Main-Road Property Group Pty Ltd v Pelligra & Sons Pty Ltd [2009] VSC 435

Until 4.30 p.m. on 11 September 2009 or further order, Main Road Property Group Pty. Ltd. be restrained, either personally or by their servants and/or agents or any of them and by their directors, officers, subsidiary companies, servants or agents or any of them from removing from the jurisdiction of this court or disposing of or disbursing, charging, dissipating, diminishing or in any way dealing with the net proceeds of the sale of the land situated at the corner of Geelong Road (Princes Highway) and Little Boundary Road Brooklyn being the whole of the land described in certificate of title volume 10402 folio 057.

The further hearing of the application was adjourned to 11 September 2009, at which Main-Road was represented. Main-Road made application to set aside the interim order on the ground of material non-disclosure. The application could not be heard that day and was adjourned to 16 September 2009. Counsel for Main-Road sought a variation of the interim order in the meantime to permit Main-Road to pay GST on the sale of the land to the Commissioner of Taxation and to exclude the payment of legal costs in the sum of $575,000 from the operation of the freezing order. Hargrave J varied the order to permit the GST to be paid and referred the other issues for hearing before the Judge in the Practice Court.

2 In short compass, Main-Road is the corporate trustee of a unit trust which was set up as the vehicle for the acquisition and commercial development of land at Hampstead Road, Maidstone and Geelong Road, Brooklyn. In 2004 Main-Road and the investors in the project who became the unit-holders in the unit trust ("the investors") commenced proceedings against the applicants, amongst others, seeking remedies by reason of alleged wrongful conduct on the part of Artusa as a director of Main-Road and promoter of the property development scheme conducted through the unit trust. Part of the claim is based on breach of fiduciary and statutory duties evidenced by a secret profit share agreement made between Artusa and Paul Pelligra, the then directors of Main-Road, by which each would share a profit management fee that Artusa claimed he was entitled to for performing the role of project manager and share the profit on construction work on the two properties undertaken by a Pelligra related company. The applicants have counterclaimed against Main-Road and the investors for the project management fee, alternatively on a quantum meruit basis for the services that Artusa provided. The counterclaim alleges that the investors agreed to pay the fee to Artusa, or to a company nominated by him, and that Main-Road, by its conduct, ratified and was bound by those agreements. The amount of the fee is claimed to be 20% of the "final profits" derived from the property development scheme.

3 The conduct of the proceedings has an extensive history, which is not relevant for present purposes. It is sufficient to note that the matter is now listed for trial to commence in February 2010.

4 The application for a freezing order was prompted by the sale of the Geelong Road property. Artusa deposed in an affidavit as follows:

1. ... I also believe that the directors of the Plaintiff intend to provide a distribution to the unit holders of the net sale proceeds of the Geelong Road property that has been entered and is scheduled for completion on 7 September 2009 and thereby wind up the affairs of the trust, thereby frustrating any judgment that I might obtain against Main Road.
2. I have instructed my solicitors to request that the Plaintiffs place the net proceeds of the Geelong Road property in trust pending finalisation of these proceedings on 11 August 2009 and 27 August 2009.

Exhibited were copies of letters from Artusa's solicitor as well as the plaintiff's solicitor's response.

We are instructed that the property situated at corner Geelong Road (Princes highway) and Little Boundary Road Brooklyn, otherwise known as the 'Geelong Road property' has been sold recently for $2.3 million.

In accordance with the particulars outlined in our client's Third Amended Defence and Amended Counterclaim, our client is entitled to 20 per cent of the profits derived from the Main-Road Development Venture.

As the Geelong Road property forms part of the subject-matter of these proceedings, we require a written undertaking from your firm that our client's share of profits will be held in trust pending finalization of these proceedings.

We ask that you comply with our request immediately.

A follow-up letter was sent on 27 August 2009 as follows:

We refer to previous correspondence and in particular our letter dated 11 August 2009, to which we have not received the courtesy of a reply.

Please provide our office with a written undertaking that our client's share of profits derived from the Main Road Development Venture will be held in trust pending finalization of these proceedings.

Unless you provide the said undertaking, we have instructions to bring an application before the Court in order to restrain your client from dispersing our client's share of profits.

We refer to your letter dated 11th August 2009.

Our clients will not provide an undertaking of the kind requested in your letter.

Our clients have a claim for significant sums of money against your clients. They also vigorously dispute your clients' counterclaim for any share of profits.

In any event, as our clients incurred massive legal expenses in recovering ownership of the Geelong Road property from your clients, you might like to inform us how you calculate your clients' alleged share of any profits.

6 In the recent decision of Orpen v Tarantello[1] Beach J summarised the principles that apply when ex parte orders are sought:

(a) First, the duty owed by a plaintiff seeking an ex parte order is to place before the court all material facts and matters;

(b) Secondly, the duty is an absolute one, owed to the court.

(c) Thirdly, the disclosure of all material facts must be both full and fair.

(d) Fourthly, it is no excuse for a plaintiff to say he was not aware of the importance of a particular material fact.

(e) Fifthly, a party fails in this obligation "unless he supplies the place of the absent party to the extent of bringing forward all the material facts which that party would presumably have brought forward in his defence to that application".

(f) Sixthly, materiality is to be decided by the court, and not by the assessment of the plaintiff or his legal advisers.

(g) Seventhly, a plaintiff must disclose any defence he has reason to anticipate may be advanced. A high standard of candour and responsibility is required of those who seek ex parte orders.[2] (citations omitted)

The duty operates to ensure that a party asking for an injunction ex parte "supplies the place of the absent party"[3] to bring to the attention of the Court the material facts that the absent party would have brought forward in its defence to the application if it had been made on notice. The facts that are material are those facts which will be material for the judge to know in determining the application. In other words, that are "a matter of substance in the decision making process".[4] If there is material non-disclosure, the order almost invariably will be set aside.[5]

7 The material non-disclosure was put in three ways: the applicants did not put before Forrest J certain facts material to whether the applicants are entitled to the payment of any fee; to the quantum of the fee payable; and to whether there is a risk of the dissipation of the sale proceeds.

8 The affidavit in support of the application for a freezing order addresses the basis of the counterclaim. Artusa refers to the investment proposal that outlined that he, or a company nominated by him, would be "entitled to a 20% management fee i.e. of the final profit will be payable to the developer/project manager". He also refers to discussions that he had with a number of the investors concerning the fee and of his discussions with Pelligra concerning the provision of his services in return for the fee, with which the other director agreed. Finally he deposes to having provided various services to Main-Road.

9 Artusa did not, however, deal in his affidavit with any of the claims made against him by Main-Road and the investors. In particular, what was not brought to the attention of the Court were the facts about the profit share agreement which Artusa has admitted in these proceedings that he had made with Pelligra and which he concealed from the unit-holders. This should have been brought to the attention of the Court. Submissions could then have been made as to why those facts should not bear upon the granting of the order that was sought.

10 Counsel for the applicants submitted that Forrest J was told at the outset of the hearing before his Honour that there were claims against the applicants based on misrepresentations, misleading and deceptive conduct and fraudulent conduct in relation to the development of the project and the negotiation of the building contract. Such general statements in those terms was not disclosure of all material facts. It was incumbent on counsel for the applicants to inform the Court of the specific allegations made against his clients. The only material brought to the attention of the Court was the letter from the plaintiffs' solicitors in which they stated that the plaintiffs have a claim "for significant sums of money". That letter, standing alone, was not a fair, let alone full, disclosure of the material facts.

11 A consideration of the pleadings brings into sharp focus the importance of the undisclosed profit share agreement and Artusa's admissions to the issue as to whether Artusa has any entitlement to be paid any part of the management performance fee.

12 It was submitted that Artusa's claim is a true counterclaim. In those circumstances, Forrest J should have been told of the basis upon which relief was sought by the plaintiffs so that Forrest J could then have determined whether that had a bearing on the orders that were sought. There was no disclosure to Forrest J of the fact that the defendants to the applicants' counterclaim have substantial claims against the applicants, in respect of which the damages have been quantified in particulars of loss and damage filed and served in these proceedings on 18 August 2009. The exchange between counsel for the applicants and Forrest J in which his Honour observed: "I assume their perspective is you're not entitled to a cent" and counsel for the applicants responded "Exactly, and they'd be saying you can't calculate profit in that way. Its way above the top" does not constitute full and fair disclosure of the material facts about the defence which is raised to the counterclaim of the matters concerning whether the applicants have a good arguable case on the counterclaim.

13 There was also material non-disclosure concerning the calculation of the amount of profit which Artusa claims is payable to him by way of the management performance fee. In paragraph 9 of his affidavit he deposed to his "estimate" of the amount due to him. Significantly, he did not disclose in his calculations that the investors contributed $1.9m of the funds required to purchase the two properties or that a loan of $1.3m had been taken out by Main-Road to fund the project. The way in which the calculations are presented mis-states the position materially. Those were matters within Artusa's knowledge and it was misleading to the Court not to disclose those facts. It was submitted that they did not need to be disclosed because effectively they were taken up, albeit in different form, in the accounting for the purchase price of the two properties and incidental costs. I do not accept that submission. Plainly, those facts are material to the ascertainment of the amount which is claimable as the fee. It is no answer that Artusa did not consider those facts material because of the way in which he did his calculations.

14 Moreover, the amount which the trustee has resolved to distribute is $1.5m of the sale proceeds. The distribution would result in the investors having received a total of $1,937,482.20 on their investment of $1.9m. The total of distributions to date is $437,482.21. Thus, it would appear that the proposed distribution reflects in substantial part the return of the investors' funds. It would appear that the profit element, if any, by reason of the proposed distribution would be of an amount of $37,482.20. Although this apparently was not known to the applicants when they sought the freezing order from Forrest J, it was information which would reasonably be expected to have been provided to the applicants had they made that enquiry. The duty to make full and frank disclosure of material facts is not restricted merely to facts actually known. The duty of the disclosure applies also to any additional facts which the applicant would have known if the relevant enquiries had been made.[6]

15 It was put by counsel for the applicants that Main-Road's application amounts to:

... only an unsuccessful attack on the quantum of the orders and whether specific allegations needed to be drawn to his [sic] attention of the judge. The court file was presumably before Justice Forrest and the case in favour and against the freezing orders was outlined before him, and if further information was required by him, he could have had recourse to the Court file.

It is not the function of the Court to inform itself as to whether there are material facts contained in the Court file to which the Court should have regard in determining whether to grant the order. It is the duty of the practitioner appearing on the application, to bring all material facts to the attention of the Court. The failure to bring all material facts to the attention of the Court is a failure in the duty of candour and frankness owed by the practitioner.

16 In my view there was also material non-disclosure concerning the perceived risk of dissipation of assets. The application was put on the basis that the trustee intends to distribute the net sale proceeds to the unit-holders and to vest the trust. It was not disclosed to the Court that the applicants' counterclaim was not against Main-Road alone but also against each of the investors so that the movement of funds from Main-Road to the investors may not take moneys from the target of their action at all.[7] This is a fact that is material to the determination of whether there is a risk of dissipation such as to render any judgment wholly or partly ineffective.

17 I should also say something about the delay in making the application.[8] The application was brought without notice on 8 September 2009 because settlement of the Geelong Road property had occurred on 7 September 2009. The applicants had known since early August 2009 that settlement was to take place on 7 September 2009. An explanation has been provided on affidavit by Artusa as to why no application was made before 8 September 2009. The delay was due partly to the lack of response from Main-Road's solicitors until 27 August 2009 and Artusa's reluctance to initiate any application until a reply had been received, and the unavailability of Artusa's counsel until 4 September 2009. The explanation does not, however, deal with why the application had to proceed ex parte and not on notice to Main-Road. The urgency was created by the applicants' tardiness in bringing the application. In having made an ex parte application, there was a substantial burden on the applicants to make full and fair disclosure, which as I say, did not happen.

18 I propose to set aside the order of Forrest J made on 8 September 2009 and will hear the parties on the question of costs. In the circumstances it is unnecessary for me to consider the issue concerning whether legal costs should be excluded.

19 Following delivery of my reasons, counsel for the applicants submitted that I should extend the injunction, notwithstanding material non-disclosure. I will not extend the injunction. I am not satisfied on the material that the applicants have a good arguable case against Main-Road concerning the performance fee, but even accepting that the material was sufficient to demonstrate a good arguable case, I am not satisfied on the basis of the material before me that there is a risk of the dissipation of funds such that there is a danger that a prospective judgment will be wholly or partly unsatisfied. The only material before the Court concerning the risk of dissipation is that contained in the affidavit of Artusa. I do not regard that material as being sufficient to persuade me of any apprehended risk.

(AS TRUSTEES OF THE ALANSHAR FAMILY TRUST) ALAN TREWARTHA & SHARON WENDY DON-LEONARD

(AS TRUSTEES OF ANGELO & ANGELA FAMILY TRUST) ANGELO RUSSO & ANGELA RUSSO

CARMELO BARILLARO AND ANNA BARILLARO (AS TRUSTEES OF THE BARILLARO SUPERANNUATION FUND)

DALE LYNCH AND DONNA LYNCH (AS TRUSTEES OF THE D & D FAMILY TRUST)

DRAE INVESTMENTS PTY LTD (AS TRUSTEES OF THE DAVID AND ANGELA GALTIERI FAMILY TRUST)

INFINITY TECHNOLOGY GROUP PTY LTD (AS TRUSTEES OF THE INFINITY TECHNOLOGY GROUP SUPERANNUATION FUND)

JOHN DICKSON AND SUE DICKSON (AS TRUSTEES OF THE JOHN AND SUE DICKSON FAMILY TRUST)

MARIO RUSSO AND ANGELA RUSSO (AS TRUSTEES OF THE MARIO ANDD ANGELA FAMILY TRUST)

MASEC NOMINEES PTY LTD (AS TRUSTEE OF THE MARIO AND ANGELO FAMILY TRUST)

MIROSLAV KRIVOKUCA AND GEORGIA KRIVOKUCA (AS TRUSTEES OF THE MG INVESTMENT TRUST)

"A" TEAM DIAMOND HEADQUATERS PTY LTD (ACN 051 644 565)

(AS TRUSTEES OF THE ALANSHAR FAMILY TRUST) ALAN TREWARTHA & SHARON WENDY DON-LEONARD

"A" TEAM DIAMOND HEADQUATERS PTY LTD (ACN 051 644 565)

[1] [2009] VSC 143 (Unreported, Beach J, 16 April 2009).

[3] Thomas A Edison Ltd v Bullock [1912] HCA 72; (1912) 15 CLR 679, 681-2 (Isaacs J).

[4] Savcor Pty Ltd v Catholic Protection International APS [2005] VSCA 213; (2005) 12 VR 639, 650 (Gillard AJA, Ormiston and Buchanan JJA agreeing).

[5] Ibid, 661 (Gillard AJA, Ormiston and Buchanan JJA agreeing); Victorian Teachers Credit Union Ltd v KPMG [2000] VSCA 23; (2000) 1 VR 654, 659 (Tadgell JA, Ormiston JA agreeing).

[6] Brink's-MAT Ltd v Elcombe [1988] 3 All ER 188, 192 (Ralph Gibson LJ, Balcombe and Slade LJJ); Victorian Teachers Credit Union Ltd v KPMG [2000] VSCA 23; (2000) 1 VR 654.

[7] Talacko v Talacko [2009] VSC 349 (Unreported, Kyrou J, 10 August 2009) [37].

[8] Bates v Lord Hailsham of St Marylebone [1972] 3 All ER 1019, 1025 (Megarry J)