Hunters Beach Investments Pty Ltd v Braams

Supreme Court of NSW|2001-05-04|Before: Young CJ

CITATION : Hunters Beach Investments Pty Ltd v Braams [2001] NSWSC 577 CURRENT JURISDICTION: Equity Division FILE NUMBER(S) : SC 2454/97 HEARING DATE(S) : 1, 2, 3 and 4 May 2001 JUDGMENT DATE : 12 July 2001

Hunters Beach Investments Pty Limited (P) PARTIES : Garry Arnold Braams (D1) Braams Group Pty Ltd (D2) ACN 003 767 020 Pty Ltd (D3) JUDGMENT OF : Young CJ in Eq

COUNSEL : M A Pembroke SC (P) C J Stevens QC and R K Eassie (D) SOLICITORS : Searle & Associates (P) Etheringtons (D) CATCHWORDS : EQUITY [109]- Trusts- Investments made prior to trust deed being executed- On facts investments subject to trust. EQUITY [191]- Trusts- Director of corporate trustee defaulting in fiduciary duties- Director's company a beneficiary- Principle that a person entitled to a share must first make good a loss caused to the trust estate applied. LEGISLATION CITED : Trustee Act, 1925, s 86 Adams v Bank of NSW [1984] 1 NSWLR 285 Coachcraft Ltd v SVP Fruit Co Ltd [1978] VR 706 Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630 Hagan v Waterhouse (1994) 34 NSWLR 308 Hawks v McArthur [1951] 1 All ER 33 Hunter v Hunter [1936] AC 222 In re Rhodesia Goldfields Ltd [1910] 1 Ch 239 CASES CITED : Insurance Commissioner v Joyce (1948) 77 CLR 39 O'Toole v Charles David Pty Ltd (1991) 171 CLR 232 Permanent Trustee Co v Dougall (1931) 34 SR (NSW) 83 Re Dacre [1916] 1 Ch 344 Re Gaynor [1960] VR 640 Re Tolley (1972) 5 SASR 466 SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Ll Rep 288 Tett v Phoenix Property & Investment Co Ltd [1984] BCLC 599 DECISION : See para 111.

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2454/97 - HUNTERS BEACH INVESTMENTS PTY LTD v BRAAMS

JUDGMENT 1 HIS HONOUR: The plaintiff is the trustee of the Balmoral Unit Trust which was established by deed bearing date 27 May 1993. The first defendant was the settlor. The plaintiff says that the first defendant was a director and the secretary of the plaintiff between 2 November 1992 and 24 February 1994 and was in effective control of the plaintiff. He was also a director of, and in effective practical control of the second and third defendants Braams Group Pty Ltd and ACN 003 767 020 Pty Ltd. 2 The plaintiff charges that the first defendant breached his fiduciary duty to the plaintiff. The second and third defendants are charged with knowingly assisting, participating in and benefiting from the first defendant's misconduct. The plaintiff claims equitable compensation. 3 There is an ancillary issue raised under para 5A of the second further amended statement of claim filed on 4 May 2001 that the defendants' units in the Trust are liable to be redeemed because of the circumstances that have occurred. 4 The plaintiff charges in para 9 of the second further amended statement of claim that during the period 2 November 1992 to 24 February 1994 the first defendant acted in breach of his duties to the plaintiff and the unitholders of the Trust in the eight matters particularised. One of these matters was abandoned at the trial. Virtually all these alleged breaches occurred prior to 27 May 1993. 5 The hearing commenced before me on 1 May 2001, Mr Pembroke SC appearing for the plaintiff, and Mr Stevens QC and Mr Eassie appearing for the defendants. The hearing then continued on 3 and 4 May 2001. The hearing was scheduled to take longer, but in the events which have happened, the defendants called no evidence. The defendants, however, submitted that for a number of reasons, in particular that the trust deed meant that the Trust commenced on 27 May 1993, the actions of the defendants before that date could not be a breach of trust or fiduciary duty. 6 The background to the dispute is that a group of people were constructing a restaurant development at Balmoral Beach. The plaintiff says that the vehicle for managing the project was a unit trust which was established on or about 2 November 1992 and formally documented by deed bearing date 27 May 1993 between the first defendant as settlor and the plaintiff as trustee. 7 That, at least, is the way the plaintiff puts it in the final version of the statement of claim. That version was only filed during closing addresses. Up until then, the defendants were arguing that the plaintiff could not make out such a case because it had not been pleaded, whilst the plaintiff was arguing that the matter during pre-trial and onwards had been conducted on that basis. I resolved the matter by giving the plaintiff late leave to amend. 8 The background facts which I have taken from the document "Progression of Steps of Deal" at p 121 of DX 11 are as follows. 9 One J C Degotardi, and his company Starking Pty Ltd had the head lease from Mosman Council and the right and obligation to develop the property. The original deal was that the equity partners were Mr Degotardi, Mr Leung and Mr Mark Wilson and the costs of the works was $1.2 million of which each of the partners was to supply one-third. Mr Degotardi was to operate through his company Morgan Properties Pty Ltd. 10 Step 2 was that this deal was varied in that Mr Degotardi was now to find $1.2 million himself and Messrs Wilson and Leung were to pay a fixed rent of $11,111 per month over the first ten years to repay the $1.2 million in total. The building contract was then let to North Shore Constructions Pty Ltd which appears to include Degotardi, David Codling, Norm Fiumara and Vince Capizzi. The contract was to build at cost. Mr Degotardi still has 33% of the project as do Messrs Wilson and Leung each have 33% of the project. 11 North Shore Constructions Pty Ltd became insolvent making it necessary to make fresh arrangements to erect the building. 12 Step 3 - David Codling negotiates to take over 50% of Degotardi's (ie Morgan Properties) interest in the project. The vehicle used is Starvel which was incorporated on 30 October 1992. Wilson and Leung still have 33% each, Morgan Properties and Starvel each have 16.66%, the last liable to pay 50% of the construction costs. Step 4 then means that Codling negotiates a deal to take Degotardi out of the project for his existing costs plus $250,000. Starvel now has 33% of the project and the project is to be financed through the Unit Trust. Under step 5, Wilson and Leung reduce their share to 30% with the release of the obligation to pay the $11,111 per month so that Starvel is now entitled to 70% of the project. 13 A series of deeds was executed to carry out these steps. Mr Capizzi does not appear to be a party to any of them. 14 The deed of agreement of 8 December 1992, pursuant to which Starvel obtained 50% of Morgan Properties' interest, included a statement that the consideration was Starvel carrying out the works in Schedule C "and the works already carried out". 15 Clause 9 of the agreement then provided: "9. In consideration of Starvel carrying out works in schedule C and the works already carried out, Degotardi has agreed to execute, and be bound by, a Trust Deed known as the Balmoral Baths Unit Trust which is to be executed by him collaterally with this Deed." 16 The trust deed was not executed at that time. A deed entitled "The Balmoral Unit Trust Deed" was only executed on 27 May 1993. 17 However, before 27 May 1993, various dealings took place as if there were a constituted trust. The minutes of meetings of the directors of the plaintiff held on 2 November 1992 record that there were 100 ordinary shares, 28 held by John William Codling, 28 by the first defendant, 30 by a company, Robertson Miric Pty Ltd and 14 by a Mr Dean. 18 By 28 April 1993, 2,250 units had been issued in the Trust. It is not necessary to go into detail at this stage, but it would seem that the project ran short of cash and the promoters were constantly seeking new investment. One of the investors who were attracted was a Mr McMahon who considered investment on 18 March 1993 on behalf of his superannuation fund. His minutes, which are PX10 record: "The Trustee [ie Mr McMahon] was presented with a proposal for investment in a unit trust. The promoters of the investment advised the following; - They are offering the fund - 2000 $1,000.00 units in the Balmoral unit trust ('The Trust') - 200 shares in Starvel Pty Limited… Each of these investments represents a ten percent interest in their respective entity. … the Trustee has resolved to take up a $200,000 investment in the Trust and to take up 200 shares in Starvel and accordingly to execute applications…". 19 Mr Braams, the first defendant, wrote on 20 April to Mr McMahon's accountant: "We hereby confirm that the McMahon Superannuation Fund holds 200 units in the Balmoral Baths Unit Trust. The total number of units issued in the Balmoral Unit Trust is 2250. "Further, we confirm that the Trust received $1000 per share or total application funds of $200,000." 20 The plaintiff says that the Trust commenced carrying on its business at least from 8 December 1992. It had opened a bank account and received money from investors from 2 November 1992. The first defendant was the sole cheque signatory and it continued the work of construction of the restaurant. 21 The first defendant was in charge of the finances. There seems little doubt that during the time that he was in charge of the finances, various sums of money were paid out of which the plaintiff now complains and seeks an account. I will come to these in due course. 22 Mr Stevens QC says that it is incorrect to say that the first defendant was at all times in control of the plaintiff. He puts that for a period Mr O'Shannessy was controlling the plaintiff. This is correct but the fact remains at all material times, Mr Braams controlled it. 23 I will now briefly consider the course of the litigation. I should mention that there was associated litigation, Miric v Braams [2001] NSWSC 299, which was decided by Foster AJ on 23 April 2001. That litigation has some peripheral relevance to the present. 24 On 11 April 2001, Foster AJ gave judgment on a notice of motion filed by the first, second and third defendants for a declaration that upon the true construction of clauses 25A and 25B of the Balmoral Unit Trust Deed, the plaintiff had no standing to maintain these proceedings. His Honour dismissed that notice of motion with costs. 25 However, before me, the defendants sought to raise the same issue on the basis that there was no issue estoppel or the like as a result of his Honour's interlocutory judgment. This is contrary to all the authorities. In Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630, 642, in a passage expressly approved of by the High Court in O'Toole v Charles David Pty Ltd (1991) 171 CLR 232, 245 and 260, Diplock LJ said: "Where the issue separately determined is not decisive of the suit, the judgment upon that issue is an interlocutory judgment and the suit continues. Yet I take it to be too clear to need citation of authority that the parties to the suit are bound by the determination of the issue. They cannot subsequently in the same suit advance argument or adduce further evidence directed to showing that the issue was wrongly determined. Their only remedy is by way of appeal from the interlocutory judgment…". 26 The problem before Foster AJ was that clause 25A of the trust deed provided that the trustee was to be a company "and must have as its members, the unitholders having a shareholding in proportion to the number of units held by them." Clause 25B then provided that if the company did not have such a shareholding the trustee covenanted to cause a new company to be formed which did comply with 25A and to call a meeting of unitholders to appoint that new company as trustee. Foster AJ held that even though there was a breach of clause 25A the present plaintiff remained as trustee until the new company took over and thus the present plaintiff had standing. 27 The points that remain for decision seem to me as follows:

What was the status of the Trust before 27 May 1993?

What was the status of the investments made prior to 27 May 1993?

Are the defendants liable to pay damages or equitable compensation in respect of all or any of the matters set out in paras 9(a) to (g) of the statement of claim?

Whether the plaintiff is entitled to an order under s 86 of the Trustee Act impounding the interest of the second defendant in the Balmoral Unit Trust;

Who are the unitholders in the Balmoral Unit Trust?

Are the first, second and third defendants deemed to have served a transfer notice in respect of their units?

What steps should be taken to appoint a new trustee under clause 25B of the trust deed?

I will deal with each of these matters in turn. 28 1. Although the trust deed is dated 27 May 1993, Mr Pembroke SC says that the evidence clearly shows that there was a trust in operation before that date. The Trust can only be the Trust which was ultimately documented on 27 May 1993, one of the prime pointers in that direction being the agreement of December 1992. 29 Mr Pembroke SC points to various facts to reinforce that submission.

(1) One of the witnesses called by the plaintiff was Graham Pike, a chartered accountant. Mr Pike presented Expert Reports and was cross examined on them.

(2) Paragraph 4.6 of Mr Pike's first report says: "Whilst the Unit Trust was not formed until 27 May 1993, the Trust Accounts had been prepared by the Plaintiff's previous accountant on the basis that the Trust had existed since 2 November 1992."

(3) Mr McMahon invested in the Trust on 18 March 1993 and his investment was acknowledged as I have already set out.

(4) On 8 December 1992, the deed of agreement to which I have already referred contemplated that the Trust would come into effect virtually simultaneously.

(5) Mr Wilcock, who invested through Shore Holdings between 13 and 27 May clearly invested on the basis of there being a trust. 30 Mr Pembroke SC says that when one looks at all this material the only conclusion that one can draw is that the parties were acting on the basis that there was already a trust in existence. 31 On the other hand, Mr Stevens QC says that all the so-called facts are merely assumptions that Mr Pike has made. No evidence has been adduced as to how investments were made by anyone other than Wilcock, Fiumara and possibly Capizzi. Mr Pike has merely assumed those funds to be trust funds. The probabilities really are that they were loan funds made to someone involved in the Trust in anticipation of the Trust coming into existence at which time had they still been extant they might have been used as investments in the Trust. In actual fact, the loan funds were needed to pay persons who were doing work on the building. 32 Mr Pembroke SC made much of the fact that the defendants did not give any evidence. Indeed, he emblazoned a set of his written submissions with the quote "Where an inference is open and the defendant elects not to give evidence the Court is entitled to be bold" per Gleeson CJ and Handley JA, SS Pharmaceutical Co Ltd v Qantas Airways Ltd [1991] 1 Ll Rep 288, 293 citing Insurance Commissioner v Joyce (1948) 77 CLR 39, at p 49 per Rich J. 33 Both Mr Fiumara and Mr Wilcock gave evidence. Both were cross examined. The flavour of their evidence was that they were investors rather than lenders. The cross examination, to my mind, did not seem to challenge that basic flavour. 34 It is not unusual in commercial cases for business people to take the view, the misguided view, that "the paperwork" is of no importance once a deal has been struck. 35 In such situations, the Court needs to consider what the parties intended to be their relationship pending the completion of "the paperwork". 36 Where "the paperwork" is never actually completed the solution that, more often than not, is adopted is to say that the premature transactions were subject to the condition precedent that the paperwork was completed. 37 When the paperwork is, in due course, completed and it is not alleged that there is any material change from the drafts, the usual inference is that the premature transactions are intended to be transactions as if the paperwork had been done before those transactions. 38 In many cases, as in the present, any contrary view would mean that the proposed investors would have participated in a solemn farce or made unsecured loans. Neither alternative has any attractions in the real world. 39 Thus, in my view the investments made between October 1992 and May 1993 should be considered in the same way as investments made after that day and the moneys received as trust moneys for investment rather than loan funds. 40 2. Mr Pembroke SC referred me to a series of cases in which money had been "invested" before the trust had been properly documented. 41 In Hawks v McArthur [1951] 1 All ER 22, Vaisey J had to consider a case where there were pre-emption articles in a company requiring a shareholder desirous of selling his shares to go through the prescribed procedure, and if that did not occur, then the company would not register the transfer. Fraser and Roberts fully paid McArthur for the whole of his shares, but their transfers were never registered because of the pre-emption articles. Hawks then obtained a judgment against McArthur and wished to execute on the shares. Vaisey J held that Hawks could not so execute as the equitable title was in Fraser and Roberts they having paid full consideration for the shares. At p 27 the reason for the decision is plain: "… otherwise the result would be that Mr Roberts and Mr Fraser paid their money and got nothing for it." 42 Later on that page his Lordship continued: "On general principles, in such circumstances as those of the present case where a man who has an interest in shares in a company receives something for the sale of those shares and executes under seal a transfer of those shares for that purpose, I cannot bring myself to suppose … that everything done in that transaction is a complete nullity." 43 This approach was followed in Coachcraft Ltd v SVP Fruit Co Ltd [1978] VR 706, a decision which was ultimately affirmed in the Privy Council; see (1980) 28 ALR 319. 44 In Tett v Phoenix Property & Investment Co Ltd [1984] BCLC 599, 618-619, Vinelott J came to the same conclusion. 45 If the investors invested their money into a unit trust, and if what they did is not to be classed as a complete nullity, then what are the equitable obligations attaching to the money? Both the ifs in the previous sentence are to my mind established in the present case. 46 I should note that Mr Stevens QC strongly submitted that the Court could not, in a case like this, ignore the pre-emption provisions and the contract that the parties had made. He relied on Hunter v Hunter [1936] AC 222, a case that was distinguished in Hawks' case and the other authorities relied on by Mr Pembroke SC. I am of the view that the line of cases commencing with Hawks means that I should not accept this proposition. 47 Mr Stevens QC then submitted that even if Hunter's case was not followed, a court of equity would, in its discretion, refuse enforcement. I again do not accede to this submission. Indeed, what I am doing in this case is not enforcing anything, I am rather recognising that the transaction was not done by people flailing the air, but that when people paid good money as an investment in a Unit Trust, they actually believed they were getting something for their money. 48 The evidence is not sufficient to say at what stage the drafting of the trust deed had reached or how much the various participants in the venture knew as to how far the drafting had reached. However, it seems as clear as day that everyone who was investing and who has given evidence, was looking forward to an equitable interest in the venture which would produce capital and income profits and they intended their investments to be used for the benefit of the venture and not otherwise. 49 3. I now need to pass to the allegations in paragraph 9(a) to (g) of the final version of the statement of claim. 50 the problems that are dealt with came about because the project was extremely short of cash and Mr Braams felt the need to obtain cash quickly from investors and, almost immediately, hand it over to contractors or sub-contractors who had been waiting a considerable time for payment. 51 The payees in some cases were owed money from North Shore Constructions Pty Ltd or other head builders before Starvel came on the scene. Much money was owing (by someone connected with the project) to Mr Braams or other associates. 52 When Mr Braams obtained funds he paid them out as then seemed to him best. Mr Pike's reports show that the probabilities are that considerable sums were paid out in connection with liabilities unconnected with this project or where the plaintiff may have had no liability. 53 In para 9 of the final version of the statement of claim the plaintiff alleged: "During the period 2 November 1992 to 24 February 1994 the first defendant acted in breach of his duties to the plaintiff and the unitholders of the Trust in the respects particularised below:"

There are then particulars (a) through (g) which I will set out verbatim: (a) Withdrawals of Moneys from Equity On various dates between March and May 1993 the first defendant failed to act honestly by signing cheques and causing the following payments to be made, purportedly on behalf of the plaintiff, without authority, and in advancement of the personal interests of the first defendant and/or David Codling, ('Codling'). 1. $55,025.40 - The first defendant. 2. $70,475.00 - Codling. (b) Payment to Vince Capizzi ('Capizzi') Between February and March 1993 the first defendant caused $25,178.00 to be paid by the plaintiff to Capizzi which payments were unauthorised and unrelated to the legitimate interests of the plaintiff. (c) Payments to Maylena Pty Ltd ('Maylena') On various dates in or about December 1992 the first defendant caused payments to be made on behalf of the plaintiff totalling $12,000.00 to Maylena without authority and for purposes unrelated to the legitimate interests of the plaintiff. (d) Payment to Norman Fiumara ('Fiumara') On 29 March 1993 the first defendant caused the plaintiff to advance $50,000 to Fiumara without specifying a term or a rate of interest. Only 45,000.00 has been repaid to date. No interest has been paid. (e) Payments to Braams Constructions Pty Ltd (now ACN 003 767 020 Pty Ltd ('Braams Constructions') On various dates between December 1992 and May 1993 the first defendant caused payments to be made by the plaintiff to Braams Constructions Pty Ltd, purportedly for labour and materials supplied to or on behalf of the plaintiff, in the sum of $113,430.45, which payments were unauthorised and unrelated to the legitimate business interests of the plaintiff. (f) Payments to 'Ready Set Go Rubbish Removals' (an unregistered Business Name) In December 1992 the first defendant caused payments to be made by the plaintiff to himself trading as 'Ready Set Go Rubbish Removals', purportedly as hiring fee for a 'Bobcat' earth-moving machine and for rubbish removal, totalling $22,800.00, which payments were without authority and for purposes unrelated to the legitimate interests of the plaintiff. (g) Unauthorised withdrawals or Payments I In or about December 1992 the first defendant caused $8,781.80 to be paid by the plaintiff to 'Eatons' in respect of building materials previously invoiced to Sydney Building Corporation Pty Ltd. II On 11 February 1993 the first defendant caused $24,000.00 to be withdrawn from the bank account maintained by the plaintiff without authority and for no purpose related to the legitimate interests of the first plaintiff. III The first defendant caused the following unauthorised payments to be made by the plaintiff for work contracted by Morgan Properties and North Shore Constructions Pty Ltd, or for work not undertaken: (i) $18,700.00: Ramco Plumbing. (ii) $19,553.50: Coralwood (Re: Roofing work). (iii) $25,000.00: B & D Contractors. (iv) $1100.00: Michael Coleman Fencing (v) $2,684.00: Soil. (vi) $3,667.00: Acme" 54 The plaintiff relied on Mr Pike's reports and evidence from some investors. The defendants did not give evidence. 55 I will deal with the claims seriatim.

(a) Unauthorised Withdrawals 56 On 25 March 1993, $384,684 was deposited into the Trust's bank account. These moneys had been received from the State Bank of South Australia and were borrowings by Messrs Braams and David Codling. The transaction between Braams and David Codling on the one hand, and the State Bank of South Australia on the other hand are complex, and were the subject of Foster AJ's judgment in Miric v Braams [2001] NSWSC 299. All the material available in this case suggests that the whole of the borrowings were made for the purpose of Braams and David Codling having an equity interest in the Trust for which they were to be issued 250 units. Mr Miric, who put his property on the line to secure the loan was to get 250 units for doing so. 57 The whole of the borrowings from the State Bank being capital funds of the Trust there was no warrant for them being paid out as they were by a series of cheques to Messrs Codling and Braams. Mr Pike's evidence shows that a total of $125,500.40 went out in this way. 58 Mr Stevens QC's submissions on 9(a) were mainly directed to there being no trust in respect of the moneys or a lack of evidence on the part of the plaintiff. 59 I have already disposed of the "no trust" argument. In my view, bearing in mind the lack of evidence on the defendants' side, the evidence of Mr Pike corroborated by the other witnesses whose affidavits I read for the plaintiff is sufficient evidence on which the plaintiff should succeed. 60 In my view this head of liability has been made out. 61 (b) Four cheques totalling $25,178 on the Trust's bank account were signed by Braams and were given to Mr Capizzi in February and March 1993. 62 Vince Capizzi had started work on the Balmoral project about June 1992 and from the time he started working paid all the costs associated with the demolition work then going on. The $25,178 appears to be payment to Mr Capizzi for work done before the plaintiff's incorporation. 63 Mr Stevens QC says that the obligation for payment of the work by Mr Capizzi was to be dealt with equally by Morgan Properties Pty Ltd and the nominee of Mr David Codling which was to carry out the work. 64 I have set out earlier the basic history of the construction of the restaurant building and it is not necessary to repeat it. 65 There does not appear to have been any doubt that Mr Capizzi did do work on the project. Answer 3.10 of the questions put to Mr Braams by Mr Pike (see PX02, Document B13) suggests that there was some documentation as to Mr Capizzi's claims but that it is voluminous and probably in the possession of the plaintiff. 66 The undated unexecuted draft deed at p 212 of DX11 shows that it was intended at least that Degotardi transfer all his interest in the project to Starvel but the draft deed says nothing about Starvel's responsibilities for the costs of the project which up to then had been borne by Degotardi or Morgan Properties. 67 It would seem that in the absence of such a covenant that there was no obligation on the plaintiff to pay the whole of the money to Mr Capizzi, but it seems to me that by clause 9 of the December 1992 agreement, it may well have been bound to pay him half. 68 Accordingly I would allow claim (b) in the sum of $12,589. 69 I should note at this stage that this whole exercise is extremely unsatisfactory. What should happen in this sort of case is that once it has been determined that there is a trust and that an officer of the trustee company has made unauthorised payments, there should be an account taken before the Master of all relevant dealings. As the Court of Appeal has said on many occasions (see eg Adams v Bank of NSW [1984] 1 NSWLR 285, 296), one cannot have part of an account; there must be a full account and all the relevant transactions between the parties must be examined. 70 However, by the time this case came to trial, all parties wanted to deal only with these discrete items as being the only items in dispute between them and so of necessity I have to deal with each bit by bit. 71 (c) On various dates in and about December 1992, Mr Pike's report shows that the first defendant caused payments to be made on behalf of the plaintiff totalling $12,000 to Maylena Pty Ltd. Maylena Pty Ltd is a concretor. It forwarded an invoice bearing date 31 January 1993 for the supply, placing and fixing of formwork, concrete and steel for $12,000. However, it was actually paid these moneys on 21 November 1992 ($2,000) and 1 December 1992 ($10,000). The $10,000 cheque was endorsed to Owdash Pty Ltd, why, no-one knows. 72 Mr Fiumara told Mr Pike that Maylena and Owdash had absolutely nothing to do with the Balmoral project at any time. There is no contrary evidence. It was open to the defendants to have told the Court how these payments could be justified, but they have contented themselves in their counsels' submission merely to say that Mr Pike did not make enough enquiries. 73 In my view there is sufficient there for me to find this was an unauthorised payment. 74 (d) On 29 March 1993, the first defendant caused the plaintiff to advance $50,000 to Mr Fiumara without specifying a term or rate of interest. Only $45,000 has been repaid to date and no interest has been paid. 75 Mr Fiumara is Mr David Codling's brother-in-law. He did a considerable amount of work on the project and was an investor. He says that in about April 1993, he was approached by David Codling and Mr Braams and asked whether he would sell his shares for $1,000 a share, $50,000 paid now and the balance "down the track". Mr Fiumara accepted that offer and was given a cheque for $50,000. A week later Messrs Codling and Braams said to him, "We have run out of money and need the $50,000. Can you let us have it back on loan?" Mr Fiumara said he only had $45,000 left. It would seem that $45,000 was paid over. Mr Fiumara considered that as he was never paid, he retained his shares. 76 That evidence shows that the payment was unauthorised. However, the loss is only $5,000 plus perhaps interest. Mr Stevens QC urges that no repayment be ordered because Mr Fiurama would have had a greater cross claim. However, this has got nothing to do with the situation, because the transaction should not have occurred at all with the Trust's money. Accordingly, leaving aside the matter of interest to later, $5,000 should be allowed. 77 (e) On various dates between December 1992 and May 1993, the first defendant caused payments to be made by the plaintiff to Braams Constructions Pty Ltd purportedly for labour and materials supplied to or on behalf of the plaintiff in the sum of $113,430.45 which were unauthorised and unrelated to the legitimate business interests of the plaintiff. 78 The defendants say that if any figure is to be allowed it would be $111,730.45 in accordance with Mr Pike's report. That sum also includes the items set out in 9(f). The defendants say that the invoices of Braams Constructions should be treated as proper business records and invoices met in conformity with their terms. They say that no complaint was made or issue taken until approximately November 1996 and nothing has been produced to show that the subject matter of the invoice was not used on the property. 79 There are great difficulties in working out what is legitimate charges by Braams Constructions for work done on the project and what is not. The defendants' submissions that one should accept Mr Braams' invoices at face value is very much weakened by the fact that there are obviously some duplications and the matter referred to in 9(f). 80 Doing the best I can, it seems to me that the $50,717 detailed in the document "Unauthorised Withdrawals and Misappropriation Summary of Evidence" furnished by Mr Pembroke SC giving details with reference to Part F of PX02 should all be allowed against the defendants as they are almost certainly duplications or suspect payments and absolutely no evidence has been given about them on behalf of the defendants. However, the balance of the $111,000 claimed has not been substantiated. 81 (f) In December 1992, the first defendant caused payments to be made by the plaintiff to himself trading as "Ready Set Go Rubbish Removals" purportedly as a hiring fee for a Bobcat earthmoving machine and for rubbish removal, which payments were unrelated to the legitimate interests of the plaintiff. I agree with the submission that this was a clear rort and the amount claimed, $18,840 should be allowed. 82 (g) This claim is under three headings, namely:

I $8,781.80 to be paid to a firm called Eatons in respect of building materials previously invoiced to Sydney Building Corporation Pty Ltd;

III $70,704.50 paid for work contracted by Morgan Properties and North Shore Constructions or for work not undertaken. 83 As to I, it seems to me that the defendants' submission is correct that the mere fact that the invoice was made out to a different builder matters very little if the goods were in fact delivered to the Balmoral site and used in the project. Most of the invoices do refer to a delivery address at Balmoral, and it seems to me, on the balance of probabilities, the plaintiff has not established that this was an unauthorised payment. 84 As to II, the allegation is that an unauthorised payment of $24,000 was made to Mr McMahon. 85 Mr Pike reported: "On 11th February 1993 $24,000 was withdrawn by bank cheque from Starvel Pty Ltd bank account and paid to Mr McMahon. "The payment appears to be unauthorised and was treated as a refund of unit holders monies. I have not confirmed with Mr McMahon the details, however, understand that he was always of the impression he paid $1,000 each for his 200 units and accordingly believe (sic) the $24,000 payment related to some other arrangement between Mr Braams and Mr McMahon." 86 Mr Stevens QC says this is total conjecture. 87 However, the fact remains that Mr McMahon was paid the $24,000 and there is just no explanation as to why he was paid it. 88 The payment called for comment. The plaintiff complained about it. The plaintiff has gone through the books and found no reason for the payment. The defendant has said nothing. The inference is that the payment was unauthorised. 89 As to the balance of the claim, I cannot find sufficient material to work out one way or the other whether they were authorised payments. The payments allegedly were made in connection with the Balmoral project, but a question appears to be whether they related to work for an earlier period of time. However, the words "or for work not undertaken" show that the whole of the claim is not in this area. In so far as there is a claim for work done on the project not paid for, I would be inclined to allow 50% for the reason given above. However, there is just such a paucity of evidence that I really cannot award any figure under this head. 90 Doing the arithmetic, the plaintiff is thus entitled to have the first defendant refund to it $229,806.40. 91 As to interest, the rule is that a person who has occasioned loss to a trust for breach of fiduciary duty usually pays interest at the commercial rate: Hagan v Waterhouse (1994) 34 NSWLR 308. I can see no reason for departing from this rule. Interest is thus payable at the court rate from February 1992 to present, a time of, say, 9 and one-third years. I calculate this using an average rate of 10.5% at $24,129.67 which rounded off, gives a verdict for the plaintiff for $253,936. 92 4. Section 86(1) and (2) of the Trustee Act provide as follows: "(1) Where a trustee commits a breach of trust at the instigation or request or with the written consent of a beneficiary, the Court may, if it thinks fit, make such order as to the Court seems just for impounding all or any part of the interest of the beneficiary in the trust estate by way of indemnity to the trustee or person claiming through the trustee; (2) The provisions of subsection (1) shall be deemed to empower the Court to impound all or any part of the interest of any beneficiary who receives any pecuniary benefit from the breach of trust." 93 There are a series of reasons why it is difficult to fit the case directly within the wording of s 86. One is that the first defendant was not a trustee in the strict sense: he was the controller of a company which was the trustee. Although "trust" and "trustee" are broadly defined in s 5 of the Trustee Act to include a trustee of a constructive trust, it is doubtful whether s 86 picks up such a fiduciary. 94 However, as is clearly recognised by all the commentators on the section, the legislation has merely re-enacted with some extensions the provisions under the general law. As Mr Pembroke SC submitted, whether one applies s 86 or the maxim that "A person entitled to share in a trust estate cannot take anything out of it, unless he makes good what he owes to the estate" (In re Rhodesia Goldfields Ltd [1910] 1 Ch 239, 247; Re Tolley (1972) 5 SASR 466, 472), the defendants are liable. 95 In that lastmentioned case, Walters J considered the authorities and said at p 472: "…if a trustee who is also a beneficiary commits a breach of trust, the other beneficiaries are entitled to a charge upon his beneficial interest in order to secure their claims against him for breach of trust. And he will not be allowed to receive any part of the trust estate to which he is entitled until he has made good his default. In other words, he can take no share out of the trust estate without making good to that estate the amount which he has misappropriated out of it. … "The theory underlying the rule for recoupment of the defalcations of a trustee from his beneficial interest is 'that the Court treats the trustee as having received his share by anticipation'."

The quotation is from the judgment of Cozens Hardy MR in Re Dacre [1916] 1 Ch 344, 347. 96 I have no difficulty with identifying the corporate defendants controlled by Mr Braams with Mr Braams himself. There is no doubt that some of the beneficial interests in the fund are vested in Mr Braams' corporations. 97 A more difficult question is should the Court where an officer of a trust corporation has breached his or her fiduciary duty to the corporation and who has a beneficial interest in the trust fund administered by the trust corporation suffer impounding of his or her interest in the fund in the same way as would occur if the individual was the trustee? 98 I have not found any case which actually deals with this proposition, a matter which is not completely surprising. As Kearney J, writing extra judicially said in his essay "Accounting for a Fiduciary's Gains in Commercial Contexts" in Finn Equity and Commercial Relationships (LBC, Sydney, 1987) at p 187: "The fiduciary relationship being a concept of equity, breach of fiduciary obligation attracts equitable relief of a personal or proprietary nature as may be appropriate to bringing the offending fiduciary to account." 99 Ordinarily, if a fiduciary has made an unconscionable gain to the detriment of the person to whom he or she owes a duty, then unless another equitable remedy is more appropriate, a constructive trust will be implied over the property gained. It seems to me that by analogy, both with the constructive trust remedy and with the impounding remedy for a trustee, that in these circumstances the beneficiary's interest should be impounded to meet the amount found to be owing to the Trust by the first defendant. 100 5. Paragraph 5 of the statement of claim sets out what the plaintiff says are the beneficial interests in the Balmoral Unit Trust. Although in the statement of defence of the first, second and third defendants there was a denial that paragraph 5 accurately set out the persons who constituted the unitholders, the plaintiff provided evidence to that effect and there was no contrary evidence. Accordingly the plaintiff is entitled to the declaration it seeks. 101 6. The allegation is that in March 2001, the first, second and third defendants presented to the Court "Any petition or other proceeding seeking relief by the dissolution or other termination of the Trust Fund" within the meaning of clause 15(b)(xv) of the Trust Deed." 102 The relevant provision of the deed reads as follows: "(xv) In the event that any Unit holder acting in any capacity whether as creditor or otherwise presents to a Court any petition or other proceeding seeking relief by winding up dissolution or other termination of the trust fund on any ground whatsoever the Unit holder so acting shall be deemed on the day prior to the presentation of the petition or institution of the other proceeding to have served a transfer notice in respect of all Units owned by him and to have fixed as the fair value thereof an amount to be determined by the Auditor of the Trust Fund and if there is no such Auditor by a Chartered Accountant nominated for the purpose by the Trustee. The Auditor or Chartered Accountant in making his determination shall be deemed to be acting as an expert and not as an arbitrator and accordingly the provisions of the said Arbitration Act shall not apply but he shall consider any evidence as to value which may be presented to him by the deemed proposing transferor or by the Trustee. The costs of obtaining the determination shall be borne by the deemed proposing transferor and may be deduced from the proceeds of sale." 103 PX08 is an amended notice of motion dated 30 March 2001 filed by the first three defendants which seeks in order 2: "Order that Hunters Beach Investments Pty Ltd (a) be removed as trustee of the Balmoral Unit Trust ("the Trust") and be wound up; (b) a liquidator be appointed to the said company to wind up its affairs and those of the Trust; (c) alternatively a receiver be appointed of the said company and the Trust." 104 Accordingly it would appear clear that the condition referred to in paragraph (xv) has occurred. The notice of motion was filed on behalf of the first, second and third defendants, and accordingly it affects the units of the member of the defendants' group who holds the units. Accordingly, the plaintiff is clearly entitled to the Co v Dougall relief it seeks. 105 No argument was presented that clause 15(b)(xv) in any way breached any rule of public policy as to access to the courts; cf Permanent Trustee Co v Dougall (1931) 34 SR (NSW) 83; Re Gaynor [1960] VR 640. 106 7. The plaintiff seeks judicial advice as to how it should proceed in the light of clauses 25A and 25B of the trust deed. The provisions of 25A have clearly been breached, though the breach has occurred as the plaintiff submits because of the management of the first defendant. 107 The Court would normally advise that the beneficiaries are entitled to have the deed complied with so that a new company should be formed, a meeting of unitholders held, and the trust property transferred to the new trustee. 108 However, the beneficiaries are now all identified and are sui juris. It may be that they would consider this to be a complete waste of time and money. 109 Accordingly I will advise the plaintiff by order that:

(1) It would be justified in seeking the advice of counsel of at least seven years' standing as to what courses it might pursue;

(2) It would be justified in convening a meeting of the unitholders to take advice as to which course it should pursue and that if three-quarters of the members are of the view that a certain course should be pursued, it would be justified in pursuing that course with further consideration reserved. 110 8. There seems to be little dispute on the evidence that the second and third defendants knowingly assisted, participated in and benefited by the first defendant's breach of fiduciary duty. 111 The upshot is that the plaintiff is entitled to virtually all the relief it seeks. I will publish these reasons and then stand the matter over for counsel to consider their implications. The matter may be mentioned before me for the purpose of handing up short minutes on 19 July 2001 at 9.30 am; if that day is inconvenient, counsel may select some other day provided that adequate notice is given to my Associate. ***************

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