Whether the pleading of the Constructive Trust Fraudulent Scheme is adequate
25 At s145 is it alleged against G+T that by giving the 'G+T Legal Advice', by giving the advice that it was lawful to make the Emergent and GRL share issues and by assisting in preparing the documentation to effect those transactions, G+T assisted RAAL with 'the Constructive Trust Fraudulent Scheme'. The consequence of the conclusions in the preceding section is that the allegation that G+T advised that the Emergent and GRL share issues were lawful is not maintainable. Consequently, an assessment of s145 must proceed on the basis that those two allegations are not present.
26 The allegation is therefore reduced to one where it is said that G+T assisted RAAL with the Constructive Trust Fraudulent Scheme only because it gave the G+T Legal Advice and prepared the documentation to effect the Emergent and GRL share issues.
27 What was the Constructive Trust Fraudulent Scheme? s129 tells one that the scheme was the one described in s128. Here one must return to the Emergent share issue to understand what the pleader is driving at. That share issue is at the heart of the shareholder dispute between the Kazals and Mr David in the affairs of their joint venture vehicle, Emergent. As I explained in my earlier reasons, Mr David was putting money into Emergent but the Kazals allegedly were not and, in due course, this generated some tension between them. On or around 20 January 2010 Emergent and Mr David's company RAAL executed a loan agreement that recorded that RAAL had leant Emergent $5,837,009.04 (s25). KTC alleges that this was done without the Kazals being informed that this was to occur and in circumstances where they disputed that those funds had been advanced by RAAL (s26). On 21 January 2010 RAAL demanded payment of $54,016 (USD49,900) from Emergent (as part of the amount owed) and indicated that if that sum were not paid within seven days it would accept USD49,900 worth of fully paid ordinary shares in Emergent in satisfaction of that sum (s27).
28 On 22 January 2010 Mr David called a meeting of the directors of Emergent. KTC alleges that they were not told about the loan agreement or the letter of demand (s29) although it does not say that they were not told about the meeting. The meeting occurred on 28 January 2010 but the Kazals did not attend (ss30-31). At the meeting, the two directors present - Mr David and a Mr Mavromanolakis - voted in favour of issuing the 49,900 ordinary shares to RAAL (s31). The effect of this was to turn what had been a 50:50 joint venture vehicle into one where Mr David controlled (through RAAL) 99.9% of the shares in Emergent with the Kazals controlling 0.1% (s39). It is this transaction which the pleader refers to as the Emergent share issue.
29 KTC's primary case is that this has caused it loss. However, at s125 it pursues a case in the alternative which is premised upon a contention that the shares in Emergent that RAAL obtained as a result of the Emergent share issue were held by it as a constructive trustee for KTC. At s127 it is then said that RAAL, as a constructive trustee, was obliged to transfer the 49,900 shares to KTC and not to use its ownership of those shares to the detriment of KTC. In various ways, including by not transferring the shares and by allowing the GRL share issue to proceed, RAAL is said to have breached these duties (s128).
30 Although the allegations of breach are not alleged to be dishonest in s128 the pleader doubles back at s129 and alleges that they constituted a dishonest and fraudulent design. In the same paragraph the pleader then christens these events the Constructive Trust Fraudulent Scheme. At ss131-133 Mr David is said knowingly to have assisted in the scheme. Mr Singh suffers the same fate at ss134-136 and one of his companies (XALT Pty Ltd) is alleged to have been in knowing receipt of trust property at ss137-143.
31 Which brings one back to G+T and Mr Bullock who at ss144-147 are said knowingly to have assisted in the scheme. On the present application G+T continued to rely upon the apparent inconsistency between alleging that G+T had advised the Emergent share issue was lawful whilst simultaneously alleging that it was part of a dishonest design in which the solicitors were complicit. However, as I have already indicated, having been persuaded that the allegation that G+T advised that the Emergent share issue was lawful cannot be maintained, that argument drops away.
32 It is an interesting question whether the claim of knowing assistance which is left - based only on the G+T Legal Advice and the preparation of the transactional documents - can succeed. However, G+T made no submission about this.
33 The G+T Legal Advice is set out at s23. In essence it is that Mr Bullock and G+T advised RAAL and Emergent and their directors (aside from the Kazals) that Mr David had to do everything possible to protect Emergent so as to protect RAAL's investment in Emergent, that RAAL had to demand repayment of its loans to Emergent and if Emergent did not meet the demand then it had to dilute KTC's shareholding in Emergent; also, that this was the right and legal thing to do. This is the assistance alleged to have been given together with the drafting of the documentation.
34 At s146 it is then alleged that Mr Bullock and G+T knew of the Constructive Trust Fraudulent Scheme and knew they were involved in dishonest breaches of trust as part of the scheme. Why? Because of the matters in ss74-76.
35 G+T complain about two aspects of this. First, they submit that some attention has to be given to the role of Mr Mavromanolakis. He was the director who with Mr David voted at the directors' meeting of Emergent in favour of the Emergent share issue. He was appointed to the board of Emergent on 13 November 2009 (s22). At s38(d) it is said that Mr David procured Mr Mavromanolakis' support for the Emergent share issue. It is alleged that Mr Mavromanolakis was told that Emergent faced an urgent funding crisis and was at risk of being wound up if RAAL ceased to provide financial support.
36 G+T points out that it is not alleged that this information provided to Mr Mavromanolakis was false or that Mr Mavromanolakis had acted improperly in voting in favour of the Emergent share issue in reliance upon it. G+T asks rhetorically how can the scheme have been fraudulent when it is neither alleged that Mr Mavromanolakis was lied to nor that he was involved in the fraudulent scheme?
37 Although this seems like a small point when cast against the maelstrom of allegations made in Exhibit 1, I am inclined to accept that it is a sound one and that much of the maelstrom serves only to distract attention from the central allegation which inevitably involves Mr Mavromanolakis. The short of the allegations is this: there were three directors of Emergent, one of the Kazals, Mr David and Mr Mavromanolakis. Mr David and one of the Kazals were each representing their 50% interest in the joint venture embodied in Emergent and Mr Mavromanolakis was an independent director. As at November 2009 Mr David was complaining that Emergent owed him money and that the Kazals were not putting in their fair share. Although it is alleged that the debt Mr David claimed was disputed, it is not disputed that he was complaining about it. A board meeting was held. The Kazals did not attend. It is not suggested that they were prevented from attending. Mr David had previously told Mr Mavromanolakis that he was no longer willing to fund Emergent and if he withdrew his funding Emergent might be wound up. KTC says it was not told that this proposal was on the table. Again, however, that does not prove dishonesty. It was raised at a board meeting to which they were invited. Perhaps in retrospect the Kazals regret the decision not to attend that board meeting but that sense of regret cannot impermissibly be conflated with the proposition that Mr David had acted dishonestly in not telling them he was going to raise it. And even if it could, it is rendered irrelevant by the events at the meeting.
38 Mr David suggested to Mr Mavromanolakis that he should agree to meet the RAAL demand for payment by issuing the shares in Emergent. The decision to issue the shares may well have involved a breach of fiduciary duty (as the Grand Court of the Caymann Islands concluded in related proceedings) but it is hard to describe what happened as dishonest. Highhanded perhaps, aggressive certainly, but dishonest it does not appear to me to be. If it were alleged that Mr David had duped Mr Mavromanolakis then a case of dishonesty might come into view. But that is not alleged. If Mr David in fact had had no intention of winding up Emergent similar considerations might have arisen. But all Mr David is alleged to have done, when all is said and done, is to use his status as a substantial (although on the pleadings, disputed) creditor to strongarm Mr Mavromanolakis into a provocative debt for equity swap. Although I would not describe that as nice, I am unable to see how it was dishonest.
39 Once that conclusion is reached, the fabric frays from the edge as the thread comes undone. The board meeting is the centre piece of the Emergent share issue; it is not peripheral. If there was a dishonest scheme (as opposed to a brutal one) then its critical element was the board meeting for everything else flows from it. Once control of Emergent was delivered to RAAL by the events of the directors' meeting, what occurred with GRL follows trivially. Maybe Mr David used his control to effect the transaction with Mr Singh which delivered an increased share of GRL to SIL. Maybe this was a further outrage on KTC. But on the hypothesis that Mr David had obtained control of Emergent by brutal rather than dishonest means (and accepting for the sake of argument that it most likely involved a breach of fiduciary duty) it is impossible coherently to imagine what was dishonest in using that power in relation to GRL. Granted that the Emergent share issue is a transaction which is apt to raise eyebrows, the problem is that I cannot understand how it can be said to be a dishonest scheme unless Mr Mavromanolakis is said to have been lied to or, alternatively, himself to have been in on it. But neither allegation is made.
40 It follows that I accept G+T's submission that the dishonest scheme alleged by KTC is fundamentally incoherent. I do not accept KTC's submission that the dishonesty of Mr David (and implicitly of G+T) is to be assessed against what is alleged against them rather than by reference to Mr Mavromanolakis. That submission seeks to reduce the role of Mr Mavromanolakis in the dishonest scheme and to make him a non-essential or at least peripheral participant. In fact, the entire scheme hinged on him. If the scheme was not dishonest in relation to Mr Mavromanolakis then the rest of KTC's case makes no sense. Nor is it to the point that it is alleged that G+T knew that Mr David had procured Mr Mavromanolakis's support. Again this brings into focus the critical issue which is not whether Mr David procured Mr Mavromanolakis' support but how he did so: did he do it with deceit or blunt force? There is no allegation of deceit and every appearance of blunt force.
41 In that circumstance, I do not need to deal with G+T's submission that it is not alleged that G+T knew that the value of the Emergent shares was far in excess of the US$49,900 that Mr David appears to have paid for it.
42 I am not satisfied that I should grant leave to KTC to rely upon Exhibit 1 and I refuse it leave to do so. Insofar as G+T and Mr Bullock are concerned, KTC has had three attempts at pleading this case. After the first attempt, Kunc J gave them one more opportunity; I declined that opportunity but afforded them one final chance. KTC's continuing inability to plead the case is a potential marker that it does not have a case against G+T. Accordingly, I dismiss the proceeding against them. KTC is to pay G+T's costs as taxed, assessed or agreed.
43 At the hearing KTC sought to rely upon some of the documents referred to in the pleadings which was opposed by G+T. I propose to admit those documents in what is an interlocutory hearing but I have not found it is necessary to refer to them. The pleading stands or falls on its terms. G+T sought to rely upon the reasons for judgment of White J on KTC v Singh [2018] NSWSC 1510 at [32] to prove that $678,333.33 of outstanding fees owed to SIL under a consultancy agreement would be treated as a shareholder loan by SIL to GRL. This was said to aid the contention that the consideration for the GRL share issue did not merely consist of the surrender by SIL of its entitlement to the redeemable preference shares. G+T was not a party to that determination, the determination was interlocutory and the material before White J was not the material before this Court. I obtain no assistance from this submission. An attempt to tender the material which had been before White J to remedy the last problem was misconceived. As G+T correctly submitted when its eye was on the ball, the present debate is about the adequacy of a pleading. I reject the tender.
I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.