[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
Source
Original judgment source is linked above.
Catchwords
[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 6398 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[2010] FCA 576
In re Richardson[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(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 TrautweinRichardson v Trautwein (1944) 14 ABC 61
Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238(2013) 31 ACLC
Williams v Lloyd (1934) 50 CLR 341
Judgment (10 paragraphs)
[1]
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)
[2]
Solicitors:
Vincent Young Lawyers (Plaintiff)
Chedid Storey Legal (Defendants)
File Number(s): 2023/192930
[3]
JUDGMENT (REVISED)
HIS HONOUR: The application before the Court is an application by the plaintiff for freezing orders.
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.
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.
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.
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.
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.
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).
On 21 June 2023, the matter was returnable before me as Duty Judge. The orders previously made were (by consent) in substance continued to allow the defendants an opportunity to serve evidence on which to challenge the orders and for the plaintiff to reply. The matter was stood over to 26 June 2023.
[4]
Issues
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.
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.
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.
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.
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.
[5]
Points of claim
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.
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.
The starting point for that is the points of claim document (PCD).
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].
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.
[6]
Voidable alienation principles
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.
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.
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.
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.
A transfer of real property from party A to party B is an alienation.
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.
[7]
Submissions
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.
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.
The defendants' submissions, whilst expressed in some detail, may be summarised simply.
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.
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.
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.
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.
A number of the matters he referred to predated the construction contract, a number postdated the construction contract.
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.
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.
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.
[8]
Determination
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.
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.
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.
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.
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].
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].
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.
[9]
Costs
In relation to costs, my order is that the plaintiff pay the defendants' costs of and incidental to the application on the ordinary basis.
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.
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.
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.
[10]
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
On 26 June 2023, the defendants served significant material which certainly from the plaintiff's perspective changed the complexion of the case. It appears this is the first time that the plaintiff became aware that the defendants contended that a trust was in existence and that House had replaced LH as trustee of the Trust.
Counsel for the plaintiff, Mr Philips, sought revised orders which were embodied in short minutes of order marked "MFI-1". In substance, Mr Philips did not seek the continuation of the asset preservation order, but instead sought freezing orders against LH and House (instead of Mr Hilmer) but limited in quantum to the amount of $453,807.31.
The hearing of the matter was progressed to some degree on 26 June 2023. However, in circumstances in which counsel for the plaintiff had only recently been made aware of the trust claims, he sought somewhat to adapt his argument regarding his claim for relief.
In those circumstances, to attempt to fairly balance the interests of the parties, by giving the plaintiff having an opportunity to more particularly articulate its case and the defendants having an opportunity to reflect, I directed the plaintiff to prepare points of claim outlining its claim in respect of the final relief and gave the defendants an adequate opportunity to consider that.
The matter was adjourned until yesterday. Mr Philips provided points of claim which I will refer to below. Some additional evidence was provided by both sides, and I sat later than usual yesterday to attempt to complete the hearing of the matter. In light of a number of difficult issues that arose, I indicated that I would reflect on the matter overnight and deliver judgment this morning.
Part of the context of the urgency to deliver a judgment immediately is the fact that some of the material disclosed by the defendants revealed that on 15 May 2023, House had entered into a contract to sell the property for $15.1 million, which contract is due for settlement today.
There are curiosities about the matter, and I can understand at least from the plaintiff's perspective that some of the events which occurred may well in its mind have aroused suspicion.
As submissions progressed during the hearing yesterday, I detected at times some shift in the way that Mr Philips put his submissions. I do not suggest that that was untoward. In my estimation, he was simply attempting his best to refine and articulate the plaintiff's case.
In seeking to understand the plaintiff's claim for final relief, or ultimate relief, I sought to engage with the contention in the PCD that LH entered into the construction contract "in substance" in its capacity as trustee for the Trust or for and on behalf of (as undisclosed agent for) the Trust.
There was some debate between myself and Mr Philips regarding whether what Mr Philips was contending in the PCD was his case in chief or effectively a reply. To ensure that Mr Philips had a fair opportunity to outline his case I indicated that I was prepared to view the PCD either as points of claim or, alternatively, as a reply to a foreshadowed defences that the property was held on trust and that because the parties contracted on a particular basis, there would be no recourse to the trust assets by LH in performance of the contract.
A purchaser is defined under the Conveyancing Act as being a purchaser for valuable consideration: s 7.
Valuable consideration does not include a nominal consideration in money: s 7.
The defendants say that cl 49(9) of the standard terms, when read with the description of LH, demonstrates that the construction contact was entered into by LH in its own right. Mr Hand notes that the construction contract was entered into by LH using the ABN for LH and not the ABN of LH as trustee of the Trust.
In addressing the plaintiff's argument that the construction contract was entered into by LH in its capacity as trustee of the Trust in order to underpin the arguments that the transfer of the property was a fraud on creditors it is relevant to have regard to the principles that I have outlined above.
The intention of the parties ordinarily in relation to a written contract is construed by reference to the terms of the contract, in particular, in accordance with the principles above.
The subjective intention of the parties will be relevant if there is a claim for rectification of a contract. However, Mr Philips did not foreshadow any claim for rectification of the construction contract.
No attempt has been made to adduce evidence that the parties jointly agreed to enter into the construction contract on the basis that LH was contracting in its capacity as trustee of the Trust rather than its own personal capacity.
Mr Philips did not, at least initially, embrace any suggestion that there was a misleading and deceptive conduct case in relation to entry into the construction contract. However, late yesterday, he did embrace the proposition that there is a degree of complaint by the plaintiff about being misled.
There are unusual and very curious features about various aspects of this case. The notion that a corporate entity in its personal capacity and in its capacity as a trustee can enter into a contract with itself as two separate personalities is unconventional.
At common law, there must be at least two parties to a contract. A party cannot contract with a nominee for itself or with its own agent, if that agent is contracting with its principal in that capacity and two agents of the same principal cannot contract with each other: Leximed Pty Ltd v Morgan [2016] 2 Qd R 442; [2015] QSC 318 (Leximed) at [21]-[23] per Philip McMurdo J (as his Honour then was) citing Ingram v Inland Revenue Commissioners [1997] 4 All ER 395 at 423 per Millett LJ (as his Lordship then was); Ingram v Inland Revenue Commissioners [2000] 1 AC 293 at 305 per Lord Hoffman (Lord Browne-Wilkinson at 298, Lord Steyn at 399, Lord Clyne at 306 agreeing); Clay v Clay (2001) 202 CLR 410; [2001] HCA 9 at 434 [51] (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ).
A trustee, in its personal capacity and in its capacity as a trustee, remains the same legal person. Except as permitted by statute, whilst a trustee can contract in two different capacities, it cannot contract with itself. The assumption that a trustee in its personal capacity and in its trustee capacity are different persons is false: see MacarthurCook Fund Management Ltd v Zhaofeng Funds Ltd [2012] NSWSC 911 at [117] per Hammerschlag J (as the Chief Judge then was) citing Minister Administering National Parks and Wildlife Act 1974 v Halloran [2004] NSWCA 118; (2004) 12 BPR 22,391 (Halloran) at [54] per Bryson JA (Spigelman CJ and Ipp JA agreeing) (see also Suncorp Insurance and Finance v Commissioner of Stamp Duties [1998] 2 Qd R 285 at 305-306 per Davies JA - with whom Fryberg J agreed - which is referred to in Halloran at [54]); Leximed at [22].
The proposition in the PCD that LH contracted as an undisclosed agent for itself as trustee of the trust is also curious.
A legal person cannot act as agent for itself: see Martello v Walton (Supreme Court (WA), Ipp J, 4 February 1999, unrep) at 29 per Ipp J (as his Honour then was); McCausland v Surfing Hardware International Holdings Pty Ltd [2013] NSWSC 902 at [578] per Slattery J.
The claim for relief that LH entered into the construction contract in its capacity of trustee for the Trust in light of the above authorities seems doubtful.
However, on reflection, it seems to me that the more specific issue is not whether LH was nominated on the contract as a contracting party and positively not as trustee of any trust, but rather whether the entry into the contract was in the course of the trust business and, in particular, whether the liabilities under it were incurred in the proper execution of its duties and powers under the Trust.
A trust is not a legal person and, subject to statutory exceptions, has no separate legal personality from the trustee: ACES Sogutlu Holdings Pty Ltd (in liq) v Commonwealth Bank of Australia (2014) 89 NSWLR 209; [2014] NSWCA 402 (ACES Sogutlu Holdings Pty Ltd) at [16] per Leeming JA (Beazley P - as her Excellency then was - and Macfarlan JA agreeing). Rather, a trust is a relationship comprising various rights and obligations, personal and proprietary, between trustee, beneficiaries and trust property: Kelly v Mina [2014] NSWCA 9 at [103] per Leeming JA (Ward JA - as the President then was - agreeing).
A trustee is personally liable for both debts and liabilities incurred in administration of a trust and those incurred in its personal capacity: ACES Sogutlu Holdings Pty Ltd at [16].
If a trustee, acting within its powers, incurs a liability to a third party in the course of the administration of the trust, although the trustee is generally personally liable to the third party, it is entitled to have recourse to trust assets by way of an indemnity: Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226; [1998] HCA 4 (Buckle) at [47].
The trustee's ability to have recourse to trust assets consists of a right of reimbursement and a right of exoneration. If the trustee has discharged the liability out of his individual property he is entitled to reimbursement. If he has not discharged it, he is entitled to apply the trust property in discharging it, viz, he is entitled to exoneration: Buckle at [47] citing Austin Scott and William Fratcher, Scott on Trusts, (4th ed, 1988, Little, Brown and Company), vol 3A, s246.
If a contract is not properly entered into by a trustee (i.e. not in the course of the administration of the trust) the trustee cannot perform the contract using trust assets.
In the event of insolvency, so called "trust creditors" cannot enforce a "trust debt" by execution levied upon trust assets: see General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388 at 389 per McPherson J (as his Honour then was). They can, however, be subrogated to the trustee's right of indemnity and have recourse to trust assets indirectly: Octavo Investments Pty Ltd v Knight (1978) 144 CLR 360; [1979] HCA 61 at 370 per Stephen, Mason, Aickin and Wilson JJ.
The distinction between the right of reimbursement and exoneration is important. Where the trustee has met a trust liability out of their personal funds, their right of reimbursement may be subrogated to by both "trust creditors" and creditors of the trustee in its personal capacity: In re Suco Gold Pty Ltd (in liq) (1983) 33 SASR 99 at 107-108 per King CJ (Matheson J agreeing). On the other hand, 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: In re Richardson; Ex parte The Governors of St Thomas's Hospital [1911] 2 KB 705 at 711 per Cozens-Hardy MR.
These principles were approved by the High Court in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth (2019) 268 CLR 524; [2019] HCA 20 (CCHWA) at [40], [44] per Kiefel CJ, Keane and Edelman JJ, at [92] per Bell, Gageler and Nettle JJ, and at [155], [156] per Gordon J. The purpose of the power of exoneration is not to exonerate the trustee's personal estate unconditionally. It is to exonerate the trustee's estate only from authorised liabilities incurred in the course of the business of the trust: CCHWA at [40] per Kiefel CJ, Keane and Edelman JJ.
The evidence does not disclose any particular reason as to why LH would have entered into the contract only in its own right. That seems to me to be a matter which is essentially to be explored by evidence.
Whether the trustee has incurred a liability in the performance of the trust depends upon that being the correct legal characterisation of what occurred. The 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: TFML Ltd v MacarthurCook Fund Management Ltd [2013] NSWCA 291; (2013) 31 ACLC 13-046 at [70] per Meagher JA (McColl and Macfarlan JJA agreeing).
Despite agonising over the matter, I do not think it is right for me to foreclose the possibility of a finding of whether trust assets would be available at the time that LH entered into the construction contract and, more particularly, later, and whether the creditors could be subrogated to the trustee's right of indemnity out of the trust assets.
I am prepared to proceed on the basis that the assertion that the critical element to be proved, namely the intent to defraud, should be viewed having regard to all the criteria that Mr Philips relies upon.
Proving intent is essentially an evidentiary exercise.
I bear in mind that in relation to findings regarding the entry into the construction contract all evidence is to be weighed according to the proof which it was in the power of one side to have produced and in the power of the other side to have contradicted: Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 at 970 per Lord Mansfield.
Whilst I have agonised over the matter considerably, and yesterday had very real doubts about the arguability of the plaintiff's prima facie case, as matters stand at the moment, I am just persuaded that there is an arguable prima facie case in the sense in which that is considered in the authorities: see, e.g. Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46 at [19] per Gleeson CJ and Crennan J, at [65]-[72] per Gummow and Hayne JJ.
I consider that the balance of convenience favours the plaintiff.
The plaintiff attempted various means of execution of the judgment debt. That was done without success. There is no evidence adduced in these proceedings as to what, if any, property LH presently has in its own right.
In particular, there is no evidence that if House was restrained to the extent of the amount claimed by the plaintiff, that it will suffer any particular prejudice. I am informed that a mortgage will need to be discharged. However, there is no evidence that the amount to be received on the settlement of the contract today was not sufficient or is not sufficient to cover the plaintiff's claim, and more particularly not dedicated to some other purpose that would give rise to a particular prejudice to House.
In relation to Mr Hand's submission that no prejudice for the purposes of s 37A has been shown, I do not accept that submission. The plaintiff's case is that there was an intent to defraud. Time will tell whether that case is ultimately made out or not. However, that is the plaintiff's contention. As such, if the plaintiff's case is accepted, trust assets would have been available to the plaintiff in the case of any claim made under the contract that is arguably prejudiced for the purposes of this s 37A case.
The balance of convenience is not considered without regard to the strength of the applicant's prima facie case. A weak prima facie case may tip the balance of convenience against the grant of an injunction just as a strong prima facie case may have the opposite effect: see EMU20 v Anderson [2020] FCA 1585 at [36] per Besanko J citing Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156; at [87]; Enertek AU Pty Ltd v 8StarEnergy Pty Ltd [2022] VSC 544 at [16] per Lyons J.
Importantly, Mr Hand made a final submission that on the material before the Court, the plaintiff did not have the capacity to meet an undertaking as to damages. He noted that there was a pool of money in a sum of about $300,000 ($302,805.50) in an NAB Business Everyday Account that had been heavily redacted. Whilst it showed the position at 19 June, that was ten days ago.
Effectively, the last submission of Mr Philips last night was to the effect that earlier in the day the plaintiff's side had prepared an affidavit going to the strength of the undertaking as to damages. He indicated that he did not necessarily want to read that affidavit and "go into that territory". I indicated that it was a matter ultimately for him.
The case was not presented on the basis that there would be an argument about the matter in which I would deliver a decision and then that Mr Philips would have an opportunity to adduce evidence going to the undertaking as to damages.
I consider that in all the circumstances there is doubt about the undertaking as to damages.
Had there been no doubt about that, I would have been prepared to make freezing orders on the basis of what I regard to be a weak prima facie case, but yet a balance of convenience favouring the plaintiff. However, the importance of a credible undertaking as to damages should not be underestimated.
Often, there is no dispute about the credibility of the undertaking. However, clearly in this case, there was evidence which is adduced, and on which Mr Hand made submissions. I cannot ignore that.
In those circumstances, where there is doubt about the undertaking, and in circumstances where Mr Philips did not adduce any such further evidence going to the undertakings as to damages, I decline to extend the freezing order.