THE CONCERTED PLAN
111 On the facts as found and the facts either admitted or not in controversy, the transfer of the Nicholson St property from 70 Nicholson Street to Establishment 5 occurred against the backdrop that:
(a) 70 Nicholson Street, in its capacity as trustee of the 70 Nicholson Street Unit Trust, owned a valuable piece of land valued at $3.9 million, which it intended to develop with the potential for a sizeable profit following completion;
(b) from 18 June 2009 onwards, the Karas and Meletsis families, through Genesis, had (at least) a 50% interest in the unit trust;
(c) Mr Karas held a second ranked mortgage over the property, securing payment of the sum of $218,842.24 (revised figure) (as now accepted by the trustees), which Mr Karas had loaned to 70 Nicholson Street. Although a second ranked mortgage, to the knowledge of Mr Meletsis and Mr Karas no amount was secured by the first ranked mortgage held by Rover Nominees, as the debt which that mortgage had secured had been discharged;
(d) the ATO was pursuing Mr Karas for tax liabilities of $44 million and his assets were subject to a freezing order, of which Mr Meletsis had knowledge; and
(e) the State Revenue Office was investigating whether 70 Nicholson Street remained entitled to claim an exemption from land tax and Mr Meletsis knew that the company no longer qualified for that exemption because the property had ceased to be used for low cost accommodation in April 2011.
112 Also on the facts as found and the facts either admitted or not in controversy, Mr Meletsis had 70 Nicholson Street sell the Nicholson property in November 2011:
(a) to a newly formed company set up for the purpose of acquiring and holding the property on trust for the Establishment 5 Unit Trust, also newly formed, the unitholders of which included the Neaniki Property Developments Trust with a 50% unitholding, through which the Meletsis and Karas families, as beneficiaries, would have an entitlement to a share of the profits of the development;
(b) at an undervalue and for a price that was worked out by reference to the amount of cash that the Leading Edge parties were able to pay ($1 million), the notional value of the Rover mortgage at $1.35 million (which was a façade because Mr Meletsis knew that no amount was owed by 70 Nicholson Street to Rover Nominees) and the notional value of various liabilities purported to be owed by 70 Nicholson Street to third parties at $650,000 (which was also a façade because Mr Meletsis knew that a substantial portion of those expenses were not amounts that 70 Nicholson Street was then, or would become, liable to pay);
(c) where ostensibly the purchase price of $3 million would be paid by way of Establishment 5 making a cash payment of $1 million at settlement with the balance comprising the purported assumption by Establishment 5 of the obligation to pay out the Rover mortgage and the unpaid debts of 70 Nicholson Street as specified in the creditor's schedule; and
(d) where, by a side arrangement that Mr Meletsis had with Mr Speer, not documented, of the $3 million purchase price, only $1 million was payable at settlement with the balance payable only after the development was completed, which is what actually happened.
113 Of the $1 million cash portion which was due at settlement of the sale, only $800,000 ultimately was received by 70 Nicholson Street, as $200,000 was kept back by Establishment 5 to pay the stamp duty on the transfer, leaving $2.2 million payable. Then in November 2014, following completion of the development, Mr Meletsis directed Mr Speer to cause Establishment 5 to pay $2.2 million to Hallmark which, in Hallmark's MYOB bank register, was described as "Settlement 70 Nicholson St". Also at or around the same time, Mr Meletsis directed Mr Speer to cause Establishment 5 to pay the interest on the "70-74 Nicholson Street Purchase Loan" to two third parties. Hallmark, it should be remembered, was a company controlled by Mr Meletsis which has, as its sole shareholder, Genesis as trustee for the GH Family Trust through which, materially, the Meletsis and Karas families would have an entitlement to receive those proceeds.
114 It is reasonably open to infer from those facts and circumstances, and I draw the inference, that it was the intention of Mr Meletsis to remove the property and the sale proceeds from the potential reach of creditors, by transferring the property to a new company for a consideration disguised as to part as the assumption of liabilities by the purchaser company, when the real arrangement was that Establishment 5 would not have the responsibility to pay the balance of the purchase price paid until after completion of the development and, when it became payable, would do so to such entity as directed by Mr Meletsis, which is what actually occurred. By that mechanism, aside from the $800,000 which 70 Nicholson Street did receive in late 2011, the balance of the sale proceeds were diverted and concealed with the Meletsis and Karas family interests both obtaining the benefit of the balance of the purchase price (through Hallmark) and an entitlement to a share of the profits of the development (through the Neaniki Property Developments Trust).
115 The following evidence of Mr Meletsis, from his cross-examination, was telling:
You didn't take any steps to test the market to find out what alternative purchasers might have paid for this property, did you?---I always wanted - no, I didn't.
No. What were you going to say, you always wanted what?---To be involved in this development.
That's right. And that's why you didn't take any steps to test the market to find out whether or not another buyer might have paid more, because that wouldn't have allowed you to maintain an involvement in the development, would it?---I was a 75 per cent unitholder - the company was - and [Mr Georgakopoulos] was 25. And [Mr Georgakopoulos] left it up to me, so whatever decisions I made there was more for myself. I tried to work out the best possible return for myself.
116 And again when Mr Meletsis referred to the interest in the Neaniki Property Developments Trust as "I was 75 per cent" and again when discussing the contract of sale, he said:
At the time you did the deal, at 23 November, you expected to get $1 million in cash shortly thereafter for the company?---23 November - I was 75 per cent unitholder. I had a 50 per cent interest after that going forward. I wasn't concerned. No.
.…
And the reason that you didn't put the property in the hands of an agent or test the market yourself was because you wanted to find somebody who would engage in this joint venture deal with you, wasn't it?---The deal was to develop the property.
Yes. And that's why you didn't go to market with it?---I wanted to keep interest in it. I said that from the start.
117 In re-examination, Mr Meletsis maintained he thought he was owed "about $2.8, 2.9 million owing for [his] 50 per cent".
118 I accept the trustees' submission that Mr Meletsis' evidence is a stark acknowledgment that he orchestrated the sale of the Nicholson St property by 70 Nicholson Street in a way that had as part of the design that he keep an interest in it for himself. It is also evident that the sale was orchestrated in a way that had as part of its design for Mr Karas to keep an interest in it for himself.
119 I am also satisfied on the evidence to the Briginshaw standard of proof and find that Mr Meletsis acted with a dishonest and fraudulent design. That intent can be inferred from his involvement in the concerted plan and in each of the steps involved in its execution, but also from the following matters:
(a) the Nicholson St property was sold at a time when Mr Meletsis knew that Mr Karas had a very significant tax liability of $44 million to the ATO and the State Revenue Office had commenced an investigation into whether 70 Nicholson Street still qualified for a land tax concession as a rooming house (and was, on the information available to Mr Meletsis, most likely to levy such a tax);
(b) the unusual haste with which settlement under the contract of sale occurred, namely within two days of the contract being signed, the minimal involvement of solicitors on behalf of 70 Nicholson Street in selling the property, including the fact that it was Mr Speer who instructed solicitors to draft the contract of sale and the vendor's statement and the fact that settlement was effected as between Mr Meletsis and Mr Speer in the absence of solicitors and when only $300,000 of the $3 million purchase price had been paid;
(c) the utilisation of the façade of the assumption of liabilities by Establishment 5 to the value of $2 million to reduce the amount actually payable by Establishment 5 at settlement, when Mr Meletsis knew that no amount was owed by 70 Nicholson Street to Rover Nominees, which the Rover mortgage secured and knew that at least some of the liabilities that he included in the creditors schedule were not debts of 70 Nicholson Street for which it was or would become liable;
(d) the discharge of the Karas mortgage over the Nicholson St property at the time it was sold for nil consideration.
120 The involvement of Mr Speer, Establishment 5 and Hallmark in the concerted plan is equally evident. Mr Meletsis was also a director of Hallmark and his knowledge and actions can be imputed to Hallmark's participation in the concerted plan and the receipt of the $2.2 million from Establishment 5. Mr Speer was the director of Establishment 5 and his knowledge and actions can be imputed to Establishment 5's participation in the concerted plan and the transfer to it of the Nicholson St property. Mr Speer's knowledge of the dishonest nature of the concerted plan can readily be inferred from his involvement in:
(a) the decision to set up Establishment 5 and the Establishment 5 Unit Trust to acquire the Nicholson St property;
(b) the "negotiation" of the purchase price;
(c) the preparation of the contract of sale;
(d) the settlement of the purchase without tendering the full purchase price or even the full cash payment of $1 million;
(e) obtaining and lodging the discharge of the Rover mortgage for registration without Establishment 5 paying any amount to Rover Nominees;
(f) entering into arrangements, which were not documented, for the subsequent payment of the non-cash portion of the purchase price by Establishment 5 as directed by Mr Meletsis after completion of the development; and
(g) Establishment 5 paying $2.2 million to Hallmark as directed by Mr Meletsis after completion of the development.
121 It can also readily be inferred from the same facts and circumstances detailed above from which Mr Meletsis' dishonest and fraudulent design can be inferred that Mr Karas was also a party to the concerted plan with knowledge of its dishonest and fraudulent design. Mr Karas was not a director of 70 Nicholson Street at the time, but it is improbable that the sale occurred without his concurrence of its fraudulent design and purpose, as borne out by the sequence of events. Those events included that as part of the sale of the Nicholson St property, Mr Karas agreed to the discharge of the Karas mortgage without payment made by 70 Nicholson Street of the outstanding debt owed to him, which was then secured by the Karas mortgage. It is reasonable to infer that the reason that the Karas mortgage was discharged without payment was because otherwise the moneys may have been available to be applied in reduction of his tax debt.
122 The Meletsis parties were highly critical of the trustees' "concerted plan" allegation. Aside from urging the Court to accept their version of events - namely that the transfer of the Nicholson St property to Establishment 5 was the means by which Mr Meletsis was able to secure the finance and the experience that the project was lacking - which, they contended, was the "more plausible explanation" for the transfer than what they described as the trustees' "case theory", they argued that it was not clear from the pleading which creditors were intended to be defeated by the "concerted plan" or the alleged dishonest and fraudulent design. Further, they argued, no creditor of Mr Karas was defeated by the transfer of the Nicholson St property to Establishment 5, because his "interest" in the property was merely that of discretionary beneficiary of the GH Family Trust, which held units in the 70 Nicholson Street Unit Trust and, moreover, it had not been alleged that the transfer was in breach of the freezing orders. It was argued that if the trustees' case was that creditors of the company were defeated by the transfer, the only substantive potential creditor was the Commissioner of State Revenue for land tax of $138,000. Thus, the argument went, the trustees' case came down to the claim that Mr Meletsis conspired with Mr Karas and Mr Speer to avoid this land tax liability by transferring the property to another company which, they contended, would be equally liable for the land tax as it would happen. Moreover, the tax would remain as a first charge on the land notwithstanding the transfer. However, that is not to deny that the steps were taken and the transfer occurred at a time when Mr Karas faced a substantial liability to the ATO, which the ATO was seeking to enforce and freezing orders had been made against him and there was anticipation that the State Revenue Office would assess the company to a special land tax levy, nor does it gainsay the existence of a dishonest and fraudulent design in the actions of the respondents in effecting the transfer with the intent to put the property beyond the reach of creditors.
123 It was further submitted that contrary to the rule in Browne v Dunn, it was never squarely put to Mr Meletsis in cross-examination or in his public examination that his decision to sell the property to Establishment 5 was part of a plan hatched by him with Mr Karas and Mr Speer to avoid a debt to the Commissioner of State Revenue or a debt owed by Mr Karas to the Commissioner of Taxation or anyone else; nor was it put to Mr Karas, in cross-examination or in his public examination, that he participated in a plan with Mr Meletsis and Mr Speer to avoid payment of a debt owed by him to the Commissioner or a debt owed by the company to the Commissioner of Taxation; nor was it put to Mr Speer in his public examination that, by causing Establishment 5 to enter into a transaction to acquire the property from the company, he implemented a plan which he had formulated in concert with Mr Meletsis and Mr Karas to defeat a $138,000 claim by the Commissioner of State Revenue against the company or a claim by the Commissioner of Taxation against Mr Karas.
124 The rule in Browne v Dunn generally requires cross-examining counsel to put implications to a witness, which counsel proposes to submit can be drawn from the evidence so that the witness has the opportunity to respond. In Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; 44 ALR 607, Hunt J described the rule in Browne v Dunn as follows (at 16):
It has in my experience always been a rule of professional practice that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary both to give the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inference sought to be drawn.
The rule is an aspect of the principle that a trial must be conducted fairly, and where notice has been given that a witness's account may be subject to challenge, the rule does not apply. Notice that the witness's version of events may be subject to challenge may come from the pleadings or otherwise from the manner in which the case is conducted.
125 Such notice was given by the trustees in this case by the express pleading against the defendants (see para 72 of the second amended statement of claim). There was no obligation formally to put the matters identified to each of the witnesses in this proceeding.