Plaintiff v Defendants

Supreme Court of Victoria|2012-04-18|Before: Davies J

TRUSTS - whether an agreement to create a trust - whether the agreement was supported by consideration - examination of facts concerning whether trust established

EQUITY - general principles and maxims of equity - doctrine of unclean hands - circumstances in which equitable relief denied because of unclean hands

1 The first defendant ("Lynpete") is a company owned and controlled by the third defendant ("Mr Watson"). Lynpete is also the sole shareholder of the second defendant ("NZPL"). The plaintiff ("Mr King") has sued the defendants on "an agreement or understanding" that Lynpete holds those shares in NZPL as nominee and trustee for Mr King. The defendants have denied the agreement and contended by way of further defence that if there was such an agreement, equity will not enforce it.

2 NZPL is part of the ICS corporate group that was formed by Mr King and Mr Watson in late 2006 and early 2007 as the structure under and through which they intended to conduct a new business venture modelled on a "product" that Mr King sold for the Freelance Group. Mr King was contracted by Freelance Group to sell the Freelance product as an authorised distributor of the Freelance Group ("the contracts"). NZPL has a 62.63% shareholding interest in the ICS corporate group. The remaining 37.37% shareholding interest is held by Lynpete. It was not in dispute that Mr King and Mr Watson originally intended that they would each have an ownership interest in the ICS corporate group through their respective corporate vehicles in the proportions of 62.63% to Mr King and 37.37% to Mr Watson. It was also not in dispute that Mr King set up NZPL as the holding vehicle for his shareholding interest and that Lynpete became the sole shareholder of NZPL at the request of Mr King.

3 The defendants' pleaded case was that Mr King and Mr Watson had discussions from time to time between mid 2006 and late 2007 about various corporate structures and arrangements which might be adopted, but that a concluded agreement that Lynpete would hold the shares in NZPL on trust for Mr King was never reached.[1] The defendants did not lead any evidence to refute or contradict the claim put against them nor did they seek to put any positive case but instead relied on a burden of proof submission. They submitted that the Court should not be satisfied on the evidence that there was a concluded agreement as alleged, contending that the evidence instead showed that Mr King has a unilateral right to require Lynpete at some point in the future to transfer the NZPL shares to him.

4 I disagree. I am satisfied on the evidence that there was a concluded agreement for Lynpete to hold the shares in NZPL on behalf of Mr King. The reasons in short compass are: first, that the existence of the concluded agreement is evidenced in the substantial body of contemporaneous documentary material before the Court, and significantly, Mr Watson was the author of much of that material; secondly, the sequence of events is consistent with a concluded agreement; and thirdly, Mr King's version of events was corroborated.

5 Mr King is a financial planner and insurance broker. Until his contract to act as authorised representative for the Freelance Group was terminated in 2008, part of his business activities included the promotion and marketing of the Freelance product to clients and prospective clients of his business, in return for which he was paid a referral fee (through his corporate entity King Financial Group Pty Ltd ("King Financial"). The Freelance product was not really explained in evidence, save that it appears that the Freelance Group was exploiting tax minimisation arrangements targeted at independent contractors. Independent contractors who participated in those arrangements became beneficiaries of one or more discretionary trusts that the Freelance Group had set up through which they routed their job assignments, so that the trusts purportedly derived the business income and contractors were paid by way of trust distribution. The perceived benefits included tax advantages from the use of the trust structure and cost savings for contractors who did not have to incur the costs of setting up and operating their own business structures.

6 Mr King set up Independent Contract Services (Australia) Pty Ltd ("ICS (Aust)") on 7 April 2006 for use in connection with his marketing of the Freelance product because he wanted to differentiate that part of his business from his other business activities. As it turned out Mr King actually never came to use ICS (Aust) as contemplated because of concerns expressed by the Freelance Group that the use of ICS (Aust) may create some confusion in the market place or perceptions that ICS (Aust) was in competition with the Freelance Group.

7 By September 2006, Mr King and Mr Watson had decided to offer a competing product in the market place to the Freelance product, using ICS (Aust) in a new corporate structure to be set up for that purpose (which later became the ICS corporate group). Documents prepared at or around that time record discussions between Mr King and Mr Watson to the effect that Mr King would take a 62.63% interest in the new structure which he would hold through a corporate vehicle "to be advised" and that Mr Watson would take a 37.37% interest which he would hold through Lynpete. The evidence was that Mr King was willing for Mr Watson to take an equity interest in the new structure in recognition of Mr Watson's contribution to building up the client base of King Financial through sales of the Freelance product. The documents also disclose that Mr King and Mr Watson were considering introducing two other people as equity holders into the new structure - a Mr Smith and a Mr Rudolph who were, it was said, also generating significant fees for King Financial from referrals of the Freelance product. The proposal was to give each of them a 10% interest, reducing Mr King's interest to a 50.1% share and Mr Watson's interest to a 29.9% share.

8 From September 2006 onwards, Mr King and Mr Watson had several meetings about the proposed venture. In evidence were briefing notes that Mr Watson prepared for these meetings around which the discussions were focussed. The proposal, according to those briefing notes, was that the ICS corporate structure would comprise two trusts with the same primary beneficiary but different trustees. One trust would be called the ICS Trust No1. The other trust would be called ICS Real Estate Trust No 1. ICS (Aust) was to be appointed trustee of the ICS Trust No 1 and a new company, ICS Real Estate Pty Limited, would be incorporated to act as trustee of ICS Real Estate Trust No 1.

9 ICS (Aust) was then owned and controlled by Mr King and his wife. According to a briefing note, Mr Watson's view was that the shareholding structure of ICS (Aust) was probably irrelevant as ICS (Aust) would only act as trustee but that Mr Watson suggested that they held one share each held in ICS (Aust) and that they should both be directors. The briefing note also recorded Mr Watson's understanding that Mr King would control the appointment of trustee and that this was to be achieved either by nominating Mr King as appointor or by setting up a new company for that purpose. The new company was also to be made the primary beneficiary of the trust.

10 The primary beneficiary was to be a new company which would be owned by Mr King as to 62.63% through an entity to be advised and by Mr Watson as to 37.37% through Lynpete. A briefing note recorded as follows:

Barry King (through TBA) 62.63%

Peter Watson (through [Lynpete]) 37.37%

Initially Directors should be [Mr King] and [Mr Watson] and when [Mr Rudolph] and [Mr Smith] come onboard they could become Directors (happy to discuss)

Another consideration would be for external Directors - we need to discuss

Once [Mr Rudolph] and [Mr Smith] come onboard the structure will be

Barry King 50.1%

Peter Watson 29.90%

[Mr Smith] 10%

[Mr Rudolph] 10%

11 Other documents created in or around that time by Mr King are consistent with an intention on the part of Mr King and Mr Watson to set up a structure in which they would be the underlying effective owners in the proportions of 62.63% to Mr King and 37.37% to Mr Watson, with such proportions to be reduced to 50.1% and 29.9% respectively if Mr Smith and Mr Rudolph were also given a share.

12 Steps were taken to implement the structure. ICS Administration Pty Ltd ("ICS Admin") was incorporated on 30 October 2006 to be primary beneficiary of both trusts and ICS Real Estate Pty Ltd was incorporated on 15 November 2006 to be trustee of the ICS Real Estate Trust No 1. The company records disclose that Mr Watson was made the sole director and sole shareholder of both companies upon incorporation. The two trusts were also set up with ICS (Admin) nominated as the appointor.

13 Mr King did not want his interest in the ICS structure traceable. Mr King's evidence was that he wanted to keep the Freelance Group from knowing that he was setting up a competing business. Mr King was aware that there was a restraint of trade clause in his contracts with Freelance Group, although he had received advice from solicitors when he entered into those contracts that the clauses were unenforceable. Nonetheless, he wanted to be able to deny any involvement in the ICS structure if that became necessary. His evidence was that this was to be achieved by having his shareholding interest in ICS (Admin) held by Lynpete on trust for him. It also included a similar restructure of two other companies that he used in his financial planning business, namely King Group Holdings Pty Ltd ("King Group") and Cover Corporation Pty Ltd ("Cover Corp") by transferring his shares to Mr Watson to hold on his behalf. Mr Watson was to sign blank share transfer forms back to Mr King as part of the restructuring of those entities. In evidence is a "To Do List" that Mr Watson prepared and sent to Mr King on 30 November 2006. The To Do List included the transfer of ownership of King Group and Cover Corp to Mr Watson, the appointment of Mr Watson as the sole director and "transferring blank forms back to [Mr King]". On 27 October 2006, there was a change in shareholders in Cover Corp from Bardon Pty Ltd (Mr King's company) to Mr Osborne (20 shares) and Mr Watson (20 shares). On a date not recorded, Mr King and his wife transferred their shares in King Group to Mr Osborne and Mr Watson.

14 At some time around January or early February 2007, Mr King decided to set up NZPL as the holding vehicle for his shareholding interest in ICS (Admin). Mr King's evidence was that Mr Watson, in conjunction with a Mr Osborne, Mr King's practice manager, were asked to hold the shares in NZPL for him. NZPL was incorporated on 15 February 2007 and Mr Osborne and Mr Watson were appointed the original directors and are recorded as the original shareholders, holding six shares each. On 25 March 2008 Mr Osborne transferred his six shares to Lynpete so that Lynpete became the sole shareholder in NZPL.

15 Company searches also record the following changes in the other companies:

(a) on 8 May 2007, Mr King resigned as a director of ICS (Aust) and Mr Watson was appointed in his stead. As at May 2007 the shareholders in ICS (Aust) were listed as NZPL (626 ordinary shares) and Lynpete (374 ordinary shares), consistently with the equity interests in the ICS structure that were the subject of the briefing notes throughout 2006;

(b) on 8 May 2007, the shareholding in ICS Real Estate Pty Ltd changed from Mr Watson (1000 shares) to NZPL (626 ordinary shares) and Lynpete (374 ordinary shares), again consistently with the equity interests in the ICS structure that were the subject of the briefing notes throughout 2006;

(c) also on 8 May 2007, the shareholding in ICS (Admin) changed from Mr Watson (1000 shares) to NZPL (626 shares) and Lynpete (374 shares), also consistent with the original intent;

(d) on 20 June 2007, Mr Osborne and Mr Watson transferred their shares in Cover Corp and King Group to NZPL. The transfer to NZPL is consistent with Mr King's version of events that he is the effective owner of NZPL.

16 Mr Osborne confirmed Mr King's evidence that he was asked by Mr King to become a shareholder in NZPL to hold those shares on his behalf. Mr Osborne recalled that Mr King told him that he was using NZPL to purchase businesses that he was not able to do himself under agreements that he had with AMP as his company, King Financial, was an authorised representative of that group. Although this explanation is different to Mr King's evidence about his motives, the inconsistency is not of great moment for present purposes. The salient point is that Mr Osborne understood that he was to hold shares in NZPL on behalf of Mr King. Mr Osborne also relevantly gave evidence that he was asked by Mr Watson to sign various documents in relation to taking on the shareholding of NZPL, specifically to sign documents to allow him to become a shareholder and also to sign a blank transfer agreement. He said that Mr Watson told him that the blank transfer agreement was necessary because if he were to leave the King Group organisation or Mr King became able to take over the ownership of the NZPL shares, the transfer would be initiated and Mr King would take back the ownership of those shares. Counsel for the defendants placed considerable weight on an exchange in cross-examination when he asked Mr Osborne whether he understood himself to be a trustee for Mr King of the shares he held in the company. Mr Osborne replied yes and elaborated:

I was holding them, as I understand, so that at a time in the future when Mr King was able, when he was free of any obligations to AMP, that he would take over these businesses.

If he ever became legally in a position to hold those shares you would transfer them to him?...Yes.

And otherwise that you were operating the business?...Yes.

And owning the shares?...Yes.

That's because they couldn't belong to Mr King?...Correct.

Not because it was an attempt to deceive AMP or anyone else who might come looking?...No.

Because Mr King wasn't, until he was legally able, to have an interest in that company?...Correct.[2]

Counsel submitted that this evidenced that Mr King did not hold any interest in the shares but rather had a right unilaterally to acquire those shares at some point in time. I will return to that submission.

17 There is little doubt on the evidence that the arrangement with Mr Watson and Mr Osborne was that they would provide Mr King with transfers in blank form. Another to do list created by Mr Watson on 2 February 2007 included as an item:

Transfers and Blank form [Mr Watson] and [Mr Osborne] to [Mr King].

18 The documents show that before the relevant change of shareholding occurred, Mr Watson was in contact with Mr King's accountant, Mr Marino, over matters relevant to the establishment of the ICS structure. Mr Marino had prepared a schematic chart of the corporate structure as he understood it. His chart showed Mr King and his wife as the ultimate owners of ICS (Admin). On 7 May 2007, Mr Watson emailed Mr Marino to advise that the chart did not reflect his shareholding in the ICS structure and that he had amended the chart to show what should be the shareholding structure initially for ICS (Admin), noting that there may be additional shareholders over time and that he was unwilling to sign relevant documents until this was resolved. The amended chart produced by Mr Watson showed the shareholding as NZPL with 626 shares and Lynpete with 374 shares, as in fact transpired. In the same email Mr Watson advised that neither he nor Mr Osborne would sign the guarantee for fees due by NZPL to Mr Marino. The email stated that "[Mr King] will have to provide this guarantee, as he and his family are the ultimate beneficiaries", although at that time Mr Osborne and Lynpete were recorded as the shareholders of NZPL in equal shares. This email provides cogent evidence of Mr Watson's understanding at the relevant time that Lynpete held the shares in NZPL on trust for Mr King.

19 On 20 June 2007 Mr Watson sent Mr Marino the relevant documentation to effect the various changes of directorships and shareholdings in the companies. In relation to NZPL, Mr Watson wrote that:

As agreed the structure is now that [Mr Osborne] and I will be the Directors - and Shareholders of [NZPL], with blank transfers signed to be held by you.

As at 12 July 2007, the shareholders of ICS (Admin) were Lynpete (374 shares) and NZPL (626 shares). That briefing note prepared by Mr Watson is entirely consistent with Mr King's case that the shares that Lynpete held in NZPL were to be held, and were held, on behalf of Mr King and not by Lynpete in its own right.

20 The documents created by Mr Watson are consistent with an agreement between Mr Watson and Mr King that Mr King's ownership interest in ICS (Admin) would be held on his behalf by Mr Watson through Mr Watson's company, Lynpete. The implementation of that agreement is evidenced by the change in shareholding in ICS (Admin) from Mr Watson as the original shareholder on incorporation, to NZPL (626 shares) and Lynpete (374 shares) on 8 May 2007. Mr Watson's own documents that he created at or around that time bear out that Mr Watson did not regard the shares held by NZPL as his own. Certainly there was no evidence from Mr Watson which put forward some other explanation for the share transfer or the signed blank transfers from himself and Mr Osborne.

21 Moreover, there was nothing inconsistent in Mr Osborne's evidence. Counsel for the defendants sought to cast a different light on Mr Osborne's evidence. A submission was put that the arrangement with Mr Osborne was that there would be transfers held in blank which gave Mr King a right unilaterally to acquire the company at some point in time in the future when he was in a legal position to own the company. It was further submitted that this arrangement was not "necessarily" indicative of a present trust to hold the property. However, it was never part of the defendants' pleaded case, that some other arrangement was effected between Mr King and Mr Watson, other than the agreement upon which Mr King sued. Specifically, it was not part of the defendants' case that there was no intention to create a trust.[3] Moreover, it was never put to Mr King that there was some other arrangement reached between himself and Mr Watson about the ownership of the shares in NZPL. The defendants' case simply was that no concluded agreement was reached. That submission must be rejected.

22 In my opinion, the evidence plainly bears out that a concluded agreement to the effect of the agreement sued on by Mr King was reached. The agreement is consistent with, and the outcome of, a business arrangement entered into between Mr King and Mr Watson for the establishment of a new corporate group in which each would hold an equity interest but that Mr King's interest would be held for him by Mr Watson's company.

23 I find on the evidence, on the balance of probabilities, that as early as September 2006 there was an agreement between Mr King and Mr Watson to set up a new structure in which Mr King would hold a 62.63% interest and Mr Watson would hold a 37.37% interest. I also find on the evidence, on the balance of probabilities, that the agreement was effected by the incorporation of ICS (Admin) and a subsequent issue of shares in ICS (Admin) to NZPL and to Lynpete. I also find on the evidence on the balance of probabilities that Mr Watson's transfer of his shares in ICS (Admin) to NZPL was in further implementation of the concluded agreement and that Lynpete at all times has held those shares on trust for Mr King.

24 A further defence that the agreement was ineffective in equity to constitute a trust over the shares because the agreement was not supported by consideration is without substance. The consideration was constituted by the 37.37% interest that Mr Watson, through Lynpete, holds in the ICS corporate structure.

25 The defendants' alternate equitable defences are predicated on the existence of a concluded agreement. Senior Counsel for Mr King contended that it was not open for the defendants to rely on those defences because the defences are based on an allegation there was an agreement, in circumstances where Mr Watson must know that the allegation was false or that the earlier denial of the agreement was untruthful. Reliance was placed on the well-established pleading principle that prohibits a party from pleading an inconsistent set of facts in the alternative where one of those sets of facts must be known to the party to be false.[4] In CGU Insurance Ltd v Lawless, the Victorian Court of Appeal explained as follows:

The rationale for this pleading principle is that it would be an abuse of the Court's process to permit facts to be pleaded which deliberately place on the record positive statements of fact, one or other of which must be known by the pleading party to be untruthful...

...the pleading principle does not restrict a party's right to plead or rely upon an alternative view of the facts because their account of an event in issue is rejected and another party's account accepted. Thus, where the occurrence of an event is not in dispute and competing accounts are proffered in explanation of its occurrence, a party whose account is rejected may rely upon another person's account and other evidence that bears upon that person's account in resolving issues in the case.[5]

The question for consideration is whether the alternative equitable defences relied on by the defendants are wholly inconsistent with their contention that no concluded agreement was made.

26 The equitable defences relied on by the defendants are predicated on the factual position that Mr King beneficially owns the shares held by Lynpete in NZPL. Pleas of election, approbation and reprobation and estoppel were made based on Mr King's conduct of litigation with the Freelance Group arising out of the termination by the Freelance Group of the contracts under which Mr King had marketed and promoted the Freelance product. A further defence is based on the doctrine of unclean hands - it is alleged that if there was an agreement as alleged and sued upon by Mr King, that Mr King's purpose in entering into that agreement was to prevent the Freelance Group from discovering or proving that he had acted in breach of contract or his fiduciary obligations and that this purpose was improper and dishonest and equity would not assist him or enforce the trust alleged.[6]

27 There is a clear inconsistency in the facts pleaded to support the equitable defences. Those equitable defences rely on the factual position that Lynpete holds its shares in NZPL on trust for Mr King. The pleas of election, approbation, reprobation and estoppel are thus wholly inconsistent with the pleaded case that there is no trust. This is not merely the pleading of claims in the alternative, as the foundation setting up those equitable defences is a set of facts wholly at odds with the primary defence. They are totally inconsistent cases. In these circumstances, it was not open to the defendants to put those defences as they are factually inconsistent with the way in which they conducted their primary defence. The defences were not pursued in any event, although not formally abandoned. The parties were asked to provide a list of issues for the Court's determination. These equitable defences are not mentioned and no submissions were put in aid of them.

28 The defence based on the equitable doctrine of unclean hands can be looked at differently. That defence is truly an alternative claim that is not propounding a claim that is inconsistent with the defendants' primary defence. That is to say, no factual inconsistency arises between denying the existence of the trust and if the trust is found to exist, asserting that it is unenforceable because Mr King's purpose in entering into the agreement by which the trust was created was improper and dishonest.

29 Senior Counsel for Mr King submitted that the defence must fail, even if it was established that Mr King's purpose was improper and dishonest as alleged. Reliance was placed on the principle that unmeritorious or immoral conduct will not disentitle a plaintiff from equitable relief unless it has "an immediate and necessary relationship to the equity sued for in that the conduct gave rise to the transaction sued upon".[7]

30 This principle was the subject of detailed consideration by Campbell J in Black Uhlans Inc v NSW Crime Commission.[8] The facts before Campbell J were straightforward. The plaintiff ("the club") occupied premises which a club member leased from the owner but the rent was paid for out of the club's funds. The club member came to purchase the land on which the clubhouse was erected. That club member was later convicted of various criminal offences in consequence of which a restraining order was made under legislation that prevented him from disposing of any interest he had in the premises which contained the clubhouse. In due course a forfeiture order was made in respect of his interest in that property and resulted in his interest in the property becoming vested in the Public Trustee on behalf of the State of New South Wales. The club contended that the real estate was held on trust for it and hence that the beneficial ownership of the property was not forfeited to the State. It was argued for the defendant that the club was not entitled to enforce the existence of the trust because of unclean hands. It was said that the only way in which the property had been able to be purchased was through the obtaining of a loan from Citibank. Further, that the loan from Citibank was only obtained by the club member telling Citibank "a pack of lies" and submitting to Citibank a set of fabricated documents. It was said that the club was party to the deception of Citibank. Campbell J held that the principle of unclean hands did not apply. His Honour reasoned:

The equity which the Club asserts is one which originally arose against [the club member] by reason of the club's money providing part of the purchase price, and operated to impose equitable obligations on him, concerning his legal ownership of the property - the circumstances in which [the club member claims] came to have money to make his own contribution to the purchase price of the property have no immediate and necessary relation to that. Another way of putting this is that even accepting (as I do) that the Peakhurst property would probably not have been purchased at all if Citibank had not been mislead, that misleading of Citibank did not make any contribution to the proportionate beneficial interest which recognition of the resulting trust would give to the Club. The entirety of the fruits of the deception of Citibank have been treated, on my findings, as a contribution to the purchase price by [the club member]. Even if the defendants were right in submitting that all of the wrongful conduct of [the club member], in their dealings with Citibank, could be attributed to the Club (a matter which I do not find it necessary to decide), recognising the particular resulting trust which I would be prepared to uphold does not involve the plaintiff in receiving a benefit from its own wrongful conduct. Recognition of that trust is nothing more than recognising a proprietary interest into which the Club's own money, not shown to be derived from any wrongful conduct, can be traced.... In my view the principle of unclean hands provides no reason for refusing to recognise the particular resulting trust.[9]

Pivotal to His Honour's reasoning was that the club did not need to prove its disentitling conduct in order to establish its interest as against Citibank. Contrary to the submission on behalf of the defendants, the reasoning did not depend on the trust in the case being a resulting trust as distinct from an express trust by agreement, which is the case here.

31 In Anaconda Nickel Ltd v Edensor Nominees Pty Ltd[10] the respondent ("Edensor") obtained equitable relief against the appellant ("Anaconda") for wrongful failure to complete an agreement for the purchase of Edensor's shares in Centaur. Anaconda argued that Edensor should be denied equitable relief because, on Edensor's case, the agreement was made to deceive the bondholders of Centaur by inducing them to believe that Anaconda had not committed itself to acquire shares in Centaur. The Court of Appeal held that the unmeritorious conduct relied on by Anaconda did not bear the requisite necessary relation to the equity sued for by Edensor to found refusal of the relief.[11] Buchanan JA, with whom Eames JA and Coldrey AJA agreed, referred in the course of reasoning to Meyers v Casey.[12] In Meyers v Casey the plaintiff brought an action against the Victoria Racing Club. The plaintiff was seeking to have his disqualification for suspicious practices in connection with the running of his horse in a race declared invalid and to restrain the club from expelling him from his membership from the club on the ground that he was not given the opportunity of defending himself against the charge of misconduct. It was held that the plaintiff's misconduct in respect of the running of the horse did not disentitle him to the relief claimed as the relief that he sought was independent of any misconduct and the question of his guilt or innocence of such misconduct was not an issue in the action. Isaacs J said:

The rights asserted by the appellant, namely, membership of the club, and public right under the by-laws to enter the race course, of course exist if at all, by reason of circumstances wholly independent of the alleged misconduct; the wrong he complains of, namely, his condemnation by an incompetent and unauthorised tribunal in the one case, and a disregard of natural justice in other, are equally independent of any misconduct by him... It is altogether different from the cases where the right relied on, and which the Court of Equity is asked to protect or assist, is itself to some extent brought into existence, or induced by some illegal or unconscionable conduct of the plaintiff, so that protection for which he claims involves protection for his own wrong.[13]

Buchanan JA also referred to Attwood v Small in which Lord Brougham said:

...that general fraudulent conduct signifies nothing; that general dishonesty of purpose signifies nothing; that attempts to overreach go for nothing; that an intention in design to deceive may go for nothing, unless all this dishonesty of purpose, all this fraud, all this intention and design, can be connected with the particular transaction, and not only connected with the particular transaction, but must be made to be the very ground upon which the transaction took place, and must have given rise to this contract.[14]

In the present case the equity sued upon arose from the assumption induced in [Edensor] by Anaconda that it would not complete the purchase of the shares. Its promise to do so was not induced by any anterior wrongdoing on the part of [Edensor]. The variation agreement was directed, not to Anaconda, but to the bondholders. Further, even if the variation agreement was brought into existence with aim of deceit, in fact no deceit was practised. The unmeritorious conduct now relied upon by Anaconda did not bear the requisite necessary relation to the equity sued for by [Edensor] to found refusal of relief.[15]

By parity of reasoning, an improper or dishonest purpose on the part of Mr King for bringing the trust on which he sues into existence, would not disentitle Mr King from enforcing that trust unless he has to rely on that purpose in order to prove the existence of the trust.

32 Counsel for the defendants placed reliance on Gascoigne v Gascoigne.[16] In that case, a husband took a lease of land in his wife's name and built a house upon it with his own money. He used his wife's name in the transaction with her knowledge and connivance because he was in debt and wanted to protect the property from his creditors. He later brought an action against his wife for a declaration that she held the property on trust for him. The Court refused the relief sought on the basis that the husband could not set up his illegality and fraud to rebut the presumption that the conveyance was intended as a gift to her. Further, the Court held that his wife was entitled to retain the property for her own use, notwithstanding that she was a party to the fraud. Counsel for the defendants also placed reliance on Meyers v Casey[17] and the passage of Isaacs J that:

It is altogether different from the cases where the right relied on, and which the court of Equity is asked to protect or assist, is itself to some extent brought into existence or induced by illegal or unconscionable conduct of the plaintiff, so that protection for what he claims involves protection for his own wrong. No court of Equity will aid a man to derive advantage from his own wrong, and this is really the meaning of the maxim.[18]

It was argued that this reasoning was apposite to the present case as the agreement that Mr King sues on arose from his "improper and dishonest" purpose.

33 As Campbell J stated in Black Uhlans Inc v NSW Crime Commission,[19] "in applying the unclean hands principle... it is necessary first to identify what is the equity which (absent unclean hands) [the Court] would be prepared to uphold".[20] In this case, it is the trust created by the concluded agreement between Mr King and Mr Watson that Mr Watson, through Lynpete, would hold all the shares in NZPL issued to Lynpete for and on behalf of Mr King. The improper and dishonest purpose alleged was the purpose of preventing the Freelance Group from discovering or proving that Mr King had acted in breach of his contract with Freelance Group under which he sold the Freelance product or his fiduciary obligations to the Freelance Group.[21] A breach of contract was submitted as a fact by Counsel for the defendants, predicated on Mr King's admission in cross-examination that the ICS business was a competing business to the Freelance Group and the "deceit" that he engaged in to mislead Freelance Group about his involvement in that business so as to prevent the Freelance Group from having a reasonable apprehension that he may be in breach of contract. It was further submitted that there was deceit whether or not there was actually a breach of contract as the evidence showed that Mr King had a reasonable apprehension that he was acting in breach of contract by establishing and running the ICS business. But the deceit was directed at the Freelance Group, not at Mr Watson. Mr King's claim for relief does not rest upon him proving the deceit as the reason for the trust. To put it another way, Mr King did not have to show that he had the purpose as alleged in order to prove the agreement on which he relies to establish the trust.

34 The case is distinguishable from Gascoigne v Gascoigne where it was necessary for the plaintiff to prove his own bad conduct to rebut the presumption of advancement and thus to establish the trust that he sought to enforce. The passage of Isaacs J in Meyers v Casey also does not assist because the principle relied on by the defendants does not have an unrestricted application, as Isaacs J made quite clear. It is not sufficient merely to show some dishonest or unmeritorious conduct. The relevant conduct must have the requisite necessary relation to the equity sued on in order to found refusal of relief. Accordingly this defence also fails.

35 For the above reasons, the plaintiff is entitled to the relief that he has claimed.

[1] Further Amended Defence (filed 16 February 2012) at [5].

[2] Transcript of Proceedings (15 February 2012), 167.

[3] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107.

[4] Brailsford v Tobie (1889) 10 ALT 194 (Holroyd J); Issitch v Worrell & Ors [2000] FCA 477; (2000) 172 ALR 586 at [32] (Spender, Drummond and Katz JJ agreeing); Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449; CGU Insurance Ltd v Lawless [2008] VSCA 38 (Maxwell P, Neave and Redlich JJA); Adamson v Ede [2009] NSWCA 403 (Allsop P, Basten JA and Sackville AJA).

[5] CGU Insurance Ltd v Lawless [2008] VSCA 38 at [27], [28].

[6] Further Amended Defence filed 16 February 2012 at [22]-[23].

[7] Anaconda Nikel Ltd v Edensor Nominees Pty Ltd [2004] VSCA 167 at [36] (Buchanan JA with whom Eames JJA and Coldrey AJA agreed); Black Uhlans Inc v NSW Crime Commission [2002] NSWSC 1060 (Campbell J).

[21] Further Amended Defence filed 16 February 2012 at [22]-[23].

At a glance

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Judgment (79 paragraphs)

Parties

Cases Cited (4)