Re Olrey Pty Ltd [2015] VSC 643 (17 November 2015)

1 Olrey Pty Ltd (Olrey) is the trustee of the FRG Investments Trust. Olrey is the 8th defendant in proceeding No SCI 2012 6147 in the Supreme Court of Victoria ('the proceedings'). Olrey has made an application pursuant to Order 54.02 of the Supreme Court (General Civil Procedure) Rules 2005 seeking judicial advice that it would be proper for it to defend the proceedings and to make a counterclaim seeking removal of a caveat lodged on the title of its primary asset, a property located at 800-802 Burke Road, Camberwell ('Camberwell property'). Olrey also seeks an order that it would be proper for it to access trust funds for the purpose of funding both its application under Order 54.02 and its defence and counterclaim in the proceedings.

2 On 25 September 2015, I delivered judgment in Re Frosthollow Pty Ltd ('Re Frosthollow').[1] Frosthollow is the 7th defendant in the proceedings. Lynn Hoh is the 3rd defendant. Ms Hoh is currently the sole director of Frosthollow and is also, currently, the sole director of Olrey. However, in December 2009 to March 2010, the relevant period in respect of the events underpinning the plaintiffs' claims against Olrey, its directors were Frank Hoh and his wife Pooi Hoh. They are the 1st and 2nd defendants in the proceedings.

3 The primary beneficiaries of the FRG Investments Trust include the 1st, 3rd and 4th plaintiffs in the proceedings: Ying Mui Pty Ltd ('Ying Mui'), George Hoh and Han Hoh; and the 1st, 3rd, 4th and 5th defendants: Frank Hoh, Lynn Hoh, Ian Hoh and Lokit Investments Pty Ltd. The claims against Olrey are a relatively small part of a wide ranging dispute between the members of the Hoh family and their associated corporate entities.

4 The plaintiffs' claims against Olrey are confined to Olrey's acquisition of the Camberwell property on 10 December 2009 and a subsequent interest free loan of $1.87 million which was authorised by the 1st, 2nd and 4th defendants, as directors of Ying Mui, in March 2010. In the period December 2009 to March 2010, the 1st and 2nd defendants were directors of Olrey. The 1st, 2nd and 4th defendants were also directors of Ying Mui.

5 The purchase price for the Camberwell property was $3.16 million. Olrey borrowed $1.5 million from the ANZ Bank under a commercial bill facility and $1.87 million from Ying Mui. The most recent accounts for the FRG Investments Trust record the trust as currently being indebted to the ANZ Bank in the sum of $1.5 million, and the Ying Mui trust in the sum of $1,870,345.60.

6 The plaintiffs allege[2] that Frank Hoh 'procured that Olrey and not Ying Mui became the registered proprietor of the Camberwell property' notwithstanding the financial contribution which Ying Mui made to the acquisition of the property. The plaintiffs allege that in so doing, Frank Hoh had a conflict of interest by reason of his being:

(i) a director of Ying Mui and also a director and shareholder of Olrey; and

(ii) the husband of Pooi Hoh who is also a director of Olrey.

7 The plaintiffs allege that Frank Hoh's conduct constitutes a breach of s 181(1)(a) and (b) of the Corporations Act 2001 ('Corporations Act'). They also allege that Frank Hoh breached his fiduciary duty to Ying Mui and acted in contravention of s 182(1)(a) of the Corporations Act.

8 The plaintiffs allege that in receiving the Camberwell property, Olrey knowingly received trust property because it had actual or constructive knowledge of the alleged breaches of fiduciary duty by Frank Hoh.[3]

9 The plaintiffs also allege that the 1st, 2nd and 4th defendants, in their capacity as directors of Ying Mui, purported to vote in favour of a resolution on 8 March 2010 whereby the $1.87 million loan advanced by Ying Mui to Olrey would be interest free. The plaintiffs allege that the 1st, 2nd and 4th defendants, in purporting to authorise an interest free loan breached their fiduciary duty to Ying Mui and contravened ss 181(1)(a) and (b) and 182 of the Corporations Act.

10 The plaintiffs allege that by reason of the interest free loan, Olrey knowingly received trust property. The plaintiffs allege[4] that by reason of its receipt of the Camberwell property and/or the interest free loan, Olrey is:

(i) required to pay equitable compensation to Ying Mui;

(ii) further or alternatively, is a constructive trustee with respect to the Camberwell property; and

(iii) further or alternatively, is a constructive trustee with respect to the funds provided pursuant to the interest free loan.

11 If the 1st, 2nd and 4th defendants successfully defend the allegations against them, the claims against Olrey of knowing receipt of trust property will fail. The claims of knowing receipt of trust property are contingent upon the court upholding the allegations of breach of fiduciary duty against the 1st and/or 2nd and/or 4th defendants ('the Relevant Defendants'). Mr Wotherspoon, who appeared for Olrey, accepted this to be so.[5] The Relevant Defendants have denied the allegations of breach of fiduciary duty. By their defence dated 28 August 2015, they plead that there was no conflict associated with procuring Olrey as the registered proprietor of the Camberwell property and authorising an interest free loan. They plead that the interests of Ying Mui and Olrey were aligned because the Ying Mui trust and the FRG Investments Trust have the same beneficiaries, save for Robert Hoh. They plead that in their respective capacity as directors of Ying Mui and Olrey, the 1st and 2nd defendants did not stand to gain from the acquisition by Olrey of the Camberwell property or the authorisation of the interest free loan.

12 Mr Wotherspoon submitted that Olrey wishes to advance additional and different defences and submissions to those which have been pleaded by the Relevant Defendants.

13 On 18 September 2015, Olrey filed a defence and counterclaim. In its defence, Olrey denies that there was any breach of fiduciary duty by the 1st defendant, Frank Hoh. It denies that there was any conflict of interest in Ying Mui lending money to Olrey in circumstances where Ying Mui obtained a right of first refusal in respect of any retail premises subsequently built on the Camberwell property, such right of refusal being recorded in the minutes of a meeting on 8 March 2010.[6] Olrey also pleads that cl 8(24) and 8(32) of the Ying Mui Trust Deed empowered Ying Mui to advance an interest free loan to Olrey for the purpose of the acquisition of the Camberwell property.[7] It further pleads that the lending of money by Ying Mui to Olrey was disclosed to George Hoh by an email from Frank Hoh on 11 March 2010.[8]

14 Olrey denies that Ying Mui has suffered any loss because Ying Mui retains the benefit of the debt of $1.87 million recorded in the financial statements of Olrey.[9] As to the allegation of knowing receipt of trust property, in addition to its denial that the 1stdefendant breached his fiduciary duties, it pleads:

(i) the Camberwell property was not trust property because it was purchased from a third party, Wenzhou Pty Ltd;[10] and

(ii) that upon becoming the registered proprietor of the Camberwell property it obtained an indefeasible title pursuant to s 42 of the Transfer of Land Act 1958.[11]

15 By its counterclaim, Olrey seeks an order that Ying Mui withdraw a caveat which it lodged on the title to the Camberwell property on 24 June 2015. Ying Mui claims a caveatable interest under an implied, resulting or constructive trust. The caveat is an absolute prohibition on the registration of further dealings on the title.

16 Olrey's application was heard on 5 November 2015. The application was supported by an affidavit sworn by Louise Gehrig, a partner with Thomson Geer, the solicitors who were retained to act for Olrey on 3 September 2015. The affidavit annexes a confidential opinion from Mr Wotherspoon regarding Olrey's prospects of defending the claim and pursuing a counterclaim. Ms Gehrig deposes to an assessment of Olrey's costs of the proceeding (on an estimate of a 10 day hearing) in the sum of $352,000.00, inclusive of GST. I have considered Mr Wotherspoon's advice. I am satisfied that Olrey has sufficient prospects of success to warrant advice that it is justified in proceeding with the defence to the claims made against it as well as proceeding with its counterclaim. However, for the reasons set out below, I have refrained from giving advice that the trustee is justified in accessing trust funds for the purpose of its defence and counterclaim.

17 At [11] of Re Frosthollow, I summarised the principles relevant to the question of whether it is appropriate for a trustee to have access to trust funds for the purpose of funding a defence. Whether it is appropriate will depend on what is in the best interests of the FRG Investments Trust having regard to the particular circumstances of the case. Relevantly, such circumstances include:

• the nature of the trust;
• whether the trustee has a pecuniary interest in the outcome of the litigation;
• the nature of the allegations against the trustee including whether there is an allegation of breach of trust;
• whether the beneficiaries of the trust have a substantial financial interest in defending claims, including claims which are made against the trustee;
• the financial means of the beneficiaries to fund their defence;
• the merits and strengths of the claim against the trust estate;
• the extent to which recourse to the trust's estate for defence costs would deprive the successful claimant of the fruits of litigation; and
• whether the costs likely to be incurred by the trustee in defending the claims, including potential exposure to a costs order in favour of the plaintiffs, are proportionate.[12]

18 The FRG Investments Trust is a discretionary trust. There are 12 nominated beneficiaries. These include the 1st, 3rd and 4th plaintiffs and the 1st, 3rd, 4th and 5th defendants. The claim of knowing receipt of trust property (both in respect of the receipt of the Camberwell property and the interest free loan) is contingent upon a finding that the Relevant Defendants breached fiduciary duties which they owed to Ying Mui. Olrey has denied that these defendants breached their fiduciary duties. The basis of this denial differs from the basis upon which the Relevant Defendants have denied a breach of fiduciary duty in their own defence. Nevertheless, it is clear that the Relevant Defendants will be active contradictors to the plaintiffs' claim that they breached their fiduciary duties. Their legal representatives will have noted and are likely to advance the additional grounds of denial of breach of fiduciary duty pleaded in Olrey's defence.

19 Mr Wotherspoon submitted that only Olrey has a direct interest in defending the claim of knowing receipt of trust property because the claim is only brought against it. I accept this submission. Nevertheless, the practical position is that the claim against Olrey will not succeed absent a finding of breach of fiduciary duty against the Relevant Defendants. Further, in order to make good its claim of knowing receipt of trust property, the plaintiffs bear the onus of establishing on the balance of probabilities that:

(i) The Relevant Defendants acted in breach of their fiduciary duties to Ying Mui;

(ii) that the Camberwell property and/or the impugned loan funds were trust property held by Ying Mui; and

(iii) that Olrey received trust property with knowledge, or with constructive knowledge, of (i) and (ii).

Plainly, irrespective of whether Olrey is an active participant in the proceedings, in order for the plaintiffs to establish the requisite knowledge by Olrey of the matters set out above, the plaintiffs will have to cross-examine the 1st and 2nd defendants regarding those matters.

20 The claim alleging knowing receipt of trust property by Olrey is one claim amongst many allegations by the plaintiffs against the defendants. The trial has been listed on an estimate of 10 days. At face value that estimate appears optimistic. The estimated costs of $352,000.00 is based on 6 days' preparation and 6 days' attendance by counsel and a partner with the remaining 4 days to be attended by a junior solicitor. I have taken account of the attempt to minimise the costs of Olrey's participation in the proceedings. However, the costs of $352,000.00 are disproportionate to the benefits to the trust from accessing trust funds to fund the defence and counterclaim.

21 First, there will be active, well represented, contradictors to the claims of breach of fiduciary duties which are an essential element of the cause of action of knowing receipt of trust property. Second, the plaintiffs cannot succeed in respect of the knowing receipt claim unless they lead evidence which establishes that Olrey knowingly received trust property and in circumstances constituting a breach of fiduciary duties to Ying Mui. These issues will be fully ventilated at trial irrespective of whether Olrey is an active participant in the litigation. The question of whether, as Olrey has pleaded, the Camberwell property is not trust property because it was acquired from a third party is a simple objective matter of fact. The issue having been raised by Olrey's defence, the plaintiffs will have to address it. Third, the estimated costs of $352,000.00 must be considered in the light of the most recent accounts of Olrey which disclose a net deficiency for the financial year ending 30 June 2014 of $56,164.00. As Olrey has almost no liquid assets, the sum of $352,000.00 will have to be borrowed. I was informed by Mr Wotherspoon that if given advice that it is appropriate for Olrey to fund its defence from trust assets, the company intends to borrow the funds from Lynn Hoh, the 3rd defendant, who is currently the sole director of the company.

22 I do not consider it to be in the interests of the beneficiaries of the trust, which include three of the four plaintiffs, for Olrey to go down the path of accumulating significant debts to fund its defence. Mr Wotherspoon submitted that absent judicial advice that it is appropriate to fund the defence out of trust assets, it would be a breach of trust for Ms Hoh, as a director, to cause Olrey to spend any money on the defence. He submitted that if the plaintiffs' claim against Olrey was successful, Ms Hoh would be personally liable for the amount expended on the defence pursuant to s 197 of the Corporations Act. Section 197(1) provides:

A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not discharged, and cannot discharge, the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets solely because one or more of the following:

(i) a breach of trust by the corporation;

(ii) the corporation's acting outside the scope of its powers as trustee;

(iii) a term of the trust denying, or limiting, the corporation's right to be indemnified against the liability.

The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

Note: The person will not be liable under this subsection merely because there are insufficient trust assets out of which the corporation can be indemnified.

...

23 The effect of s 197(1) is that if, absent judicial advice, Olrey borrows funds from Ms Hoh to fund the litigation and then subsequently cannot repay that debt to her, Ms Hoh might have to discharge the debt to herself. Effectively, her loan to the company could become a gift. Contrary to Mr Wotherspoon's submission, I do not consider s 197 to be a fundamental obstacle to Olrey borrowing money from Ms Hoh to fund its defence and counterclaim. Mr Wotherspoon has advised Olrey that it has good prospects of defence and in respect of its counterclaim. If it is ultimately successful at trial this will be reflected in an order for costs, which in turn can be used to repay any moneys advanced by Ms Hoh to fund the defence and counterclaim. Further, if Olrey is unsuccessful, any loan from Ms Hoh will only become repayable upon her making a demand for repayment.

24 When I pointed out to Mr Wotherspoon that I had refused to give Frosthollow Pty Ltd judicial advice that it would be appropriate to fund its defence out of trust assets he responded:

Yes, well it appears to me that Frosthollow will not be a moving party... Because to put itself in funds will involving breaching, or committing a breach of trust.[13]

25 In fact, since the order was made in Re Frosthollow on 25 September 2015, Frosthollow Pty Ltd has filed a defence, an affidavit of documents sworn by Lynn Hoh and filed further and better particulars of its defence. In addition, on 11 November 2015, Hargrave J made an order by consent for security for Frosthollow's costs in the sum of $69,500.00 up to and including mediation on 20 November 2015. Plainly, the absence of advice to Frosthollow that it was appropriate to fund its defence from trust assets (subject to further order of the Court) has been no impediment to Frosthollow actively pursuing its defence of the plaintiff's claims.

26 I accept that Olrey has a direct interest in seeking to remove the caveat from the title of the Camberwell property. I also accept that given the caveat imposes an absolute prohibition on any dealings with the property, Olrey has good prospects of obtaining orders for the removal of the caveat. Ying Mui loaned $1.87 million to Olrey towards the purchase price of the Camberwell property of $3.16 million. Olrey raised $1.5 million itself via a commercial bill facility. It is difficult to envisage on what basis Ying Mui could establish an interest by way of constructive trust (the only interest it claims) equivalent to the total value of the property such as to justify an absolute prohibition on any dealings with the property. Nevertheless, based on the submissions advanced by Mr Wotherspoon on 5 November 2015 I am satisfied that there is no pressing need for Olrey to obtain removal of the caveat.

27 If Olrey decides not to actively defend the plaintiffs' claims it will not be prejudiced if it awaits the judgment of the Court on the question of whether, and if so, to what extent, the plaintiffs have an interest in the Camberwell property pursuant to a constructive trust. Absent the Court making a finding that Olrey holds 100% of the Camberwell property pursuant to a constructive trust for the plaintiffs' benefit, it is difficult to envisage the plaintiffs resisting an application for removal of the caveat. Such application could be brought by way of a separate application pursuant to s 90(3) of the Transfer of Land Act 1958.

28 Olrey is entitled to an order for its costs in respect of its application under Order 54. The fact that the Court has declined to provide advice that it is appropriate to access trust funds to fund its defence and counterclaim has clarified the position of Olrey as trustee of the FRG Investments Trust. This outcome has justified Olrey in bringing the application.

(i) Olrey Pty Ltd is directed that it would be appropriate and that it would be justified in defending the claims made against it in its capacity as trustee of the FRG Investments Trust in proceeding No. SCI 2012 6147 in the Supreme Court of Victoria;

(ii) Subject to further order of the Court, Olrey Pty Ltd is directed that it would not be appropriate and Olrey Pty Ltd is not justified in paying the costs of defending the 2012 proceeding and pursuing a counterclaim in that proceeding out of the assets of the FRG Investments Trust; and

(iii) Olrey Pty Ltd's costs of the originating motion dated 23 October 2015 are to be paid out of the assets of the FRG Investments Trust.

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[1] [2015] VSC 512.

[2] Plaintiff's amended statement of claim dated 23 June 2015, [101].

[5] Transcript of Proceedings, Re Olrey Pty Ltd (Supreme Court of Victoria, S CI 2015 5526, McDonald J, 5 November 2015) T9 LL 7-10.

[6] Defence and Counterclaim of the Eighth Defendant dated 18 September 2015, [48(a)].

[12] Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand & Anor [2008] HCA 42; (2008) 237 CLR 66, [76], [84] and [162].

[13] Transcript of Proceedings, Re Olrey Pty Ltd (Supreme Court of Victoria, S CI 2015 5526, McDonald J, 5 November 2015) T37 LL13-17.