53 From the AUD16.51m total, credit must be given for the approximately AUD8m contributed by Mrs Lu and Mrs Huang. Credit needs also to be given to the AUD4.2m Westpac loan. Those credits have the effect of reducing Mr Xu's contribution to the project to AUD4.31m. But that is more than double the amount he was to expend under the tripartite agreement and is about the same contribution made by each of Mrs Lu and Mrs Huang. Furthermore, Mr Xu and Mrs Xia gave security over their assets in favour of Westpac.
54 If Mr Xu was in breach of his fiduciary duty to Mrs Lu and Mrs Huang when Hua Cheng International acquired the Hurstville land, it is not obvious that he obtained any benefit or gain thereby. And Mrs Lu and Mrs Huang point to a different event as giving Mr Xu a benefit or gain.
55 The joint venture agreement of 5 February 2008 provided that Hua Cheng Property should bear all the project costs. That term was defined to include the cost of the property.
56 It was submitted that Mr Xu, in breach of fiduciary duty, caused the joint venture agreement to be executed to gain him, through his shareholding, the substantial share of the benefit of paying Hua Cheng International the purchase price of the Hurstville land before any division of profits was made for the benefit of Mrs Lu and Mrs Huang through their shareholding in Hua Cheng Property.
57 That was the only benefit that could be identified by counsel for Mrs Lu and Mrs Huang after a five-day trial.
58 It was submitted that it should be inferred that the purchase in the name of Hua Cheng International was not bona fide and was made to secure benefits for Mr Xu in the form of the priority payment of the purchase price of the land and others that Mr Xu might obtain by exploiting his position as de facto owner of the land.
59 No additional benefits were identified and I limit myself to Hua Cheng Property's obligation to pay Hua Cheng International the purchase price of the Hurstville land before division of profits.
What remedy?
60 Counsel for Mrs Lu and Mrs Huang submitted that they were entitled to the declaration sought on the basis of the first limb of Barnes v Addy (1874) LR 9 Ch App 244. At 251-252 Lord Selborne LC said:
"Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort , or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."
61 The first part of the last sentence is referred to as the first limb of Barnes v Addy described as involving knowing receipt.
62 Here there was no trust. Money was provided to Mr Xu in China on the basis that he would match those funds and deposit them to the credit of Hua Cheng Property to enable it to purchase the Hurstville land. Instead of doing that Mr Xu paid the moneys for the benefit of Hua Cheng International.
63 But in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at 141 [113] the High Court pointed out that in recent times it has been assumed, although rarely decided, that the first limb applies not only to persons dealing with trustees, but also to persons dealing with at least some other types of fiduciary.
64 Reference was made to DPC Estates Pty Ltd v Grey [1974] 1 NSWLR 443. That was a case in which the first defendant was the manager of the plaintiff. It engaged in buying, managing and selling real estate. The second defendant was a family company engaged in buying and selling land. Its managing director and the first defendant entered into an agreement whereby the first defendant gave real estate information to the managing director who caused the second defendant to purchase properties utilising that knowledge. The profits were to be divided equally between the first and second defendants.
65 The plaintiff sued for a declaration that the properties were held on trust for the plaintiff and for an account of profits. The Court of Appeal held that the plaintiff was entitled to relief against the second defendant for different reasons.
66 Jacobs P at 457-458 said the principle in Barnes v Addy was applicable:
"Upon the principle of that case a distinction must be drawn between a person who receives trust property for his own benefit, as a volunteer or otherwise, and others who deal with a fiduciary, but do not actually receive trust property. In the latter case a person is not to be held responsible as a constructive trustee unless, even though no trust property passes into his hands, he is cognisant of a dishonest design on the part of the trustee."
67 Hardie JA at 463 was of the view that the second defendant through its managing director became a participant in the course of conduct designed to enrich itself and the first defendant under circumstances precluding it from retaining the proceeds of such enrichment.
68 Hutley JA at 470 said the position of a third party obtaining advantages from a fiduciary in the form of information and assistance should be analogous to that of a third party obtaining property from a fiduciary.
69 But this is not a case of benefit flowing to Hua Cheng International from its acquisition of the Hurstville land. It paid a market price. The benefit was obtained by the shareholders of Hua Cheng International who would gain profit from the contributions of Mrs Lu and Mrs Huang to the purchase price.
70 Further, the benefit upon which Mrs Lu and Mrs Huang rely was created well after the acquisition of the Hurstville land when the joint venture agreement was executed. Any breach of fiduciary duty by Mr Xu in executing that agreement would not, in my view, justify relief in the form of a declaration that the Hurstville land was held by Hua Cheng International in trust for Mrs Lu and Mrs Huang and such of the defendants who contributed to its purchase price. It never was the intention of the parties that Mrs Lu, Mrs Huang and Mr Xu would hold interests in the Hurstville land personally. The land was to be acquired by Hua Cheng Property. Any reversal of benefit received by Mr Xu should be for the benefit of Hua Cheng Property.
71 Mrs Lu and Mrs Huang were reliant on their respective companies to make their contributions to the project. It was submitted that any beneficial interest alleged to be held in trust were those of their companies and they were not parties to the proceedings.
72 I have rejected the notion of a declaration of trust in favour of the persons or entities that contributed to the purchase price of the Hurstville land. The issue does not arise for decision. I would have rejected the submission in any event. Whatever arrangement was made between Mrs Lu and Mrs Huang and their respective companies they acted as principals and not agents of their companies when they entered into the tripartite agreement.
73 The traditional rule of minimum equity was that the court should make an order to give the minimum equity necessary to do justice between the parties. The relief granted should do no more than reverse the detriment.
74 In Giumelli v Giumelli [1999] HCA 10; (1998-1999) 196 CLR 101 at 120 [33] the High Court rejected a submission that the Court of Appeal had made an order that went beyond any reversal of the detriment. The court said that consistently with the course of Australian authority since The Commonwealth of Australia v Verwayen (1990) 170 CLR 394, that decision was not authority for any such curtailment of the relief available in the case before the court. Their Honours said, to the contrary, that there was much support in the judgment for a broader view.
75 In Muschinski v Dodds (1984-1985) 160 CLR 583 at 620 Deane J dealt with the situation where property remained in the hands of a party to a joint venture when the substratum of the relationship came to an end without blame:
"Those circumstances can be more precisely defined by saying that the principle operates in a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it. The content of the principle is that, in such a case, equity will not permit that other party to assert or retain the benefit of the relevant property to the extent that it would be unconscionable for him so to do."
76 Needham J followed this passage in Nichols v Nichols (1986) 4 BPR 97262. The defendant as a resident of Lord Howe Island held an in perpetuity lease of land upon which the plaintiff had constructed a house. The couple subsequently separated. His Honour held that as the original intention of the plaintiff was to provide a house for the defendant and her children, it would not be unconscionable for the defendant to retain from the proceeds of sale a sum sufficient to provide for her and the children a house adequate to meet their needs according to the ordinary standards of living on the island. By addressing the detriment suffered by the plaintiff, the court provided minimum equity.
77 Notwithstanding that in appropriate circumstances a broader approach may be taken, I am of the view that an approach similar to that in Nichols should be taken in this case and the court should give the minimum equity necessary to do justice between the parties.
78 It would be unconscionable for Hua Cheng International to retain the Hurstville land for the benefit of its shareholders. They are different in identity and proportion from the joint venturers and their joint venture vehicle, Hua Cheng Property. It was from the joint venturers and Westpac that Hua Cheng International obtained the money to purchase the Hurstville land and it is they who should benefit from the project through their joint venture company.
79 Prima facie, the appropriate relief is a declaration that Hua Cheng International holds the Hurstville land on trust for Hua Cheng Property.
80 When this form of relief was suggested on the first day of the trial it was adopted by the defendants but opposed by Mrs Lu and Mrs Huang.
81 They submitted that because the tripartite agreement had been terminated it was inappropriate to make such a declaration because it would, in effect, be an order for specific performance of that agreement. They argued that the declaration was a form of relief that Mrs Lu and Mrs Huang had not sought. They submitted that the declaration would give Mr Xu an indirect interest in the Hurstville land out of proportion to his contribution to its acquisition. It was said that Mr Xu's shareholding in Hua Cheng Property was increased from 20% to 60% based on anticipated future contributions that, it was submitted, never materialised.
82 A forecast statement of financial performance of Hua Cheng Property dated 8 October 2008 calculated a profit from ordinary activities before tax of AUD11.185392m. The Hurstville land was entered in the forecast at the approximate figure of AUD8.5m. The profit was calculated after payment of this amount to Hua Cheng International.
83 There was no challenge to the forecast. It shows that the project is likely to be profitable.
84 There are also third party interests to be considered. A development approval application has been issued for a 17-storey building containing 42 two-bedroom apartments, 9 three-bedroom apartments, 35 commercial tenancies and 35 retail tenancies.
85 The project has been successfully marketed off the plan. Contracts have been exchanged for 50 residential units and 5 commercial units. Deposits of AUD3.5m have been received representing prospective purchases in excess of AUD33m. These interests would be prejudiced if the project were to cease.
86 Mr Xu has an increased obligation to fund the future development of the land. His share of cost has increased from 20% to 60%. He will not obtain an advantage disproportionate to his shareholding in Hua Cheng International.
87 Mrs Lu and Mrs Huang come to equity and must do equity. They must pay due regard to the prejudice that would follow a termination of the project. Their opposition to a declaration that Hua Cheng International holds the land in trust for Hua Cheng Property must be disregarded.
88 The Uniform Civil Procedure Rules 2005, Pt 36 r 36.1 enables the court at any stage of the proceedings to give such judgment or make such order as the nature of the case requires whether or not a claim for relief extending to that judgment or order is included in any originating process or notice of motion. The rule complements the Civil Procedure Act 2005, s 90. It provides that the court is, at or after trial or otherwise as the nature of the case requires, to give such judgment or make such order as the nature of the case requires. It also complements s 56 which provides that the overriding purpose of the Act and of rules of court in their application to civil proceedings is to facilitate the just, quick and cheap resolution of the real issues in the proceedings.
89 Thus, in proceedings for a declaration, it may happen that a court in resolving the proceedings in favour of a defendant makes a declaration contrary to that sought by the unsuccessful plaintiff even though the defendant made no formal claim for such a declaration.
90 I propose to make the declaration.
91 But there are adjustments that also need to be made. The first adjustment will require Hua Cheng Property to reimburse Hua Cheng International for any payments it makes to Westpac under the loan facility that now stands at AUD3m together with accrued interest as at 12 March 2010 of AUD37,934.21. If Hua Cheng Property is to get the benefit of the land, it should assume the liability to the bank from which portion of the funds for its acquisition were obtained.
92 The second adjustment will restrain Hua Cheng International from claiming from Hua Cheng Property any amount defined as the cost of the property in the joint venture agreement. Since the funding of the purchase of the Hurstville land came from Westpac and the joint venturers, once provision is made for the discharge of the liability to Westpac by someone other than Hua Cheng International, it will have suffered no detriment with respect to its acquisition of the Hurstville land and it would be unconscionable for it to claim to be paid the purchase price under the joint venture agreement.
93 I will not make an order for the winding up of Hua Cheng Property. It is through it that the development will continue and winding up is the last resort of an otherwise solvent company. (Fexuto v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688 at 742).
94 The Corporations Act 2001 (Cth), s 233(1) contains a series of orders that a court may make including the appointment of a receiver or a receiver and manager of any or all of a company's property.
95 What clearly emerges in this case is that Mrs Lu and Mrs Huang have lost confidence and trust in Mr Xu and the appointment of a receiver and manager would obviate a need for the three individuals to meet to further the project.
96 I accept the submission of counsel for the defendants, however, that such a course would have serious commercial consequences as it would suggest that interests in the development were being sold at fire sale prices.
97 The Corporations Act, s 233(1)(j) provides that the court can make an order that it considers appropriate in relation to a company including an order requiring a person to do a specified act.
98 In Ghabrial v Romolly Pty Ltd (1990-1991) 5 ACSR 611 Cohen J ordered that the directors appoint a quantity surveyor to assess how much of the cost of construction was attributable to each part of the construction.
99 The third adjustment is for Mr Xu to be ordered to cause Hua Cheng Property to appoint Mrs Lu and Mrs Huang as directors as was provided in the tripartite agreement.
100 There is a fourth adjustment I think should be made to ameliorate the lack of confidence and trust Mrs Lu and Mrs Huang have in Mr Xu. I propose to order the directors to appoint a suitable person who consents to the role of acting as a referee should any dispute arise between the directors as to any course to be taken by Hua Cheng Property in developing the Hurstville land and an order that each of the directors will be bound by any decision of the referee.
101 I will dismiss the second amended statement of claim. Mrs Lu and Mrs Huang must pay the defendants' costs. I will hear the parties on the appropriate terms of the orders. I direct the parties to bring in short minutes of order reflecting these reasons.