of the claim that the plaintiffs had originally sought to make against the defendants; including a fraud claim, have been omitted.
The defendants' position remains, however, that the court should not grant to the plaintiffs the leave they seek to file the draft pleading.
The defendants delivered to the court detailed written submissions in opposition to leave being granted to the plaintiffs to file the original version of the draft pleading. Aspects of those submissions have been overtaken by the revisions that have led to the present form of the draft pleading. As I understand it, the defendants still rely on their original submissions concerning the principles that the court should apply in determining whether leave to file the draft pleading should be granted to the plaintiffs.
I accept the submissions made by the defendants in pars 12 to 21 of their original written submissions. There is no need on this application for the court to enter upon a detailed analysis of the relevant principles. The plaintiffs must state in their pleading with sufficient clarity the case that must be met by the defendants. The primary obligation of the plaintiffs is to plead the material facts that the plaintiffs claim entitles them to the relief claimed: UCPR 14.28(1).
Ideally, the pleading of a cause of action by a plaintiff should involve a coherent and comprehensive list of material facts set out in a logical order that permits the defendant to comprehend in an unambiguous way the nature of the case that the defendant is required to meet.
It is permissible for plaintiffs to plead their case by repeating allegations stated elsewhere in the pleading, and by making assertions that are cross referenced to other parts of the pleading. While that is a legitimate approach, its adoption is fraught with the risk of introducing unrecognised errors and ambiguities because the transplanted allegations are not apt or adequate to do the job expected of them.
The defendants correctly submit that a pleading is embarrassing where it is "unintelligible, ambiguous, vague or too general, so as to embarrass the opposite party who does not know what is alleged against him": Meckiff v Simpson [1968] VR 62 at 70.
The following observations by Lord Oliver of Aylmerton, speaking for the Privy Council, in Wharf Properties Ltd v Eric Cumine Associates (1991) 52 BLR 1 (adopted by Einstein J in Bendigo & Adelaide Bank Ltd v Cairncross; Bendigo & Adelaide Bank Ltd v Elite Advertising Group Pty Ltd (2011) 84 ACSR 589; [2011] NSWSC 610 at [24]) are pertinent:
It is for the plaintiff in an action to formulate his claim in an intelligent form and it does not lie in his mouth to assert that it is impossible for him to formulate it and that it should, therefore, be allowed to continue unspecified in the hope that, when it comes to trial, he may be able to reconstitute his case and make good what he then feels able to plead and substantiate.
I have applied the principle stated by Sackville AJA (with whom Beazley and Macfarlan JJA agreed) in State of New South Wales v Radford (2010) 79 NSWLR 327; [2010] NSWCA 276 at 340 [63], to the effect that the court should not grant a plaintiff leave to file an amended statement of claim where the statement of claim, if filed, would have been struck out for non-compliance with the requirements of the pleading rules.
The defendants resisted leave being granted to the plaintiffs on the principles in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175, as considered by the Court of Appeal in Karl Suleman Enterprizes Pty Ltd (in liq) v Pham [2013] NSWCA 93 at [22]. The conclusions that I have reached in response to the present application make it unnecessary for me to consider the application of those principles at this stage. I will return to this question in my conclusion below.
Finally, in their original written submissions, the defendants put an argument that the plaintiffs should not be given leave to file the original form of the draft pleading because that would have the result that substantial additional discovery by the defendants would be required, and discovery that had been given would be wasted or need to be repeated. As I understand it, the defendants do not at this stage pursue that argument, and they did not rely upon evidence at the hearing to support it.
The defendants delivered additional written submissions in support of their argument that the court should reject the plaintiffs' application for leave to file a draft pleading. The plaintiffs also delivered written submissions in support of their application, and in reply to the defendants' written submissions.
The plaintiffs' application for leave to file the draft pleading was argued before the court on 27 July 2015.
As the application now made to the court depends upon whether the draft pleading is properly pleaded, it will be necessary to analyse the relevant aspects of the draft pleading. That is a complex exercise, in part because the plaintiffs' claim has been pleaded in a compressed manner. It is not unfair to characterise a number of the allegations made in the draft pleading as being cast at a high level and involving a degree of abstraction. The draft pleading continues to contain an array of cross referenced allegations.
With those considerations in mind I have embarked upon the course of navigating my way through the draft pleading.
[2]
Preliminary observations
I have decided that I should not give leave to the plaintiffs to file the draft pleading in its present terms.
There are some aspects of the draft pleading that I have concluded do not support a reasonably arguable claim by the plaintiffs in accordance with the applicable rules. There are other aspects that have led me to the conclusion that the defects in the draft pleading are remediable by revision of the drafting.
I am satisfied that there are significant aspects of the plaintiffs' claim for which they are justified in proceeding against the defendants. However, in important respects the plaintiffs may now only be entitled to declarations as to their rights, as it appears to be premature for any practicable exercise to be undertaken to determine the quantum of their entitlements, if they succeed in their claims. There are other respects in which the plaintiffs' ability to plead their claims in a more conventional way has been inhibited by their lack of information, and the question of whether they are entitled to that information is a pressing issue to be addressed.
I proposed to publish these reasons for judgment and then give the plaintiffs an opportunity to inform the defendants and the court as to what they propose to do in response to these reasons. I will invite the defendants to respond to the position adopted by the plaintiffs. I will invite the parties to cooperate in bringing in short minutes of order that give effect to these reasons and any appropriate responses by the parties.
It may be helpful if I say at the outset that the plaintiffs make three types of claims against the defendants concerning the latter's conduct in relation to the Byron Bay venture; being (1) breaches of contract alleged by the plaintiffs; (2) breaches of, or knowing participation in breaches of, fiduciary duties allegedly owed by Mr Dixon Smith; and (3) breaches which the plaintiffs allege the defendants have committed of contracts that the defendants have alleged in their defence were made with the plaintiffs, but the plaintiffs do not admit were made.
In bare outline, the plaintiffs base their case on three events that occurred in the operation of the Byron Bay venture, which commence with the making of a loan by a lender to one of the companies that were the vehicles for conducting that venture. I will set out the details below. However, the plaintiffs allege (1) that Mr Dixon Smith wrongly allowed that debt to accumulate over some four or so years at the default rate of interest, rather than refinancing the debt; (2) Mr Dixon Smith ultimately repaid part of the debt out of the assets of the joint venture in a manner that suited his own interests and devalued the rights of the plaintiffs; and (3) in conjunction with the repayment of the debt, Mr Dixon Smith wrongly caused the commercial entities through which the joint venture was conducted to issue interests to Oriday in a manner which had the effect of almost entirely diluting the interests of the plaintiffs in the joint venture and making those interests nearly worthless. This brief outline ignores pleading deficiencies asserted by the defendants.
[3]
The draft second further amended statement of claim
The draft pleading contains claims arising out of a number of different ventures between the plaintiffs and the defendants. The pleading dispute, as I have noted, only concerns one of those ventures, which may conveniently be called the "Byron Bay venture". It is not necessary to refer to the others.
Many of the rights claimed by the plaintiffs are pleaded on the basis that the rights are held "for the first plaintiff or at his nomination, the second plaintiff", and also many of the entitlements of the defendants are described as being "for the benefit of the first defendant or his interests", or similar language. It will be convenient simply to refer either to the plaintiffs, or the defendants, or those parties by their names, instead of the more elaborate wording in the draft pleading. There will be some inconsistency, therefore, in the way that I describe the parties, as I will use the name that appears to be most convenient in the context.
In a conventional way, the draft pleading starts by making allegations concerning the parties, relevant companies and trusts, and the relationship between the parties and those companies and trusts.
As I have said, the second defendant, Townway, was the trustee of the Townway Investment Trust (par 6(b)). Townway is significant because it was the vehicle for the holding of the plaintiffs' and the defendants' interests in the Byron Bay venture. Mr Dixon Smith controlled Townway, and ultimately owned 50% of its issued shares (par 7(a), (b)).
Crisjoy Pty Ltd (Crisjoy) was the trustee of the Lighthouse Unit Trust (par 7A). It will be seen that Crisjoy held the title to the properties that were the subject of the Byron Bay venture. Apart from allegations that the plaintiffs and the defendants acquired interests in the issued shares of Crisjoy, and the Lighthouse Unit Trust, through Townway, the draft pleading does not contain any allegations concerning the control of Crisjoy, other than in par 7D, which alleges that from 22 June 2012 Mr Dixon Smith was the sole director of Crisjoy, and controlled that company. There is no allegation that Mr Dixon Smith controlled Crisjoy before that date.
Leadshine Pty Ltd (Leadshine) is a company that operated a quarry business (the Quarry) on the land owned by Crisjoy the subject of the Byron Bay venture. There is no allegation concerning the control of Leadshine at any time before 22 June 2012, from when it is alleged that Mr Dixon Smith was the sole director of Leadshine, and controlled the company (par 7D).
What I have described as the Byron Bay venture is pleaded in par 14 as having two components. The first is described as the Byron Bay Land, which is in two parts; one called the Eastside Land and the other called the Westside Land. The Byron Bay Quarry Business (called the Quarry above) was a sand quarrying business conducted on the Byron Bay Land.
In December 2002, a syndicate was being formed to acquire the Byron Bay Land and the Quarry. Mr Hirshman and Mr Dixon Smith discussed participating in the syndicate, and agreed that they would together acquire a 10% interest (par 15).
Crisjoy was incorporated, and made the trustee of the Lighthouse Unit Trust, and acquired the Byron Bay Land; and Leadshine acquired the Quarry (par 16).
There are no allegations in the draft pleading concerning the stage that the Byron Bay venture has reached, particularly in relation to the development of the Eastside Land and the Westside Land. I infer that the development process has a considerable way to go before it is completed. I also infer that it is premature to speculate about whether, and in what circumstances, the Byron Bay venture will be profitable. Whether or not those inferences are correct, there is nothing in the draft pleading to displace them.
[4]
The initial Byron Bay Agreement
Paragraph 17 pleads what is described as the Byron Bay Agreement between Mr Hirshman and Mr Dixon Smith, which was entered into in December 2002. The agreement is pleaded in seven components, but in essence the plaintiffs allege that the plaintiffs and the defendants would acquire interests in Crisjoy, Leadshine and the Lighthouse Unit Trust, through Townway. Townway would acquire 10% of the issued shares in Crisjoy and Leadshine, and 10% in the units of the Lighthouse Unit Trust. Townway would hold those interests on trust for the plaintiffs and the defendants jointly. The plaintiffs and the defendants would be equally entitled to distributions of profit; they would be required to contribute equally to the cost of acquisition of the Byron Bay Land and the Quarry; and to the cost of development and working capital requirements. (I note that sub-pars (a), (c), (d), and (f) refer to 10%, but sub-par (e) refers to 20% in relation to the obligation to contribute to the acquisition costs. I do not understand this, but I do not think it matters).
In summary, the plaintiffs and the defendants were to participate in the Byron Bay venture as to 10% on an equal basis through Townway, which would hold its 10% interests in the various components of the venture on trust for the plaintiffs and the defendants. Mr Dixon Smith, through his control of Townway, would have effective control of the venture as between the plaintiffs and the defendants. Other syndicate members would hold the remaining 90% in the Byron Bay venture.
[5]
The Byron Bay Agreement Restructure in 2005
A restructure of the Byron Bay venture, called in the draft pleading the "2005 Byron Bay Restructure", occurred in late 2005, and is pleaded in pars 42A to 45F of the draft pleading.
It is alleged in par 43 that, as a result of the restructure, Townway became entitled to 20% of the shares in Leadshine, 40% of the shares in Crisjoy, and 40% of the units in the Lighthouse Unit Trust. It must be inferred from the terms of the draft pleading that Townway remained subject to the original agreement as to the manner in which it would hold those interests.
Paragraph 44A contains a series of high level allegations concerning the consequences of the restructure. I use the expression "high level" to refer to the fact that the draft pleading only states the ultimate result of the restructure, and does not plead in any detail at all what the steps were in the restructure, or how those steps lead to the ultimate result.
A company called Balmoral Broken Head Pty Ltd (Balmoral) became involved in the Byron Bay venture as part of the 2005 Byron Bay Restructure. There is an allegation in par 42A that Crisjoy and Balmoral entered into what was called the Mezzanine Facility Agreement on 9 August 2005.
Returning to par 44A, the following allegations appear to be relevant:
1. The Lighthouse Unit Trust (which must mean Crisjoy) sold a 50% interest in the Eastside Land to Balmoral for $3,500,000.
2. Balmoral loaned $1 million to Crisjoy secured by a mortgage over the Eastside Land.
3. ING Bank (Australia) Limited (ING) loaned $1,500,000 to Leadshine secured by a mortgage over the Westside Land. Of this sum $750,000 was on-loaned to Crisjoy, on the basis that Crisjoy would be responsible for repaying that amount to ING.
4. The total debt of Crisjoy was the $1 million owed to Balmoral plus the $750,000 payable to ING.
5. Sub-paragraphs (c)(v) and (vi) are obscure. The former makes an allegation by reference to a subsequent par 46A, concerning a 6 February 2007 agreement between Mr Hirshman and Mr Dixon Smith, which is said to oblige the defendants to make all contributions for repaying the debt owed by Crisjoy. As neither Townway nor the defendants held all of the shares in Crisjoy, or all of the units in the Lighthouse Unit Trust, it is not easy to see why the defendants were to be responsible for 100% of Crisjoy's debt. As to sub-par (vi), it appears to be an out of place allegation that "the cross defendant" is not liable to the defendants or Crisjoy in respect of any part of a number of liabilities that are defined in the cross claim.
Paragraph 44B is an allegation that the plaintiffs were entitled to 50% of the profit accruing to the Byron Bay Entities; that is, the Byron Bay venture, as I have called it. This allegation is difficult to follow, as the allegation is made in par 43 that, as of late 2005, Townway became entitled to 20% of the shares in Leadshine, 40% of the shares in Crisjoy and 40% of the units in the Lighthouse Unit Trust. That would give Townway a right to 20% of the profit made by the Quarry. As Crisjoy was a trustee, it was unlikely to earn any significant profit. 40% of the units in the Lighthouse Unit Trust would give Townway a right to 40% of the profits earned from Crisjoy's owning the Eastside Land and the Westside Land (which would include rent payable by Leadshine, and any profits from the development of the land). Townway would hold any profits received equally for the plaintiffs and the defendants. It is therefore difficult to understand the basis of the plaintiffs' claim that they were entitled to 50% of the profit accruing to the whole venture.
The only sensible way to read par 44B is as if it said that the plaintiff was entitled to 50% of the profit accruing to Townway from its interests in the Byron Bay Entities.
Paragraph 44C contains an allegation that, in about December 2005, Mr Hirshman and Mr Dixon Smith discussed the defendants' acquiring the interest of the plaintiffs relating to the Eastside Land on certain terms. The draft pleading gives no indication of the content of the discussions or the nature of the terms.
As will be seen, the absence of any pleading of the content of the discussions is of some significance, because the particulars given concerning an allegation in par 46B that a term is to be implied in a later agreement between the plaintiffs and the defendants include the discussions alleged in par 44C.
It is alleged in pars 44D and 44E that, on 16 December 2005, the Mezzanine Facility Agreement was varied. Following the variation, the loan by Balmoral to Crisjoy was $1 million; the interest rate was 15.9% pa, and 20% pa on default compounding monthly; the maturity date was 16 December 2008; the loan was to be secured by mortgage over the Eastside Land; and the loan was guaranteed by Mr Dixon Smith and Townway. In so far as the loan to Balmoral was guaranteed by Townway, the plaintiffs as well as the defendants would be at risk because of their equal beneficial interests in Townway.
There is a bare allegation in par 44F that the $1 million debt to Balmoral related to the Eastside Land, and was unrelated to the Westside Land or the Quarry. No factual basis for this allegation is pleaded. The truth of the allegation does not flow naturally from prior allegations in the draft pleading. It is true that there are allegations that Balmoral acquired a 50% interest in the Eastside Land, and that the $1 million debt was secured by mortgage over the Eastside Land. However, even though the two parcels of land are physically separated (by a road), both parcels were owned by Crisjoy, and without more information it cannot be known whether the development proposals in relation to both parcels were entirely separate, or connected in some way. On the face of it Crisjoy had one business, being the ownership and development of the two parcels, and the fact that it borrowed money on the security of one parcel says nothing about its plans for the development of all of its property.
The allegation in par 44F is central to the claim that the plaintiffs seek to make in the draft pleading. The plaintiffs' claim depends upon it being possible, in a legal, practical, and accounting sense, to distinguish between the implementation of the Byron Bay venture in respect of the Eastside Land on the one hand, and the Westside Land on the other. The two parcels were physically separate, but under the single ownership of Crisjoy. The debt that Crisjoy owed to Balmoral was secured only on the Eastside Land. However, it does not necessarily follow that the pursuit of the Byron Bay venture as a whole would involve entirely separate activities in relation to the development of both parcels.
There is force in the defendants' complaint that the allegation by the plaintiffs in par 44F that the debt owed to Balmoral was "related" to the Eastside Land, but was "unrelated" to the Westside Land or the Quarry, is indefinite, and insufficiently particular, in relation to a significant allegation of fact. The concept of the relation between the debt and a particular parcel of land or the Quarry does not convey any practical meaning.
This is an important issue because of the later allegations in the draft pleading that Mr Dixon Smith committed breaches of the 6 February 2007 agreement, and related breaches of fiduciary duty, because of the steps that he took to repay Balmoral, which depend, or are likely to depend, for their resolution on a relatively precise understanding as to the significance of the Balmoral debt to the Byron Bay venture as a whole, and how the debt may have been relevant only to the purposes of developing the Eastside Land.
It is not apparent why the plaintiffs found it necessary to adopt the unexplained concept of bare relationship concerning the connection of the Balmoral Debt to the two parcels of land. If they are able to allege that the Balmoral Debt is related to the Eastside Land, and not related to the Westside Land, they must have some information concerning the relationship between the debt and the two parcels that has enabled them to make the generalised assertions in par 44F. If that is true, it is difficult to see why they were not able to plead facts that would support the conclusion of the existence of a relationship in the case of one parcel, and the absence of a relationship in the case of the other. If the available information was not sufficient to enable the basis of the existence or absence of the relationship to be pleaded completely and in detail, proper pleading practice would require that as many facts as were known be pleaded, and then some explanation be given as to why the information that was known was not sufficient.
The plaintiffs should revise par 44F to set out the facts that cause the Balmoral Debt to be related to the Eastside Land but not the Westside Land, before they are given leave to file the draft pleading.
[6]
The 6 February 2007 Agreement
It is then alleged in the draft pleading that Mr Hirshman and Mr Dixon Smith entered into an agreement called the 6 February 2007 Agreement.
It is alleged in par 45 (c) and (d) that a term of the agreement was that the defendants would pay to the plaintiffs various identified sums for the plaintiffs' entitlement to receive a distribution by Townway of any profit received by it as unit holder of the Lighthouse Unit Trust in respect of the ownership, development or sale of the Eastside Land. I have slightly oversimplified the allegation. This allegation is made in the statement of claim that is currently on the file.
Paragraphs 46A and 46B plead the relevant terms of the 6 February 2007 Agreement, and should be set out in full:
46A. It as (sic) a further term of the 6 February 2007 Agreement that, as between themselves in respect of entitlements and obligations flowing from their respective interests in the units in the Lighthouse Unit Trust and shares in Leadshine:-
(a) the first defendant or his interests would be entitled to all benefits accruing to the Byron Bay Entities relating to or derived from the Eastside Land accruing after the 2005 Byron Bay Restructure and would be obliged to meet any expenses relating to the Eastside Land after the 2005 Byron Bay Restructure (which expenses included all interest accruing and capital repayments in respect of the Crisjoy Debt); and
(b) the first defendant or his interests and the first plaintiff or at his nomination the second plaintiff, would remain equally entitled to all benefits accruing to the Byron Bay Entities in connection with the Westside Land and the Byron Bay Quarry Business and would be equally responsible to fund all expenses relating to the Westside Land and the Byron Bay Quarry Business (which include all interest accruing and capital repayments in respect of the Net Leadshine Debt).
46B. It was a further term of the 6 February 2007 Agreement that the first defendant would:
(a) ensure that the interests of the plaintiffs would not be adversely affected by any costs or expenses associated with the Eastside Land;
(b) would not deal with the Byron Bay Land or Byron Bay Entities in a way that would adversely affect the plaintiffs' interests, to the extent that such dealing is referable to costs or expenses associated with the Eastside Land;
(c) in the alternative, make such payments as would be necessary to hold the plaintiffs harmless from any costs or expenses associated with the Eastside Land.
Particulars
The term was implied:
(i) in fact from the discussions alleged in paragraph 44C above and the agreement alleged in paragraph 46A above; or
(ii) in fact by reason that it was necessary to give business efficacy to the agreement alleged in paragraph 46A above; or
(iii) by law, as part of the implied term to do such things as are necessary to enable the first plaintiff to have the benefit of the agreement alleged in paragraph 46A and not to do anything that would deprive the first plaintiff of the benefit of the agreement alleged in paragraph 46A: Mackay v Dick (1881) 6 App Cas 251; Butt v M'Donald (1896) 7 QLJ 68; Secured Income Real Estate (Australia) v St Martins Investments (1979) 144 CLR 596.
[7]
Analysis of the express term alleged in par 46A
The term of the 6 February 2007 agreement pleaded in par 46A is alleged to be an express term of that agreement. As no particulars are given, I infer that the agreement was made orally between Mr Hirshman and Mr Dixon Smith.
In essence, the effect of the term of the 6 February 2007 agreement alleged in par 46A is that no change would be made to the legal structure of Townway's ownership of interests in Crisjoy, the Lighthouse Trust, or Leadshine. However, the entitlement to benefits and the obligation to meet expenses would, as between the plaintiffs and the defendants, be accounted for on the basis that the plaintiffs would share 50% in respect of the Westside Land and the Quarry, and the defendants would be entitled to the rest.
However, particularly in relation to the aspect of the Byron Bay venture that related to the development of the two parcels of land, both were owned by Crisjoy, so that the outcome of the venture would depend upon the management decisions made by Crisjoy. Crisjoy owed the debts referred to in par 44A, and was indebted to Balmoral in respect of a debt secured on the Eastside Land. Notwithstanding that these matters related solely to the Eastside Land, the development of the two parcels was still related through the management of Crisjoy. Mr Dixon Smith controlled Townway, so he may have been able to exercise some control of Crisjoy and Leadshine through the interests held by Townway in those companies. From 22 June 2012, the draft pleading alleges that Mr Dixon Smith controlled both Crisjoy and Leadshine.
Thus, the plaintiffs became entitled in an accounting sense to half of the net benefits of one of two parts of a single Byron Bay venture that at various times was substantially or wholly controlled by Mr Dixon Smith, with the consequence that management decisions made by Mr Dixon Smith in relation to the single venture could reduce the net benefits that were to be accounted for in favour of the plaintiffs, to the advantage of the net benefits that were to be accounted for in favour of the defendants.
This has apparently led the plaintiffs to plead that the 6 February 2007 agreement contained the implied term alleged in par 46B.
[8]
Analysis of the implied term alleged in par 46B(a) and (b)
In practical terms, the components of the implied term that is alleged fall into two categories. Sub-paragraphs (a) and (b) would impose obligations on Mr Dixon Smith in relation to how he caused Crisjoy and Leadshine to manage the Byron Bay venture, while sub-par (c) would oblige Mr Dixon Smith to make payments to hold the plaintiff harmless from any costs or expenses associated with the Eastside Land.
It is necessary to consider first whether the implied term has been pleaded properly, and secondly whether the basis for implying the term into the 6 February 2007 agreement is adequate.
[9]
Pleading of implied term in par 46(a)
The obligation alleged in sub-par (a) is positive, and if implied into the 6 February 2007 agreement, would require Mr Dixon Smith to use whatever control he had to "ensure" that Crisjoy and Leadshine incurred costs and expenses "associated" with the Eastside Land in a manner that did not "adversely affect" the plaintiffs' undivided 50% interest in the net benefits from developing the Westside Land, and operating the Quarry.
The adequacy of the way the implied term is pleaded must be assessed in the context that, assuming Mr Dixon Smith controlled both Crisjoy and Leadshine, the implementation of the Byron Bay venture required him, over a significant period of time that has not yet elapsed, to manage the activities of the two companies in a manner that incurred costs and expenses in relation to the development of both parcels of land, and the operation of the Quarry, and that attempted to maximise the returns to many investors, including the plaintiffs, the defendants and others, who may have had conflicting interests.
It may be possible, depending upon the circumstances, to identify costs and expenses that were incurred solely in relation to the development of the Eastside Land, or the Westside Land, or the operation of the Quarry. Many costs and expenses would be solely attributable to a discrete part of the venture. Many costs and expenses might be incurred in relation to one part of the venture for the purpose of earning a return to be invested in the conduct of other parts of the venture. Put shortly, costs and expenses could not be identified as being "associated" with the Eastside Land, without substantially more certain criteria than are pleaded in the draft pleading.
Furthermore, the meaning of the expression "adversely affected" is uncertain in this context. An adverse effect is a relative concept that requires a comparison between an actual outcome and an outcome to which the plaintiffs would be entitled by reason of the term pleaded in par 46A(b). However, over the course of the implementation of a single venture with a number of components over a substantial period, it will not necessarily be straightforward whether costs and expenses incurred in implementing one component ultimately adversely affect the results from implementing another component. It will not necessarily be a simple matter, or perhaps even possible, to determine whether or not the incurring of costs and expenses in relation to one component of the venture have improved or reduced the amount of the return from another component. The real meaning of "adversely affected" in this context cannot be understood without a precise specification of the two states that are to be the basis of the relative comparison.
The application of resources available to the Westside Land and the Quarry to meet expenses generated by the development of the Eastside Land may appear to affect the former adversely, but that appearance may be ephemeral. It must be presumed that the plaintiffs intend to refer only to actual, or crystallised, adverse effects, which are likely to arise either at the end of the investment, or the end of accounting periods (the draft pleading does not identify which). Using a concrete example, in the case of a single venture with discrete components such as the Byron Bay venture, Crisjoy could in the course of developing the Eastside Land encounter adverse financial circumstances that could lead to its insolvency. That would jeopardise the whole Byron Bay venture. Crisjoy could apply resources available to the Westside Land or the Quarry to avert insolvency. There would be an apparent adverse effect on the Westside Land or the Quarry, but seen in the context of the completed Byron Bay venture the adverse effect that was initially apparent might disappear.
The use of the expression "adversely affected" is therefore inherently uncertain, as it obscures the issue of how the relevant effect is to be measured in the context of the whole of the Byron Bay venture.
There is no allegation in the draft pleading as to when the plaintiffs would be entitled to receive their return under the term pleaded in par 46A(b). I infer that, at least in relation to the development of the Westside Land, the return would be received at or close to the completion of the development, when Crisjoy would be able to determine what the net return was (which could involve the payment of interim returns in anticipation of the successful completion of the Byron Bay venture in relation to the Westside Land). It is possible that Townway's returns from holding 20% of the shares in Leadshine would be received when Leadshine was in a position to declare dividends payable out of profits earned from the operation of the Quarry.
The plaintiffs should not be given leave to file the draft pleading until it is revised to identify in a more precise and concrete way, first the costs or expenses to which the implied term relates (and which are described as being "associated"), and secondly, the basis for determining over the life of the Byron Bay venture the difference between the actual outcome of the venture and the outcome that the implied term required Mr Dixon Smith to ensure happened.
[10]
Pleading of implied term in par 46A(b)
My initial impression was that the part of the implied term pleaded in par 46B(b) was in substance a negative form of the part of the implied term pleaded in par 46B(a). However, a consideration of the paragraphs of the draft pleading in which the plaintiffs plead alleged breaches of the implied term (particularly pars and 60I to 60K) shows that that is not so. The positive obligation in par 46B(a) is only concerned with adverse effects caused by any costs or expenses associated with the Eastside Land. The adverse effects must be directly caused by the costs or expenses. However, while in par 46B(b) the adverse effects must be "referable" to those costs and expenses, the prohibited effects may be caused by dealings with the Byron Bay Land or the Byron Bay Entities. It transpires that the plaintiffs intend this part of the implied term to prohibit Mr Dixon Smith dealing with the capital structure of Crisjoy, the Lighthouse Unit Trust, and Leadshine in a manner that diluted Townway's, and thus the plaintiffs', interests in the Byron Bay venture.
This term also depends upon the use of the expressions "adversely affect" and "associated", and the same considerations apply as I have set out above in relation to par 46B(a).
[11]
Adequacy of particulars of implied term in par 46(a) and (b)
Particulars are given of the implied term pleaded in par 46B, but only of a rudimentary nature.
There is no content pleaded in par 44C concerning the discussions, so the first part of particular (i) is entirely uninformative. The other aspect of particular (i) is no more than a claim that the term is to be implied from the fact of the term alleged in par 46A.
Particular (ii) only asserts, without explanation, that the implied term is necessary to give business efficacy to the term alleged in par 46A, and particular (iii) asserts that the same result obtains on the basis of what is generally understood as a Mackay v Dick (1881) 6 App Cas 251 implied term.
It must be remembered that the term alleged in par 46A dealt with the entitlement of the plaintiffs and the defendants to share in parts of the Byron Bay venture's benefits and expenses on an accounting basis, that did not disturb the legal structure of the parties' investment in the Byron Bay venture. It requires, so to speak, a virtual rather than a real adjustment to the outcome of the financial operations of the companies that manage the venture.
The implied term alleged in par 46B (a) and (b) would require Mr Dixon Smith to actually cause the Byron Bay venture to be conducted in a manner that did not in fact cause outcomes that would, to use the plaintiffs' words, adversely affect the plaintiffs' interests. In the case of par 46B(b) the manner in which Mr Dixon Smith dealt with the capital structure of Crisjoy, the Lighthouse Unit Trust and Leadshine would also be constrained by the terms of the side agreement between Mr Hirshman and Mr Dixon Smith.
The only reasons stated in the particulars to imply this term is to give effect to the term alleged in par 46A and to allow the plaintiff's to enjoy the benefits of the 6 February 2007 agreement.
However, far from the implication of the term in par 46B(a) and (b) being needed to give effect to the term alleged in par 46A, it is not needed for that purpose (subject to a qualification concerning that part of par 46B(b) that would have the effect of prohibiting Mr Dixon Smith from diluting Townway's interests in the Byron Bay venture)..
The term in par 46A requires that an accounting exercise be carried out that identifies any expenses relating to the Eastside Land, and all benefits relating to or derived from the Eastside Land; and an equivalent exercise to be carried out in relation to the Westside Land and the Quarry. Accordingly, there is no reason to imply a term that would require Mr Dixon Smith to actually cause the Byron Bay venture to be conducted in a way that would avoid costs and expenses associated with the Eastside Land adversely affecting the interests of the plaintiffs, as those costs and expenses could not affect the interests of the plaintiffs under the term in par 46A, because the accounting exercise will make adjustments to attribute those costs and expenses to the Eastside Land benefits.
There are other significant difficulties with the allegation that the term pleaded in par 46B(a) and (b) should be implied into the 6 February 2007 agreement. A side agreement between Mr Hirshman and Mr Dixon Smith that imposed upon the latter an obligation to manage the various components of the Byron Bay venture, over the whole of its life, and in the face of the need to have proper regard for the competing interests of all investors, in a manner that required him to ensure that the plaintiffs' 50% interest in Townway's 40% interest in the Lighthouse Unit Trust, and 20% interest in the shares in Leadshine, in fact were not adversely affected by any costs or expenses associated with the Eastside Land would have legal and practical consequences. It is highly questionable that the court would be justified in implying into the 6 February 2007 agreement a term that required Mr Dixon Smith to manage the Byron Bay venture in a manner that preferred the interests of the plaintiffs over the interests of all other investors, and irrespective of the commercial fortunes of the venture.
I return to consider the qualification I mentioned above in connection with the statement that the implied term in par 46B(a) and (b) is not needed to give effect to the agreement pleaded in par 46A. That agreement would have the effect that the plaintiffs and the defendants would not change the structure of their investment in the Byron Bay venture through Townway, but they would account for benefits and expenses in a manner consistent with the plaintiffs only retaining a 50% interest in the Westside Land and the Quarry. That virtual exercise should permit the parties to correct for expenses incurred in developing the Eastside Land being paid out of or charged against the Westside Land or the Quarry. As pleaded, the agreement would not correct for reductions in the return to the plaintiffs caused by changes in the capital structure of the Byron Bay Entities, which reduced the absolute size of the return to Townway. In that respect, it cannot be said that the implied term alleged in par 46B(b) is not necessary to enable the plaintiffs to enjoy the benefit of the agreement pleaded in par 46A. However, two observations should be made. First, I suspect it was intended that the agreement pleaded in par 46A would require adjustments to correct for both costs and expenses incurred in developing the Eastside Land and any changes to the capital structure of the Byron Bay Entities not required for the purposes of the 6 February 2007 agreement. However, the draft pleading does not achieve that result. Secondly, there remains the consideration that, on the basis of the particulars that have been given to support the implication of the term, no reason appears for implying a constraint on the way Mr Dixon Smith was able to deal with the capital structure of the Byron Bay Entities, simply for the purpose of protecting the plaintiffs under the side agreement.
The particulars provided by the defendants to support the implication of the implied term in par 46B(a) and (b) are inadequate to support the implication in the face of these considerations.
These are not mere pleading points. For the reasons I have stated above, the defendants have not made clear what they mean by an adverse effect, but it seems to be inevitable that, if the court permitted the plaintiffs to proceed with a second further amended statement of claim that included an allegation that the 6 February 2007 agreement contained the implied term pleaded in par 46B(a) and (B), it would introduce into the proceedings the need for a comprehensive examination of the commercial and financial affairs of the Byron Bay venture over its life. The court cannot countenance that result if it does not arise because of a properly pleaded claim.
[12]
Analysis of the implied term alleged in par 46B(c)
The implied term alleged in par 46B(c) does not have the effect of constraining the way that Mr Dixon Smith was required to act in relation to the conduct of the Byron Bay venture. In so far as he could control the activities of the venture, the effect of the implied term would be that, if any costs or expenses associated with the Eastside Land reduced the benefits that the plaintiffs received under the 6 February 2007 Agreement from what they would otherwise have been, Mr Dixon Smith would be required to pay to the plaintiffs the amount by which the benefits were reduced.
It can at least be said of this alternative implied term that the implementation of the 6 February 2007 Agreement would be confined to the terms of that agreement, and would not impinge on the manner in which Mr Dixon Smith was required to cause the Byron Bay venture to operate in fact. Not only would the effect of the 6 February 2007 Agreement be that the plaintiffs and the defendants would account on a particular basis, but the existence of the agreement would not impinge upon how the venture was implemented.
I interpolate that the implied term in par 46B(c) does not appear to require Mr Dixon Smith to make payments to adjust for any reduced return to the plaintiffs caused by any dilution in Townway's interest in the Byron Bay venture.
Subject to the following qualification, I accept that it is arguable that the implied term in par 46B(c) arises on the particulars that have been given by the plaintiffs. It is arguable that, if Mr Dixon Smith was able to control the management of the Byron Bay venture, it should be implied in the agreement pleaded in par 46A that, if Mr Dixon Smith caused the return to which the plaintiffs were entitled to be reduced by expenses incurred in the development of the Eastside Land being paid out of the Westside Land or the Quarry, he would be required to make good the reduction by making a payment to the plaintiffs.
However, the implied term alleged in par 46B(c) also introduces the uncertainty that flows from the use of the word "associated" in connecting costs or expenses to the Eastside Land. It should be possible for the plaintiffs to plead the par 46B(c) implied term in a manner that describes with adequate certainty the nature of the costs or expenses in relation to their connection with the Eastside Land. The plaintiffs would need to face the difficulty that, over the full course of the conduct of the Byron Bay venture, it may be commercially desirable or justifiable for Crisjoy to incur all manner of debts in various ways that are associated with both the Eastside Land and the Westside Land for the optimal prosecution of the venture. The plaintiffs need to be more precise in identifying the costs and expenses (in their terms "associated with the Eastside Land") that would justify the implication of the 'hold harmless' obligation given the terms of the obligation pleaded in par 46A.
This requirement should not be unduly onerous to the plaintiffs. For some reason they have chosen to plead the content of the implied term based upon the completely general expression "cost or expenses associated with the Eastside Land", but when one looks to the allegations of breach in par 60M, which relevantly refers back to the allegations in par 60H, one sees that the breach involves a very specific allegation concerning transactions implemented by Mr Dixon Smith. The plaintiffs should analyse the conduct that they have alleged constitutes the breach; to isolate exactly the reason why in relation to those transactions that was not justifiable in terms of Mr Dixon Smith's obligation to manage the affairs of the Byron Bay venture in the interests of all investors; and then to tailor their allegation concerning Mr Dixon Smith's implied obligation to save them harmless to fit the reason so identified.
In summary, I would therefore not give leave to the plaintiffs to amend their statement of claim to include par 46B(a) and (b). The particulars are inadequate; but further, there are strong grounds for concluding that the implied term is not required by the 6 February 2007 agreement, and that the implication could not be drawn in relation to the side agreement because of the effect that it would have on the operation of the Byron Bay venture.
I also would not, at this time, give leave to include the part of the implied term alleged in par 46B(c). That is because of the unsatisfactory use of the word "associated". It is likely that that defect in the drafting of the draft pleading can be remedied. It is likely that the plaintiffs could plead an implied term generally to the effect of the "save harmless" term, provided that they focused on the need to identify with precision costs and expenses connected with the Eastside Land that justified being included in any 'save harmless' obligation.
[13]
The 2010 Byron Bay Restructure
The draft pleading contains allegations in pars 60A to 60C that, on 24 April 2010, the Byron Bay venture was restructured. The parties to the restructure agreement included Crisjoy, Townway and Leadshine. Under the agreement, Crisjoy acquired from one of the other parties 50% of all of the shares in Leadshine, plus an interest in the Westside Land. (It is not clear what interest was acquired in the Westside Land, as Crisjoy was, according to the draft pleading, already the owner of the Westside Land).
It is alleged in par 60C that the effect of the restructure was that the plaintiffs' interest in Leadshine, through Townway, increased from 10% to 20%, and their interest in the Westside Land also increased from 10% to 20%.
[14]
Allegations of breaches of contract by the first defendant
The events giving rise to the allegations of breach of the 6 February 2007 Agreement are pleaded in pars 60D to 60K of the draft pleading as follows:
60D. On 13 March 2012, Balmoral made a written demand on the second defendant under the Mezzanine Facility Agreement for $2,961,252.96.
60E. By the time of the demand by Balmoral on 13 March 2012, the Balmoral Debt had been accumulating at the default interest rate since its maturity on 16 December 2008.
60F. Following the demand by Balmoral, the first defendant caused the third defendant to advance to Crisjoy:
(a) $949,435 in the financial year ending 30 June 2012; and
(b) $960,884.55 in the financial year ending 30 June 2013.
60G. Following receipt of the funds referred to in paragraphs 60F, Crisjoy paid Balmoral in partial compliance with the demand.
60H. At around the same time, the first defendant:
(a) caused Leadshine to borrow $1,000,000 from Paul Ramsay Holdings Pty Ltd;
(b) caused Leadshine to lend $950,000 to the first defendant;
(c) advanced $950,000 to Balmoral as a payment on the guarantee given by him in the Mezzanine Facility Agreement;
(d) asserts that he thereby obtained for himself personally the benefit of the security previously held by Balmoral over the Eastside Land.
60I In or about June 2012, the first defendant caused Crisjoy to issue the third defendant with 9,900 fully paid ordinary shares in Crisjoy. The issue of the 9,900 fully paid shares in Crisjoy to the third defendant resulted in:-
(a) the third defendant holding 99% of the issued shares in Crisjoy;
(b) the second defendant's shareholding in Crisjoy being diluted from 40% to 0.4%; and
(c) the first plaintiff, or at his nomination, the second plaintiff's entitlement (through the second defendant) to the profits accruing from Crisjoy, and any other benefits derived from Crisjoy, being diluted from 20% to 0.2%.
60J In or about June 2012, the first defendant caused Leadshine to issue the third defendant with 900 fully paid ordinary shares in Leadshine. The issue of 900 fully paid shares in Leadshine to the third defendant resulted in:-
(a) the third defendant holding 90% of the issued shares in Leadshine;
(b) the second defendant's shareholding in Leadshine being diluted from 20% to 2%;
(c) Crisjoy's shareholding in Leadshine, held as trustee for the Lighthouse Unit Trust, being diluted from 50% to 5%;
(d) the second defendant's indirect interest in Leadshine, through its unit holding in the Lighthouse Unit Trust, being diluted from 20% to 2%;
(e) the first plaintiff, or at his nomination, the second plaintiff's entitlement (through the second defendant and through the second defendant's unit holding in the Lighthouse Unit Trust) to the profits accruing from Leadshine, and any other benefits derived from Leadshine, being diluted from 20% to 1.1%.
60K In or about June 2012, the first defendant caused the Lighthouse Unit Trust to issue the third defendant with units in the Lighthouse Unit Trust. The issue of units in the Lighthouse Unit Trust resulted in:-
(a) the third defendant holding 90% of the issued units in the Lighthouse Unit Trust;
(b) the second defendant's unit holding in the Lighthouse Unit Trust being diluted from 40% to 4%; and
(c) the first plaintiff, or at his nomination, the second plaintiff's entitlement to the profits accruing from the Lighthouse Unit Trust, and any other benefits derived from the Lighthouse Unit Trust, being diluted from 20% to 2%.
They are the events that the plaintiffs allege give rise to the breaches of the 6 February 2007 Agreement, but the breaches themselves are alleged in pars 60L to 60N (leading to alternative allegations in par 60O that the plaintiffs have suffered loss and damage, and in par 60P that Mr Dixon Smith is liable to save the plaintiffs harmless).
Plainly, these allegations of breach depend upon the plaintiffs being given leave to file a draft pleading that includes the terms alleged to have been breached. As I have said, I am not prepared to give that leave in relation to par 46B and the particulars to that paragraph in their present form. I will nonetheless consider the paragraphs of the draft pleading in which breaches are alleged.
It will be appropriate to set out and then analyse the allegations of breach, in relation to the preceding allegations of the conduct that constituted the breaches.
The plaintiffs allege in par 60L:
60L Each of the transactions alleged in paragraphs 60F to 60K above:
(a) related to the refinancing of the Balmoral Debt, being a debt referable solely to the Eastside Land;
(b) resulted in the second plaintiff's interest in the Byron Bay Land and the Byron Bay Quarry Business, held through the second defendant and the shares and units held by the second defendant, being substantially devalued, by reason of the large number of additional shares and units that have been issued;
(c) have adversely affected the interest of the first plaintiff, or the plaintiff's interests, by reason of expenses associated with the Eastside Land, unless the first defendant holds the first plaintiff harmless from those costs; and
(d) have the effect that the first defendant has failed to hold the first plaintiff, or his interest, harmless in respect of the expenses associated with the Eastside Land.
The plaintiffs then allege in par 60M that the conduct pleaded in pars 60H, 60I, 60J and 60K constituted a breach by Mr Dixon Smith of the term alleged in par 46B(a) and (b); and in par 60N that the same conduct constituted a breach of the term alleged in par 46B(c).
The allegation in par 60L(a) is in terms of the conduct referred to being "related" to the refinancing of the Balmoral Debt, which is said to be "referable solely" to the Eastside Land. Thus, the use of the unsatisfactory term "associated" in each sub-paragraph of par 46B seems to have been unnecessary, at least to the extent that the plaintiffs assert in this paragraph that the conduct in pars 60F to 60K related solely to the Eastside Land.
It is not clear how all of the conduct in pars 60F to 60K resulted in the devaluation alleged. It is reasonably clear how the conduct in pars 60I to 60K could have had that effect by reason of the dilution of Townway's interest in the Byron Bay venture, but not that in pars 60F to 60H. This latter conduct involved replacing one debt by others. In the absence of an allegation that the loan of $950,000 alleged in par 60H(b) to have been made by Leadshine to Mr Hirshman was incapable of repayment by him, there would be no net effect on the assets of any relevant company.
Before the plaintiffs were given leave to file a draft pleading containing pars 60F to 60H, they would need to add an allegation, including any necessary particulars, of the facts that will have the result that the plaintiffs will suffer loss.
It appears from various parts of the draft pleading that the plaintiffs intend to allege that the transactions pleaded in pars 60I to 60K were part of the same transaction as the conduct alleged in pars 60F to 60H. If they had that intention, it has miscarried because they have not pleaded any connection between the refinancing of the Balmoral Debt and the issue of shares and units in the Byron Bay entities to Oriday.
Paragraph 60L(c) alleges that the plaintiffs have been adversely affected by each of the transactions by reason of expenses associated with the Eastside Land, unless the first defendant holds the first plaintiff harmless from those costs. Paragraph 60L(d) makes a similar allegation.
I note that the word "associated" is used in draft pleading in pars 60L(c) and (d).
If the transactions alleged in pars 60I to 60K were separate transactions, and not part of the conduct alleged in pars 60F to 60H, then the allegations in par 60L(c) and (d) will have miscarried, because they depend upon all of the conduct being referable to expenses associated with the Eastside Land.
The plaintiffs may have a basis for complaining about the conduct in pars 60I to 60K on grounds that have nothing to do with the refinancing of the Balmoral Debt. The plaintiffs have not alleged any connection between that conduct and the refinancing (except by the contiguity of the allegations in the draft pleading), but they then go on to complain that the conduct is a breach of the 6 February 2007 agreement, because it does concern costs and expenses associated with the Eastside Land.
The plaintiffs allege in par 60N that the same conduct constituted a failure by Mr Dixon Smith to make such payments as necessary to hold the plaintiffs harmless from the effect of the conduct.
This allegation highlights the fact that the plaintiffs have not pleaded any allegations concerning when the accounting exercise and the making of adjusting payments required by the term of the 6 February 2007 agreement pleaded in par 46A of the draft pleading were to occur. As I have suggested above, in relation to the development of the Westside Land I would infer that it was to occur at or near the completion of the development, when Crisjoy was in a position to calculate the profit available for distribution. The position would probably be different for Leadshine, which could declare dividends at the end of accounting periods if profits were available.
How can it be alleged that Mr Dixon Smith has failed to make a 'save harmless' payment if there is no allegation as to when the contract obliged him to make that payment? This is not merely a technical question, because it seems probable that the time for payment has not yet arisen.
It must be noted that pars 60M and 60N allege that the conduct in par 60H constituted a breach of the implied term, and not the conduct alleged in pars 60D to 60G. Accordingly, the breach is said to have been constituted by Mr Dixon Smith causing Leadshine to borrow $1 million from a third party, and to lend $950,000 to Mr Dixon Smith, to enable him to pay that amount to Balmoral in respect of the guarantee that he gave to Balmoral of Crisjoy's debt. Leadshine's financial position will not be affected provided that Mr Dixon Smith repays the $950,000.
[15]
Conclusion concerning breaches of implied term pleaded in par 46B
As the court will decline at this stage to give the plaintiffs leave to file the draft pleading including par 46B, it follows that the court would not give leave to plead the breaches of that implied term that the plaintiffs wish to allege.
There is therefore limited utility in the court drawing comprehensive conclusions concerning the adequacy of the pleading of breach of the implied term.
I have identified, however, that the word "associated" has been carried over from the pleading of par 46B to the allegations of breach.
The plaintiffs have not pleaded facts that support a conclusion that the steps taken by Leadshine alleged in par 60H have had an adverse effect, to use their words, on Leadshine's financial position. That conduct is therefore not capable of constituting the breaches subsequently alleged.
The plaintiffs have not pleaded that the transactions by which shares and interests were issued by the Byron Bay Entities to Oriday were connected to the repayment of the Balmoral Debt.
They have also not pleaded why Mr Dixon Smith could now be in breach of the par 46B(c) implied term by having failed already to hold the plaintiffs harmless in respect of expenses associated with the Eastside Land.
[16]
Claims for loss and damage
The plaintiffs plead in par 60O that they have suffered loss and damage as a result of the breaches of the 6 February 2007 Agreement. The following particulars are given:
The plaintiffs' loss is the difference between:
(i) the interest and benefits the plaintiffs would have had without the loans by Crisjoy or dilution of shares and interests; and
(ii) the plaintiffs' present position.
The reason for the inclusion of the words "without the loans by Crisjoy" is confusing. There is no allegation that Crisjoy made any relevant loans. Paragraph 60F is an allegation that Mr Dixon Smith caused Oriday to loan two sums to Crisjoy, which Crisjoy used to repay part of the loan from Balmoral. However, the loans by Oriday to Crisjoy to enable it to repay part of the Balmoral Debt secured on the Eastside Land have nothing to do with the plaintiffs' claim, because it did not diminish the value of their interest through Townway in the Westside Land and the Quarry. The only allegations concerning the making of loans that the plaintiffs have pleaded that involved a breach of contract are contained in par 60H, which relevantly involved Leadshine lending $950,000 to Mr Dixon Smith. The plaintiffs have not pleaded how they have suffered a loss as a result of this transaction.
As the plaintiffs' interest in the Byron Bay venture under the 6 February 2007 agreement is now limited to 50% of Townway's 40% holding in the Lighthouse Unit Trust plus 50% of Townway's 20% holding in the shares of Leadshine, (adjusted on an accounting basis to reflect the returns from the unit trust referable to the Westside Land and the Quarry), the plaintiffs' entitlements will be diluted, and thus devalued, by the transactions referred to in pars 60I to 60K, but only if the consideration paid by Oriday was not adequate to justify the issue to Oriday of the shares and units in the Byron Bay Entities.
The plaintiffs have not pleaded facts capable of establishing that they have actually suffered loss as a result of the transactions that diluted Townway's interests in the Byron Bay Entities. The reason apparently is that they have not been given any information by the defendants about the terms on which the shares and units in the Byron Bay Entities were issued to Oriday. I will deal with this issue separately below.
Paragraph 60P alleges:
In the alternative, the first defendant is obliged, by reason of the term of the 6 February 2007 Agreement alleged in paragraph 46B above, to put the first plaintiff or his interests in the position in which they would have been if:
(a) there had been no Balmoral Debt; or, in the alternative
(b) the Balmoral Debt had been repaid without dilution of the units and shares alleged in paragraphs 60I to 60K above and without otherwise reducing the assets of Leadshine, Crisjoy or the Lighthouse Unit Trust.
Sub-paragraph (a) appears to claim that Mr Dixon Smith is obliged by the terms of the 6 February 2007 Agreement to protect the plaintiffs from the existence of the Balmoral Debt. However, that debt was created as part of the 2005 Byron Bay Restructure (see pars 43 to 44F), and the 6 February 2007 Agreement is alleged to oblige the defendants to meet any expenses relating to the Eastside Land after the 2005 Byron Bay Restructure (see par 46A(a)). The plaintiffs have not pleaded a basis for any claim that they are entitled to be saved harmless from the existence of the Byron Bay Debt.
Paragraph 60P(b) assumes that the dilution of the shares and units in the Byron Bay Entities occurred as part of the repayment of the Balmoral Debt. As I have noted, the draft pleading does not include an allegation to that effect. It is not a consequence that can readily be inferred from the facts that are pleaded. The plaintiffs allege in par 60F that Oriday made advances of slightly less than $2 million to Crisjoy, after Balmoral delivered its demand for repayment to Crisjoy. It is possible that Crisjoy could have issued shares in itself, and perhaps units in the Lighthouse Unit Trust, to Oriday in repayment of that debt. However, Oriday did not make any loan to Leadshine, so there is no basis to expect that the shares issued by Leadshine to Oriday had any connection with Oriday's involvement in the repayment of the Balmoral Debt.
The plaintiffs are not in a position to give proper particulars of the amount that they claim they are entitled to be paid by Mr Dixon Smith under the implied term alleged in par 46B (putting aside the comment I have made above that the implied term in par 46B(c) does not appear to be wide enough to cover the consequences of the dilution) because they do not know whether, and if so how, the transactions that caused the dilution were entered into in order to repay the Balmoral Debt, or whether the consideration provided by Oriday was inadequate.
The operative allegation appears to be that in par 60P(b). Again, there is an implication, that Mr Dixon Smith has a positive obligation to hold the plaintiffs harmless from the effect of the transactions referred to, without there being any facts pleaded to establish that the obligation has crystallised.
[17]
Fiduciary duty claims
The plaintiffs plead an alternative to their breach of contract case in pars 60Q to 60AE, which they describe as "breach of fiduciary and related duties".
The plaintiffs' fiduciary duty claim is pleaded in a complex manner; in particular because the order in which the fiduciary duties owed to various parties are pleaded is different to the order in which the breaches of fiduciary duties are alleged, and the allegations of breach of each duty do not immediately follow the allegations of the existence of the duty. It will facilitate an understanding of the structure of the draft pleading if I consider the allegations in a different order to that in which they appear in the document.
[18]
Mr Dixon Smith's breaches of duty as a director of Townway
The plaintiffs allege that Mr Dixon Smith was a director of Townway (par 60S), so that he owed duties under ss 181 and 182 of the Corporations Act 2001 (Cth) to Townway (par 60T).
The plaintiffs appear to be suing as beneficiaries of a trust of which Townway was trustee, to enforce duties of a fiduciary nature owed by Mr Dixon Smith, as a director of Townway, on the basis that, because Mr Dixon Smith controls Townway, he will not cause that company to sue himself. I do not understand that the defendants challenge the plaintiffs' right to proceed in this derivative way against Mr Dixon Smith on behalf of Townway.
The plaintiffs alleged that Mr Dixon Smith breached those duties in two ways; first (par 60X) because of the manner alleged in par 60H that Mr Dixon Smith had caused Leadshine to borrow $1 million and lend $950,000 to Mr Dixon Smith, which allowed him to pay $950,000 to Balmoral, and assert that he gained the benefit of Balmoral's security over the Eastside Land.
Secondly, as alleged in par 60Z, Mr Dixon Smith acted in the manner alleged in pars 60I to 60K (that is, he caused Crisjoy, Leadshine and the Lighthouse Unit Trust to issue the shares and units to Oriday that led to the dilution of Townway's interests referred to above).
No particulars are given of the first of these breaches. It is not self-evident as to why, given that Townway had interests in the Eastside Land, the Westside Land, and Leadshine, and it was a guarantor of the Balmain Debt payable by Crisjoy, that it was a breach of Mr Dixon Smith's duties as a director of Townway for him to cause Leadshine to borrow $1 million, and to make a $950,000 loan to Mr Dixon Smith, so that he, as another guarantor of the debt, could pay that amount to Balmoral (even if that gave him a right of subrogation to Balmoral's mortgage over the Eastside Land). It is true that Townway held shares in Leadshine, but if the loan made by Leadshine to Mr Dixon Smith is recoverable, the effect of the transaction on Leadshine's balance sheet will be neutral (putting aside the fate of the $50,000, which is not explained).
It will be appropriate to set out par 60Z, as it contains the allegations as to why Mr Dixon Smith breached his fiduciary duty to Townway:
The first defendant, by engaging in the conduct alleged in paragraphs 60I to 60K above, breached his fiduciary duty to the second defendant in that:
(a) if the issue of units and shares was not for value, the first defendant obtained a benefit for his associated entity, the third defendant, at the expense of the interests of the second defendant, because the second defendant's units and shares were devalued;
(b) regardless of whether the issue of units and shares was for value, the first defendant obtained a benefit for his associated entity, the third defendant, at the expense of the interests of the second defendant, because the potential for the second defendant to participate, by reason of its shares and units, in any future increase in the value of the assets held by Crisjoy, Leadshine and the Lighthouse Unit Trust, would be reduced by reason of the dilution;
(c) the first defendant was in a position of conflict in deciding to cause Crisjoy, Leadshine and the Lighthouse Unit Trust to issue shares to the third defendant rather than adopting some alternative course to raise any funds that needed to be raised by Crisjoy to repay the Balmoral Debt
(d) there was an opportunity to make funds available to Crisjoy, Leadshine and the Lighthouse Unit Trust, either by lending money to those entities or by subscribing for the issue of new shares in those entities, and the first defendant caused that opportunity to be made available to the third defendant rather than to the second defendant.
Particulars
The plaintiffs are not presently able to say whether the issue of units and shares was for value, because the plaintiffs have not been provided with sufficient information about the financial position of the relevant entities.
The plaintiffs are not presently able to say what alternative courses were available to raise any funds that needed to be raised by Crisjoy because the plaintiffs have not been provided with sufficient information about the financial position of the relevant entities.
The plaintiffs have requested further information and, by letter dated 27 July 2015, the defendants' solicitors have refused to provide it.
The plaintiffs say that, in circumstances where the first defendant caused Leadshine, Crisjoy and the Lighthouse Unit Trust to deal with the first defendant's related entity in a position of conflict, the onus is on the first defendant to establish that the transaction was in the best interests of the second defendant.
By the terms of par 60Z, the plaintiffs have attempted to plead positive grounds as to why Mr Dixon Smith breached his fiduciary duties to Townway, even though it appears that they remain incapable of quantifying any consequences of the breaches.
The plaintiffs say four things. First, if Oriday did not give value, Townway's interests must have been devalued. Secondly, if Oriday did give value, Townway's capacity to participate in any future increases in the value of Crisjoy, Leadshine and the Lighthouse Unit Trust would be reduced by reason of the dilution. Thirdly, Mr Dixon Smith was in a position of conflict because he could have caused Crisjoy to raise funds to pay Balmoral by "adopting some alternative course". Fourthly, Mr Dixon Smith could have made the funds available to Crisjoy through Townway rather than Oriday.
The first basis alleged for breach of fiduciary duty is probably logically correct, if it happened. However, the plaintiffs have not alleged positively that it did happen.
The second basis is not necessarily logically true. If Oriday provided adequate consideration, so that the amount paid was in proportion to the number of new shares or units issued, compared to the capital represented by Townway's investment, then future growth in the value of the assets should not disadvantage Townway.
The third basis assumes that some alternative course for raising funds was available, without identifying it.
The fourth basis assumes that Mr Dixon Smith ought to have acted through Townway rather than Oriday, or alternatively caused Oriday to act through Townway, in relation to the underlying transactions that led to the issue of the new shares and units. It is not made clear why Mr Dixon Smith was required to use his own resources to act through Townway, if Townway was required to split its returns from the Westside Land and the Quarry equally between the plaintiffs and the defendants.
Paragraph 60AE is a compendious claim for damages, equitable compensation or an account of profits, that covers all of the preceding allegations of breach. The particulars provided are:
If the issue of the units and shares was at an undervalue:
(i) the profits include the additional value of the units or shares in the hands of the third defendant;
(ii) equitable compensation for the second defendant includes the decreased value of the units or shares in the hands of the second defendant;
(iii) equitable compensation for the first plaintiff includes the decreased value of the second plaintiff's interest in the second defendant.
Equitable compensation includes of the lost opportunity or lost opportunities to the plaintiffs or the second defendant, or the profits include the profits or other benefit derived by the first defendant or the third defendant.
The use of the expression: "If the issue of the units and shares was at an undervalue", makes it clear that the claim is contingent on the truth of the premise.
Particular (ii) is the applicable one in the case of the alleged breach of fiduciary duty owed to Townway now being considered.
Although the problem arises in slightly different ways for the claim for equitable compensation for breach of fiduciary duty and the claim for damages for breach of contract, the essential problem faced by the plaintiffs is that they do not know enough about the facts concerning the transactions that led to the issue to Oriday of the new shares and units to be able to plead in a positive way how they were disadvantaged by those transactions.
[19]
Conclusion concerning breach of fiduciary duties owed to Townway
In relation to that part of the claim that the plaintiffs make on behalf of Townway arising out of the circumstances pleaded in par 60H (being primarily Leadshine's loan of $950,000 to Mr Dixon Smith), they do not appear to have sought an order that Mr Dixon Smith pay compensation to Townway. Par 8D is a bare claim by the plaintiffs for damages and/or equitable compensation or, in the alternative, an account of profits. It is not a claim made for the benefit of Townway.
If the plaintiffs do not seek a remedy against Mr Dixon Smith on behalf of Townway, it would not be appropriate for this claim to be included in the draft pleading.
If the plaintiffs did seek a remedy against Mr Dixon Smith on behalf of Townway, it would be necessary for them to revise the draft pleading to allege facts that would identify the loss for which Townway is entitled to compensation from Mr Dixon Smith.
The claim that the plaintiffs make against Mr Dixon Smith on behalf of Townway in relation to the issue of the shares and units to Oriday also appears to assume that those transactions occurred in order to permit Crisjoy to repay the Balmoral Debt. As I have observed above, the plaintiffs have not alleged that connection in the draft pleading. They have only alleged the circumstances in which the Balmoral Debt was repaid immediately before they alleged the transactions involving the issue of shares and units to Oriday. As I have also said, it is not self-evident that the two transactions were connected, particularly in relation to the issue of shares by Leadshine.
If the plaintiffs wish to allege that Mr Dixon Smith breached his duties owed to Townway by reason of the fact that he caused the shares and interests to be issued to Oriday as part of the transaction whereby the Balmoral Debt was repaid, they must plead that relationship specifically.
The defendants complain that the plaintiffs should not be permitted to plead this claim contingently, in the manner that they do by stating in par 60Z(a): "if the issue of units and shares was not for value…"
Traditionally, in a situation where a plaintiff believed that one of a number of alternatives occurred, but could not be sure which, the plaintiff would be permitted to plead one of the alternatives as if it had positively occurred, and then plead in the alternative that one or more of the other possibilities had occurred. The pleading rules permit plaintiffs to plead in the alternative a series of positive allegations, even where the facts are inconsistent and only one of them could be true.
In my opinion, there is no impediment to plaintiffs pleading positively, but alternatively, a series of inconsistent allegations, when only one of them can be true, and that is the proper way that pleadings should be prepared. The approach that the plaintiffs have adopted in the present case could readily be corrected.
Whereas sub-pars (a) and (b) of par 60Z challenge the propriety of the issue of the shares and interests to Oriday on the basis that the transactions gave Oriday an illegitimate benefit, sub-pars (c) and (d) challenge the transactions on the basis that there was some alternative approach that ought to have been adopted in order to avoid Mr Dixon Smith benefiting from a conflict of interest. However, sub-par (c) is no more specific than that Mr Dixon Smith ought to have adopted "some alternative course to raise any funds that needed to be raised by Crisjoy to repay the Balmoral Debt". In my opinion, it is not permissible for the plaintiffs to make such a general allegation, without identifying the alternative course or courses that they contend Mr Dixon Smith ought to have taken. The plaintiffs' present ignorance of the facts, if that be the cause of their making the general allocation in sub-par (c), does not justify the approach that they have adopted.
An equivalent vice is to be found in the manner in which sub-par (d) has been pleaded. The plaintiffs alleged that Mr Dixon Smith should have caused the opportunity to make loans to the Byron Bay Entities, or to subscribe for new shares or units in those entities, to be made available to Townway rather than Oriday. The plaintiffs do not plead any facts upon which they could base an arguable claim that it was commercially viable for loans to be made to the Byron Bay Entities. They do not plead that the plaintiffs were in a position to contribute half of the funds. They do not plead the basis of any claim that Mr Dixon Smith was obliged to provide funds to the Byron Bay Entities through Townway, in circumstances where the plaintiffs would receive 50% of the benefit of that investment.
In my view, it is not permissible for the plaintiffs to propound the general claims alleged in sub-pars (c) and (d) without pleading any foundation that would make arguable the claim that Mr Dixon Smith was obliged to act in accordance with those sub-paragraphs.
I have not ignored the submissions made by the plaintiffs in par 19 of their written submissions in reply. They submit that they are under no obligation to set out the alternative course that Mr Dixon Smith should have adopted to raise the funds. The course that he adopted involved self-dealing. That is, they submit, prima facie, a breach of fiduciary duty because it involves a conflict of interest. They submit that, similarly, it is not necessary for them to plead or prove that Townway could have taken advantage of the opportunity that Mr Dixon Smith made available to Oriday. They submit by reference to authority that it is no defence to a claim for breach of fiduciary duty that the beneficiary was unwilling or unable to take up the opportunity.
I am not at this point concerned with the remedies that may be available to Townway, if it is established that Mr Dixon Smith breached the duties to the company that the plaintiffs allege, or what the conditions for Townway being entitled to any remedy might be. I am concerned with the adequacy of the plaintiffs' pleading, and have in mind the words of Lord Oliver of Aylmerton set out above at par 21. If Townway has a claim for breach of fiduciary duty against Mr Dixon Smith because he acted with a conflict of interest, and it is not necessary for the plaintiffs to allege any particular condition before Townway is entitled to a remedy, they should not do so. They have chosen to make the allegations in par 60Z(c) and (d). The plaintiffs imply that some alternative course to raise funds to repay the Balmoral Debt was available to Crisjoy, without identifying any alternative, or even showing that an alternative was possible. They also assert positively that funds could have been made available to the Balmoral Entities by loan, or by subscribing for new shares and units through Townway. Those positive allegations give rise to a requirement in the plaintiffs to plead the facts necessary to base an arguable case that those two courses of action were available.
[20]
Mr Dixon Smith's breaches of fiduciary duties owed to the plaintiffs
The plaintiffs plead in pars 60U to 60W that Mr Dixon Smith owed fiduciary duties directly to the plaintiffs.
Paragraph 60U pleads eight circumstances arising out of the relationship between Mr Hirshman and Mr Dixon Smith that may be summarised as: Mr Hirshman reposed trust and confidence in Mr Dixon Smith to manage the plaintiffs' investments in the Byron Bay venture, through Townway, which was controlled by Mr Dixon Smith, and Mr Dixon Smith assumed responsibility for managing those investments on behalf of the plaintiffs.
The fiduciary duties imposed upon Mr Dixon Smith are set out in par 60V, and may be summarised as Mr Dixon Smith having to act in the interests of Mr Hirshman, and not himself or any third party, and not to prefer his own interests, or the interests of any third party in preference to the interests of Mr Hirshman; and not to allow a conflict to arise between his own interests, or the interests of a third person, and the interests of the plaintiffs, without Mr Hirshman's fully informed consent.
Paragraph 60V limits the subject-matter of Mr Dixon Smith's fiduciary duty to the matters set out in pars 60U(c) to (e). It will be necessary to set out those sub-paragraphs:
(c) the first defendant assumed responsibility for negotiating on behalf of both of them in respect of that transaction [apparently the whole Byron Bay venture], including the 2005 Byron Bay Restructure;
(d) the first defendant assumed responsibility for setting up the corporate structure through which the first plaintiff and the first defendant would invest in the Byron Bay Project, including the establishment of the Townway Investment Trust with the second defendant as trustee;
(e) the first defendant assumed responsibility for arranging and implementing the 2005 Byron Bay Restructure, including one of the purposes of the 2005 Byron Bay Restructure, being to bring about a situation where the plaintiffs no longer had an interest, direct or indirect, in the Eastside Land, but retained their interest, through the second defendant, in the Westside Land and the Byron Bay Quarry Business.
Thus, it appears to be alleged that, in managing the affairs of Townway Crisjoy, Leadshine and the Lighthouse Unit Trust, in relation to the issues listed in the preceding paragraph, Mr Dixon Smith had to act in the interests of Mr Hirshman rather than himself or any third party (which would disentitle him from acting in the interests of the defendants, or the other participants in the venture).
This allegation is tempered by the allegation in par 60W that the fiduciary duty operated concurrently with the contractual relationship between the parties, and that Mr Dixon Smith was free to pursue profit in his own interest in respect of the Eastside Land.
It will be remembered that the effect of the 6 February 2007 Agreement, as pleaded, was that, without the structure of Townway's interests in the Byron Bay venture being altered, the parties would account between themselves on the basis that the defendants had the whole interest in the Eastside Land, and the interests in the Westside Land and the Quarry were shared equally between the plaintiffs and the defendants. The fiduciary duties alleged would have the effect that, in relation to the Westside Land and the Quarry, Mr Dixon Smith was obliged to act in the interests of the plaintiffs, and not the interests of the defendants, even though they were equally interested in those assets, or the interests of the other investors who held 60% of the shares in Crisjoy, 60% of the units in the Lighthouse Unit Trust, and 80% of the shares in Leadshine.
The manner in which the fiduciary duty allegedly owed by Mr Dixon Smith to Mr Hirshman is pleaded in par 60V is inconsistent with the pleading in par 60W of Mr Dixon Smith's concurrent contractual entitlement to act in his own interests. The former paragraph pleads that Mr Dixon Smith owed fiduciary duties when acting in respect of the matters set out in par 60U(c) to (e) to "act for the interests of the first plaintiff and not for his personal interest or the interests of the third party". The same fiduciary duty is described in par 60W as being "to act in the joint interests of the first plaintiff and the first defendant in respect of their joint investment". In par 60V the plaintiff's claim that Mr Dixon Smith had to act solely in the interests of Mr Hirshman, but in par 60W they say that he had to act in the joint interests in relation to the joint investment.
The breaches of these fiduciary duties alleged in the draft pleading mirror the breaches alleged in relation to Mr Dixon Smith's breach of duty towards Townway (pars 60Y and 60AA).
[21]
Conclusion concerning breach of fiduciary duties owed to the plaintiffs
The first observation that must be made is that the par 60U(e) has been drafted upon the assumption that it was a purpose of the 2005 Byron Bay Restructure that the plaintiffs would cease to have an interest in the Eastside Land, and only retain a 50% interest in the Westside Land and the Quarry. The terms of the 2005 Byron Bay Restructure are pleaded in pars 42A to 44F. It had nothing to do with separating the plaintiffs' and the defendants' interests as between the Eastside Land, the Westside Land and the Quarry. That only happened on 6 February 2007, as part of the agreement made on that date, as pleaded in particular in par 46A. Paragraph 60U(e) therefore appears to be misconceived. (This appears to be recognised in par 60W, which makes reference to the agreement alleged in pars 46A and 46B).
The next issue that requires consideration is the alleged concurrent existence of the fiduciary duty that Mr Dixon Smith owed to the plaintiffs, and his contractual entitlement to pursue profit in his own interest in respect of the Eastside Land. The question is whether the plaintiffs have pleaded facts that would arguably allow the fiduciary and the contractual rights and duties to coexist.
The plaintiffs' claim distils to one in which Mr Dixon Smith had to cause Crisjoy and Leadshine to act in respect of the Westside Land and the Quarry in in the interests of maintaining the plaintiffs' 50% interests in those assets through Townway, to the exclusion of the interests of the defendants and all other investors, while he was free to cause Crisjoy to act in relation to the Eastside Land in any manner that suited his own commercial interests.
In my opinion, there are two flaws in this aspect of the pleading of the plaintiffs' claim. The first is that they do not plead facts that give rise to a reasonable argument that the affairs of Crisjoy in relation to the development of the two parcels of land were sufficiently separate that it is meaningful to impose upon Mr Dixon Smith a fiduciary obligation to act in the interests of the plaintiff in relation to Crisjoy's development of the Westside Land, but to leave him contractually free to act in his own interests in relation to Crisjoy's development of the Eastside Land. It simply does not appear with any clarity how the fiduciary obligation and the contractual freedom could coexist within the activities of a single company in relation to the development of the two parcels of land that it owned.
Secondly, the plaintiffs and the defendants had equal 50% interests in Townway's 40% interests in the shares in Crisjoy and the Lighthouse Unit Trust, and 20 % of the shares in Leadshine. Not only did the defendants have an equal interest to the plaintiffs, but other investors held 60% or 80% of the total interests in all of the Byron Bay Entities. I am not satisfied that the plaintiffs have pleaded facts that support a reasonably arguable case that, as a result of the 2005 Byron Bay Restructure (or more probably the 6 February 2007 agreement) Mr Dixon Smith was required in relation to the management of Crisjoy concerning the Westside Land, and Leadshine concerning the Quarry, to act in the interests of the plaintiffs to the exclusion of the interests of the defendants and the other investors.
The pleading of the plaintiffs' claim concerning the fiduciary duty that Mr Dixon Smith allegedly owed to them personally fails for comparable reasons to those that caused the plaintiffs' pleading of the implied term in par 46B(a) and (b) to fail. It ignores the entitlements of the defendants and the other investors. I am not satisfied that the draft pleading makes allegations of fact that would permit the alleged fiduciary duty owed to the plaintiffs to coexist with the contractual freedom allowed to Mr Dixon Smith.
It is not necessary to repeat in respect of the allegations in par 60Y (concerning the borrowing by Leadshine of $1 million, and the loan of $950,000 to Mr Dixon Smith, so that he could pay that sum to Balmoral, and claim a right of subrogation to Balmoral's mortgage over the Eastside Land) the same observations as were made about par 60X, as they are in materially the same terms.
The same observations that have been made concerning par 60Z (in relation to Mr Dixon Smith's breach of his fiduciary duties to Townway) apply equally to the allegations in par 60AA (which concerns the breaches of fiduciary duties owed directly to the plaintiffs). The allegations are materially the same.
That is also true of the claim for damages, equitable compensation or an account of profits in par 60AE, which has been considered above.
[22]
Townway's breach of fiduciary duty
Further, the plaintiffs allege in par 60Q that Townway held 20% of the issued shares in Leadshine, 40% of the issued shares in Crisjoy, and 40% of the issued units in the Lighthouse Unit Trust on trust as to half for the plaintiffs and half for the defendants jointly.
They allege in par 60R that consequently Townway owed the following duties to the plaintiffs:
60R. By reason of the matters alleged in paragraph 60Q, the second defendant owed the following duties to the plaintiffs in respect of the assets held on trust for the plaintiffs:-
(a) a duty by reason of its position as trustee to maintain value the assets of the trust;
(b) a fiduciary duty, when acting as trustee, to act for the interests of the beneficiaries as a whole and not for its personal interests, or the interests of a third party, or the interests of one beneficiary the exclusion of the interests of other beneficiaries;
(c) a fiduciary duty not to prefer the interests of the first defendant, or the interests of a third person, to the interests of the beneficiaries as a whole in respect of those assets.
The duty alleged in sub-par (a) is novel, as an absolute duty to maintain the value of the asset the subject of the duty is not usually imposed upon fiduciaries. I am not satisfied that the allegations in par 60Q support a reasonably arguable claim that Townway owed the absolute duty alleged in par 60R(a). Townway held less than 50% of the shares and units in the Byron Bay Entities. There is no allegation that Townway controlled those entities.
The other duties alleged in par 60R are put in more orthodox terms. The breach of this alleged duty is pleaded in par 60AB in the following terms:
60AB. In breach of its duties owed to the plaintiffs alleged in paragraph 60R above, the second defendant:
(a) consented to or acquiesced in the first defendant's conduct as alleged in paragraph 60Z above; and
Particulars
The second defendant consented or acquiesced by failing to object to the first defendant's conduct in circumstances where the first defendant was its controlling mind so that the second defendant knew everything that the first defendant knew.
(b) failed to take any action against the first defendant, Crisjoy or Leadshine;
(c) by consenting or acquiescing as alleged in paragraph 60AB(a), allowed a position of conflict to arise between the interests of the first defendant or the third defendant on the one hand and the plaintiffs on the other in relation to the second defendant's shares in Crisjoy and Leadshine and the second defendant's units in the Lighthouse Unit Trust;
(d) by consenting or acquiescing as alleged in paragraph 60AB(a), preferred the interests of the first defendant and the third defendant to the interests of the plaintiffs.
The conduct alleged in par 60Z is the conduct alleged against Mr Dixon Smith in breach of his duty as a director of Townway by causing Crisjoy, Leadshine and the Lighthouse Unit Trust to issue the shares and units to Oriday.
The claim appears to proceed upon the assumption that, if Mr Dixon Smith was the director of both Oriday and Townway, and chose to cause Oriday to enter into transactions with Crisjoy, Leadshine and the Lighthouse Unit Trust, his failure in his capacity as a director of Townway to stop himself from acting in the manner in which he did as a director of Oriday, is a breach of trust by Townway to the plaintiffs.
The conduct that is alleged to constitute breaches of fiduciary duty to the plaintiffs is consent or acquiescence in Mr Dixon Smith's conduct, as a director of Oriday, Crisjoy and Leadshine, in causing the issue of the shares and units to Oriday. The plaintiffs have not pleaded any act of consent by Townway. The only claim available on the facts pleaded is one of acquiescence. As Townway did not participate, and had no right to participate, in the transaction by which the shares and units were issued, an allegation that acquiescence was wrongful could only be an allegation that Townway had some obligation to act to prevent the transactions occurring.
The plaintiffs' claim against Townway is pleaded as if it is self-evident that Townway, which held its interests in the Byron Bay Entities on trust as to 50% for the plaintiffs and 50% for the defendants, had an obligation as trustee to take some unidentified action to prevent or reverse the transactions by which the shares and units were issued to Oriday. The draft pleading implies that self-evident obligation in a context where, by reason of the plaintiffs' ignorance of the facts, the plaintiffs have been unable elsewhere in the draft pleading, in pleading claims that Mr Dixon Smith is liable to pay equitable compensation to them and Townway, to allege whether or not the transactions occurred for value, and if not, what the consequences were.
I am not satisfied that the plaintiffs have pleaded facts that give rise to a reasonable argument that Townway breached its fiduciary duties as trustee for the plaintiffs and the defendants, in so far as it acquiesced in the transactions by which the shares and units were issued to Oriday.
[23]
Oriday's knowing receipt in breach of trust
The plaintiffs make the following allegations in pars 60AC and 60AE of the draft pleading:
60AC. The third defendant knowingly received assets obtained as a result of the first defendant's breaches of fiduciary duty alleged in paragraphs 60Z and 60AA above and the second defendant's breaches of fiduciary duty alleged in paragraph 60AB above in that:
(a) the third defendant received the newly issued shares in Crisjoy and Leadshine and the newly issued units in the Lighthouse Unit Trust; and
(b) the third defendant had the requisite knowledge because the first defendant was the third defendant's director and controlling mind in respect of that receipt.
60AD. By reason of the matters contained in paragraph 60AC above, at all material times, the third defendant held, and holds, the following on constructive trust for the first plaintiff or, at his nomination, the second plaintiff, or in the alternative for the second defendant:-
(a) 4,950 shares in Crisjoy issued to the third defendant;
(b) 450 shares in Leadshine issued to the third defendant; and
(c) 50% of the units issued in the Lighthouse Unit Trust issued to the third defendant.
It is difficult to see why, even if the claim of knowing receipt of assets obtained by breach of fiduciary duty was made out, Oriday would hold the various assets on trust for the plaintiffs alone, rather than Townway. At most, Oriday would hold the shares and units on constructive trust for Townway in proportion to Townway's shareholding in Crisjoy and Leadshine, and its unit holding in the Lighthouse Unit Trust.
The plaintiffs' claim against Oriday can only survive to the extent that the plaintiffs are given leave to file the draft pleading containing allegations of breach of fiduciary duty by Mr Dixon Smith to which the claim against Oriday could attach.
[24]
Byron Bay Loan Agreement and Eastside Agreement
In pars 60AF to 60AL of the draft pleading, the plaintiffs seek to plead a contingent case against the defendants, based upon agreements that the defendants allege were made between them and the plaintiffs. The plaintiffs plead allegations made by the defendants in their defence that the agreements were made, do not admit the allegations, but then seek to plead a positive claim for damages for breach of an implied term of the non-admitted agreements, if those agreements are found to have been made.
In par 17 of their original statement of claim, the plaintiffs pleaded the existence of what they called the Byron Bay Agreement. I have summarised the plaintiffs' allegations in pars 36 and 37 above. As I understand par 17 of the defence, the defendants plead an oral agreement made between Mr Hirshman and Townway (the Byron Bay Loan Agreement), and otherwise deny the plaintiffs' par 17. The substance of the agreement pleaded was that Mr Hirshman would lend to Townway half of the amount that Townway contributed to the cost of acquiring the land at Byron Bay and the Quarry, the cost of developing the Byron Bay land, and the working capital requirements of the Byron Bay Entities. In consideration, Townway would pay to Mr Hirshman 50% of any amounts received from the Byron Bay Entities from the conduct of the Byron Bay venture.
I have summarised the 2005 Byron Bay Restructure pleaded by the plaintiffs in pars 38 and 43 above. The plaintiffs' allegation in the original statement of claim was confined to par 43. In summary, Townway increased its investment in the Byron Bay venture to 40% of the shares in Crisjoy, 40% of the units in the Lighthouse Unit Trust, and 20% of the shares in Leadshine.
In par 43 of their defence, the defendants pleaded that a different agreement was made, which they called the Eastside Agreement. The alleged agreement was oral and made between Mr Hirshman and Townway, with Mr Dixon Smith acting on behalf of Townway. The defendants accept that Townway increased its percentage interest in the Byron Bay venture as alleged by the plaintiffs. They say that Mr Hirshman did not make any additional contribution. The principal features of the Eastside Agreement are that Balmoral acquired a half share in the Eastside Land. They say further that the Byron Bay Loan Agreement was amended but only in so far as Mr Hirshman ceased to have any rights or obligations in connection with the Eastside Land, and that Townway would pay Mr Hirshman $488,330, but only out of cash received by Townway from the Byron Bay Entities that related to capital or income derived from the Eastside Land. The defendants say that no monies have ever become payable to Mr Hirshman under the Eastside Agreement. (I infer that it remains possible that monies will become payable to Mr Hirshman under the Eastside Agreement, but if so, that could only happen in conjunction with the completion of the Byron Bay venture).
The following oversimplifies the positions taken by the plaintiffs and the defendants. The plaintiffs allege that they had a 50% beneficial interest in Townway's investments in the Byron Bay venture, which was varied by the 6 February 2007 Agreement so that, as between the plaintiffs and the defendants, the plaintiffs only retained a 50% interest in Townway's interests in the Westside Land and the Quarry. The defendants say that Mr Hirshman was only a lender to Townway, and his right was to receive 50% of the proceeds received by Townway from the Byron Bay venture, which was reduced to 50% of the proceeds from the Westside Land and the Quarry, plus an amount of $488,330, but only if Townway received that sum from the proceeds of the Eastside Land development. (I have intentionally ignored a number of features of the Eastside Agreement).
The plaintiffs allege that the reduction in the plaintiffs' interest in the Byron Bay venture to 50% of Townway's investment in the Westside Land and the Quarry occurred as a result of the 6 February 2007 Agreement, while the defendants claim that the change occurred as part of the 2005 Eastside Agreement.
I will now turn to the new allegations that the plaintiffs seek to include in the draft pleading concerning the alleged Byron Bay Loan Agreement and Eastside Agreement.
The plaintiffs plead in pars 60AF and 60AH that the defendants "assert" the existence of the Byron Bay Loan Agreement and the Eastside Agreement.
Then, in pars 60AG and 60AI, the plaintiffs respond to the defendants' assertions by pleading: "If there was [the relevant agreement] (which is not admitted), then…"
The plaintiffs allege that if the two agreements were made, Mr Dixon Smith was a party to them (even though the defendants had alleged that only Mr Hirshman and Townway were parties to the agreement, and that Mr Dixon Smith made the agreement on behalf of Townway).
Relevantly, the plaintiffs allege that both agreements asserted by the defendants contained the following implied terms (the sub-paragraph references are different in each paragraph):
(b) it was an implied term of that agreement that the first and second defendants would do all such things as are unnecessary on their part to enable the [plaintiffs] to have the benefit of the [relevant agreement]; and
(c) it was an implied term of that agreement that the first and second defendants would not do things to deprive the [plaintiffs] of the benefit of the [relevant agreement].
The particulars given state that these terms are to be implied under the principle in Mackay v Dick (1881) 6 App Cas 251; Butt v M'Donald (1896) 7 QLJ 68; and Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596.
The plaintiffs allege that, if the two agreements were made, the defendants breached the implied terms in two ways.
First, they allege in par 60AJ(a) and (b) that Mr Dixon Smith allowed interest on the Balmoral Debt to accumulate at the default interest rate from 16 December 2008, and failed to refinance the Balmoral Debt earlier than 2012 or 2013, so that the interest on the Balmoral Debt continued to accrue at the default interest rate. The particulars of this breach given by the plaintiffs are: "The plaintiffs say that it would have been possible to obtain financing at a lower interest rate than the default interest rate accumulating on the Balmoral Debt". The plaintiffs do not provide any detail concerning the refinancing that they say would have been possible.
As appears from par 44E, the maturity date of the Balmoral Debt was 16 December 2008, the interest rate was 15.9% per annum, and the default rate was 20% per annum. The plaintiffs' claim therefore is that Mr Dixon Smith breached the implied terms by failing to cause Crisjoy to refinance the $1 million Balmoral Loan, so that the loan accumulated at a rate of 4.1% per annum compounding more than was necessary.
The effect of the claim by the plaintiffs that Mr Dixon Smith was a party to the agreements that the plaintiffs do not admit were made, as well as Townway, is that the plaintiffs can then claim that Mr Dixon Smith breached the agreements, if they are found to have been made, by failing to cause Crisjoy to refinance the Balmoral Loan. The plaintiffs apparently accept that they could not make that allegation against Townway, as it only held 40% of the shares in Crisjoy.
It must not be forgotten, however, that the plaintiffs have only alleged that Mr Dixon Smith was the sole director of, and controlled Crisjoy, from 22 June 2012 (par 7D). Crisjoy was apparently in default under the Balmoral Loan from 16 December 2008 until Balmoral served a demand on Crisjoy on 13 March 2012 (par 60E). Thus, all of the accumulation of the debt at default rates occurred before the time when Mr Dixon Smith commenced to control Crisjoy.
If the issue of the absence of alleged control of Crisjoy by Mr Dixon Smith is ignored, it becomes apparent that the plaintiffs' complaint is that Mr Dixon Smith was party to the two agreements that the plaintiffs do not admit were made, and that implied terms of those agreements obliged Mr Dixon Smith to cause Crisjoy to refinance the Balmoral Debt from 16 December 2008 at an interest rate no more than 15.9% per annum.
The second breach of the implied terms alleged by the plaintiffs (par 60AJ(c) and (d)) is based on the allegations in pars 60I to 60K concerning the dilution of Townway's interests in the Byron Bay Entities. In essence, if the issue of the interests to Oriday was not for value, it reduced the value of Townway's interests in the Byron Bay Entities. Regardless of whether the issue of the interest was for value, it reduced to almost zero the portion of any profits from the Byron Bay Entities that would be payable to Townway.
The plaintiffs also allege in par 60AK that Townway breached the agreements that are not admitted by consenting to, or acquiescing in, Mr Dixon Smith's conduct.
The damages claimed by the plaintiffs in par 60AL are the loss in the value of the loan repayment that the plaintiffs would have received from Townway if the breaches had not occurred.
The first component of these damages must be equal to the proportion of the $488,330 that the plaintiffs will ultimately not receive because the increase in the Balmoral Debt caused by Mr Dixon Smith's failure to refinance it caused Townway to receive less than the $488,330 as capital or income derived from the Eastside Land.
The second component is the reduction in the plaintiffs' receipts from Townway, being 50% of its receipts of capital or income from the Westside Land and the Quarry, and any additional reduction in the $488,330 caused by the dilution of Townway's interests in the Byron Bay Entities.
[25]
Conclusion concerning breaches of implied terms in non-admitted agreements
I accept that the plaintiffs are entitled to allege that, if the two agreements were made, Mr Dixon Smith was personally a party to them.
However, the plaintiffs wish to allege that Mr Dixon Smith breached the implied terms in relation to the failure to cause Crisjoy to refinance the Balmoral Debt in respect of the period during which the plaintiffs have not alleged that Mr Dixon Smith controlled Crisjoy. The making of the positive allegations that Mr Dixon Smith did control Crisjoy from 22 June 2012, being a time after Balmoral served its demand on Crisjoy, reinforces the conclusion that the plaintiffs do not allege that Mr Dixon Smith controlled Crisjoy during the relevant period. The plaintiffs have not pleaded a case reasonably capable of establishing that Mr Dixon Smith committed this breach of the implied terms, without any pleading that he was able to control Crisjoy.
There is also a question of whether the plaintiffs have included in the draft pleading a proper basis for implying the terms alleged.
As it stands, the plaintiffs have done no more than assert that the non-admitted agreements gave the plaintiffs a right to 50% of Townway's receipts of capital or income in relation to the Westside Land and the Quarry, and $488,330 from the Eastside Land, but only to the extent that Townway received some part of that $488,330.
It is sufficient to set out the following extract from the judgment of Mason J (as his Honour then was) in Secured Income Real Estate (Aust) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 to 608:
But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. As Lord Blackburn said in Mackay v Dick (1881) 6 App Cas 251 at 263: "… as a general rule … where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect."
It is not to be thought that this rule of construction is confined to the imposition of an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith CJ said in Butt v M'Donald (1896) 7 QLJ 68 at 70-1: "It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."
It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contacting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.
I accept that these authorities are capable of supporting the implication of terms into the two non-admitted agreements of the general form pleaded in pars 60AG and 60AI. Those standard implied terms are expressed in terms of requirements that either positively oblige a party to do all such things as are necessary to enable the other party to have the benefit of the relevant agreement, or not to do things to deprive the other party of the benefit of that agreement.
The real question is whether the failure by Mr Dixon Smith to cause Crisjoy to refinance the Balmoral Debt, or Townway's failure to cause him to do so, is capable of being a breach of those standard implied terms.
The standard implied terms are concerned with one party cooperating to enable the other to do what the contract requires that other to do, or one party cooperating to enable the other to receive the benefit that the other is entitled to receive under the contract. In the first case, the contract must require the first party to do something, and in the second case, the contract must entitle the other party to a benefit.
Those implied terms are not apt to apply to a case, such as the present, where the non-admitted contracts entitle the parties to share in the proceeds received by another (that is, Townway, whether their investment is by loan or capital investment) from a partial investment in a joint venture in which other third parties have also invested. The contracts provide for the parties to divide between them Townway's receipts from its investments in the Byron Bay venture. They do not entitle either the plaintiffs or the defendants to any particular return, and do not contain any express terms that oblige one or other party to secure a particular return. The contracts do not provide any particular result that the plaintiffs were entitled to receive, and the implied terms alleged by the plaintiffs could not oblige Mr Dixon Smith or Townway to do, or refrain from doing, all acts that would increase the return to the plaintiffs, or alternatively avoid reducing that return, as the case may be. What may loosely be called the 'duty of co-operation' did not oblige the defendants to do everything that could be done to maximise the returns to the plaintiffs that were described in general terms in the contracts.
Furthermore, even if Mr Dixon Smith, in his personal capacity, was subject to the implied terms, and even if those terms required Mr Dixon Smith to cause Crisjoy (assuming he controlled it) to refinance the Balmoral Debt, it does not follow that the other party to the non-admitted agreements, being Townway, could breach the implied terms by failing to cause Mr Dixon Smith to cause Crisjoy to refinance the Balmoral Debt. The plaintiffs have pleaded that Townway held 40% of the shares in Crisjoy. They have not pleaded how Townway through its director Mr Dixon Smith could have exercised control over Crisjoy during the relevant period through that 40% shareholding. As I have noted, the plaintiffs have not even alleged that Mr Dixon Smith controlled Crisjoy during the relevant period.
Finally, I do not consider the particulars given by the plaintiffs in par 60AJ, that it would have been possible to obtain financing at a lower interest rate than the default interest rate accumulating on the Balmoral Debt, to be adequate. That is not a self-evidently true proposition. It is likely that the persons who controlled Crisjoy would have refinanced the Balmoral Debt to reduce the interest payable had it been commercially feasible to do so. If the plaintiffs wish to prosecute a claim that Mr Dixon Smith could have caused Crisjoy to refinance at a lower interest rate, they would need to provide at least adequate particulars as to the circumstances in which that refinance could take place.
Next, it is necessary to consider whether, if Mr Dixon Smith caused the dilution events to occur as pleaded in pars 60I to 60K, that is capable of being a breach of the implied terms alleged in pars 60AG and 60AI.
I accept that it is arguable on the facts pleaded that the dilution of Townway's interest in the Byron Bay Entities could potentially reduce the return that Townway received from those entities in relation to the development of the Eastside Land, below the threshold that would trigger a payment from Townway to the plaintiffs, and also reduce Townway's return from the Westside Land and the Quarry.
In the interests of avoiding undue repetition, I will simply say that the observations that I have made in a number of contexts concerning the deficiencies in the draft pleading that have arisen as a result of the plaintiffs' lack of knowledge of the transactions pleaded in pars 60I to 60K concerning the dilution of Townway's interests in the Byron Bay Entities also apply in this context.
[26]
Conclusion
For the foregoing reasons, I am not satisfied that the draft pleading sufficiently satisfies the relevant pleading rules, or that it will facilitate the just, quick and cheap resolution of the dispute between the parties concerning the Byron Bay venture to permit the draft pleading to be filed in its present form.
The 6 February 2007 Agreement lies at the heart of the plaintiffs' claim. In particular, par 46A alleges that the parties agreed that they would not alter the legal structure of the plaintiffs' investment in the Byron Bay venture through Townway, but that the plaintiffs would only remain entitled to 50% of Townway's net returns from its interests in the Westside Land and the Quarry. That would require, at an appropriate time, some accounting exercise to be carried out to dissect Townway's net returns into those attributable to the Westside Land and the Quarry on the one hand, and the Eastside Land on the other.
The first problem that arises in relation to the accounting exercise is that, as Crisjoy owned both the Westside Land and the Eastside Land, and as costs and expenses incurred by Crisjoy might not self-evidently be incurred solely in relation to one of the parcels to the exclusion of the other, there is the need for precision in defining the formula necessary to attribute costs and expenses to one parcel rather than the other. The use of the word "associated" is an inadequate shortcut.
Assuming that Mr Dixon Smith is able to control Crisjoy and Leadshine, he might be able to cause those companies to conduct their businesses in a way that maximises the return from the Eastside Land and reduces the return from the Westside Land and the Quarry. The 6 February 2007 Agreement should be able to adjust for such conduct on Mr Dixon Smith's part as a matter of accounting. However, the use by the plaintiffs of the expression "adversely affected" is also an inadequate shortcut in the context.
The plaintiffs have ignored the issue of the timing of the accounting exercise, and have claimed an entitlement to damages that have already crystallised, and that Mr Dixon Smith has already breached the agreement by failing to make 'save harmless' payments. Given the structure of the Byron Bay venture, the actions that will be necessary to implement it, and the interests of all of the investors who are involved, it is a mystery how any amounts payable to the plaintiffs for breach of the agreement could be calculated at this time.
The plaintiffs have not been content to rely upon the alleged terms of the 6 February 2007 Agreement that require the net returns received by Townway to be divided between the parties after an accounting adjustment. They have alleged an implied term that would govern how Mr Dixon Smith was required to cause Crisjoy and Leadshine to implement the Byron Bay venture in fact, assuming at relevant times he was in control of it. If the agreement required an accounting adjustment, the solution to the problem of Mr Dixon Smith maximising Townway's return through the Eastern Land to the disadvantage of the plaintiffs should lie in the terms upon which the accounting adjustment was required to be made. The identification of the terms of the accounting adjustment may be difficult, but that is what is required by the plaintiffs' case. The plaintiffs, however, without providing persuasive particulars, alleged that the side agreement constituted by the 6 February 2007 Agreement obliged Mr Dixon Smith to cause the Byron Bay venture to be implemented to the exclusive benefit of the plaintiffs, in so far as the incurring of costs and expenses was concerned, irrespective of the interests of the defendants and the majority of third-party investors.
When the plaintiffs come to alleged breaches of the 6 February 2007 agreement, they start by pleading the very specific transaction alleged in par 60H, but they do not allege how that transaction has, or will, adversely affect them as a result of the accounting adjustment required by the agreement.
The plaintiffs proceed in a number of places on the assumption that the transactions alleged in pars 60I to 60K involving the issue of shares and units to Oriday were undertaken as part of the exercise in repaying the Balmoral Debt, but they do not plead that connection, or allege what the nature of the connection was. The existence of the connection is not obvious, and the transactions cannot easily be related to the repayment of the Balmoral Debt, particularly in relation to the involvement of Leadshine.
The transactions involving Oriday are plainly on their face extraordinary, and cry out for a proper explanation. The plaintiffs requested that explanation by letter dated 24 July 2015, and were rebuffed by a response given on 27 July 2015. The plaintiffs have not applied for orders that they be given the explanation they requested. Accordingly, I should say nothing about their entitlement to that information.
Notwithstanding their complete lack of knowledge concerning the circumstances of the transactions involving the issue of shares and units to Oriday, the plaintiffs have made contingent allegations of breach of various duties by Mr Dixon Smith, and knowing involvement in those breaches by Oriday, in which the plaintiffs alternatively assume that Oriday provided value, and that it did not. It is impossible to escape from the conclusion that the plaintiffs have made serious allegations of breach, and it is entirely possible that no breaches have occurred, and the plaintiffs are not in a position to know whether or not they have. The plaintiffs must address the need to force the defendants to give them the information that they have sought.
Because of the complexity of the plaintiffs' claims that Mr Dixon Smith has breached his duties as a director to Townway, and that Townway and Mr Dixon Smith have breached fiduciary duties to the plaintiffs, I will not attempt to summarise the conclusions that I have stated above. However, it can be said that the plaintiffs have not addressed the real problems that arise out of claiming Mr Dixon Smith had to act solely in the interests of the plaintiffs and to ignore the interests of the defendants and the majority third-party investors. I consider the manner in which the plaintiffs say the fiduciary duties owed to them could be implemented concurrently with the defendants' contractual entitlement to act in their own interests in relation to the Eastside Land to be entirely mysterious.
In navigating through the draft pleading, I came upon other deficiencies that were surprising, and may be an unintended consequence of the historical evolution of the pleading.
If the plaintiffs' claim had consistently been pleaded in relation to the accounting adjustment that they allege was agreed, and the terms governing the adjustment had been pleaded with precision, and the plaintiffs had discovered the facts concerning the transactions in which shares and units were issued to Oriday, and accordingly been able to plead a positive case against the defendants in relation to those transactions, the draft pleading may not have involved the contentious issues that it has. It is unfortunately the case, in my view, that the plaintiffs have attempted to cast their net more widely than is necessary or proper, and that the prosecution of the draft pleading in its present form would be embarrassing and oppressive to the defendants.
As I have said above, I will not make orders now, but will give an opportunity to the plaintiffs to indicate how they wish to respond to these reasons for judgment.
It will be necessary for me to hear the parties on costs in any event.
[27]
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: 16 November 2015