Jax Franchising Systems Pty Ltd as Trustee for the JF Unit Trust [2012] NSWSC 1115

6. JFS's costs of the present proceedings are to be paid out of the assets of JF Unit Trust (including any receipts or profits from the Jax Quickfit franchising business) to the extent that those assets are sufficient, and without prejudice to JFS' entitlement, to the extent that such assets are insufficient, to recoup those costs from other assets or funds. 7. JFS would be justified, unless and until ordered otherwise in the Proceeding, in acting on the basis that the following agreements: (a) the JV Agreement, (b) the Management and Marketing Agreement dated 12 February 2008 between JFS, Quickfit and JQFS, and (c) the Goodwill Licence Agreement dated 12 February 2008 between JFS and JQFS, are valid and effective. 8. Order that no person is to have access to the Confidential Exhibit marked JB-1 without the leave of a judge of the Court. 9. Grant liberty to JFS to apply on 3 days' notice. Catchwords: TRUSTS AND TRUSTEES - application for judicial advice - Federal Court proceedings commenced against trustees and others - whether and to what extent trustees justified in defending proceedings - what interlocutory steps should be taken - reliance on defence by other defendants Legislation Cited: Corporations Act 2001 (Cth) Trustee Act 1925 Cases Cited: Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247 Category: Interlocutory applications Parties: Jax Franchising Systems Pty Ltd as Trustee for the JF Unit Trust (Plaintiff) Representation: Counsel: A C Harding (Plaintiff) Solicitors: Dibbs Barker (Plaintiff) File Number(s): 2011/393346

Judgment 1By an Amended Summons filed 21 May 2012 Jax Franchising Systems Pty Ltd (JFS) as Trustee for the JF Unit Trust seeks judicial advice pursuant to s 23 Trustee Act 1925 on the approach JFS should take to proceedings brought against it in the Federal Court. These are the same proceedings in which Jax Quickfit Franchising Systems Pty Ltd (JQFS) is also a defendant and in respect of which I have provided judicial advice. 2On 28 May 2012 I made the Orders set out in this judgment. I said that I would provide my reasons for doing so at a later time. These are my reasons. 3The Plaintiffs in the Federal Court proceedings are B J McAdam Pty Ltd, Bruce McAdam, Merim Holdings Pty Ltd and Shirley McAdam (collectively referred to as the McAdam interests). The Federal Court proceedings concern claims made by the McAdam interests in respect of the establishment and operation of the Jax Quickfit Tyre Franchise business. The business commenced in 2004 following a merger of the two tyre franchise business previously conducted by Quick Fit Tyre Service Pty Ltd (Quickfit) as franchisor of the Quickfit business in Queensland and Victoria (the Seventh Defendant in the Federal Court proceedings) and Jax Franchising Systems Pty Limited (JFS) as franchisor of the Jax business in New South Wales and the Australian Capital Territory (the Second Defendant in the Federal Court proceedings). 4The Jax entities were and are controlled by interests related to three families, namely the McAdam interests, the Hurrell interests and the Board interests. 5JQFS was incorporated on 2 December 2004. At the time of its incorporation the issued share capital in JQFS was held, as to 65%, by JFS and, as to 35%, by Quickfit. On 19 April 2005, JFS transferred its 65% shareholding in JQFS to the Third Defendant in the Federal Court proceedings, which is now named Jax Tyres Investments Pty Ltd (JTI). 6Pursuant to a Unit Trust Deed dated 4 January 2005 (JQFS Unit Trust Deed), JQFS was appointed trustee of the JQFS unit trust. At all material times since 4 January 2005, the unit holders in the JQFS unit trust have been, as to 65%, JTI as trustee of the JFA unit trust and, as to 35%, Quickfit as trustee of the Quickfit unit trust. 7Relevantly, JQFS's function is to operate the combined Jax Quickfit franchising business and to act as a conduit for the distribution of any profits from that business to the company vehicles of the various families behind the merged business (which include, indirectly, the McAdam interests). To date, JQFS has, in distributing the profits from the business, acted on the basis that it holds the business as manager of a joint venture between JFS and Quickfit. The contention of the McAdam interests in the Federal Court proceedings is that JQFS holds the business in its capacity as trustee of the JQFS unit trust, the unitholders (trust beneficiaries) being JTI and Quickfit. The contention of the Hurrell interests and the Board interests is that the joint venture analysis is the correct one and that profits must be distributed to JFS and Quickfit as the joint venture parties. However, whichever contention is correct, JQFS will not itself benefit from the profits of the business. 8The claims made against, or which affect, JFS in the Federal Court proceedings are contained both in a Further Amended Statement of Claim and an Amended Interlocutory Process, and can be grouped broadly as follows: (a) claims in contract and under the Fair Trading Act 1987 (NSW) (FTA) and Trade Practices Act 1975 (Cth) (TPA), whereby the McAdam interests claim an entitlement to appoint a director to the board of JFS (the Directorship Claims); (b) claims that JFS was a knowing participant in breaches of trust by JQFS and/or was a knowing recipient of property held on trust by JQFS, in consequence of JQFS' entry into the Joint Venture Agreement (the Trust Claims); (c) claims that JFS was knowingly involved in misleading and deceptive conduct by JQFS and Mr Hurrell with respect to JQFS' entry into the JV Agreement (the Misleading Conduct Claims); (d) claims of oppression, such that JFS should be wound up (the Oppression Claims). 9The greater detail of these claims is set out below:

The Directorship Claims 10The Plaintiffs allege that in October 2004, Marcus McAdam, Mr Hurrell, Mr Board and their associated companies entered into an oral shareholder agreement, whereby the McAdam interests would be entitled to appoint a director to the board of JFS and other companies. 11The Plaintiffs also plead an oral agreement to similar effect allegedly made on or about 22 July 2005 between Marcus McAdam, Mr Hurrell and Mr Andrew Skyring. 12The Plaintiffs allege breach of these agreements and seek, inter alia, to have them specifically performed. 13In the alternative, the Plaintiffs alleges that on about 12 October 2004 and/or 22 July 2005 Mr Hurrell, on behalf of various parties (including, in the case of the representations made on 12 October 2004, JFS), represented to the Mr McAdam interests that they would be entitled to appoint a director to the board of JFS and other companies. 14The Plaintiffs assert that the said representations were misleading or deceptive because Mr Hurrell and his company Vakofa (the Hurrell interests) have subsequently failed to appoint a director representing the McAdam interests to the board of JFS and other companies. They seek orders under ss 80 or 87 of the TPA and/or s 72 of the FTA requiring JFS to appoint Marcus McAdam to the board of JFS. 15To the extent the Plaintiffs' claims are founded upon the alleged shareholder agreements made in 2004 and 2005, JFS is not alleged to be a party to those contracts and therefore does not propose to take an active stance with respect to those claims. 16JFS does, however, propose to defend the claims of misleading and deceptive conduct with respect to the appointment of directors to JFS.

The Trust Claims 17As JFS understands it, the Trust Claims are essentially as follows: (a) From early 2005, following entry into the Shareholders Agreement, the Jax/Quickfit merged business (Merged Business) was owned and operated by JQFS as trustee for the JQF Trust. The Plaintiffs contend this was reflected in the accounts of the JQF Trust, which during the period 1 April 2005 to 30 June 2009 accounted for accumulated losses and profits as being the property of the JQFS as trustee of the JQF Trust. (b) JQFS as trustee of the JQF Trust owed duties as a trustee to the beneficiaries of that Trust, JTI (as trustee of the Jax Franchising Australia Unit Trust (JFA Unit Trust)) (65%) and Quickfit (35%). (c) On 12 February 2008, JQFS entered into the JV Agreement, which had the effect, inter alia, of: (i) constituting JFS and Quickfit as owners of the Merged Business in the respective proportions 65% and 35%; (ii) divesting JQFS of any equitable right, title or interest in the Merged Business, by providing that JQFS would hold the assets of the Merged Business as agent for and on behalf of JFS and Quickfit as assets of an unincorporated joint venture between JFS and Quickfit. (d) JQFS entered into the 2008 JV Agreement without the ratification and consent of: (i) JTI; (ii) the beneficiaries of the JFA Unit Trust (being the trust of which JTI is trustee), including the third plaintiff in the Proceeding, Merim Holdings Pty Limited; (iii) the board of JQFS. (e) Since 2009, JQFS has distributed profits from the Merged Business to JFS and Quickfit, instead of to JTI and Quickfit. JFS has in turn made distributions to Mr McAdam, Vakofa and Valedon. (f) Accordingly, JQFS has acted in breach of its duties as trustee to JTI and Quickfit (including, presumably its duty to exercise reasonable care in the conduct of the trust) by denuding itself of its interest in the Merged Business and by transferring that interest for no apparent benefit in return to JFS and Quickfit. (g) There appears to be a separate allegation that JQFS engaged in breach of trust by distributing to JFS and Quickfit profits to which they were not entitled under the 2008 JV Agreement. (h) FS was knowingly involved in the said breaches of trust by JQFS and knowingly received property held on trust by JQFS. (i) FS and Quickfit hold on trust for JQFS as trustee of the JQF Trust the benefit of the JV Agreement and any interest and/or property in the Merged Business under that agreement. 18At the heart of the Plaintiffs' allegations, therefore, is the assertion that JQFS owned the Merged Business as trustee for the JQF Unit Trust, and that JQFS' entry into the JV Agreement was in breach of trust because it divested JQFS (and therefore the beneficiaries of the JQF Unit Trust) of the Merged Business. 19JFS intends to defend the claim on the basis, inter alia, that: (a) the JV Agreement executed in 2008, and expressed to be effective from April 2005, merely formalised and confirmed what had been the status quo since 2005, namely, that JQFS was merely an operator of the Merged Business and held the assets of that business as agent and/or trustee for the joint-venture partners, which were and had always been, JFS and Quickfit in the respective proportions 65% and 35%; (b) consistently with this, in the period from 2005: (i) franchise agreements that have not been migrated or assigned to the Merged Business continue to be owned by JFS and Quickfit; (ii) with respect to franchise agreements that have been migrated or assigned to the Merged Business, JQFS has paid or accrued the obligation to pay to JFS and Quickfit royalty fees for use of their franchising systems, in the proportions 65% and 35% respectively; (iii) JQFS in written communications with prospective franchisees has referred to "the joint venture between [JFS] and [Quickfit]" and also recorded that "[JQFS]...will be responsible for the issue of invoices and generally will act as the agent of both [JFS] and Quickfit"; (c) the JV Agreement was circulated in draft to members of the JQFS board, including Marcus McAdam, prior to its execution, such that Marcus McAdam would have been aware of the contents of the JV Agreement before it was executed. At Tab 17 of JFSl is a copy of the minutes of a meeting dated 18 November 2007 which records, as Item 10, "JV Documents. Draft sent earlier this week. Letter for review next meeting". (d) although on 19 April 2005 JFS transferred its shareholding in JQFS to JTI, at no time was this intended to effect a transfer of its beneficial interest in the joint venture and the Merged Business to either JQFS as trustee for the JQF Unit Trust or to JTI directly. JTI has never traded or carried on any business; (e) JFS and Quickfit since 2005 have been entitled to share in the profits and losses of the venture in their respective proportions 65% and 35%. During the period 2005 to 2009 there were no profits, only accumulated losses. Although those losses were recorded in the accounts of the JQF Unit Trust, this was due to error on the part of the accountants who misunderstood the basis on which JQFS held the JV assets. Once the position was clarified and formalised by the JV Agreement, the accounts were duly corrected in 2009. 20JFS intends to file and serve a cross-claim seeking declarations reflecting the position set out in paragraph 14(a) above, and in the alternative seeking declarations that the court declare the true position.

The Misleading Conduct Claims 21JFS understands that the Plaintiffs allege that JQFS and/or Mr Hurrell and/or Mr Board engaged in conduct that was misleading or deceptive or likely to mislead or deceive, which caused loss or damage to the McAdam interests, in that: (a) in the period from early 2006 to late 2007, 'the board of JQFS' did not disclose to the McAdam interests that any new joint-venture agreement would be inconsistent with the continued ownership of the Merged Business by JQFS as trustee of the JQF Unit Trust; (b) on or about 18 November 2007, Mr Hurrell: (i) represented to the McAdam interests that the proposed JV Agreement "resolved the outstanding issues between Quickfit and the Jax parties including the issue of pre-emptive rights"; (ii) did not inform the McAdam interests of the true effect of the proposed JV Agreement; (c) in reliance on the conduct at (a) and (b) above, the McAdam interests took no steps to restrain JQFS from entering into the JV Agreement; (d) in about September and early October 2009, Mr Hurrell represented to Marcus McAdam on behalf of the McAdam interests that the JV Agreement would be rectified and/or the interest of JTI in the Merged Business and its profits would be recognised, so as to be consistent with JTI having the beneficial ownership of the Merged Business in accordance with its units in the JQF Unit Trust; (e) in reliance on the conduct at (d) above, Marcus McAdam voted to approve the 2009 accounts for JQFS and the McAdam interests took no steps to prevent the accounts being so approved; (f) JFS was knowingly involved in the conduct of JQFS and Mr Hurrell, by reason that: (i) Mr Hurrell executed the JV Agreement on behalf of JFS; (ii) JFS received the distribution of profits from JQFS, without recognition of the interests of JTI and (indirectly) Merim in those profits; (iii) the knowledge of Mr Hurrell as sole director of JFS at that time is to be attributed to JFS. 22JFS intends to defend the Misleading and Deceptive Conduct Claims essentially on the grounds that: (a) for the reasons stated above, the JV Agreement simply formalised and confirmed what had always been the case, namely, that JFS, with Quickfit, was a party to the joint venture and a part-owner of the Merged Business; (b) at no time was Marcus McAdam misled about the terms or contents of the JV Agreement; in particular, he had been sent the JV Agreement in draft before it was executed; (c) Marcus McAdam voted to approve the 2009 accounts for JQFS, which, consistent with the true position, provided for a distribution of profits to JFS and Quickfit; (d) JFS was not knowingly involved in any misleading or deceptive conduct of JQFS or Mr Hurrell.

The Oppression Claims 23The Plaintiffs also seek orders that JFS be wound up pursuant to s.233(l)(a) and/or s.461(l)(k) of the Corporations Act 2001 on the basis of oppression. Orders for the appointment of a receiver and manager, or alternatively a buy-out of shares, are sought in the alternative. 24JFS denies there has been any oppression. It is a going concern and proposes to resist any winding up. 25Subject to the advice of the Court, JFS intends to defend the allegations made against it in the FASOC broadly on the bases set out above. 26In both the Trust Claims and the Misleading Conduct Claims, JFS is alleged to be a secondary wrongdoer. In most cases the primary wrongdoer is alleged to be JQFS and/or Mr Hurrell. Mr Hurrell and the Hurrell interests, and JQFS, are defendants to the litigation and are independently represented by solicitors and counsel. JFS understands that Mr Hurrell and the Hurrell interests intend to take an active role in defending the Proceeding. 27JFS does not, however, propose merely to file a submitting appearance as: (a) JFS considers it appropriate to defend allegations that, if substantiated, would threaten a great proportion of the asset base of JFS and potentially result in orders for damages being made against JFS and/or orders for JFS to be wound up; (b) JFS is the proper party, and the only party with standing, to defend the claims that have been made against it; (c) ultimately, the interests of JFS and Mr Hurrell may diverge on some matters. For example, on the central issue of whether JFS or JTI is the owner of 65% of the Merged Business, Mr Hurrell may be indifferent to the outcome, as his company Vakofa owns the same percentage interest in JTI and the JFA Unit Trust as it does in JFS and the JF Unit Trust. 28Additionally, JFS will likely wish to adduce evidence from Mr Andrew Skyring (who was the accountant for the Jax/Quickfit Group throughout the relevant period) in defence of the proceedings (in particular, as to the matters set out in paragraph 14(e) above). 29JFS also intends to file a cross-claim as set out above. 30With respect to the Amended Interlocutory Process: (a) JFS wishes to reserve the right to oppose the grant of leave sought by the Plaintiffs to commence derivative actions on JFS' behalf, and against JFS; (b) ultimately, however, JFS may decide to consent to a grant of leave in favour of the Plaintiffs to commence derivative actions in the name of JFS on terms that would include the Plaintiff(s) giving undertakings of the kind set out in (c) below; (c) if leave is granted to the Plaintiffs to commence derivative actions in the name of JFS, JFS intends to require undertakings (if appropriate, secured undertakings) from the relevant Plaintiff(s) to indemnify JFS against any loss it may suffer (including an exposure to costs) if the derivative action is ultimately unsuccessful.

Estimated costs 31JFS estimates that defending the Proceeding will involve the following work: (a) requesting particulars of the FASOC; (b) finalising and settling the Defence; (c) attendances at mentions and interlocutory steps; (d) advising on and, if appropriate, defending the Amended Interlocutory Process; (e) giving discovery of JFS' documents, including verified lists of documents; (f) inspecting documents produced by JFS and other parties on discovery or in answer to subpoenas or notices to produce; (g) taking instructions from, conferring with and advising JFS; (h) interviewing witnesses; (i) preparing affidavits; (j) corresponding with other parties; (k) briefing and conferring with counsel; (l) preparing for and appearing at the hearing. 32At this point, JFS estimates that the above costs including work in progress will be approximately $200,000-$250,000 plus GST. 33It is in those circumstances that JFS has sought the advice of the Court on the following questions: (1) Whether JFS would be justified in defending the proceedings; (2) Whether JFS would be justified in bringing a cross-claim in the proceedings seeking declarations and any related orders to the effect that JFS is a proper party to the Joint Venture Agreement dated 12 February 2008 ("the JV Agreement") between JFS, Quickfit Tyre Service Pty Limited ("Quickfit") and Jax Quickfit Franchising Systems Pty Limited ("JQFS") and, under that agreement, the beneficial owner of 65% of the joint venture assets. (3) Whether JFS would be justified, unless and until ordered otherwise in the proceedings, in acting on the basis that the following agreements: (a) the JV Agreement, (b) the Management and Marketing Agreement dated 12 February 2008 between JFS, Quickfit and JQFS, and (c) the Goodwill Licence Agreement dated 12 February 2008 between JFS and JQFS, are valid and effective. (4) Whether, in respect of the Plaintiffs' Amended Interlocutory Process dated 14 September 2012 and filed in the proceedings, JFS would be justified in: (1) opposing the orders sought in the Interlocutory Process insofar as they affect JFS; or, (2) alternatively, if so advised by its legal representatives, consenting to those orders on terms that the relevant Plaintiff(s) indemnify JFS for any loss or liability suffered or incurred by JFS in the event the derivative actions commenced in the name of, or against, JFS are unsuccessful. (3) Whether JFS would be justified in taking no active role with respect to the Interlocutory Application filed 11 May 2012 in the proceedings. 34I have read a detailed and thorough Memorandum of Advice from Mr Andrew Harding of counsel. I am satisfied that counsel has addressed the necessary facts to support the conclusions reached and that the conclusions are properly arguable: Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247 at [80]. In reaching the view which I have concerning the appropriateness of the courses proposed I have had particular regard to the estimate of costs. 35On the basis of the foregoing I made the following orders: 1.Jax Franchising Systems Pty Limited as trustee of the JF Unit Trust ("JFS") would be justified in defending, and doing all things necessary or reasonably incidental to conducting the defence of, all allegations made against JFS in the Federal Court proceeding No NSD 402 of 2010 ("the Proceeding"). 2. Without limiting Order 1 above, JFS would be justified in taking the following action: (a) resisting the relief claimed or foreshadowed against JFS in the Proceeding (including in any amendment or addition to the existing claims, or in any further interlocutory applications, provided JFS counsel forms and maintains the view that such amendments, additions or interlocutory applications arise out of substantially the same factual matrix), provided that and for so long as counsel maintains the view that JFS has reasonable prospects of so doing; (b) bringing a cross-claim in the Proceeding seeking declarations and any related orders to the effect that JFS is a proper party to the Joint Venture Agreement dated 12 February 2008 between JFS, Quickfit Tyre Service Pty Limited and Jax Quickfit Franchising Systems Pty Limited ("the JV Agreement") and, under that agreement or otherwise, the beneficial owner of 65% of the joint venture assets, provided that and for so long as counsel maintains the view that JFS has reasonable prospects on such a cross-claim; (b1) bringing an application for security for costs or such other interlocutory applications as JFS on legal advice considers appropriate, provided JFS' counsel holds and maintains the view that JFS has reasonable prospects on any such application; (c) maintaining that the application by the plaintiffs in the Proceeding for leave under s 237 of the Corporations Act 2001 (Cth) ought to be determined before JFS is required to plead to the substance of the breach of trust and oppression claims made or foreshadowed against it; (d) defending or resisting the grant of leave to bring, or applying to strike-out or summarily to dismiss, the claims of oppression and misleading and deceptive conduct, provided that and for so long as counsel holds and maintains the view that JFS has reasonable prospects of successfully defending, resisting the grant of leave to bring, or applying for such strike-out or summary dismissal, as the case may be. 3. In respect of the Amended Interlocutory Process dated 14 September 2011 and filed in the Proceeding, JFS would be justified in: (a) opposing the orders sought in the Interlocutory Process insofar as they affect JFS; or, (b) alternatively, if so advised by its legal representatives, consenting to those orders on terms that the relevant plaintiff(s) indemnify JFS for any loss or liability suffered or incurred by JFS in the event the derivative actions commenced in the name of, or against, JFS are unsuccessful. 4. JFS would be justified in taking no active role with respect to the Interlocutory Application filed 11 May 2012 in the Proceeding. 5. JFS would be justified in using the assets of JF Unit Trust (including any receipts or profits from the Jax Quickfit franchising business) for the purpose of taking the action described in Orders 1, 2 and 3 above to the extent that those assets are sufficient, and without prejudice to JFS' entitlement, to the extent that such assets are insufficient, to recoup those costs from other assets or funds. 6. JFS's costs of the present proceedings are to be paid out of the assets of JF Unit Trust (including any receipts or profits from the Jax Quickfit franchising business) to the extent that those assets are sufficient, and without prejudice to JFS' entitlement, to the extent that such assets are insufficient, to recoup those costs from other assets or funds. 7. JFS would be justified, unless and until ordered otherwise in the Proceeding, in acting on the basis that the following agreements: (a) the JV Agreement, (b) the Management and Marketing Agreement dated 12 February 2008 between JFS, Quickfit and JQFS, and (c) the Goodwill Licence Agreement dated 12 February 2008 between JFS and JQFS, are valid and effective. 8. Order that no person is to have access to the Confidential Exhibit marked JB-1 without the leave of a judge of the Court. 9. Grant liberty to JFS to apply on 3 days' notice.

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: 20 September 2012