Infigo II Pty Ltd v Linmas Holdings Pty Ltd

he correct legal characterisation of what occurred - That characterisation cannot be determined by the label or description given to the relevant conduct by the parties to it. Rather, it depends upon whether the conduct or action was, or must be taken to have been, undertaken in the proper execution of the trust TRUSTS - Reimbursement and exoneration - A trustee's right of reimbursement and right of exoneration distinguished - A right of reimbursement may be subrogated to by both "trust creditors" and creditors of the trustee in its personal capacity - Where the trustee has a right of exoneration, only a trust creditor may have recourse to trust assets to meet the liability by subrogating the trustee's right of indemnity CONSTRUCTION - The capacity in which a party contracts is determined objectively in the same manner as the contract itself is construed - Post-contractual evidence may not be used to identify the parties to a contract which is wholly written and which is not said to be a sham or to involve fraud or sought to be rectified in equity Legislation Cited: Conveyancing Act 1919 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: ACES Sogutlu Holdings Pty Ltd (in liq) v Commonwealth Bank of Australia (2014) 89 NSWLR 209; [2014] NSWCA 402 Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 BH Australia Constructions Pty Ltd v Kapeller (2019) 100 NSWLR 367; [2019] NSWSC 1086 Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557; [1998] HCA 26 Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 268 CLR 524; [2019] HCA 20 Clay v Clay (2001) 202 CLR 410; [2001] HCA 9 Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226; [1998] HCA 4 EMU20 v Anderson [2020] FCA 1585 Enertek AU Pty Ltd v 8StarEnergy Pty Ltd [2022] VSC 544 General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388 Huntley Management Ltd v Timbercorp Securities Ltd (2010) 187 FCR 151; [2010] FCA 576 In re Richardson; Ex parte The Governors of St Thomas's Hospital [1911] 2 KB 705 In re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 Ingram v Inland Revenue Commissioners [1997] 4 All ER 395 Ingram v Inland Revenue Commissioners [2000] 1 AC 293 Ingram v Y Twelve Pty Ltd [2013] NSWSC 1777 Jones v Dunkel (1959) 11 CLR 298; [1952] HCA 8 Kelly v Mina [2014] NSWCA 9 Langdon v Gruber [2001] NSWSC 276 Leximed Pty Ltd v Morgan [2016] 2 Qd R 442; [2015] QSC 318 MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911 Martello v Walton (Supreme Court (WA), Ipp J, 4 February 1999, unrep) McCausland v Surfing Hardware International Holdings Pty Ltd [2013] NSWSC 902 Minister Administering National Parks and Wildlife Act 1974 v Halloran [2004] NSWCA 118; (2004) 12 BPR 22,391 Octavo Investments Pty Ltd v Knight (1978) 144 CLR 360; [1979] HCA 61 P T Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 Puglia v Basol [2005] NSWSC 1271 Re Trautwein; Richardson v Trautwein (1944) 14 ABC 61 Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156 Suncorp Insurance and Finance v Commissioner of Stamp Duties [1998] 2 Qd R 285 TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291; (2013) 31 ACLC Williams v Lloyd (1934) 50 CLR 341; [1934] HCA 1 Texts Cited: Scott Austin, and William Fratcher, Scott on Trusts, (4th ed, 1988, Little, Brown and Company) Category: Principal judgment Parties: Infigo II Pty Ltd (Plaintiff) Linmas Holdings Pty Ltd (First Defendant) 2041House Pty Ltd (Second Defendant) Benjamin Jacob Hilmer (Third Defendant) Representation: Counsel: S Philips (Plaintiff) D Hand (Defendants)

Solicitors: Vincent Young Lawyers (Plaintiff) Chedid Storey Legal (Defendants) File Number(s): 2023/192930

JUDGMENT (REVISED)

1. HIS HONOUR: The application before the Court is an application by the plaintiff for freezing orders.
2. The plaintiff is a building contractor. The first defendant (LH) is a company which, for a period of approximately 18 months between 30 August 2021 and 23 February 2023, was the trustee of a discretionary trust known as the Linmas Trust (the Trust). The second defendant (House) replaced LH as trustee of the Trust from 23 February 2023. The third defendant (Mr Hilmer) is the sole director and shareholder of each of LH and House.
3. The proceedings were commenced in urgent circumstances by a summons filed on 16 June 2023 in which the plaintiff sought, inter alia, freezing orders against LH and Mr Hilmer and an asset preservation order against House.
4. On 4 July 2022, the plaintiff entered into a construction contract with LH for the refurbishment of a property at Balmain (property). The construction contract on its face indicates that LH entered into the contract in its own right rather than as trustee of the trust.
5. On 9 December 2022, the plaintiff lodged a payment claim on LH. On 16 January 2023, it made an adjudication application. On 20 February 2023, the adjudicator made a determination in favour of the plaintiff in a sum, together with adjudication expenses. On 3 March 2023, an adjudication certificate was issued, and the certificate was filed by the plaintiff in the District Court and judgment entered in an amount of $454,136.48 (judgment debt). The plaintiff sought to enforce payment of that judgment debt. The plaintiff became aware on or after 9 June 2023, that the title to the property had been transferred from LH to House for no apparent consideration.
6. The plaintiff, by its initial summons, sought final relief, including a declaration pursuant to s 37A of the Conveyancing Act 1919 (NSW) (Conveyancing Act) that the transfer of the property was made with the intent to defraud creditors, that it was void ab initio such that the transfer must be set aside with related orders that Mr Hilmer sign any necessary documents to re-transfer the title of the property from House to LH.
7. On 16 June 2023, Hammerschlag CJ in Eq made the requested freezing orders against LH and Mr Hilmer (up to a value of $453,807.31) and asset preservation orders (against House).

Issues

1. The issues for consideration which the parties effectively agree in relation to the freezing orders include whether the plaintiff has a prima facie case for final relief and whether the balance of convenience and questions of hardship and related factors warrant a continuation of the freezing orders.
2. The defendants claimed that the plaintiff in its ex parte application before Hammerschlag CJ in Eq did not sufficiently draw to the attention of his Honour that no money claim was made against Mr Hilmer by the plaintiff and that the plaintiff did not have a claim as would justify the freezing of Mr Hilmer's assets.
3. In the circumstances of the developments of the matter, whether or not the initial freezing order ought to have been made against Mr Hilmer whilst raised is something that I think need not be further dwelt upon. Effectively, Mr Philips renewed his application for freezing orders, and the immediate issue is whether in light of the circumstances now prevailing, freezing orders ought to be made.
4. The fact that the Trust existed from on or about 31 August 2021, whilst seemingly a surprise to the plaintiff, does not seem to me to be seriously in dispute.
5. Further, the defendants acknowledge that the property is subject to rights arising from the current contract for sale and other relevant matters. Additionally, they do not dispute that the expected proceeds to be received on settlement will be an asset of the Trust.

Points of claim

1. Because of the developments in the matter which I have outlined above, it is important to understand how the plaintiff puts its case for final relief.
2. Submissions in the matter ensued yesterday at various points. I was concerned to understand the material facts or considerations said to underpin the plaintiff's claim for final relief.
3. The starting point for that is the points of claim document (PCD).
4. The plaintiff contends that: when Linmas entered into the Construction Contract, in substance, Linmas did so in its capacity as trustee of the Linmas Trust, or for and on behalf of (as undisclosed agent for) the Trust, and 2 therefore that the Construction Contract was, in substance, a contract between the Plaintiff and the Linmas Trust: PCD [2].
5. I will set out below the facts and circumstances on which the plaintiff relies (PCD [4]-[28]): 4. On 30 August 2021, a Trust Deed was executed (Trust Deed) which: (a) established the Linmas Trust (Trust), the Appointor and Specified Beneficiary of which is the Third Defendant (Hilmer) who is the sole shareholder and director of Linmas; and (b) appointed Linmas as the Trustee of the Trust. 5. By clause 11.11 of the Trust Deed, Linmas, as Trustee of the Trust, was indemnified out of the Trust Fund for all debts, damages and other liabilities incurred relating the execution of its powers and obligations under the Trust Deed. 6. On around 25 October 2021, Linmas entered into a contract to purchase the Property as trustee of the Trust. 7. As at 4 July 2022 (the date of the Construction Contract) Linmas held its interest in the Property on trust for the Trust (although this was not disclosed to Infigo). 8. On 4 July 2022 Linmas also entered into a "back to back" construction contract with itself, as trustee of the Trust (Back to Back Contract), which contract was relevantly in identical terms as the Construction Contract except that: (a) the Principal was Linmas as Trustee for the Linmas Trust; (b) the Contractor was Linmas; and (c) the lump sum payable by Linmas was $2,285,204.00 (precisely $100,000 more than the lump sum payable by Linmas as Principal under the Construction Contract). 9. By entering into the Back to Back Contract, Linmas: (a) promised (to the Trust) to undertake (in effect for a fee of $100,000) the same construction work with respect to the Property that Infigo was obliged to perform for Linmas under the Construction Contract; and (b) purported to (falsely) represent to itself (as Trustee of the Trust) that it had the skill and expertise required to perform and execute the whole of the construction work required under the contract, with the knowledge that it had no such skill and expertise and, as a result, had entered into the Construction Contract with the Plaintiff for the performance of such work. 10. The existence of the Back to Back Contract was not disclosed to Infigo. 11. As at 4 July 2022, and at all material times since, Linmas was not registered for GST, did not conduct any construction or other business and did not had sufficient, or any, skill or expertise necessary to undertake any of the construction work required under the Back to Back Contract. 12. On 29 September 2022, a payment of $892,411.61 was made to the Plaintiff pursuant to the Construction Contract from the bank account of the Trust. 13. There is no evidence that Linmas, as trustee of the Trust, or the Trust itself, as Principal, or otherwise, made any payments to Linmas, as Contractor, pursuant to the under the Back to Back Contract. 14. On 17 October 2022, Linmas, in its (disclosed) capacity as Trustee of the Trust, entered into a Management Agreement with Coliv Service Co Pty Ltd (Coliv) (Management Agreement) by which agreement Linmas disclosed that the Trust was the owner of the Property and Coliv agreed to provide management services to the Trust with respect to the Property. 15. In these circumstances, the entry into the Back to Back Contract by Linmas, amounted, in substance, to a sham transaction, the purpose of which was to ensure that Linmas did not disclose to Infigo that it was, in substance, entering into the Construction Contract for and on behalf of, and as trustee and agent for, the Trust and that the real and proper Principal under the Construction Contract was, in substance and fact, the Trust. 16. On 9 December 2022, Infigo lodged payment claim on Linmas for $747,575.18 pursuant to the Building and Construction Industry Security of Payments Act (SOPA). 17. On 16 January 2023, Infigo lodged an adjudication application pursuant to SOPA. 18. In early February 2023, the solicitor for Linmas was instructed that, in circumstances where Linmas and Infigo were in dispute with respect to the Construction Contract, Hilmer, as the appointer under the Trust, wished to appoint a new trustee of the Trust. 19. On 20 February 2023, the SOPA adjudicator released a determination in favour of Infigo against Linmas for $406,990.10 plus adjudication expenses of $41,118. 20. On 23 February 2023, 3 days after the release of the adjudicator's determination, the Second Defendant (2041 House) was first registered (with Hilmer as the sole shareholder and director) and Linmas was removed as trustee of the Trust, and was replaced by 2041 as Trustee of the Trust (Replacement of Trustee). 21. On 13 March 2023, 2041 House, as the new trustee of the Trust, sought an assessment of stamp duty payable on the transfer of the Property from Linmas to 2041 House. 22. On 18 April 2023, 2041 House was advised that the stamp duty payable would be $50 and on the same day the process for transferring title in the Property from Linmas to 2041 House was initiated. 23. On 15 May 2023, 2041 House exchanged a contract for sale of the Property to an entity related to Co-Liv (Co-Living HeadCo Pty Ltd) (Purchaser) for a total purchase price of $15,100,000 (which included a 10% deposit of $1,510,000). 24. On 7 June 2023, Infigo's solicitors asked Linmas (through its solicitor) to provide an undertaking to give not less than 14 days' written notice if Linmas intended to dispose of or deal with its assets (including the Property). 25. On 9 June 2023 Linmas transferred the Property, without any consideration, to 2041 House (Transfer). 26. On 14 June 2023, the solicitor for Linmas declined to provide the requested undertaking and asserted that Linmas was not taking any steps to keep funds out of reach of Infigo. 27. On 15 June 2023, Infigo became aware for the first time of the Transfer. 28. On 16 June 2023, the Defendants were informed that FIRB approval had been obtained by the Purchaser for its purchase of the Property, with the effect that the date for completion of the sale of the Property became 29 June 2023.

Voidable alienation principles

1. Section 37A of the Conveyancing Act is in the following terms: 37A Voluntary alienation to defraud creditors voidable (1) Save as provided in this section, every alienation of property, made whether before or after the commencement of the Conveyancing (Amendment) Act 1930, with intent to defraud creditors, shall be voidable at the instance of any person thereby prejudiced. (2) This section does not affect the law of bankruptcy for the time being in force. (3) This section does not extend to any estate or interest in property alienated to a purchaser in good faith not having, at the time of the alienation, notice of the intent to defraud creditors.
2. There is considerable caselaw analysis on the provisions of s 37A. I have been referred to the decision of Barrett J (as his Honour then was) in Puglia v Basol [2005] NSWSC 1271 (Puglia) and Stevenson J in Ingram v Y Twelve Pty Ltd [2013] NSWSC 1777 (Ingram). For the purposes of this application, I have had regard to those decisions. In particular, I call to mind the following principles.
3. First, there must be an alienation: Puglia at [7]. Second, it must be made with the intent of defrauding creditors Puglia at [11]. The section by its terms excludes property alienated to a purchaser in good faith not having at the time of alienation notice of the intent to defraud creditors.
4. An alienation at its core involves the transfer of value from one person to another. It is ordinarily understood as applying only to a transfer of property effected by the action of the transferor, as distinct from a transfer by involuntary operation of law: see Cardile v LED Builders Pty Ltd (1999) 198 CLR 380; [1999] HCA 18 at 408 per Gaudron, McHugh, Gummow and Callinan JJ.
5. A transfer of real property from party A to party B is an alienation.
6. In s 37A, an intent to defraud creditors, whilst suggestive of some form of fraud or deceit, does not require proof of all the elements of the tort of deceit: Langdon v Gruber [2001] NSWSC 276 at [54] per Austin J. I note the following: 1. The onus of proof of intent to defraud is on the party alleging the intent: Williams v Lloyd (1934) 50 CLR 341; [1934] HCA 1 at 372 per Dixon J (as his Honour then was) (Evatt and McTiernan JJ agreeing). 2. The intention of the transferor may be gathered from the surrounding circumstances as disclosed by the evidence: Puglia at [12] citing Cannane v J Cannane Pty Ltd (in liq) (1998) 192 CLR 557; [1998] HCA 26 (Cannane) at 566 [12] per Brennan CJ and McHugh J. 3. It is not necessary to prove the actual content of the relevant transferor's mind: Puglia at [12]. 4. It is not necessary to bring actual proof that the debtor had in its mind an intention to defraud creditors. If it appears from evidence in all the circumstances that the transfer might be expected to have that effect, and has had that effect, the Court will attribute the necessary fraudulent intention to the debtor: Langdon at [54] citing Re Trautwein; Richardson v Trautwein (1944) 14 ABC 61; P T Garuda Indonesia Ltd v Grellman (1992) 35 FCR 515 at 523-524 per Wilcox, Gummow and von Doussa JJ; Cannane at 566. 5. Inferences may be drawn from the circumstances or forensic decisions by the parties regarding the calling of evidence: e.g. Jones v Dunkel (1959) 11 CLR 298; [1952] HCA 8 at 321 per Windeyer J.

Submissions

1. Mr Philips' argument proceeded on the basis that at a simple level there was an alienation, and the carve-out under s 37A(3) did not apply because House was not a purchaser as defined.
2. Essentially, his case is that, or was initially, that an intent to defraud creditors was formed by LH on or about 20 to 23 February 2023 and continued until the time the property was transferred to House.
3. The defendants' submissions, whilst expressed in some detail, may be summarised simply.
4. Essentially the defendants say that: 1. LH entered into the construction contract in its own capacity without entitlement to be indemnified from the Trust assets. 2. The judgment debt is not a debt of the Trust. 3. The necessary intent to defraud the plaintiff as a creditor cannot be demonstrated. 4. In any event, the plaintiff was not thereby prejudiced.
5. The crucial aspect of the prima facie case (whether it is properly considered as being the case in chief or case in reply) is whether there was an intent to defraud creditors.
6. Mr Philips submitted that the intent arose in two stages, being formed as noted above on or about 20 or 23 February 2023, and the second stage being at the time of the transfer on 9 June 2023.
7. Mr Philips developed submissions to demonstrate in accordance with [2] of the PCD that the construction contract was entered into by LH in its capacity as trustee of the Trust.
8. A number of the matters he referred to predated the construction contract, a number postdated the construction contract.
9. I raised the question with Mr Philips as to what material could regard be had to in construing the construction contract and whether I could take into account the material that postdated the construction contract.
10. I will address this further below. Suffice it to say at this point that the various indicia that Mr Philips outlined seemed to go to two issues. First, whether LH in its own capacity or in its capacity as trustee of the Trust was the contracting party to the construction contract, and, secondly, whether there was any intent to defraud.
11. The indicia on which Mr Philips relied are as follows: 1. First, there was no disclosure to the plaintiff that LH was a trustee. Mr Philips noted that the trust deed includes powers to the effect that the trustee can acquire property, engage in property development, renovate a property and enter into contracts: cll 10.4.1, 10.4.6 and 10.4.7. LH, he says, was not prevented from entering into a construction contract in its capacity as trustee of the Trust. He stated in fact it should have been entering into the contract in its capacity as trustee. 2. Secondly, the back to back contract contained recitals to the effect that LH in its private capacity (not as trustee) had the skill and expertise to execute all the requirements of the construction contract and to carry out the works and that that was inaccurate because LH did not have the relevant expertise to carry on any construction business, let alone substantial construction work. 3. Thirdly, the fact that the construction contract and the back to back contract were entered into contemporaneously and the back to back contract was not disclosed to the plaintiff. 4. Fourthly, the fact that LH was not registered for GST. 5. Fifthly, on 29 September 2022, the fourth progress payment, and at that point the largest, progress payment ($892,411) was made to the plaintiff in respect of construction works and was paid from an account in the name of the Trust. 6. Sixthly, on 17 October 2022, the trustee of the Trust entered into a management agreement in relation to the property with an entity which is related to the ultimate purchaser of the property, and the existence of a management contract was in fact disclosed by LH as being in the name of the trust. Mr Philips said the relevance of that was, or is, that it was in counter distinction to what happened in relation to the construction contract. Essentially, he submits that there was no need for the existence of the Trust not to be disclosed to the plaintiff or for there to be some sort of back to back arrangement in place. He says that there is no need for the back to back arrangement purportedly entered into between LH as trustee and LH in its personal capacity, and that it was unnecessary, and it was a legal fiction or a sham. 7. Seventhly, within three days after the adjudication determination, House was incorporated and appointed as a new trustee of the Trust. 8. Eighthly, and lastly, the intent to defraud continued to subsist at the time of the transfer.

Determination

1. In terms of the claim for final relief, there does not, at least at this stage, appear to be any serious issue that there was an alienation, nor that House was not a purchaser for valuable consideration.
2. Thus, the critical issue for the plaintiff's announced s 37A case is whether there was an intent to defraud by the transfer on 9 June 2023.
3. Mr Philips, in his submissions, certainly during various parts of the hearing, essentially indicated that the intent to defraud was formed on or about 23 February 2023. His reference to and reliance upon indicia clearly predated that and much of it focussed upon the entry into the construction contract.
4. The capacity in which a party contracts, or is given rights or assumes or becomes subject to obligations or liabilities under a contract, must be determined objectively in the same manner as the contract itself is construed: see Huntley Management Ltd v Timbercorp Securities Ltd (2010) 187 FCR 151; [2010] FCA 576 (Timbercorp) at [53] per Rares J.
5. That requires the Court to consider what a reasonable person in the position of the parties would have understood as the meaning conveyed by the words in which they expressed their bargain. Normally, that process requires consideration not only of the text but also of the surrounding circumstances known to the parties and the purpose and object of the transaction: Timbercorp at [53].
6. In addition, the parties to a contract can seek to identify the nature of their relationship or the capacity in which the party contracts. However, those characterisations are not determinative themselves of the true nature of that relationship or capacity. Parties cannot deem their relationship or the capacity in which a party contracts to be something that it is not. The substance and the effect of the documents construed in their context is the critical determinant of the true nature of the parties' relationship and the rights, obligations and liabilities it creates: Timbercorp at [57]-[58].
7. In the case of a contract, which is wholly written, and which is not said to be a sham or to involve fraud or sought to be rectified in equity, it is said that post-contractual evidence may not be used to identify the parties: BH Australia Constructions Pty Ltd v Kapeller (2019) 100 NSWLR 367; [2019] NSWSC 1086 at [90] per Leeming JA.

Costs

1. In relation to costs, my order is that the plaintiff pay the defendants' costs of and incidental to the application on the ordinary basis.
2. Pursuant to r 42.7 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), costs do not become, unless the Court orders otherwise, payable until the conclusion of the proceedings. I am not sufficiently persuaded that an order should be made that the costs are payable forthwith.
3. I consider that the ordinary rules should apply and that, pursuant to r 42.7(2), the costs do not become payable until the conclusion of the proceedings.
4. In those circumstances, the Court: 1. Dismisses the application for the continuation of the freezing orders and discharges the freezing orders with immediate effect. 2. Orders the plaintiff to pay the defendants' costs of and incidental to the application on the ordinary basis, as agreed or assessed, such costs not to be payable until the conclusion of the proceedings, in accordance with r 42.7(2) UCPR. 3. Stands the matter over to the Equity Registrar at 9:30am on Monday, 17 July 2023.

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: 03 July 2023