Re Olrey Pty Ltd (No 2) [2016] VSC 18 (3 February 2016)

(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 be 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.[2]

2 As at 17 November 2015, the plaintiffs' claims against Olrey involved two claims of knowing receipt of trust property based upon:

(a) Olrey's acquisition of a property located at 800-802 Burke Road, Camberwell, on 10 December 2009 ('the Camberwell property'); and

(b) Olrey's receipt of an interest-free loan of $1.87 million from Ying Mui Pty Ltd, such loan having been approved by the first, second and fourth defendants in proceeding No SCI 2012 6147 in the Supreme Court of Victoria ('the main proceeding').

3 Shortly after the Court delivered judgment on 17 November 2015, the plaintiffs notified Olrey of their intention to withdraw the two Barnes v Addy[3] ('Barnes v Addy') claims referred to above. In addition, the plaintiffs withdrew a caveat which had been lodged over the Camberwell property and which underpinned an application by Olrey by way of counterclaim for the withdrawal of the caveat.

4 Further on 9 December 2015, Sifris J ordered by consent that the plaintiffs pay into court the sum of $36,593 as security for Olrey's costs of the proceeding up to and including 4.00pm on 11 December 2015.

5 On 11 December 2015, his Honour granted leave to the plaintiffs to file and serve a further amended statement of claim ('FASOC') and ordered the plaintiffs to pay Olrey's costs thrown away by reason of the amendments. On 17 December 2015, Olrey filed its defence to the plaintiffs' further amended statement of claim ('the defence').

6 Paragraph [455] of the FASOC pleads that, by reason of matters set out at (a) - (e) thereof '... it would be expedient for the Court, pursuant to section 48 of the Trustee Act, or alternatively, pursuant to its inherent jurisdiction, to remove Olrey, and appoint Amore, or alternatively such trustee that the Court considers appropriate, as the trustee of the FRG Investments Trust'.

7 On 18 December 2015, pursuant to leave granted by Sifris J, the first to fourth defendants in the main proceeding filed a counterclaim. Olrey is the seventh defendant by counterclaim. The counterclaim seeks relief, including (in the alternative) a declaration that all assets comprised in the FRG Investments Trust ('the Trust') currently held by Olrey as trustee of the Trust are held on constructive, or alternatively, resulting trust for Sharikat Ying Mui Sdn Bhd.

8 The third plaintiff by counterclaim, Lynn Ho, is the sole director of Olrey. Paragraph [15] of Olrey's proposed defence to the counterclaim dated 18 January 2016 pleads:

At the trial of the Proceeding it will inform the Court that it will abide by the court's decision in relation to the relief sought by the Counterclaim. [4]

9 Thus, on the one hand the plaintiffs by the FASOC seek Olrey's removal as the trustee of the Trust, whilst the first to fourth defendants seek a declaration that Olrey holds the assets within the Trust on a constructive trust for Sharikat Ying Mui Sdn Bhd.

10 The orders made by this Court on 17 November 2015 were subject to an application for leave to appeal by Olrey. This application was rejected by the Court of Appeal on 21 January 2016. The Court considered that the 'litigation landscape changed dramatically'[5] by reason of the plaintiffs abandoning the two Barnes v Addy claims which had previously been made against Olrey. The Court concluded that the advice that was given on 17 November 2015 had effectively been rendered redundant or irrelevant by the changes to the claims against Olrey.[6]

11 On 23 December 2015, Olrey's solicitors emailed my chambers with a request for the Court to hear and determine a fresh application for judicial advice. That application was heard on the 25 January 2016. The application was supported by an affidavit of Louise Gehrig sworn on 21 January 2016. The affidavit exhibits an opinion of Mr Wotherspoon of counsel.

12 Mr Wotherspoon, who appeared for Olrey on 25 January 2016, submitted a draft order seeking judicial advice in the following terms:

1. The plaintiff is directed that it would be justified in defending the claims advanced against it in the Main Proceeding but only as to the matters pleaded in paragraphs 58 and 65 of its defence dated 17 December 2015.
2. In the event that the plaintiff is to be removed from its trusts, it is justified in addressing the Court in the Main Proceedings concerning the matters in paragraph 55(a) to (c) of the Defence.
3. In relation to the Counterclaim filed 18 December 2015, the plaintiff would be justified in filing a defence in terms of the draft exhibited to the affidavit of Ms Louise Gehrig sworn 21 January 2016 and abiding by the Court's decision.
4. The Plaintiffs are permitted to have recourse to the assets of the FRG Investments Trust to pay the reasonable costs of this application and the costs of its participation in the Main Proceeding as set out in orders 1 to 3 above.
5. Vary Order 2 of the orders made 17 November 2015 to authorise the plaintiff to pay, out of the assets of the FRG Investments Trust, its costs of defending the claims made against it by the amended statement of claim filed 26 June 2015 in the Main Proceeding and pursuing its counterclaim, such costs being no greater than $48,377.00.

13 Olrey is the trustee of the Trust. The financial report for the Trust for the year ending 30 June 2015 are annexed to Ms Gehrig's affidavit of 21 January 2016.[7] The report discloses that as at 30 June 2015, the Trust's assets included cash of $40,965.50. However, the Trust's liabilities exceeds its assets in the amount of $31,347.60.

(a) the first, third and fourth plaintiffs in the main proceeding: Ying Mui Pty Ltd, George Ho and Han Ho; and

(b) the first, third, fourth and fifth defendants: Frank Ho, Lynn Ho, Ian Ho and Lokit Investments Pty Ltd.

The claims against Olrey constitute a small portion of a wide-ranging dispute between members of the Ho family and their associated corporate entities.

15 In so far as Olrey seeks advice that it is justified in actively defending the claims against it, it does so only in respect of the matters pleaded in [58] and [65] of the defence.

16 Paragraph [58] of the defence pleads to [458] of the FASOC. Paragraph [458] alleges (emphasis altered):

Further, by an agreement made on or about 8 March 2011, Frank and Lokit purported to enter into an agreement with Olrey (Impugned Olrey Agreement).

Particulars

The Impugned Olrey Agreement is in writing and may be inspected by appointment with the solicitors for the plaintiffs.

17 Paragraph [458] must be read in conjunction with [459] - [462], which are in the following terms (emphasis altered):

(a) signed by Frank, on his own behalf as a party to the Impugned Olrey Agreement;

(b) signed by Lynn, in her capacity as a director of Lokit on behalf of Lokit; and

(c) signed by Pooi, in her capacity as a director of Olrey on behalf of Olrey.

460. The Impugned Olrey Agreement provided, inter alia that:

(a) in consideration for the Impugned Olrey Agreement and the management of the business of Olrey by Frank, Olrey agreed that so long as Frank had an Guarantee and/or Indemnity outstanding for the performance of Olrey or the Trust, Frank must not be removed as a director of Olrey (clause 1) (Entrenchment Clause);

(b) in consideration of the providing of Frank's services, the parties agreed that Lokit must be paid an amount of 8% of all rental proceedings earned by Olrey and/or the Trust from any and all properties as may be registered to Olrey as Trustee of the Trust (clause 2) (8% Rental Clause); and

(c) upon the sale of any real estate, Lokit shall be entitled to an 8% fee which was agreed between the parties as being the fee for Frank providing the financial support and for Lokit foregoing the support which Frank might otherwise have provided to it (clause 2) (8% Sale Clause).

1. Lynn procured Olrey to execute the Impugned Olrey Agreement to give effect to the Asset Sale and Distribution Decision.

Particulars

The fact that Lynn procured Olrey to execute the Impugned Olrey Agreement to give effect to the Asset Sale and Distribution Decision is to be inferred from the following matters:

(i) The sole director of Olrey is Lynn;

(ii) Frank, with the knowledge and approval of Lynn, made the Asset Sale and Distribution Decision set out in paragraph 132 and implemented that decision as alleged throughout this pleading; and

(iii) The sole beneficiary of the Impugned Olrey Agreement was Lokit, the company to be paid 8% of rental and sale proceeds pursuant to the 8% Rental Clause and 8% Sale Clause, and Lokit is under the effective management and control of Frank and the only shareholders of Lokit are Frank and Pooi.

1. By reason of the matters set out in paragraphs 458 to 461 above, the conduct of Olrey, in executing the Impugned Olrey Agreement, was a breach of trust, because that conduct was engaged in:

(a) to give effect to the Asset Sale and Distribution Decision; and

(b) motivated by a bad faith, arbitrary, capricious, wanton, irresponsible and mischievious desire by Frank, with the knowledge, assistance and approval of Lynn, to give effect to the Asset Sale and Distribution Decision by transferring assets:

(i) to entities controlled by Frank or his immediate family or at their direction; and

(ii) in any event, to the exclusion of George, Han and Maureen.

18 By [58] of the defence, Olrey places in issue the enforceability of the Impugned Olrey Agreement:

58. To the allegations made in paragraph 458, it:

(a) admits that the Second Defendant purported to sign an agreement dated 8 March 2011 as an authorised officer of Olrey in accordance with s. 127 of the Corporations Act 2001 (Cth) and that the First and Fifth Defendants were named as additional parties to the said agreement;

(b) says that, in the period from 1 July 2010 to 30 June 2015 and in the belief that the agreement was binding and enforceable, Olrey paid or became liable to pay the Fifth Defendant sums totalling $40,130.24 (ex GST);

(c) says further that on 7 December 2015 it obtained legal advice to the effect that the agreement was unenforceable against Olrey because:

(i) the agreement contained provisions which were incompatible with r. 21.2 of Olrey's Constitution (which rule was given statutory force by s. 140 of the Corporations Act 2001 (Cth)); and

(ii) s. 127 of the Act had not been complied with-

and that steps should be taken to have the agreement set aside.

PARTICULARS

A copy of the opinion containing the legal advice is available for inspection at the offices of the Eighth Defendant's solicitors by appointment.

(d) following the receipt of the 7 December 2015 advice, Olrey's solicitors wrote to the solicitors for the First and Fifth Defendants foreshadowing instructions from Olrey to seek to set aside the 8 March 2011 agreement.

PARTICULARS

A copy of the said letter is available for inspection at the offices of the Eighth Defendant's solicitors by appointment.

(e) says that, at the date of this Defence, Olrey has not received a reply from the solicitors for the First and Fifth Defendants.

19 The Court will make an order directing that Olrey is justified is defending the claims advanced against in the main proceedings on the basis of the matters pleaded in [58] of the defence.

20 Olrey also seeks advice that it is justified in defending the claims against it based upon [65] of the defence. This paragraph pleads:

Further, if its conduct in executing the 8 March 2011 agreement was a breach of trust (which is denied), it was not a dishonest and fraudulent breach of trust for the purposes of a second limb Barnes v Addy (1874) LR 9 Ch App 244 claim and Olrey and the First and Third Defendants are not liable thereby.

21 Paragraph [65] of the defence does not state to which paragraph in the FASOC it responds. However, the content makes it clear that it relates to a Barnes v Addy claim. The FASOC contains no Barnes v Addy claim against Olrey. Thus paragraph [65] of the defence seems to respond to the allegations in [464] of the FASOC that Frank and Lynn Ho knowingly assisted, counselled or procured Olrey's alleged breach of trust.

22 The claim in [464] of the FASOC is a claim made against Frank and Lynn Ho. Olrey is not justified in defending this claim. Frank and Lynn Ho are both separately represented in the main proceeding. During the hearing on 25 January 2016, Mr Wotherspoon submitted that Olrey wished to lead evidence from Lynn Ho providing an innocent explanation for her execution of the Impugned Olrey Agreement. Ms Ho can lead evidence as to the circumstances in which she executed the agreement in her own defence of the claim pleaded against her in [464] of the FASOC.

23 Paragraph [62] of Olrey's defence denies the allegations of breach of trust in [462] of the FASOC. However, in contrast to paragraphs [58] and [65] of the defence, Olrey has not sought judicial advice that it would be justified in actively defending the claim of breach of trust in [462] of the FASOC.

24 Olrey seeks advice that in the event that it is to be removed from its trusts, it is justified in addressing the court in the main proceeding concerning the matters in [55](a) - (c) of the defence. I accept that Olrey is justified in doing so.

25 Olrey seeks advice that, in relation to the counterclaim filed on 18 December 2015, it is justified in filing a defence in the terms of the draft exhibited to the affidavit of Ms Gehrig sworn 21 January 2016, and abiding by the court's decision. The proposed defence to counterclaim is only two pages in length. Olrey does not plead to most paragraphs in the counterclaim. Paragraph [15] of the proposed defence to counterclaim states:

At the trial of the Proceeding it will inform the Court that it will abide by the Court's decision in relation to the relief sought by the Counterclaim.

26 Olrey is justified in filing a defence to the counterclaim in the terms exhibited to Ms Gehrig's affidavit. Further, it is justified and it is appropriate that it adopt the course of abiding by the court's decision in respect of the matters pleaded against it in the counterclaim.

27 Olrey should be permitted to have recourse to assets of the Trust to pay the reasonable costs of its participation in the main proceeding as set out above. In Ms Gehrig's affidavit of 21 January 2016, she estimates that the costs of Olrey's limited involvement in the proceedings would be approximately $37,000 plus GST. This estimate, however, assumed judicial advice that Olrey would be justified in defending the claim consistent with [65] of the defence. I have declined to give such advice. As such, Olrey's costs of participating in the main proceeding will be limited to:

(a) Appearing on the first day of the hearing and addressing the court as to the limited role it intends to play in the proceeding;

(b) Making submissions in respect of the enforceability of the Impugned Olrey Agreement as set out in [58] of the defence; and

(c) Addressing the court concerning the matters pleaded in [55](a) - (c) of the defence.

28 Paragraph [2] of the orders made by the Court on 17 November 2015 provided as follows:

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.

29 By its current application, Olrey seeks an order in the following terms:

Vary Order 2 of the orders made 17 November 2015 to authorise the plaintiff to pay, out of the assets of the FRG Investments Trust, its costs of defending the claims made against it by the amended statement of claim filed 26 June 2015 in the Main Proceeding and pursuing its counterclaim, such costs being no greater than $48,377.00.

30 On 11 December 2015, Sifris J ordered the plaintiffs to pay the costs of Olrey thrown away by reason of the amendments to the statement of claim.

31 On 25 January 2016, I was advised by Mr Wotherspoon that those costs have been quantified at $48,377.

32 The plaintiffs' withdrawal of the two Barnes v Addy claims against Olrey has dramatically altered the nature of the proceedings as between the plaintiffs and Olrey. An order has been made that the plaintiffs pay Olrey's costs thrown away by reason of the amendment. Those costs will be significant. As matters presently stand, the effect of paragraph [2] of the orders made by the Court on 17 November 2015 is that Olrey is not able to pay its lawyers for work undertaken in defending the main proceeding out of the assets of the Trust without further order or orders.

33 The conclusion is irresistible that Olrey has been put to considerable trouble and expense defending claims brought by the plaintiffs which have now been withdrawn. The orders made by Sifris J requiring the plaintiffs to pay Olrey's costs thrown away by reason of the amendment has the practical effect that if Olrey pays its lawyers from the Trust assets, the Trust will be reimbursed for a significant portion of those payments as a consequence of the costs order made by Sifris J on 11 December 2015.

34 Paragraph [2] of the Court's order made on 17 November 2015 expressly contemplated the possibility that circumstances may warrant Olrey utilising trust assets to pay the costs of defending the main proceeding. I am satisfied that the abandonment by the plaintiffs of the Barnes v Addy claims against Olrey together with the costs order made by Sifris J on 11 December 2015, are circumstances warranting a further order as envisioned by paragraph [2] of the orders made on 17 November 2015.

35 An order will be made authorising Olrey to pay out of the assets of the Trust its costs of defending the claims made against it by the amended statement of claim filed on 26 June 2015 in the main proceeding and pursing its counterclaim, such costs being no greater than $48,377. An order shall also be made that Olrey's costs of the application heard on 25 January 2016 are to be paid out of the assets of the Trust.

[1] Re Olrey Pty Ltd [2015] VSC 643.

[3] (1874) LR 9 Ch App 244.

[4] Affidavit of Louise Gehrig sworn 21 January 2016, exhibit "LG2", 486.

[5] Re Olrey Pty Ltd (Unreported, Court of Appeal Supreme Court of Victoria, Maxwell P, Whelan and Santamaria JJA, 21 January 2016) [5].

[7] Affidavit of Louise Gehrig sworn 21 January 2016, exhibit "LG2", 318-325.