Jax Quickfit Franchising Systems Pty Ltd as Trustee for the Jax Quickfit Franchising Systems Unit Trust [2012] NSWSC 1114

Judgment 1This is an application by Jax Quickfit Franchising Systems Pty Ltd (JQFS) as Trustee of the JQFS Unit Trust for judicial advice pursuant to s 63 Trustee Act 1925. The advice is sought in relation to the action JQFS should take in respect of proceedings in the Federal Court in which JQFS is the Eighth Defendant. 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 pleaded by the McAdam interests against JQFS in the Federal Court proceedings are, in summary, these: (a) a claim of standing under s 1324 of the Corporations Act or alternatively an application for leave under s 237 of the Corporations Act to bring proceedings against JQFS; (b) a claim that JQFS has breached its duty to JTI as trustee of the JQFS unit trust; (c) a claim that JQFS engaged in misleading or deceptive conduct in contravention of the Trade Practices Act 1974 (Cth) or the Fair Trading Act 1987 (NSW); (d) a claim that certain resolutions passed at a board meeting of JQFS on 14 January 2011 approving the 2010 financial accounts were not valid on the ground that the meeting was held in contravention of s 248C of the Corporations Act; and (e) a claim of oppression under s 232 of the Corporations Act. 9In the Amended Statement filed in support of the Summons it is said that the circumstances which are alleged to give rise to the claims that are pleaded in the proceedings appear primarily to concern allegations of acts or omissions by other Defendants. These other Defendants are represented in the proceedings and (to date JQFS's current understanding) are proposing actively to defend the proceedings. These Defendants are, relevantly, JFS, the Hurrell interests, the Board interests and possibly Quickfit. 10To date information and documents have been gathered by JQFS's former and present solicitors from certain of the existing directors of JQFS. 11In addition, JQFS's former solicitors (Holding Redlich) have sought to contact former directors of JQFS to obtain information. To date only limited information has been obtained from these sources. 12Holding Redlich have also had contact with the solicitors representing the Hurrell Interests, and are of the understanding that those solicitors will at some point be obtaining statements from their clients. It is expected (subject to any issues that may be raised about confidentiality or privilege, if existing) that access will be given for JQFS's solicitors to examine such statements when available. 13JQFS expects a statement will also be able to be obtained from Mr Skyring of Bedford Titley, the accounting firm who acted for JQFS, including JQFS as Trustee, at relevant times. Holding Redlich have had some discussions with Mr Skyring to obtain information. 14Holding Redlich also corresponded with lawyers whom they identified may have been the lawyers (or possible former lawyers) of JQFS, including McCullough and McLaughlin (now Redchip), in order to seek access to documents. Documents from these sources, however, have not yet been accessed. 15Accordingly, to date there has been incomplete gathering of information and documents by JQFS and its solicitors to investigate the allegations raised in the proceedings relevant to the relief sought as against JQFS and to provide a comprehensive statement of facts in support of this application. 16An issue arises as to the role JQFS as a Defendant should play in the proceedings to address issues that arise in the proceedings relevant to itself and the relief sought against it. 17A further issue arises as to the extent to which, independently of and separately to the other Defendants, JQFS should investigate the allegations relied upon by the Plaintiffs as giving rise to the causes of action pleaded in the proceedings as against it and to consider and, if appropriate, to commence and to pursue any cross claims. There is a potential, depending on the outcome of investigations which are not yet complete, for possible third party claims or cross claims to be raised by JQFS. 18Serious allegations of breach of trust are raised against JQFS coupled with monetary claims against it for damages and/or equitable compensation. JQFS wishes to have some role in the proceedings to ensure that all relevant facts and documents are before the Court and to ensure its interests and trust assets are protected. 19 JQFS's solicitors anticipate that a defence of the proceedings and the Interlocutory Process will involve in general terms, the following work: (a) Conferring (to the extent possible) with existing directors to obtain instructions; (b) Reviewing board minutes, financial accounts and other documentation relating to the operation of the JAXQuickfit Business; (c) Reviewing the affidavit material served by the Plaintiffs to date; (d) Interviewing relevant persons to obtain information concerning the events which occurred between 2004 and 2008 relating to the alleged basis upon which the Jax Business and the Quickfit Business became "merged"; (e) Liaising with the other legal representatives for the parties; (f) Preparing requests for particulars if appropriate and reviewing any particulars provided; (g) Preparing a Defence to the FASOC and, if appropriate, to the Interlocutory Process, and preparing any supporting affidavits; (h) Identifying documents sought to be requested by way of discovery and preparing discovery requests; (i) Reviewing discovered material and taking instructions regarding same; (j) Attending to any requests directed to JQFS for provision of documents by way of discovery and providing discovery; (k) Attending at directions hearings; (I) Briefing Counsel (including, if necessary, Senior Counsel); (m) Preparing witness statements and considering, if appropriate, the need for any expert evidence and attending to obtaining and briefing potential experts; (n) Considering whether there are reasonable prospects of success on an application by JQFS for the strike-out or summary dismissal or some or all of the claims pleaded, or relief sought, by the Plaintiffs; and, if so satisfied, preparing and filing such an application and briefing Counsel (including, if necessary, Senior Counsel) to appear at the hearing of the application: (o) Considering whether there are reasonable prospects of success on an application by JQFS for an order to the effect that, subject to any further order made by the trial judge. JQFS will be entitled to be indemnified out of the trust estate for its own costs and any costs for which it may be liable, even if the Plaintiffs succeed in whole or in part in the proceedings. If satisfied that there reasonable prospects of success on such an application, it would then be necessary to prepare and file such an application and to brief Counsel (including, if necessary. Senior Counsel) to appear at the hearing of the application. (p) Considering whether there is any opportunity for the proceedings to be resolved on a commercial or otherwise compromised basis; (q) Considering whether the matter is appropriate to be referred to mediation and any preparation and attendances at a mediation to be held and/or other attendances in relation to any settlement discussions; (r) General preparation for any interlocutory applications and for the final hearing. At this stage (although it is difficult to estimate) JQFS's solicitors estimate that any final hearing of the matter given the number of parties, would probably be in excess of 8 -10 days. 20If the above is to be undertaken, JQFS's solicitors estimate that legal costs and expenses may be incurred by JQFS in respect of a defence of the proceedings in the vicinity of between $300,000 and $500,000 (subject to such matters as whether Senior Counsel is to be briefed, the extent of documentation and information to be gathered and reviewed, the accessibility of potential witnesses to provide information and statements and the length of any interlocutory hearings or final hearing). 21Whilst it is difficult to provide a definitive estimate of costs that may be incurred in any interlocutory applications it is estimated that the costs of those applications, if contested (and assuming they are not listed for a hearing exceeding two days), could be in the vicinity of $50,000 plus GST (including Junior and Senior Counsel's fees), 22The above estimates do not include any estimate for any associated costs and expenses should JQFS consider it necessary to bring cross claims or any costs associated with having to defend any cross claims against it. 23A lengthy and detailed advice has been obtained from Mr TGR Parker of Senior Counsel and Mr LV Livingston of counsel. 24Counsel's Opinion addresses the following issues: (a) whether the McAdam interests have standing to make the claims against JQFS which they seek to bring in the proceedings; (b) whether it is appropriate for JQFS, in its capacity as trustee, to take neutral stance in the proceedings in respect of the substantive issue of the scope of the JQFS unit trust; (c) JQFS's prospects of successfully applying in the proceedings for orders striking out, or summarily dismissing, the claims made against JQFS other than the breach of trust claim; and (d) JQFS's prospects of successfully defending all the claims presently made against it in the proceedings. The conclusions reached by counsel are summarised at [2] to [14] of the Opinion. 25It is in those circumstances that JQFS seeks judicial advice whether, in respect of the claims in the proceedings pertaining to JQFS, it would be justified in: (a) taking a neutral stance on the substantive issue of the scope of the JQFS unit trust alleged in the proceedings; (b) seeking an early determination of that issue in advance of all other issues in the proceedings; (c) otherwise defending the proceedings including, in respect of the non-trust claims, by resisting the grant of leave under s 237 of the Corporations Act 2001 (Cth) ("Corporations Act") for the bringing of such claims or by applying for the strike out or summary dismissal of those claims; and (d) using the resources of the JQFS unit trust to take such action as may be authorised by the judicial advice. 26In Application of Macedonian Orthodox Community Church St Petka Inc (No 3) [2006] NSWSC 1247 Palmer J said: [80] In a judicial advice application in which the trustee asks whether it is justified in prosecuting or defending litigation, all the Court does is to reach a view as to whether the Opinion of Counsel satisfies it that there are sufficient prospects of success to warrant the trustee in proceeding with the litigation. Counsel's Opinion must address the facts necessary to support the legal conclusions reached and must demonstrate that the propositions of law relied upon for those conclusions are properly arguable. Whether, in the light of Counsel's Opinion, there are "sufficient" prospects of success calls for another judgment, founded upon such considerations as:

• the nature of the case and the issues raised;
• the amounts involved, including likely costs
• whether the likely costs to be incurred by the trustee are proportionate to the issues and the significance of the case;
• the consequences of the litigation to the parties concerned;
• in the case of a charitable trust, any relevant public interest factors: see e.g. In re Brogden (1888) 38 Ch D 546; In re Kay's Settlement [1939] Ch 329. 27In Re Lenyco Pty Ltd [2010] NSWSC 1094 Brereton J said: The circumstance that the trustee has what on its face appears to be careful, competent and considered advice from senior and junior counsel as to the viability of its defences is a powerful consideration on an application such as this. As I have earlier recorded, although the decision of the High Court in the Macedonian Orthodox Church case encourages this type of application for judicial advice, such applications are not an opportunity for the substantive plaintiff to have a preliminary judicial examination of the case. The question is whether the trustees would be justified in defending the proceedings in their capacity as such, not whether they will ultimately succeed. 28I have read the joint Opinion of counsel. I consider that the Opinion carefully analyses the alternatives available to JQFS in its approach to the proceedings. As Palmer J said in Macedonian Orthodox Community case at [79] I cannot engage in any analysis of the Opinion because to do so would destroy its confidentiality. I am satisfied that the issues have been thoroughly and competently considered. 29I have had particular regard to the estimate of costs contained in the Amended Statement in coming to the view that the Opinion of counsel in the joint advice should be accepted. 30On the basis of the foregoing, I made the following orders:

1. Jax Quickfit Franchising Systems Pty Limited ("JQFS") would be justified in defending, and doing all things necessary or reasonably incidental to conducting the defence of, all allegations made against JQFS in the Federal Court proceedings No NSD 402 of 2010, except in relation to the substantive issue of the scope of the JQFS unit trust, provided that and for so long as counsel maintain the view that JQFS has reasonable prospects of successfully defending those proceedings.
2. Without limiting order 1 above, JQFS would be justified in taking the following action: (a) resisting the relief claimed or foreshadowed against JQFS in the Federal Court proceedings, provided that and for so long as counsel maintain the view that JQFS has reasonable prospects of so doing; (b) taking whatever procedural steps are open to JQFS to invite the Federal Court to resolve the substantive issue of the scope of the JQFS unit trust before allowing any breach of trust claim to proceed and prior to the determination of any other issues in the Federal Court proceedings; (c) taking no position on the substantive issue of the scope of the JQFS unit trust, and submitting to whatever decision the Federal Court may make on that question; (d) giving an undertaking to the Federal Court that, if and to the extent that the Federal Court finds that the Jax Quickfit franchising business (or any part of it) is subject to the terms of the JQFS unit trust, JQFS as trustee will act consistently with that decision, including if necessary bringing proceedings to recoup any monies incorrectly paid to the joint venture parties and redistributing the proceeds to the trust beneficiaries; (e) maintaining that the application by the plaintiffs in the Federal Court proceedings for leave under s 237 of the Corporations Act 2001 (Cth) ought to be determined before JQFS is required to plead to the substance of the breach of trust and oppression claims made or foreshadowed against it; (f) in respect of any breach of trust claim brought with leave under s 237 of the Corporations Act - defending that claim by: i. relying upon clauses 18.1 and 18.5 of the JQFS unit trust deed; and/or ii. applying for relief under s 85 of the Trustee Act 1925 (NSW); (g) defending, or resisting the grant of leave to bring, or applying to strike-out or summarily to dismiss, the claims of oppression and misleading or deceptive conduct and the claim that the resolutions passed at the meeting of directors on 14 January 2011 were invalid or ineffective, provided that and for so long as counsel maintain the view that JQFS 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.JQFS would be justified in using the assets of the JQFS unit trust, to the extent that those assets (including any receipts from the Jax Quickfit franchising business which may be found in the Federal Court proceedings to be assets of that trust) are sufficient, for the purpose of taking the action described in orders 1 and 2 above, and without prejudice to JQFS's entitlement, to the extent that such assets are insufficient, to use other assets or funds for the purpose of taking the action described in orders 1 and 2 above. 4.JQFS's costs of the present proceedings be paid out of the assets of the JQFS unit trust, to the extent that those assets (including any receipts from the Jax Quickfit franchising business which may be found in the Federal Court proceedings to be assets of that trust) are sufficient, and without prejudice to JQFS's entitlement, to the extent that such assets are insufficient, to recoup those costs from other assets or funds.

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