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[2010] VSC 388
Supreme Court of Victoria
2010-09-02
ROBSON J
Original judgment source is linked above.
PRACTICE AND PROCEDURE - effect of orders and declarations as to ownership of real property - dispute as to basis of order - whether interest in trust property held through unit trust or independently of unit trust - order applied by its terms
CORPORATIONS - whether director breached duties under ss 180, 181 and 182 of the Corporations Act 2001 - company a trustee of a unit trust - extended family dispute as to beneficial ownership of two properties held by company as trustee of unit trust - properties mortgaged to raise finance for director's mother to buy a house - company's assets used to finance costs of litigation over beneficial ownership of assets held by the company as trustee - whether company in breach of trust - whether director in breach of duties - breaches found
TRUSTS - whether director liable as a constructive trustee for breaches of trust by trustee company - liability found
RELEASE - whether release in previous proceedings applied to proceeding against director by the plaintiffs - contra preferentem rule - release applied
TORRENS SYSTEM - failure to lodge a caveat by prior equitable interest holder - whether priority lost in prior equitable interest in favour of subsequent interest holder - priority deferred
Abigail v Lapin [1934] AC 491
Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201
ASIC v Gallagher (1993) 11 WAR 105
ASIC v Maxwell[2006] NSWSC 1052; (2006) 59 ACSR 373
ASIC v Macdonald (No 11) [2009] NSWSC 287; (2009) 230 FLR 1
ASIC v Sydney Investment House Equities [2008] NSWSC 1224; (2008) 69 ACSR 1
Barnes v Addy (1874) LR 9 Ch App 244
Beale v Government Insurance Office of NSW (1997) 48 NSWLR 430
Re Beddoe [1893] 1 Ch 547
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 225 FLR 1
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
Brisbane City Council v Attorney-General for Queensland [1979] AC 411
Charles v Federal Commissioner of Taxation [1954] HCA 16; (1954) 90 CLR 598
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226
Cornwell v The Queen [2007] HCA 12; (2007) 231 CLR 260
Costa and Duppe Properties Pty Ltd v Duppe [1986] VicRp 9; [1986] VR 90
Cowan v Scargill [1985] Ch 270
CPT Custodian Pty Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98
CPT Manager v Chief Commissioner of State Revenue (2006) 64 ATR 654
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89
Glenn v Federal Commissioner of Land Tax [1915] HCA 57; (1915) 20 CLR 490
Halloran v Minister Administering National Parks and Wildlife Act 1974 [2006] HCA 3; (2007) 229 CLR 545
Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121
Heid v Reliance Finance Corporation Pty Ltd [1983] HCA 30; (1983) 154 CLR 326
Highwater Nominees Pty Ltd v Mead [2006] WASC 17
Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
ING Life Ltd v Commissioner of State Revenue [2008] QSC 248
J. & H. Just (Holdings) Pty. Ltd. v. Bank of N.S.W [1971] HCA 57; (1971) 125 CLR 546
Kimberly-Clark Australia Pty Ltd v Arico Trading International Pty Ltd [2001] HCA 8; (2001) 207 CLR 1
Kuru v New South Wales [2008] HCA 26; [2008] 236 CLR 1
Jacobs v Platt Nominees Pty Ltd [1990] VicRp 14; [1990] VR 146
Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) [1965] HCA 17; 113 CLR 265
Lend Lease Funds Management Ltd v Commissioner of State Revenue [2009] VSC 360
Lockwood Security Products Pty Ltd v Doric Products Pty Ltd [2004] HCA 58; (2004) 217 CLR 274
Malhotra v Tiwari [2005] VSC 496
Marchesi v Barnes [1970] VicRp 56; [1970] VR 434
Moffett v Dillon [1999] VSCA 32
R v Byrnes and Hopwood [1995] HCA 1; (1995) 183 CLR 501
Re S&D International Pty Ltd (No 1) [2009] VSC 225
S&D International Pty Ltd (in liq) v Malhotra [2006] VSC 280
Saunders v Vautier [1841] EngR 629; (1841) 49 ER 282
Shropshire Union Railways and Canal Company v The Queen (1875) LR 7 HL 496
Tatmar Pastoral Co Pty Ltd v Housing Commission of New South Wales (1984) 54 ALR 155
Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1; [1972] AC 153
Vrisakis v ASIC (1993) 11 ACSR 162
1 This judgment is the second given in this proceeding. Many of the background facts are set out in the earlier judgment.[1] Each of the plaintiffs and the defendants to this proceeding claim an interest over moneys paid into court. The moneys are the net proceeds from the sale of real property previously registered in the name of S&D International Pty Ltd (in liquidation) (S&D), the second plaintiff, as trustee. To minimise costs and for ease of determination, the various claims have been dealt with in separate hearings. I have already heard and determined claims in this proceeding concerning securities held by the first defendant, MIG Property Services Pty Ltd (MIG).[2] This current judgment deals with claims between the plaintiffs, the third defendant, Mr Malhotra, the fourth defendant, Mr Bill Velos, and the fifth defendant, Mr Pradeep Tiwari.
2 The introductory facts are essentially drawn from my reasons in the previous judgment,[3] but due to new evidence I make some necessary changes. S&D acted as the trustee for the S&D International Unit Trust (the "Unit Trust"). An issue in the current hearing is the true effect and meaning of the order of Balmford J in Malhotra v Tiwari.[4] This issue did not arise for consideration in Re S&D International Pty Ltd (No 1).[5] Accordingly, some statements made in the introduction in Re S&D International Pty Ltd (No 1) have been amended here to recognise the issue to be resolved in this hearing.
3 The property held by S&D as trustee included a property at 580 Barkly Street, Footscray which has now been sold by the first mortgagee, MIG Property Services Pty Ltd (MIG) (the first defendant), and another property at 45 Boronia Drive, Hillside which has now been sold by the liquidator of S&D (the first plaintiff).
4 Previously, the Hillside property had been in the possession of the second defendant Mr Vartelas, who was appointed by the registered first mortgagee and mortgage debenture holder, MIG, as agent in possession. Following the decision in Re S&D International Pty Ltd (No 1), the property was delivered up to the liquidator of S&D and recently sold by him.
5 Prior to S&D's liquidation, it carried on an Indian wholesale grocery business at the Footscray property known as Bharat Traders International. The business was initially established as a partnership in 1991 by Dinesh Malhotra, the third defendant, his brother, Vinod Malhotra, and Markandey Tiwari, the then husband of Sheela Tiwari. In 1992, Markandey Tiwari divorced his wife Sheela Tiwari. Sheela then married Dinesh Malhotra in January 2003. They separated in January 1994 and divorced on 5 June 1995. In 1992, Markandey and Vinod left the partnership and Dinesh Malhotra was registered as sole proprietor of the business name. The business was thereafter built up and conducted by Sheela Tiwari and Dinesh Malhotra. In July 2005, Mr Malhotra married Renu Kapoor. In mid-1999, Kapoor commenced divorce proceedings against Mr Malhotra and in September that year applied to the Family Court for a property settlement, in which proceeding both parties filed affidavits concerning Mr Malhotra's financial affairs. Kapoor alleged that Mr Malhotra had a share in the Footscray property and the business. Mr Malhotra denied that allegation.
6 In 1996, the Unit Trust was established and S&D appointed the trustee. In 1996, S&D took over the business. Also in 1996, the Footscray property was acquired and registered in S&D's name. Subsequently, in 2000, the Hillside property was acquired and registered in S&D's name. These properties were mortgaged to the Commonwealth Bank of Australia ("CBA"), along with a mortgage debenture over the assets and undertaking of S&D. Subsequently, these securities were assigned to and held by MIG. As mentioned above, in Re S&D International Pty Ltd (No 1) it was found that those securities have been satisfied and discharged from the proceeds of the sale of the Footscray property.
7 The two units in the Unit Trust were held in the name of Sheela Tiwari. Dinesh Malhotra resigned as a director in 1999; although he subsequently claimed in 2002 that at all times he was the beneficial owner of half the Footscray and Hillside properties, half the business, half the units in the Unit Trust and half the shares in the trustee (S&D). In April 2002, Dinesh Malhotra and Sheela Tiwari fell out. On 26 April 2002, Dinesh Malhotra was locked out of the Footscray property by Sheela Tiwari where they had both resided behind the shop. Prior to this, on 18 April 2002, Mr Malhotra had lodged caveats over the Footscray and Hillside properties claiming to hold a 50 per cent share of the property - an estate in fee simple. About this time, Sheela Tiwari consulted Velos & Davis solicitors and retained them to remove the caveats. On 8 April 2002, Pradeep Tiwari was appointed (having turned 18) a director of S&D along with his parents Sheela Tiwari and Markandey Tiwari.
8 After Mr Malhotra was locked out of the Footscray property, in July 2002 Sheela Tiwari and her son Pradeep Tiwari caused S&D to grant unregistered mortgages to the ANZ Bank over the Footscray and Hillside properties and a registered mortgage debenture over the assets and undertaking of S&D as security for a $200,000 business loan from ANZ Bank to S&D. Those moneys and further moneys of S&D were used, along with a home loan from the ANZ Bank to Sheela Tiwari, to enable Sheela Tiwari to buy a home at Point Cook. The ANZ Bank did not register the second mortgages or lodge a caveat giving notice of its unregistered second mortgages over the Footscray and Hillside properties until 2005 when it lodged caveats, but at no stage did it seek to register the mortgages. It registered with ASIC the mortgage debenture which gave a fixed charge over the properties.
9 On 19 August 2002, Dinesh Malhotra instituted against Sheela Tiwari and S&D legal proceedings in the Supreme Court of Victoria to establish his half interest in the Footscray and Hillside properties, the units in the Unit Trust, and the shares in the trusts and the business. Soon thereafter on 25 September 2002, he delivered his statement of claim. On about 10 October 2002, Velos & Davis received a company search of S&D which disclosed that the ANZ Bank had a taken a mortgage debenture on 11 July 2002 over the assets and undertaking of S&D to secure S&D's indebtedness to the ANZ Bank.
10 Thus began a long series of court cases which have led to the current proceedings. Suffice to say, Dinesh Malhotra succeeded in his initial proceedings before Balmford J in establishing, inter alia, that he was an equal joint beneficial owner in the Footscray property, the Hillside property and the units in the Unit Trust.
11 Sheela Tiwari retained the firm of Velos & Davis to act for her and S&D in the proceedings instituted by Mr Malhotra in the Supreme Court of Victoria. On 28 September 2004, Velos & Davis received from Sheila Tiwari's accountant, David Mond, accounts of S&D disclosing that S&D owed moneys to the CBA and $200,000 to the ANZ Bank. The assets disclosed were the two properties and stock on hand. On 8 October 2004, Sheela Tiwari and Pradeep Tiwari caused S&D to give an equitable charge over the Footscray property and the Hillside property to Velos & Davis to secure legal fees and disbursements incurred on Sheela and S&D's behalf in the Supreme Court proceedings.[6] The trial of the Supreme Court proceeding commenced on 11 October 2004.
12 In July 2004, Pradeep Tiwari had contracted to buy a property at Hoppers Crossing. To assist with this purchase he received $39,500 from S&D, purportedly a distribution of profits from the Unit Trust on 22 July 2004. When the Tiwari Family Trust was established in July 2002, it had assigned to it the units in the Unit Trust. Subsequently, on 20 September 2004, Mr Tiwari borrowed $40,000 from S&D to assist at settlement of the Hoppers Crossing property purchase.
13 Mr Bill Velos, solicitor, of the firm of Velos & Davis, is the fourth defendant. An issue raised by Mr Malhotra in this hearing is whether S&D also retained Velos & Davis and incurred any liability for legal fees and disbursements to Velos & Davis and whether, if it did, those fees were secured by the equitable charges Velos & Davis took over the Footscray and Hillside properties. On 6 August 2007, Mr Velos and his partner, Peter Davis (Velos & Davis), obtained judgment in the County Court before Judge Daly against Sheela Tiwari for $190,708.52 plus costs in respect of fees and charges incurred in acting for her (and allegedly S&D) in the Supreme Court proceedings.[7] This debt has not been paid and Mr Velos claims to be entitled to the moneys in court as a matter of priority by virtue of the equitable charges to meet the fees and disbursements incurred by Sheela Tiwari and allegedly S&D.[8]
14 Sheela Tiwari appealed the decision of Balmford J and, while the matter was pending in the Court of Appeal, Sheela Tiwari and Dinesh Malhotra agreed to appoint an administrator to run the business until their dispute could be resolved. They appointed Stirling Horne and Peter Vince, the sixth and seventh defendants, as administrators. Dinesh Malhotra alleges that despite the business being previously profitable, they, with the connivance of Sheela Tiwari and her son Pradeep Tiwari, recommended that S&D be wound up. At that stage S&D owed the CBA as a secured creditor approximately $240,000 and the ANZ Bank as a secured creditor the business loan of $200,000 and interest thereon. In June 2005, the creditors of S&D, including Mrs Tiwari, but over the protests of Mr Malhotra, resolved to wind up the company and appointed Messrs Horne and Vince as liquidators.
15 Subsequently, Dinesh Malhotra instituted further proceedings in the Supreme Court to terminate the winding up and to remove Messrs Horne and Vince as liquidators. At first instance before Mandie J, he failed to have the winding up terminated and Messrs Horne and Vince removed as liquidators. He successfully appealed the decision of Mandie J not to remove Messrs Horne and Vince but unsuccessfully against the decision not to terminate the winding up. In June 2007, Mr Handberg, the first plaintiff, was appointed as the liquidator of S&D instead of Messrs Horne and Vince. In November 2004, Messrs Horne and Vince lodged a caveat against the properties notifying their claim to a lien over the assets for their unpaid fees and expenses. Messrs Horne and Vince had previously sought to have Mr Malhotra's caveats removed. In July 2006, Gillard J of Supreme Court of Victoria refused their application.
16 As mentioned above, the CBA bank held securities over S&D and the properties and at about the time S&D was placed in administration, the CBA Bank called up its loan to S&D. In June 2005, Dinesh Malhotra was able to arrange for the CBA to be paid out by Colonel Naresh Malhotra, who took over the securities but assigned them to MIG on 11 September 2006. MIG was controlled by Mr Mond, an accountant, who acted as a financial adviser and accountant to Sheela Tiwari. On 25 October 2006, Mr Vartelas was appointed by MIG receiver and manager of the assets and undertaking of S&D under the mortgage debenture held by MIG.[9] In August 2007, Mr Vartelas was appointed the agent of MIG and entered into possession of the two properties. At that time, the principal debt secured by the CBA mortgages was $242,540.38.
17 On or about 19 September 2007, MIG, through its agent Mr Vartelas, sold to Tiwari Enterprises Pty Ltd,[10] a company associated with Sheela Tiwari, the Footscray property at public auction for the total sum of $1,360,000. Settlement of the sale occurred on 18 October 2007.[11] On 19 October 2007, the estate agents accounted to MIG for the deposit. At settlement, withdrawals were provided for the Dinesh Malhotra caveat, the ANZ Bank caveat and the Horne and Vince caveat. Mr Dinesh Malhotra agreed with MIG to provide a withdrawal of his caveat on the basis that MIG would pay the surplus (if any) into court. MIG did not pay the surplus into court nor had it done so by the time this proceeding commenced.
18 At or after settlement, MIG did not account to the mortgagor or the subsequent interest holders for the moneys it was retaining in satisfaction of its secured debt. It did not treat its mortgage and other securities as satisfied in full. On the contrary, it retained the proceeds of sale and failed to calculate what it was owed. MIG alleged that at all times it acted properly in accordance with its rights and obligations.
19 In May 2007, the ANZ Bank sold the Point Cook property as mortgagee in possession to another member of the Tiwari family, Prathibha Tiwari. The sale proceeds were not applied to discharge the ANZ Bank mortgages over the Footscray and Hillside properties, but were used to repay other debts of the Tiwari family. By a deed of assignment of 9 July 2008, the ANZ Bank assigned absolutely its right title and interest in the ANZ Bank mortgage over the Footscray and Hillside properties to Mr Tiwari.[12] Mr Tiwari claims that as at the date of the assignment the S&D debt stood at $356,080.85. He claims that under the assignment he assumed absolutely the title, right and interest of the ANZ Bank in the ANZ Bank mortgages and the S&D debt.[13] He says that entitles him to the moneys in court next after MIG, whose mortgage has now been satisfied.
20 In September 2008, on the application of the liquidator of S&D, MIG and Mr Vartelas were ordered to pay into court the balance of the moneys which they still retained from the sale of the Footscray property and the receivership of S&D.
21 As mentioned above, in Re S&D International Pty Ltd (No 1), the issues between the plaintiffs and MIG and Mr Vartelas were decided. This part of the proceedings seeks to resolve issues between the plaintiffs, Mr Malhotra, Mr Velos and Mr Pradeep Tiwari concerning their respective entitlements to the moneys in court. Essentially, Mr Malhotra claims to be the beneficial equal owner of half the moneys in court less the amounts allowed to Mr Handberg as his costs and disbursements, and that neither Mr Velos or Mr Pradeep Tiwari have any right to those moneys with priority over Mr Malhotra. Mr Velos claims the charges in favour of Velos & Davis are valid as against the whole of the moneys in court in priority to the rights of Mr Tiwari (if any) and any rights Mr Malhotra may have to half of the moneys. Mr Tiwari claims his equitable securities are valid as against the whole of the moneys in court in priority to the rights of Velos & Davis (if any) and any rights Mr Malhotra may have to half of the moneys. The plaintiffs make claims to the benefit of Mr Malhotra, effectively challenging the securities of Mr Velos and Mr Tiwari over the moneys in court or alternatively, the half due to Mr Malhotra.
22 The moneys in court, being the proceeds from the sale of the Footscray and Hillside properties, will remain the property of S&D as trustee of the Unit Trust unless any of the claims of Mr Malhotra, Mr Velos (for Velos & Davis) and Mr Tiwari to those moneys can be made good and will be subject to any claims the sixth and seventh defendants and Mrs Tiwari may have.
23 Mr Malhotra claims that at all material times he was an equal half owner of all the assets of the business and the Footscray and Hillside properties.[15] He relies on the declarations of Balmford J. He says that her Honour found and declared that he was an equal joint beneficial owner of the Footscray and Hillside properties. He says that the only interest that has priority to his interest is the CBA mortgage which has been discharged. He claims 50 per cent of the funds in court less the amounts allowed to Mr Handberg as his costs and disbursements.[16] He alleges his interests were created before those, if any, of the ANZ Bank and Velos & Davis and that those stand behind his interests.[17]
24 Mr Velos claims that Mr Malhotra did not hold a proprietary interest in the properties. He claims that he has rights only as a beneficial holder of a unit in the Unit Trust and this interest merely gives him rights as an unsecured creditor of S&D.[18] The plaintiffs also claim that Mr Malhotra only has an interest under the terms of the Unit Trust as a beneficial unit holder but that this interest does give him a proprietary interest in the Footscray and Hillside properties.[19] No issue has been raised by any of the parties arising out of Mr Malhotra's interest being a joint interest.
25 Mr Tiwari claims that the ANZ Bank mortgages were valid and effective.[20] The plaintiffs claim that the ANZ Bank mortgages were not given for a proper purpose and were given in breach of trust.[21] The plaintiffs claim that in the premises the ANZ Bank mortgages were neither valid nor effective, or alternatively, were neither valid nor effective to charge or encumber the interest of Malhotra in the properties.[22]
26 Further or alternatively, the plaintiffs claim that by reason of Mr Malhotra's caveats, the ANZ Bank took the mortgages and Mr Tiwari took the assignment with notice or constructive notice of Mr Malhotra's interest in the properties.[23]
27 The plaintiffs claim that if the mortgages were validly given, then the rights of the ANZ Bank are subject to and postponed by the interests and rights of Mr Malhotra and any interest or rights acquired by Mr Tiwari in the properties under the assignment from the ANZ Bank are subject and postponed to the interests and rights of Mr Malhotra in the properties.[24]
28 Mr Velos claims that Velos & Davis acquired a valid and effective equitable charge over the properties. The plaintiffs allege that the charges were not given for a proper purpose of the trust and were in breach of trust.[25] They allege that the equitable charges were not valid or effective, alternatively, were not valid or effective to charge or encumber the interest of Mr Malhotra in the properties [26]
29 Further or alternatively, the plaintiffs claim that by reason of Mr Malhotra's caveats and claims, Velos & Davis took the equitable charges with notice, or constructive notice, of Mr Malhotra's interests in the properties.[27]
30 The plaintiffs claim that if the equitable charges of Velos & Davis were valid, any consequent interest of Mr Velos in the properties is subject and postponed to the interests and rights of Mr Malhotra in the properties.[28] Mr Velos claims that by reason of Mr Malhotra's conduct Mr Malhotra's interests in the properties were postponed to the interests of Velos & Davis.[29]
31 Mr Velos claims that S&D retained Velos & Davis to act for it in the Supreme Court proceedings. The plaintiffs do not dispute this claim. Mr Malhotra claims that S&D did not retain Velos & Davis. Mr Velos claims that Mr Malhotra has no standing to make this claim.[30]
32 Mr Velos claims that by the ANZ Bank's conduct, and further or alternatively by its conduct and the further conduct of Mr Tiwari, ANZ Bank's interests in the properties were postponed to the interests of Velos & Davis.
33 Mr Tiwari claims that Velos & Davis had knowledge and or notice of the ANZ Bank's equitable mortgages over the properties prior to taking the equitable charges and accordingly took their interest subject thereto.[31]
34 Mr Tiwari claims that the benefit of the ANZ Bank mortgages were validly assigned to him and that moneys are now owing to him under the mortgages by S&D.
36 The plaintiffs allege that by reason of S&D's breaches, the trust has suffered loss and damage being the amounts secured by the ANZ Bank mortgages, the business loan and the Sheela advance.[34]
39 The plaintiffs claim that by reason of the breaches, S&D has suffered the said loss and damage.[39]
40 The plaintiffs claim that by reason of the operation of s 1317H of the Corporations Act 2001 Mr Tiwari is liable to compensate and indemnify S&D in respect of the said loss and damage and is entitled in equity and under s 553C of the Corporations Act 2001 to set-off the amount of that loss and damage against the amount Mr Tiwari is entitled to claim under the mortgages.[40]
41 Mr Tiwari claims that he was released by the plaintiffs from all claims, liabilities and causes of action against him arising as a result of any alleged loans to Sheela Tiwari relating to the Point Cook property.[41]
42 The plaintiffs allege that S&D breached it duties as trustee by entering into the retainer and undertaking responsibility for payment of the Velos & Davis fees and charges, and by giving the equitable charges to Velos & Davis.[42]
43 The plaintiffs allege that by reason of S&D's breaches, the trust has suffered loss and damage being the amounts paid by S&D pursuant to the Velos & Davis retainer and S&D's liability to pay any further amounts pursuant to that retainer; further or alternatively, the amounts secured by the equitable charges.[43]
44 The plaintiffs claim that Mr Tiwari knowingly assisted in the breaches of trust by S&D by executing, authorising, causing or suffering the giving of the Velos & Davis retainer and the equitable charges[44] and is liable to compensate the trust for the said loss and damage flowing from the equitable frauds.[45]
46 The plaintiffs claim that by reason of the breaches, S&D has suffered loss and damage the measure of which is the total of the amounts paid by S&D to Velos & Davis pursuant to the Velos & Davis retainer, S&D's liability to pay any further amounts pursuant to that retainer; and further or alternatively, the amounts secured by the equitable charges.[48]
47 The plaintiffs claim that by reason of the operation of s 1317H of the Corporations Act 2001 Mr Tiwari is liable to compensate and indemnify S&D in respect of the said loss and damage and is entitled in equity and under s 553 C of the Corporations Act 2001 to set-off the amount of that loss and damage against the amount Mr Tiwari is entitled to claim under the mortgages.[49]
48 For the reasons that follow I make the following findings.
49 I find that Balmford J held and declared that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties. I find that it is irrelevant whether or not she came to that conclusion on the basis that Mr Malhotra was beneficially entitled to a half interest in the units in the Unit Trust or that S&D otherwise held the properties on trust for the joint benefit of Mr Malhotra and Mrs Tiwari.
50 If I am wrong about the effect of the order of Balmford J and Mr Malhotra only acquired an interest in the Unit Trust through being beneficially entitled to units in the Unit Trust and if the orders of Balmford J should otherwise be ignored or read such that Balmford J only found and ordered that Mr Malhotra merely has a beneficial interest in a unit of the Unit Trust, I find that Mr Malhotra does not have a proprietary interest in the properties or their traceable product and that his interest is merely as an unsecured creditor of S&D.[50] Accordingly, in those circumstances he has no proprietary interest in the moneys in court.
51 I find that the ANZ Bank mortgages were valid and effective to grant equitable mortgages in favour of the ANZ Bank.
52 I find that the ANZ Bank mortgages were second in time to Mr Malhotra's proprietary interest. I find that on the grounds argued before me, Mr Malhotra has not lost his priority for his equitable proprietary interest over the ANZ Bank equitable mortgages.
53 I find that Velos & Davis acquired a valid and effective equitable charge over the Footscray and Hillside properties.[51]
54 I find that the Velos & Davis' equitable charges were second in time to Mr Malhotra's proprietary interest. I reject Mr Velos' claim that by reason of Mr Malhotra's conduct he has lost his priority over Velos & Davis.[52]
55 I find that S&D retained Velos & Davis to act for them in the Supreme Court proceedings. I find that Mr Malhotra does not have standing to challenge the retainer or the fees charged to S&D under it by Velos & Davis.[53]
56 I find that the Velos & Davis equitable charges were second in time to the ANZ Bank mortgages.
57 I find that Velos & Davis did not have knowledge/notice of the ANZ Bank equitable mortgages.
58 I find that the ANZ Bank, by its conduct, lost what would otherwise have been its priority in the equitable mortgages over the properties it held as against the Velos & Davis equitable charges.[54]
59 I find that Mr Tiwari is able to enforce the ANZ Bank mortgages but subject to Mr Malhotra's interest (and the interest of Mrs Tiwari, if any) in the Footscray and Hillside properties and their proceeds and subject to the Velos & Davis equitable charges.
60 I find that S&D breached its duties as a trustee in giving the ANZ Bank mortgages, taking the business loan and making the Sheela advance.
61 I find that S&D suffered loss and damage by granting the ANZ Bank mortgages, taking the business loan and making the Sheela advance.
62 I find that Mr Tiwari has been released by the plaintiffs from any claims arising out of the loan of moneys to Sheela Tiwari in relation to the Point Cook property.
63 If I am wrong about the release, I find that Mr Tiwari is liable as a constructive trustee for the said loss and damage suffered by S&D.
64 If I am wrong about the release, I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating the grant of the ANZ Bank mortgages, taking the business loan and making the Sheela advance.
65 I find that S&D breached its duties as trustee in giving the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.
66 I find that S&D suffered loss and damage by the giving of the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.
67 I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating S&D giving the Velos & Davis charges, S&D paying fees to Velos & Davis and S&D incurring liabilities to Velos & Davis for fees and expenses.
68 I find that Mr Tiwari is liable as a constructive trustee for the said loss and damage suffered by S&D.
69 I propose to order under the Corporations Act 2001 that Mr Tiwari pay compensation to S&D for the said loss and damage and at law indemnify S&D for such loss and damage.
70 I now turn to giving my detailed reasons for these findings.
71 As indicated above, I find that Balmford J found and ordered that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties. This decision legally determined the property interest of Mr Malhotra and bound Mrs Tiwari and S&D (as trustee of the Unit Trust). Accordingly Mr Malhotra is entitled to a half interest to the moneys in court subject to the issue of costs.
72 I find it is unnecessary to resolve whether or not Balmford J came to that conclusion on the basis that Mr Malhotra was an equal joint beneficial owner of the units in the Unit Trust or otherwise was entitled to an interest in the properties. I do so for the following reasons.
73 Mr Malhotra claims that S&D held an equal joint beneficial interest in each of the Footscray and Hillside properties on an express trust for Mr Malhotra, independent of the terms of the Unit Trust, and that Balmford J held as such. He says that S&D was a party to that decision and is bound by it.[55]
74 On the other hand, S&D, Mr Tiwari and Mr Velos all contend that Balmford J only found that Mr Malhotra had a beneficial half interest in the Unit Trust and that apart from the rights he has under the trust he has no other interest in the Footscray and Hillside properties. Mr Velos contends that Balmford J's judgment does not stand as authority that Mr Malhotra has any entitlement to the Footscray or Hillside properties outside the Unit Trust of which he is now the 50 per cent owner.[56]
75 Mr Velos raises a preliminary point that Mr Malhotra is not entitled to make a claim for the proceeds in court other than through his claim to be beneficially entitled to units in the Unit Trust. In particular, Mr Malhotra is not entitled to claim that S&D held an equal joint beneficial interest in each of the Footscray and Hillside properties on an express trust for Mr Malhotra. Mr Velos argues that the formal claims made by Mr Malhotra in these proceedings do not include a claim other than through the Unit Trust.[57]
76 Mr Velos refers to Mr Malhotra's contentions of fact and law dated 27 November 2008. He says that the only basis in his contentions for him to hold any entitlement to the proceeds is through the Unit Trust because it is the Unit Trust which actually owns those two properties. I do not accept this submission. Mr Malhotra relies on and sets out the orders of Balmford J pronounced on 4 March 2005 and quotes orders 2(a) and (b).[58] Mr Malhotra asserts his claim is based on half ownership in both properties.[59] Mr Velos submits that that assertion must be read in the context of the contentions of fact and law and the wider litigation and that as such can only be made through the Unit Trust. Mr Velos relies on the fact that Mr Malhotra accepts that his claim to the proceeds is subject to the claims under the CBA securities and therefore his claim will involve issues of priority. Both Mr Malhotra and Mrs Tiwari agreed to give securities to the CBA. I do not accept that such a concession by him is inconsistent with his claims under the orders of Balmford J.
77 In my opinion, Mr Malhotra has raised his claim to a proprietary interest in the properties on the basis of the findings and orders of Balmford J. It is not necessary, therefore, to consider whether or not he should have served amended points of claim to raise the issue.
78 In my opinion, Balmford J found and declared that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties. In that case the claims of the subsequent equitable interest holders, Mr Velos and Mr Tiwari, fall to be determined by well established equitable principles. I turn now to examine Balmford J's reasons, findings and orders.
FINDINGS AND REASONS OF BALMFORD J DECISION**[60]**
79 By a writ dated 19 August 2002, Malhotra took proceedings against Sheela Tiwari and S&D.[61] The General Endorsement attached to the writ alleged inter alia that:
at all material times, it was the clear and mutual intention of [Malhotra] and [Tiwari] that all property acquired by [S&D] would be beneficially owned in equal shares by Tiwari and Malhotra.
80 The General Endorsement also alleged that Sheela Tiwari signed a document which acknowledged:
...all assets, shares and other interests held and managed by the company or the trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per each, between me and Mr Dinesh Malhotra....
81 Further, the General Endorsement alleged that Mrs Tiwari and S&D, in breach of the trust referred to, have neglected or refused to account to Malhotra for the share to which he is entitled to.
82 A statement of claim was delivered on 25 September 2002.[62] It alleged four representations and alleged three agreements described as the marital agreement, the Footscray agreement and the Hillside agreement.
83 The first representation and marital agreement was as follows:
In or about January 1993 and following the Plaintiff's marriage to the first Defendant, the Plaintiff and first Defendant:
(a) represented to each other ("the first representation"); and
(b) agreed
that they would commence to operate the business as partners and that they would become joint owners of the business in equal shares ("the Marital Agreement"). [63]
84 The second representation was alleged as follows:
[I]n or about June 1995, the first Defendant represented to the Plaintiff that there was no need for either party to seek any property settlement following their divorce because each of the parties would continue to operate the business for their joint benefit ("the second representation").[64]
85 The third representation was pleaded as follows along with the Footscray agreements:
In or about July 1996:-
(a) the Plaintiff and the first Defendant agreed to incorporate the business by setting up the second Defendant and creating the Trust; and
(b) the Plaintiff and the first Defendant agreed that they would acquire the Footscray property through the second Defendant with the intention of:
(i) becoming the joint beneficial owners of the Footscray property; and
(ii) continuing to operate the business from the Footscray property as joint beneficial owners; and further,
("the Footscray agreements")
(c) the first Defendant represented to the Plaintiff that:
(i) she would hold one of her shares in the second Defendant on trust for the Plaintiff;
(ii) she would hold half of the issued units in the Trust on trust for the Plaintiff.
("the third representations")[65]
86 The fourth representation was alleged to be in a document dated 16 October 2000 entitled "Statement of Assets and Liabilities" as follows.[66]
[O]n 16 October 2000, the first Defendant on her own behalf and on behalf of the second Defendant duly declared, acknowledged and represented to the Plaintiff that, inter alia:
"....all assets, shares and other interests held and managed by the company or the trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per cent each, between myself and Mr Dinesh Malhotra ...."
("the fourth representation").[67]
87 Other claims were made by Mr Malhotra under the Fair Trading Act 1999, the Trade Practices Act 1974 and Part IX of the Property Law Act 1958, but these were treated by Balmford J as being abandoned.[68]
88 In the prayer for relief Mr Malhotra claimed against each defendant, inter alia:[69]
A A declaration that the Plaintiff is a joint beneficial owner of the Footscray property, Hillside property and the business.
B A declaration that the first Defendant and/or the second Defendant hold one half of the business, Footscray property and Hillside property on an express, implied, resulting and/or constructive trust on behalf of the Plaintiff.
C Alternatively, a declaration that the interest held by the first Defendant in the second Defendant and the Trust is held by her on an implied, resulting or constructive trust for and on behalf of the Plaintiff and the first Defendant equally.
89 Balmford J began her reasons for judgement by saying:
In this proceeding, initiated by writ on 19 August 2002, the plaintiff ("Dinesh Malhotra" or "Dinesh") seeks a declaration that he is a joint beneficial owner of three items of property (together referred to as "the properties"), namely;
An Indian grocery store business conducted at 580 Barkly Street West Footscray under the name "Bharat Traders International" ("the business");
The shop and dwelling at 580 Barkly Street, West Footscray ("580 Barkly Street") in which the business is conducted; and
A vacant block of residential land at 45 Boronia Drive, Hillside, in the Shire of Melton ("the Hillside property").[70]
90 Balmford J referred to Mr Malhotra's claim of an express trust as the main claim. She said:
The principal relief sought by [Malhotra] is a declaration that he is a joint beneficial owner of the properties, on the ground that the defendants hold one half of each of the properties on an express trust for him.[71]
She said that in final addresses Mr Selimi (counsel for Malhotra) also relied on the principle of promissory estoppel and of constructive trusts (my emphasis).[72] Balmford J said that:
It is common ground that, subject only to two submissions of the defendant, if the Court is satisfied as to the making of certain representations by the defendant on all of which the plaintiff relies, the effect of those actions will be to entitle the plaintiff to the relief which he seeks.[73]
91 Balmford J accepted the evidence of Mr Malhotra as set out in her judgment as to the making of the representations on which he relied.[74] It is necessary to set out the evidence on which he relied as accepted by Balmford J on representations 3 and 4 as they were made at the same time as and after the company was introduced. It is then necessary to compare it to the representations pleaded.
92 Balmford J describes the third representation as:
in or about July 1996 Sheela Tiwari represented to Dinesh Malhotra that she would hold one of her two shares in the company and half of the issued units on trust for him.[75]
As can be seen, she did not include the alleged "Footscray agreement" as part of the representation.
93 The evidence Mr Malhotra relied on was found by Balmford J to be:
Dinesh Malhotra said Sheela Tiwari had asked him whether the setting up of the company and the unit trust would mean that they would still be joint and equal owners in the unit trust and the company, and he had said to her that there was no need to change and that would be the continuing arrangement. He was asked why he did not become a director of the company, and said that it would have been belittling to the relationship if he had said that now that they were buying real estate he did not trust her.[76]
94 Balmford J accepted this evidence. It does not, however, support Mr Malhotra's contention that S&D held the Footscray property on an express trust for him independent of the terms of the Unit Trust.
95 As to the fourth representation, Balmford J said the document headed "Statement of Assets and Liabilities" is essentially a statement that all assets of the company are owned equally by herself and Dinesh Malhotra.
S&D International Unit Trust (the Trust) T/tee for
S&D International Pty Ltd (the company)
(ABN 59 903 547 433)
Statement of Assets and Liabilities
I, Sheela Tiwari, of 580 Barkly Street, West Footscray VICTORIA - 3012, Australia do solemnly state that:
1. The Company/Trust documents show that I am the only shareholder of S&D International Unit Trust (the Trust) trustee for S&D International Pty Ltd (the Company)
2. The documents also show that I am the sole director and secretary of the Company.
3 The Company owns and holds properties, businesses and other interests.
4. The properties of the Trust and/or Company include along with commercial interests and properties, residential properties and chattels as well.
5. Despite what the documents show and contrary to the very obvious, the fact is that all assets, shares and other interests held and managed by the Company or the Trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per cent each, between myself and Mr Dinesh Malhotra who currently lives with me at the above address and has been associated with the company in various capacities and with myself and business even before the company was formed.
6. Unless explicitly documented otherwise, any future acquisitions of the Company and/or the Trust and anything I acquire personally or for my children (or household) with finances used from the Trust or the Company directly or indirectly, will be held and owned as equal (and joint) owners as stated in clause 5.
7. There is no other claim or claimant to the above assets. In case of a claim being waged, of any sort, by my children or my own family members (brother(s) or anyone) or my first husband Mr Markandey Tiwari, the litigation will involve and confine only my share of the assets.
8. I will continue to hold in trust anything and everything Mr Dinesh Malhotra entrusts me with, from time to time.
9. The fact of his association with the company implicit, explicit (as part time manager or director) or otherwise and/or even no association at all, does not and never will compromise his right of ownership as stated above.
Signed and executed
(Sheela Tiwari, Sole Director/Secretary)[77]
97 Mrs Tiwari signed and the company seal was affixed. A person also signed as a witness.
98 The representation in the statement is by both Sheela Tiwari personally and as the sole director and secretary of S&D. S&D signed the document and expressly acknowledged that it holds the assets on trust for both Mr Malhotra and Mrs Tiwari. The representations by Mrs Tiwari and S&D are expressed to be made "despite what the documents show." S&D through its sole director does expressly acknowledge that the assets held by S&D or the Unit Trust are owned equally (and jointly) fifty per cent each between Mrs Tiwari and Mr Malhotra. This evidence supports Mr Malhotra's contention that S&D held the Footscray property on an express trust for him independent of the terms of the Unit Trust. It is also consistent with Mr Malhotra, Mrs Tiwari and S&D proceeding on the basis that ownership of units in the Unit Trust gives the unit holder ownership of the assets of the trust.
99 As to the Hillside property, Balmford J accepted Mr Malhotra's evidence that Sheela Tiwari and Mr Malhotra were looking for a block of land on which to build a house later on. She said;
They selected the block and it was bought in the name of the company, on the advice of Mr Yacoub. .... He and Sheela guaranteed the bank loan of $90,000. He said he did this because he owned half of the company which had bought the land.[78]
100 Mr Yacoub was the accountant to Mr Malhotra and Sheela Tiwari. He set up the Unit Trust. Balmford J accepted Mr Yacoub's evidence that when the purchase of the Hillside property was discussed he suggested to Mr Malhotra that it should be bought in the name of the Unit Trust.[79]
101 Balmford J said that her acceptance of the evidence as to the making of the four representations meant the requirements for the creation of an "express trust" were established.[80] Mr Velos contends that the express trust she referred to is of the units held by Mrs Tiwari in the Unit Trust and is not by S&D of the properties independently of the Unit Trust.
102 Mr Malhotra contends that Balmford J found under representation three that there was an agreement between Mr Malhotra and Mrs Tiwari whereby they agreed to incorporate the business by setting up S&D and creating the Unit Trust; and that they agreed that they would acquire the Footscray property through S&D with the intention of becoming joint beneficial owners of the Footscray property and continuing to operate the business from the Footscray property as joint beneficial owners. These claims were made by Mr Malhotra in his plea of the Footscray agreement. It does not appear that Balmford J made any findings on this alleged agreement. Rather, as discussed above, her description of the third representation was limited to the representation pleaded after the Footscray agreement was pleaded in paragraph 11 of the statement of claim.
103 Mr Malhotra relies on the fourth representation made by Sheela Tiwari in the Statement of Assets and Liabilities, that confirms and acknowledges that all assets (which includes the Footscray and Hillside properties) were "held and managed" by S&D or the Unit Trust and were owned equally by Mr Malhotra and Mrs Tiwari.
104 Immediately after referring to Mr Malhotra's claim of an express trust as his principal relief at the beginning of her reasons for judgment,[81] Balmford J dealt with the creation of an express trust and referred to Lord Wilberforce's judgment for the Privy Council in Brisbane City Council v Attorney-General for Queensland[82] where it was said that to create a trust no formal words are required once the intention is clear. It is not clear what express trust she is referring to. Mr Malhotra contends it was a trust independently of the Unit Trust. Mr Velos argues that it was referring to an express trust in relation to the units of the Unit Trust. Mr Malhotra refers to the head note summary of the case which states: "whether express trust exists based on representations made." Again that could refer to an express trust of the units in the Unit Trust.
105 When one examines the evidence given by Mr Malhotra and accepted by Balmford J about the representations and her conclusion that she accepts that evidence as to the making of the representations on which he relies, it is not clear whether she reaches her conclusion that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties on the ground that Mrs Tiwari held half the units in the Unit Trust on an express trust for Mr Tiwari or on the ground that S&D held the properties on an express trust for Mr Malhotra and Mrs Tiwari. Her acceptance of the fourth representation by Mrs Tiwari and S&D tends to support the latter.
106 In deciding there should be judgment for Malhotra Balmford J made a declaration to the effect that Mr Malhotra was an equal joint beneficial owner of:
(d) the issued units in the Unit Trust.[83]
107 These declarations were binding as between the parties, Mr Malhotra, Mrs Tiwari and S&D.[84] Declarations may be used to establish title to land.[85] There are several further observations that may be made about her decision. Firstly, she does not expressly make findings on the three agreements alleged as pleaded: the marital agreement, the Footscray agreements or the Hillside agreement. The Footscray and Hillside agreements are alleged to have included the term that S&D would hold the Footscray and Hillside properties for Malhotra and Tiwari as joint beneficial owners. As to the Hillside property, no representation was alleged save the fourth contained in the Statement of Assets and Liabilities.
108 Balmford J does refer to the purchase of the Hillside property where she says that it was bought in the name of the company on the advice of Mr Yacoub.[86] The inference can be drawn that the parties agreed that it would be bought in the name of the company.
109 Balmford J said the fourth representation was the most significant of the representations.[87] As indicated above that representation stated expressly that the assets held by the company were owned equally and jointly, fifty per cent each by Mrs Tiwari and Mr Malhotra. That representation is consistent with there being no trust outside of the Unit Trust but rather an understanding of the consequences of the units in the Unit Trust being held beneficially equally and jointly, fifty per cent each by Sheela Tiwari and Mr Malhotra.
110 This view is supported by several factors. As mentioned, Balmford J made no reference to an express trust of the company's assets independent of the Unit Trust. Further, Balmford J accepted and set out the evidence of Mr Yacoub, the accountant for the business since it was established, as follows:
[174] Jack Yacoub is Lebanese and it was not suggested that he was related to either of the parties. He is a Certified Practising Accountant and has been the accountant for the business since its inception. He said that Dinesh Malhotra was always the controlling partner. He owned the business for one year after the original three-member partnership and then in 1993 instructed Mr Yacoub that it was to be transferred to Sheela Tiwari, and this was done. However, Mr Yacoub's understanding from then on was that it was a partnership between them. After 1993 Dinesh Malhotra consulted him on many issues, including investment issues and how to improve the business. He never understood Dinesh Malhotra to be an employee of Sheela Tiwari; from 1993 onwards he was always a partner. He never gave the impression of being an employee and always said that he was part owner of the business.
[175] He said that in 1994-5 he advised Dinesh Malhotra to establish a corporate body for taxation reasons and to minimise personal liability. When the purchase of 580 Barkly Street was proposed, he advised that it should be purchased by the company. They agreed to establish a company as trustee for a unit trust. The initial meeting was with Dinesh Malhotra, and later he and Sheela Tiwari attended in Mr Yacoub's office to discuss the matter. They discussed in his presence calling the company S&D International, for the initials of Sheela and Dinesh. He spoke to both of them in English. Sheela Tiwari's English was "reasonably understandable". It was Dinesh Malhotra who was liaising and instructing him.
[176] He said that Dinesh Malhotra decided that the units in the unit trust should be in the name of Sheela Tiwari because the business was in her name, and she should be the sole director of the company. He advised Dinesh Malhotra that he should be an equal shareholder, but Dinesh said that he trusted Sheela and she would not do anything to hurt him. He observed a level of very good and solid trust between them. He continued to believe that they were really partners, and that they were the actual owners of 580 Barkly Street. He had prepared taxation returns for each of them since 1991 and continued to do so and to prepare returns for the company and the unit trust until 2001.
[177] He said that in 2002 Sheela Tiwari came to see him and wanted him to transfer all of the units in the unit trust to Dinesh Malhotra, because she was upset that he was going overseas to be married. She was crying, and explained that there was a relationship between them, which Mr Yacoub had not known before. He said to her that he acted for both of them, and could not transfer 100 per cent of the units, because she was entitled to 50per cent. It was left that they would meet again when Dinesh Malhotra returned from overseas. As a result of this discussion he prepared a transfer of one share in the company to Dinesh, minutes of a directors' meeting appointing him a director and a document intended to transfer 50 per cent of the units in the unit trust to him, and forwarded those documents to Sheela Tiwari.
[178] He said that when the purchase of the Hillside property was discussed he suggested to Dinesh Malhotra that it should be bought in the name of the unit trust.
[179] I have no reason not to accept the evidence of Mr Yacoub.
111 That evidence supports the view that Mr Malhotra and Mrs Tiwari were proceeding on the basis that the under the Unit Trust they remained the joint beneficial owners of the properties held by S&D.
112 Mr Velos contends that the submissions made to Balmford J by Mrs Tiwari and S&D's counsel, Mr Jonathon Evans, establish that the claim for an express trust by Mr Malhotra was understood and dealt with by Mrs Tiwari on the basis that it did not extend to anything outside the Unit Trust.[88] Mr Velos relies on an affidavit by Mr Evans[89] which refers to the written submissions dated 22 December 2004 signed by Mr Evans and made to Balmford J.[90] Mr Evans deposed that his recollection was that in the proceedings it was never suggested by Mr Malhotra or his legal advisers that S&D held the assets of which it was the legal proprietor as trustee of any trust other than the Unit Trust, and in particular that it was never suggested that there was a separate trust of which S&D was trustee, on which S&D held assets on trust for Mr Malhotra, independently of the Unit Trust.[91] Mr Evans deposes that the fact such a suggestion was never put by Mr Malhotra in the proceeding before Balmford J is borne out by the pleadings and the reasons for judgment.
113 This evidence of Mr Evans further supports the view that the parties proceeded on the basis that the Unit Trust gave them a beneficial property interest in the properties held by the Unit Trust.
114 This conclusion is also supported by Mr Evans' submissions which do not analyse in any detail the precise nature of the claims made by Mr Malhotra but only briefly refer to them by saying that Mr Malhotra's primary relief is to seek declarations that he is entitled to a one-half interest in the assets of the Unit Trust. There is no argument in Mr Evans' submissions on behalf of Mrs Tiwari and S&D that even if Mrs Tiwari did hold half of the units in the Unit Trust on an express trust for Mr Malhotra, Mr Malhotra was not an equal joint beneficial owner of the properties and the business.
115 As indicated above, Balmford J started her reasons for judgment by setting out Mr Malhotra's claims including that he was a joint beneficial owner of three items of property. She identified the principal relief sought as a declaration that he is a joint beneficial owner of the properties, on the ground that the defendants (that is Mrs Tiwari and S&D) hold one half of each of the properties on an express trust for him.[92] Her Honour noted that it was common ground that, subject only to two submissions of the defendant, if the court is satisfied as to the making of certain representations by the defendant on all of which the plaintiff relies, the effect of those actions will be to entitle the plaintiff to the relief which he seeks.[93]
116 Mr Velos contends that Balmford J only considered Mr Malhotra's claims in the context of the Unit Trust.[94] It may be the case that Balmford J considered Mr Malhotra's claim in the context of the Unit Trust but that does not affect one way or the other her finding that S&D held the beneficial interest in the (otherwise trust) properties on behalf of Mrs Tiwari and Mr Malhotra equally and jointly.
117 I accept that Balmford J made her findings without any detailed consideration of the terms of the Unit Trust but rather on the basis of the representations made by S&D and Mrs Tiwari. I agree that it is not clear from the judgment whether Balmford J reached her conclusions on the basis that the units in the Unit Trust were held on an express trust for Mr Malhotra or rather that S&D held the assets on an express trust for Mr Malhotra or a combination of both. In my opinion, the resolution of this issue is not necessary for me to decide. What is clear is that Balmford J found on the basis of the evidence, including the Statement of Assets and Liabilities, that as between Mr Malhotra, Mrs Tiwari and S&D as trustee of the Unit Trust, Mr Malhotra and Mrs Tiwari were the joint beneficial owners of the properties held by S&D. That was the claim of Mr Malhotra and he succeeded on that claim. She also found he was an equal joint beneficial owner of the business; the issued shares in S&D; and the issued units in the Unit Trust.[95]
118 Mr Velos sought to attack the orders themselves. Mr Velos contended at one stage that the orders were made in the absence of anybody representing Mrs Tiwari or S&D.[96] That submission was withdrawn as he subsequently acknowledged that Mr Lowenstein of counsel appeared on the making of the orders. Even then Mr Velos argues that Mr Lowenstein would not have had the benefit of the knowledge of what happened or the file or the brief. I do not agree with these submissions. S&D and Mrs Tiwari were represented and further the order has not been successfully appealed by either S&D or Mrs Tiwari.
119 On 12 July 2005, Mr Malhotra filed an originating process in the Supreme Court of Victoria seeking an order terminating the winding up of S&D (this process had commenced on the basis that S&D was insolvent). Mr Malhotra also sought orders disallowing the liquidators' remuneration on the ground that they had misconducted themselves.[97] Mandie J refused the application. In the course of his reasons, his Honour said of Balmford J's findings and declarations:[98]
By judgment of the Court dated 4 March 2005 the plaintiff was granted declarations that he was the "equal joint beneficial owner" of the Footscray property, the Hillside property, the business, the issued shares in the Company and the issued units in the Trust. It was common ground in the present proceeding that the true effect of those declarations was that the plaintiff was an equal unit holder in the Trust and in the Trust assets (subject, of course, to any liabilities of the Trust). That is to say, the plaintiff was an equal unit holder in the Trust, with Sheela (or his successors and transferees) being entitled to the other half of the units thereof. Thus, the plaintiff was not entitled, other than under the Trust, to any beneficial or equitable interest in the Footscray property, the Hillside property or the business. His entitlement arose under the Trust, as a beneficial holder of one-half of the units thereof.
He noted that although the judgment of Balmford J referred to Malhotra's entitlements as being "joint" (probably because of the terminology used in the Statement of Assets and Liabilities), Malhotra had become registered as a several holder on one-half of the units in the Unit Trust. [99]
120 Mr Malhotra, S&D and Sheela Tiwari were all parties to those proceedings. Mr Malhotra was represented by Mr Salimi of counsel who also acted for him before Balmford J. Mr Velos contends that Mr Salimi's concession was on instructions from Mr Malhotra.[100] In my opinion, Mr Malhotra's concession, if it be that, can have no bearing on the proper construction of Balmford J's orders nor on her reasons for judgment.
121 Mandie J is well recognised and respected as a very experienced and learned judge. He now sits on the Court of Appeal. I would be loath to disagree with any matter he expressed a considered view on. Nevertheless, Mandie J made those observations on the basis that Balmford J found that Mr Malhotra acquired his interest in the properties solely through his beneficial interest in the units in the Unit Trust. In my view, the issues between the parties included the issue of whether Mr Malhotra was an equal beneficial owner of the Footscray and Hillside properties. Even if Balmford J did reach the conclusion that Mr Malhotra was an equal beneficial owner of the Footscray and Hillside properties on the basis of him being an equal beneficial owner of the units in the Unit Trust, that was the claim that was made by Mr Malhotra and in issue and Balmford J so found and ordered. The orders she made are determinative of that issue between the parties and are binding on them.
122 The decision can only be overturned on appeal. The fact that the parties may have agreed in other proceedings that the order was to a different effect, does not alter the decision or its actual effect. In my opinion, the observations of Mandie J are difficult to reconcile with Balmford J's finding and orders that Mr Malhotra was in law the equal beneficial owner of the Footscray and Hillside properties. In my view, the concession or common ground made before his Honour was incorrect and inconsistent with the clear findings and orders of Balmford J and are of no effect.
123 In 2006, Horne and Vince applied to remove Mr Malhotra's caveats.[101] Gillard J did not doubt that Mr Malhotra had caveatable interests in the land,[102] but found that the grounds of claim were not correctly stated.[103] Accordingly, he refused the application and granted leave to Mr Malhotra to amend the grounds in the caveats to "a half interest as a beneficial owner of 50 units in a Unit Trust established by Deed on 29 July 1996". His Honour said of the law supporting his conclusions:
The law is clear. A holder of a unit in a unit trust has an equitable interest in all the property of the trust, subject, of course, to the terms of the trust deed. See Read v Commonwealth, and Costa and Duppe Properties Pty Ltd v Duppe. There is no doubt that a unit holder has a proprietary interest in the assets of the trust fund, and the two pieces of land in question form the trust fund. Those general principles, of course, are subject to the particular provisions of the trust deed. Counsel for the respective parties agreed that in the light of the well established principles and the terms of the trust deed, Mr Malhotra had at least a half interest in each of the properties and accordingly, he had, on the evidence, a caveatable interest.[104]
124 Like Mandie J, Gillard J was a highly respected and learned judge. He did not, however, make any express reference to Balmford J's orders. Rather, he proceeded on the basis that all Balmford J had found and ordered was that Mr Malhotra was an equal beneficial owner of the units in the Unit Trust. The observations of Gillard J do not alter my view.
125 Accordingly, I find that it has been held and decided as between S&D as trustee of the Unit Trust, Sheela Tiwari and Mr Malhotra, that Mr Malhotra is as an equal joint beneficial owner of the Footscray and Hillside properties.
126 It is implicit in the decision and orders of Balmford J that Sheela Tiwari is also an equal joint beneficial owner of the Footscray and Hillside properties. Sheela Tiwari is not a party to the current proceeding. Her son Pradeep Tiwari did give evidence that his mother was aware of these proceedings. She has not sought to be joined as a party. I do not believe I am able to make any orders which might affect her interests, if any, without her being joined as a party and I shall proceed accordingly.
127 If I am wrong and Mr Malhotra interest is solely as an equal joint beneficial owner of the units in the Unit Trust, then I find that Mr Malhotra does not hold a proprietary interest in the properties or their proceeds and that his interest is merely as an unsecured creditor of S&D.[105]
128 The plaintiffs submit that under the Unit Trust the holders of a unit in the trust are beneficial owners of the trust property and in particular the Footscray and Hillside property.[106] They submit that depending on the terms of the relevant trust deed, a unit in a unit trust typically confers on its holder a proportionate proprietary interest in all the property which for the time being is subject to the trust. The plaintiffs contend that this is the case in respect of the Unit Trust. They say the content of those rights may vary from case to case, depending on the terms of the relevant trust deed, but at the very least, it comprises a right to compel the due administration of the trust.[107]
129 According to Mr Velos (Mr Tiwari supports these contentions)[108] under the terms of the Unit Trust, Mr Malhotra has an interest in the trust fund as a whole but does not have any interest in individual assets, including the Footscray and Hillside properties, and that on the basis of the S&D trust deed (the "Trust Deed"), equitable ownership of the two properties always remained with the trustee, S&D. Mr Velos submits that accordingly that for the purpose of s 73 of the Transfer of Land Act Mr Malhotra is effectively an unsecured creditor of the Unit Trust. Mr Velos submits that Mr Malhotra has no proprietary entitlement to any of the monies in court.[109] Mr Velos concedes that Mr Malhotra has rights protected by equity and agrees with the plaintiffs that Mr Malhotra has the enforceable right to proper administration of the Unit Trust but says that right exists whether or not he has any beneficial interest in the individual Unit Trust assets.[110] I now turn to the relevant authorities.
130 In Charles v Federal Commissioner of Taxation[111] the High Court of Australia held that a unit in the trust deed before them conferred a proprietary interest in all the property which for the time being is subject to the trust of the deed. Mr Velos accepts that this decision was regarded for some time as seminal authority for the proposition now put by the Plaintiffs, but is now no longer. In Costa & Duppe Properties v Duppe[112] Brooking J of the Supreme Court of Victoria recognised that a unit holder in a unit trust does have a proprietary interest in the trust assets. Brooking J was dealing with a dispute between a trustee and a unit holder, where the unit holder had lodged caveats claiming an equitable interest in three parcels of land held by the trustee. Brooking J held that the unit holder had a proprietary interest in all the property and therefore in each asset of the trust, and upheld the caveats. Mr Velos concedes that the facts of this case do have similarities to the present case. He contends, however, that even in that case Brooking J specifically noted that a unit holder does not always have a proprietary interest in trust assets, saying:
Things are not always what they seem. A unit is an undivided part or share in the trust fund, but it does not necessarily follow from this definition that the holder of a unit has a proprietary interest in any of the assets making up the trust fund... By cl. 7(a) of the deed the beneficial interest in the trust fund shall be vested in the unit-holders, but "beneficial interest" does not always mean an interest that is proprietary; moreover the effect of an instrument in relation to the creation of proprietary interest depends, not simply on any express provision it may contain in that regard, but on what effect the law will give to the instrument considered as a whole in the light of applicable principles."[113]
131 Mr Velos contends that Brooking J then made it clear that he was primarily relying on Charles as authority for his argument that the unit holder in this case had a proprietary interest in the trust asset and that accordingly, if Charles is no longer good law on the question of the general proprietary interest of a unit holder, then Costa falls with it.
132 Mr Velos argues that in 1998, in Commissioner of Stamp Duties (NSW) v Buckle, [114] the High Court of Australia recognised that the entitlement of beneficiaries in respect of the assets held by the trustee which constitutes the "property" to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves. He contends that the High Court recognised that a "trust fund" is not necessarily the same as the individual trust assets held by the fund and that a beneficiaries' entitlement to the fund, as against a trust asset, may differ.
133 Mr Velos submits that in CPT Custodian Pty Ltd v Commissioner of State Revenue[115] (CPT's case). The High Court has reconsidered the nature of the interest a unit holder has in particular trust fund assets and declined to follow Charles or Costa. In CPT's case the High Court was considering whether a unit holder was an "owner" for the purposes of land tax. There were specific provisions dealing with the definition of "owner." The plaintiffs submit that the High Court did not deal with the broader question of the nature of a unit holder's interest in property of a unit trust.[116] However, as I see it, the High Court did in fact deal with the issue at general law in response to a submission by the Commissioner that as a matter of general law, because the trust deeds conferred upon each unit holder fixed and ascertainable rights, in relation to the distribution of income and capital, and not depending upon the exercise of discretion, the trust deeds conferred upon each unit holder an equitable estate or interest in each asset from time to time comprising the trust fund; (ii) no other person or class had any such rights or interests; and (iii) these equitable estates or interests answered the statutory requirement in the definition of "owner" of entitlement to land for any estate of freehold in possession.[117]
134 The High Court rejected these propositions, accepting that a trust deed could be so framed that a trustee held both the legal and equitable proprietary interests in the trust assets and that the unit holders did not have an equitable interest in specific trust assets. The High Court referred with approval to the decision of Griffith CJ in Glenn v Federal Commissioner of Land Tax,[118] in which his Honour, referring to an argument for the "Revenue" in that case, said it was:
based on the assumption that whenever the legal estate in land is vested in a trustee there must be some person other than the trustee entitled to it in equity for an estate of freehold in possession, so that the only question to be answered is who is the owner of that equitable estate. In my opinion, there is a prior inquiry, namely whether there is such a person. If there is not, the trustee is entitled to the whole estate in possession, both legal and equitable.
The High Court went on to describe Griffith CJ's statement as:
a prescient rejection of a "dogma" that, where ownership is vested in a trustee, equitable ownership must necessarily be vested in someone else because it is an essential attribute of a trust that it confers upon individuals a complex of beneficial legal relations which may be called ownership.[119]
135 Thus the High Court accepted that under the terms of a trust the equitable ownership of the trust assets may be vested in the trustee. In Duppe, Brooking J had accepted that "If there is a proprietary interest in the entirety, there must be a proprietary interest in each of the assets of which the entirety is composed."[120] (emphasis added) The High Court rejected this proposition and distinguished Charles, limiting its findings to the particular trust deed before the court which was of a much simpler nature.
136 In doing so, the High Court said the correct approach was first to consider the terms of the trust rather than looking broadly at the characteristics of a "unit trust".[121] Under the terms of the relevant trusts before it, the trustee had the right to provide out of receipts for future and contingent liabilities, to apply receipts in the purchase of any property or business, the power to invest receipts in authorised investments and the only right of the unit holder was to a proportionate share of the income of the fund for the year. These provisions are similar to those in the Unit Trust. The High Court rejected the argument that because a unit holder could bring the trust to an end and appropriate the trust assets to himself this made the unit holder the owner of the assets. The High Court said the rule in Saunders v Vautier[122] did not give consideration to significance of the right of the trustee under general law to reimbursement or exoneration for the discharge of liabilities incurred in the administration of the trust. They held that under the terms of the unit trust before them the unit holders did not have an absolute vested and indefeasible interest in the capital and income of property.
137 CPT's case was followed and applied by Mandie J in Lend Lease Funds Management Ltd v Commissioner of State Revenue[123] where Mandie J said that depending on the terms of the unit trust, "where no persons can be identified as entitled to an equitable estate in the land, the trustee, despite being a trustee, is entitled to the whole estate both legal and equitable." In CPT Manager v Chief Commissioner of State Revenue[124] Gzell J had observed in statement accepted as obiter that there was nothing in the High Court's decision in CPT's case "to suggest that the holder of a unit in a unit trust lacks an equitable interest in the trust property." Mandie J said that "that statement was, with respect, incorrect or perhaps only relevant in the context of that case."[125]
138 CPT's case has also been followed an applied in ING Life Ltd v Commissioner of State Revenue[126] and by the High Court in Halloran v Minister Administering National Parks and Wildlife Act 1974[127] where the High Court held that consistently with CPT's case, a person who held units in a property trust "would not have any interest in any particular part of the Trust Fund or in any investment thereof."[128] The case concerned the question of whether it was the unit holders or the trustee who should receive the benefit of compensation following compulsory acquisition of land owned by the unit trust. The issue under consideration was who was the "owner of an interest in the land" - a matter to which general law considerations were relevant.
139 In accordance with CPT's case, it is necessary to review the terms of the Unit Trust and compare them to the issues addressed in that decision. The CPT trust deeds provided that the unit holders owned the "trust fund" as a whole.[129] Similarly, clause 2(a) of the Trust Deed provides that the "beneficial interest in the Trust Fund" (ie as a whole) be divided into units.[130] As pointed out by the High Court in Buckle, this means that the unit holders have an interest in the trust fund as a whole. It does not mean, as suggested by the plaintiffs, that the unit holders therefore also have a proprietary interest in the individual trust assets. That proposition had been put by Brooking J in Costa and the High Court in CPT's case specifically referred to his Honour's statement and refused to accept it, noting instead the danger of confusing differing concepts of "property" and "interest".[131]
140 Similarly to the CPT trusts, the Unit Trust was an active trading trust. It did not just own land. Its principal function was conducting an Indian grocery business located at the Footscray property. On a continuing basis the trustee bought and sold trading stock, and purchased and used operating plant and equipment, as well as office equipment. The unit holders could have no direct entitlement to trading stock or gross receipts. If all the trading stock and sales receipts, for instance, which are clearly trust assets, were owned directly by the unit holders, then it would have been impossible for the trustee to deal with them and conduct the business. The trustee had to be able to give both beneficial as well as legal title in the stock it sold to its customers, and therefore it had to have both beneficial and legal ownership of those assets in the first place.
141 Under the Trust Deed, the "trust fund" actually available to unit holders is constituted by net and not total trust assets. Accordingly, the Trust Deed did not confer any title on unit holders over individual assets. Further, the entitlements of the unit holders under the Unit Trust are quite explicitly limited by the Trust Deed.
142 Clause 10(a) of the Trust Deed[132] entitles the unit holders to be paid the "income" of the trust. However, it also empowers the trustee at its discretion, before making any such payment to unit holders, to divert such income into a "reserve" which, under clause 10(b), becomes part of the capital of the Trust Fund, and is therefore no longer income available to the unit holders. The "income" entitlement is only to a "net" amount of receipts, as decided by the trustee. There is no power or ability for the trustee to make distributions to unit holders of particular trust assets in specie, either during the life of the trust or on or after its winding up. Under clause 20(a) of the Trust Deed,[133] on winding up, all trust assets are required to be sold and converted "into money" and, after the payment of liabilities and expenses, the net balance is to be distributed to unit holders. This provision is subject to the additional right of the trustee under clause 20(d) of the Trust Deed, to retain in its hands, on winding up, such part of the trust fund (including investments in their unconverted form) as it considers necessary to meet actual or contingent outgoings or liabilities of the trust. Any remaining part of the trust fund not ultimately required to meet these debts will then be converted into money and distributed at such time in the future as the trustee considers the liabilities have all been met. There is therefore no situation, under the Trust Deed, even on its termination, where Mr Malhotra could ever receive a transfer of any particular trust asset or obtain a direct proprietary interest in either the Footscray or Hillside properties.
143 The plaintiffs rely on the fact that under clause 19(b) of the Trust Deed, unit holders having 50 per cent or more of the units are entitled to terminate the trust and to a distribution of sale proceeds. However, as the entitlement is only an entitlement to a net balance, as described above, this right gives Mr Malhotra no entitlement to 50 per cent of the Footscray and Hillside properties or, for that matter, to 50 per cent of the sale proceeds. The only relevance of a winding up of the trust by its beneficiaries is if the Rule in Saunders v Vautier applies. As discussed above, this issue was also considered by the High Court in CPT's case. In that matter, on the initial appeal from Nettle J, the Court of Appeal had held that, if the unit holder held 100 per cent of the units¸ then by operation of that rule, the unit holder could "bring the trust to an end and, if it so chooses, appropriate the trust assets to itself", thus making the 100 per cent unit holder the owner of the trust assets[134]. The High Court disagreed and overruled the Court of Appeal. The High Court observed that:
The classic nineteenth century formulation by the English courts of the rule in Saunders v Vautier did not give consideration to the significance of the right of the trustee under the general law to reimbursement or exoneration for the discharge of liabilities incurred in administration of the trust. [135]
The Trust Deed does confer such a general right of reimbursement and exoneration.
144 The Trust Deed[136] gives S&D an indemnity against all claims, losses, damages, fees etc which "arise in connection with the Deed or the Trusts" (clause 7.5). The trustee is given the power to employ and remunerate a "manager" (clause 8(u)). The trustee is given a particular power "instead of acting personally", to rather engage "a solicitor, accountant... or any other person whatever may be his vocation to transact any business or do any act required to be done in connection with the Trust Fund...", which person is entitled to be "paid all charges and expenses"(clause 7.2(b)). The trustee itself is permitted to be "paid by way of remuneration for its services" (clause 17). Therefore, in the words of the High Court, under the Trust Deed "the unit holders were not the persons in whose favour alone the trust property could be applied"[137].
145 The High Court held that there was a "modern formulation of the rule in Saunders v Vautier", whereby the rule only applied where an adult beneficiary has "an absolute, vested and indefeasible interest in the capital and income of property",[138] ie, in all of the capital and income. The High Court further stated that that modern formulation did not apply to the facts of the case before them in CPT's case. In CPT's case, the trustee and manager had entitlements which also had to be honoured by the trust. In the same way, S&D has its own entitlements and the unit holders in the Unit Trust have no "absolute, vested and indefeasible interest" in the all of the capital and income of the Unit Trust. Under the Trust Deed, both capital and income can be transposed into other assets or used to pay the trust's liabilities and the trustee has a right of indemnity against all such liabilities. The trustee has power to sell one or both of Hillside and Footscray to meet the debts of the business/trust, if it needed to. Under the terms of the Trust Deed these assets, like all the trust's other assets, are not preserved for Mr Malhotra and Sheela Tiwari and they therefore have no "absolute, vested and indefeasible" interest in them.
146 The High Court referred[139] to its previous decision in Chief Commissioner of Stamp Duties (NSW) v Buckle[140] where it had held that, given the trustee's "right to reimbursement or exoneration for liabilities properly incurred in the administration of the trust, the trustee cannot be compelled to surrender the trust property to the beneficiaries until the claim has been satisfied". In Buckle, the High Court had also noted that:
Until the right of reimbursement or exoneration has been satisfied, "it is impossible to say what the trust fund is".[141]
Thus, if the trust fund cannot be identified at the time the trust is wound up, then the rule in Saunders v Vautier cannot apply. S&D's power on winding up the trust, under clause 20(d) of the Trust Deed, to retain any part of the trust fund and its investments against outgoings and liabilities, including future contingencies would then, in itself, negate the application of the rule in Saunders v Vautier.
147 Finally, in CPT's case the High Court distinguished between a beneficiary's entitlement after a Saunders v Vautier transfer had taken place, as against the entitlement existing before this had occurred, or had even been called for.
Equity often regards as done that which ought to be done, but not necessarily that which merely could be done.[142]
148 For these reasons, I find that under the particular terms of the Unit Trust that a unit holder does not have a proprietary interest in the Footscray and Hillside properties. That is not to say they do not have an interest in the trust fund that equity will protect. Nor does it deny that they have an interest in the trust fund as a whole. Rather, it is a recognition that the trustee was both the legal and equitable owner of the fee simple estate in the Footscray and Hillside properties. Accordingly, Mr Malhotra does not have an equitable proprietary interest in the Footscray property and the Hillside property or the product thereof if his rights were governed by the terms of the Unit Trust. Accordingly I find that under the terms of the Unit Trust, Mr Malhotra was effectively an unsecured creditor for the purposes of s 77(3) of the Transfer of Land Act 1958.
WERE THE ANZ BANK MORTGAGES VALID AND EFFECTIVE?
149 I find that the ANZ Bank mortgages were valid and effective to grant equitable mortgages in favour of the ANZ Bank. I do so for the following reasons.
150 In July 2002, S&D executed a mortgage over each property in favour of the ANZ Bank. Neither mortgage was ever registered. S&D also granted a fixed charge over its assets under a fixed and floating charge mortgage debenture in favour of the ANZ Bank. This mortgage was notified to Australian Securities and Investment Commission ("ASIC"). These securities supported a loan of $200,000 from the ANZ Bank to S&D. In July 2008, ANZ Bank assigned its mortgages to Mr Tiwari but not the mortgage debenture.
151 In July 2002, Sheela Tiwari decided to purchase 5 Livorno Lane, Point Cook for $475,000.[143] The loan of $200,000 to S&D by the ANZ Bank was used to assist Sheela Tiwari to purchase the property. The property was purchased for her exclusive benefit, and not for the purposes of the Unit Trust.[144] The funds which Sheela used to purchase the Point Cook property came from three sources:
(a) an ANZ Bank Home Loan of $275,000 advanced to Sheela;
(b) an ANZ Bank Business Mortgage Loan of $200,000 advanced to S&D (as trustee of the Unit Trust); and
152 On 12 July 2002, S&D drew down the entire amount of the Business Mortgage Loan of $200,000 and transferred the funds to its cheque account.[145] On the same day, a sum of $226,358.60 was drawn out of the cheque account. Of that sum, $199,242.35 was applied (together with the $275,000 ANZ Bank Home Loan to Mrs Tiwari) in payment of the purchase price on the Pt Cook property.[146] The balance of $27,116.25 was applied in payment of "loan costs" payable by Sheela.[147] Sheila's home loan was secured by a first registered mortgage over the Point Cook property.[148]
(a) a guarantee and indemnity dated 11 July 2002 from Sheela and Mr Tiwari;[149]
(b) a second registered mortgage over the Point Cook property;
(c) the ANZ Bank's unregistered mortgage (second ranking) over the Footscray property; and
(d) the ANZ Bank's unregistered mortgage (second ranking) over the Hillside property.
154 In May 2007, the ANZ Bank sold the Point Cook property as mortgagee in possession to another member of the Tiwari family, Prathibha Tiwari. The sale proceeds were not applied to discharge the ANZ Bank mortgages over the Footscray and Hillside properties, but were used to repay other debts of the Tiwari family including those of Mr Tiwari which had been incurred in the acquisition of the Hoppers Crossing property. The unregistered mortgages and the S&D debt (but not the mortgage debenture) were subsequently assigned to Pradeep Tiwari in July 2008. Mr Tiwari claims that as at the date of the assignment the S&D debt stood at $356,080.85. He claims that under the assignment he assumed absolutely the title right and interest of the ANZ Bank in the ANZ Bank mortgages and the S&D debt.[150] He says that entitles him to the moneys in court next after MIG, whose mortgage has now been satisfied.
155 Mr Tiwari's claim is resisted by the plaintiffs, who also set up a cross claim. The plaintiffs allege that S&D breached its duties as trustee in giving the ANZ Bank mortgages over the properties.[151] The plaintiffs allege that as a consequence each of the mortgages was neither valid nor effective or alternatively was neither valid nor effective to charge or encumber the interest of Malhotra in the subject property.[152] The plaintiffs further or alternatively allege that by reason of the Malhotra caveats, the ANZ Bank took the Footscray mortgage and the Hillside mortgage, and Tiwari took the assignment of the mortgages, with notice, or constructive notice, of Mr Malhotra's interests in the subject properties.[153] Accordingly, the plaintiffs allege that if the Footscray mortgage and the Hillside mortgage were validly given, then:
(a) any consequent interests or rights of the ANZ Bank in the Hillside property and the Footscray property are subject to and postponed by the interests and rights of Mr Malhotra in the properties; and
(b) any interests or rights which were acquired by Mr Tiwari in the Hillside property and the Footscray property under or by reason of the Assignment are subject to and postponed by the interests and rights of Mr Malhotra in the properties.[154]
156 The plaintiffs allege that S&D breached its duties as trustee in making the advance of $226,358.60 to Sheela Tiwari (described as "the Sheela advance") to assist her to buy the Point Cook property and granting the mortgages to the ANZ Bank.[155] They allege that by reason of those breaches S&D suffered loss and damage including the amounts secured by the Footscray and Hillside mortgages.[156]
157 As indicated above, in the Plaintiffs Claim Against Tiwari, the plaintiffs claim that the ANZ Bank mortgages were not valid or effective.[157] They do not press this claim in their written final submissions.[158] The plaintiffs allege against Tiwari that the giving by S&D of each of the Footscray and Hillside mortgages was not for a proper purpose of the Unit Trust and was in breach of S&D's fiduciary obligations at law and under the Trust Deed.[159] The points of claim allege two consequences flow from these breaches of trust. First, the plaintiffs allege that neither the Footscray mortgage nor the Hillside mortgage was effective, or alternatively, neither of these mortgages was valid or effective to charge or encumber the interest of Mr Malhotra in the subject property.[160] Secondly, the plaintiffs allege that by reason of S&D's breaches the Unit Trust has suffered loss and damage and seek damages from Mr Tiwari as a knowing participant in those breaches.[161] The plaintiffs in their closing submissions only press the second consequence of damages against Mr Tiwari and do not pursue the claim that the ANZ Bank mortgages were not valid and effective.
158 In any event, save for the existence of the title searches, no evidence was led to establish that the ANZ Bank received the ANZ Bank mortgages with sufficient knowledge to make it liable as a knowing recipient of trust property under the first limb of Barnes v Addy.[162] In the absence of any further evidence, I find as against S&D that they were valid and effective and proceed on the assumption that the ANZ Bank mortgages were valid and effective to grant equitable mortgages over the Footscray and Hillside properties to the ANZ Bank to secure the loan by the ANZ Bank of $200,000 to S&D.
159 At the time, the equitable ANZ Bank mortgages ranked second after CBA's first registered mortgages and were also subject to and ranked behind Mr Malhotra's prior equitable interest as an equal joint beneficial owner. As indicated above, Mrs Tiwari is not a party to this proceeding. I therefore do not make any finding whether or not the ANZ Bank mortgages also ranked behind any equitable interest Mrs Tiwari may have in the Footscray and Hillside properties.
WHAT IS THE PRIORITY AS BETWEEN MALHOTRA AND THE ANZ BANK?
160 I proceed on the basis that in July 2002, Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties and that he is accordingly entitled to a half interest in the moneys in court, subject to the issue of costs.
161 The plaintiffs allege that by reason of the Malhotra caveats, the ANZ Bank took the Footscray mortgage and the Hillside mortgage with notice, or constructive notice, of Mr Malhotra's interests in the subject properties, and therefore subject to Mr Malhotra's interest.[163]
162 Assuming, as I have found, that the ANZ Bank mortgages were valid and effective, I find the ANZ Bank took whatever equitable interest it acquired under them subject to Mr Malhotra's interest. The ANZ Bank had searched the titles on 4 July 2002 before it took the mortgages. It was aware of Mr Malhotra's claim. In his caveat he had claimed his interest as a 50 per cent share of the property - an estate in fee simple. He relied on a deed of agreement between S&D and himself. No evidence was called on behalf of the ANZ Bank to suggest in any way that they did not take their mortgages with full knowledge of Mr Malhotra's claim or to rebut the suggestion that their mortgages were not subject to Mr Malhotra's claim. The ANZ Bank did not seek to register its mortgages over the properties. No evidence was led to suggest that the ANZ Bank did not know and believe that Mr Malhotra had a prior claim to the property that S&D sought to mortgage. Even if the ANZ Bank was not aware of his caveats, Mr Malhotra's interest is first in time and prevails.[164] Mr Tiwari does not suggest that if Mr Malhotra is an equal joint beneficial owner of the properties that his interest should be deferred to that of the ANZ Bank. Accordingly, Mr Tiwari's claim through the ANZ Bank mortgages to the moneys in court ranks behind Mr Malhotra's claim.
163 As to Mr Tiwari's claim against the balance of the moneys, the plaintiffs have raised the defences and cross claims outlined above based on alleged breaches of duties by Mr Tiwari as a director of S&D and under the second limb of Barnes v Addy.[165] There is also the outstanding issue of the interests of Mrs Tiwari, if any.
164 I find that Mr Velos acquired a valid and effective equitable charge over the properties. I reject the claim of the plaintiffs that the equitable charges were not valid or effective to grant an equitable charge in favour of Velos & Davis.[166] My reasons are as follows.
165 The plaintiffs allege that S&D acted in breach of trust in giving the equitable charges to secure the fees incurred by Sheela and S&D in defending Mr Malhotra's action. Similarly to the response in Mr Tiwari's claim, the plaintiffs allege that by reason of S&D's breach of duty, the equitable charges were not valid or effective, or alternatively, not valid or effective to charge Mr Malhotra's interest in the properties. Further, or alternatively, by reason of Mr Malhotra's caveats, Velos & Davis took the equitable charges with notice, or constructive notice, of Malhotra's interests in the properties.[167]
166 On the other hand, in their prayers for relief in the plaintiffs' claim against Velos, the plaintiffs only seek a declaration that the interests of Mr Malhotra in the Footscray property and the Hillside property are not validly encumbered by the equitable charges; and further or alternatively, a declaration that any interest of Velos in the Footscray property or the Hillside property pursuant to the equitable charges is subject or postponed to the prior interest of Malhotra in that property.[168] The plaintiffs have expressly abandoned any claim under the first limb of Barnes v Addy[169] that Velos & Davis received and became chargeable with the trust property. The Plaintiffs Closing Submissions do not contend that the Velos & Davis charges are not valid and effective by reason of an alleged breach of duty. The alleged breaches of duty by S&D are relied on in the damages claim against Mr Tiwari which is dealt with below.
WHAT IS THE PRIORITY AS BETWEEN MALHOTRA AND VELOS?
167 I find that the Velos & Davis equitable charges were second in time to Mr Malhotra's proprietary interest. I reject Mr Velos' claim that by reason of Mr Malhotra's conduct he has lost his priority over the Velos & Davis charges.[170]
168 Mr Velos, a partner of Velos & Davis, claims that in October 2004 Velos &Davis took equitable charges over the Footscray and Hillside properties to secure fees due to them for acting for Sheela and S&D in the Supreme Court proceedings brought by Mr Malhotra against Sheela and S&D. Mr Velos claims that fees of $146,925.33 and interest thereon remain outstanding to Velos & Davis by Sheela and are secured by the equitable charges which they allege now attaches to the funds in court. Mr Velos claims that Mr Malhotra is merely an unsecured creditor. I have already dealt with that issue. I deal with the priority between Mr Velos and Mr Tiwari below.
169 The plaintiffs allege that by reason of Mr Malhotra's caveats and Mr Malhotra's claims, Mr Velos took the equitable charges with notice, or constructive notice, of Mr Malhotra's interests in the Footscray and Hillside properties.[171] Mr Velos denies he had constructive notice of Mr Malhotra's interest. Further, Mr Velos claims that by reason of Mr Malhotra's conduct Mr Malhotra's interest in the properties ought to be postponed to the interests of Velos & Davis.[172]
170 I will deal with the issue of notice first. Velos & Davis were fully aware of Mr Malhotra's caveats. They were central to the case they were conducting for the Tiwaris. The plaintiffs submit that Mr Velos was not a bona fide purchaser for value without notice.[173] They contend his belief, based on his instructions from the Tiwaris, that Mr Malhotra's claims were hopeless or lacked merit is not to the point. They submit that Mr Velos was nonetheless on notice of them and that he did not dispute this.[174] I accept this submission.
171 Mr Velos claims that Mr Tiwari's caveat did not properly and accurately specify the interest he in fact has and the grounds of that interest. In my view, that is not the appropriate issue to address on the question of notice. The caveat, coupled with the statement of claim, gave Mr Velos full and complete notice of the interest that Balmford J subsequently held him to have.
172 As to the question of whether Mr Malhotra has lost his prior entitlement by his conduct, Mr Velos relied on the representations that Mr Malhotra had made in the Family Court and elsewhere that he did not have an interest in the Footscray and Hillside properties.
173 In Latec Investments Ltd v Hotel Terrigal Pty Ltd,[175] Kitto J laid down the test for determining whether the conduct of the prior interest holder may displace its priority. He said:
In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure. But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest.
174 When Mr Velos lodged the caveat in October 2004, he was aware of the Statement of Assets and Liabilities that had been executed by Sheela Tiwari and S&D, he was aware of Mr Malhotra's statement of claim, he was aware that Beach J of the Supreme Court of Victoria had dismissed Sheela Tiwari's claim for summary judgment which had been upheld by the Court of Appeal. Mr Malhotra had produced a document signed by the defendants to support his claim.
175 I have carefully considered the extensive submissions made on Mr Velos' behalf on the issue of whether Mr Malhotra's interest ought to be postponed to that of Mr Velos.[176] I have also considered Mr Velos' evidence and his affidavit of 22 September 2010 where he deals with his belief about the strength of Sheela Tiwari's case. I accept that Mr Velos believed that Mrs Tiwari would succeed and that Mr Malhotra's claim would be defeated. Mr Velos' affidavit makes it clear, however, that his belief was based in large part on what Mrs Tiwari told him. For example, she told him that she did not sign the agreement and that her signature had been forged or she had been tricked into signing it by being told it was something else. As it turned out, the trial judge found that she did sign it knowingly.
176 I find that Mr Velos did not rely on the conduct of Mr Malhotra to form a supposition that his interest did not exist but that rather he relied on the instructions of his own client Mrs Tiwari that ultimately were not accepted by Balmford J. I think one can test it this way: if Mrs Tiwari had not informed Mr Velos that Mr Malhotra's claims were baseless, despite Mr Malhotra's earlier statements to the Family Court and such like, then there would be little if any basis for Mr Velos to assert that he relied on Mr Malhotra's conduct to lead him to believe that Mr Malhotra did not have an interest in the properties and that he could safely take his interest.
177 For the following reasons, I find that S&D did retain Velos & Davis to act for them in the Supreme Court proceedings. I find that Mr Malhotra does not have standing to challenge the retainer or the fees charged under it to S&D.[177]
178 Mr Velos claims that S&D retained Velos & Davis to act for it in the Supreme Court proceedings. The plaintiffs do not dispute this claim. The plaintiffs conceded that proceedings were brought against S&D and S&D did have some matters to answer.[178] On the other hand, Mr Malhotra claims that S&D did not retain Velos & David. Mr Velos claims that Mr Malhotra has no standing to make this claim.[179]
179 The correspondence from Velos & Davis was not directed to S&D although it was addressed to its directors. S&D was not a party to any fee agreement with Velos & Davis. The fee agreement entered into only named Sheela Tiwari as the client. On the other hand, the equitable charge signed by S&D acknowledged that it was liable for the fees incurred on its and Sheela's behalf. Further, Velos & Davis did act and appear for S&D in the proceedings. Velos & Davis have claimed that S&D and Sheela were jointly and severally liable for all the fees incurred.
180 Whether or not S&D should have agreed to be jointly and severally liable for Velos & Davis' fees is a separate matter from whether or not Velos & Davis acted for and was entitled to charge fees to S&D. This issue is dealt with below in addressing whether or not the giving of the charges to Velos was in breach of S&D's duties and the plaintiffs claim against Mr Tiwari in respect thereof.[180]
181 S&D is represented in these proceedings. It has not contended it did not retain Velos & Davis. Mr Malhotra has no standing to make any submissions for or on behalf of S&D. These are matters for S&D. Mr Malhotra submits, that in relation to the plaintiffs' case against Mr Velos and Mr Tiwari, he has been just assisting the plaintiffs in the claims they have made. He confirms that he has not made any independent claims against anyone in this proceeding. As to Mr Velos' claim that Velos & Davis acted for S&D, Mr Malhotra says that he has not said that Velos & Davis did not act for the company. His position has been to seek documents so that he could see how much the company should have paid Velos & Davis.[181]
WHAT IS THE PRIORITY AS BETWEEN ANZ BANK AND VELOS?
182 The ANZ Bank unregistered mortgages were first in time. Prima facie priority in time will decide matters unless the prior equity holder's conduct is such as to deny it priority over a subsequent interest holder.[182] I find that the ANZ Bank by its conduct lost what otherwise would have been its priority in its equitable mortgages over the properties as against the Velos & Davis equitable charges.[183]
183 ANZ Bank did not lodge a caveat in respect of its unregistered mortgages. Mr Velos claims that due to the conduct of the ANZ Bank his charges should have priority against the equitable ANZ Bank mortgages.[184] Mr Velos contends that as Mr Tiwari has taken an assignment from ANZ Bank he obtains not better interest than the ANZ had as against the Velos & Davis charges. Mr Velos contends that Mr Tiwari is also guilty of postponing conduct of his own which, cumulatively with the ANZ Bank's own conduct, makes even greater the merits of Mr Velos having priority over the ANZ mortgages.[185]
184 I shall first consider whether the ANZ Bank's conduct in the circumstances was sufficient to allow Mr Velos to take priority despite being second in time. It is well established that all relevant circumstances must be taken into account in deciding whether or not the ANZ Bank loses its priority.[186] These circumstances include the allegation that Velos & Davis were in fact aware that S&D had given equitable mortgages to the ANZ Bank both by reason of their own inquiries and because Mr Tiwari told them.
185 Before turning to examine the facts, I deal further with the law. In Heid v Reliance Finance Corporation Pty Ltd,[187] Gibbs CJ, Murphy, Mason, Deane and Wilson JJ decided a case involving the deferment of a prior equitable interest on the basis of estoppel. Mason and Deane JJ (in a separate judgment) referred to a more general principle that preference be given to the better equity. They said:
It may be that an equitable interest will not be postponed to an equitable interest created later in time merely because there is a causal nexus between an act or omission on the part of the prior equitable owner and an assumption on the part of the later equitable owner as to the non-existence of the prior equity. Fairness and justice demand that we be primarily concerned with acts of a certain kind - those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest.
Thus, the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not in itself involve the loss of priority which the time of the creation of the equitable interest would otherwise give (J. & H. Just (Holdings) Pty. Ltd. v. Bank of N.S.W.)[188] notwithstanding that the person acquiring the later interest had, before acquiring that interest, searched the register book and ascertained that no caveat had been lodged. It is just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner should retain his priority.[189]
186 In Jacobs case, the Appeal Division of the Supreme Court of Victoria (Crockett, King and Gobbo JJ) held that if estoppel is alleged in sustaining a postponement of a prior equity it was essential for the representee to alter his position on the faith of the representation to his detriment.[190] As shown in the passage above from the judgement of Mason and Deane JJ in Heid's case, the mere failure of the holder of a prior equitable interest in the land to lodge a caveat does not by itself involve loss of priority. See also the discussion of Ormiston JA in Moffett v Dillon[191] where he considers both approaches and expresses the view that the guiding principle is that "to resolve contests between equitable interests which might otherwise appear to be equal in the eyes of equity by declaring that the interest created earlier should take priority, unless the holder of the later interest could establish that it amounted to a "better" interest."[192] He said the onus rests on the later holder to establish the better interest.[193]
187 Jacobs case establishes that the mere failure to lodge a caveat is not enough to postpone a prior equitable interest holder to a subsequent equitable interest.[194] Jacobs case applied J&H Just (Holdings) Pty Ltd v Bank of New South Wales[195] where the High Court had held that the mere failure to lodge a caveat does not necessarily involve the loss of priority which the time of the creation of the instrument would otherwise give. Previously in Victoria, Gowans J in Osmanoski v Rose[196] had sought to distinguish J&H Just (Holdings) on the basis of that the statutory provisions in the New South Wales case were different to those in the Transfer of Land Act 1958. Nevertheless, Gowans J did hold that the subsequent interest holders had relied on a search of the register and the absence of any caveat. In Jacobs case the Full Court doubted the approach taken in Osmanoski v Rose.[197]
188 In J&H Just (Holdings), Barwick CJ, with whom McTiernam and Owen JJ agreed said of the failure to lodge a caveat:
Whilst it may be true in some instances that "the register may bear on its face a notice of equitable claims", this is not necessarily so and whilst in some instances a caveat of which the lodgment is noted in the certificate of title may be "notice to all the world" that the registered proprietor's title is subject to the equitable interest alleged in the caveat this, in my opinion, is not necessarily universally the case. To hold that a failure by a person entitled to an equitable estate or interest in land under the Real Property Act to lodge a caveat against dealings with the land must necessarily involve the loss of priority which the time of the creation of the equitable interest would otherwise give, is not merely in my opinion unwarranted by general principles or by any statutory provision but would in my opinion be subversive of the well recognized ability of parties to create or to maintain equitable interests in such lands. Sir Owen Dixon's remarks in Lapin v. Abigail with which I respectfully agree, point in this direction.
Of course, there may be situations in which such a failure may combine with other circumstances to justify the conclusion that "the act or omission proved against" the possessor of the prior equity "has conduced or contributed to a belief on the part of the holder of the subsequent equity, at the time when he acquired it that the prior equity was not in existence" cf. per Knox C.J. in Lapin v. Abigail . This is the relevant principle to apply if it is claimed that the priority of a prior equitable interest has been lost in competition with a subsequent equitable interest. (Citations omitted)
In short priority which might otherwise exist according to the time at which an interest was acquired may be lost where some act or omission by the holder of the earlier interest has led the holder of a later interest to acquire his interest upon the supposition that the earlier did not exist.
190 He said further that the party seeks to reverse priorities "must not only show a change of position but also that he has suffered detriment by reason of the failure of the earlier interest holder to caveat."[200] I now apply these principles to this case.
191 In July 2002, the ANZ Bank lent S&D $200,000 to assist Mrs Tiwari with buying the Point Cook property and took mortgages in registrable form over the Footscray and Hillside properties standing in the name of S&D. For reasons which have not been explained, the ANZ Bank did not register the mortgages. Further, the ANZ Bank did not even lodge caveats notifying its interest in the land under its unregistered mortgages until 28 July 2005.[201] The ANZ Bank also took a debenture mortgage over the assets and undertaking of S&D which did by its terms constitute a fixed charge over the properties. The taking of the charge was registered with ASIC and its existence was noted on a search of S&D. Velos & Davis conducted a search of S&D on 10 October 2002 which recorded charge no. 878590 created 11 July 2002 and registered on 25 July 2002.[202] Velos & Davis also conducted and relied on a title search. The search only disclosed the CBA mortgage and Mr Tiwari's caveats.
192 On 28 September 2004, Velos & Davis received from Sheela Tiwari's accountant David Mond accounts of S&D as at 30 June 2002 disclosing that S&D owed moneys to the CBA and approximately $200,000 to ANZ Bank.[203] The loan from the ANZ Bank is described as "unsecured". On one version of the accounts, a handwritten notation beside the loan from the ANZ Bank has "secured on Livorno Lane", which is the Point Cook property. Mr Jonathan Evans of counsel deposed that the handwriting was his and he made the notes whilst in conference held on 28 September 2004. Mr Evans does not recall the conference, but exhibits his notes. Mr Tiwari deposes that he attended the conference with his mother Sheela Tiwari and it was held with Kamilla Shaw of Velos & Davis and Mr Evans.[204] Mr Evans says that the draft balance sheet showed that there was an ANZ Bank loan. He says his notes lead him to believe, based on his own experience of how he makes notes, that he understood the ANZ Bank loan referred to in the notes to have been secured only against the property described as Livorno Land. He says that if he had been told the ANZ Bank loan was secured by unregistered mortgages over the Footscray and Hillside properties, he would have recorded that instruction.[205] On 8 October 2004, S&D executed the charges.
193 Mr Velos deposed and said in evidence that he had no knowledge of the ANZ Bank unregistered mortgages and that if he had he would not have taken the charges from S&D. In those circumstances he would not have provided his legal services on credit as he did.
194 Mr Tiwari deposed that he believed that Velos & Davis knew of the loans from the ANZ Bank from at least mid 2002. He says that in mid 2002 he and his mother had a meeting with Kamilla Shaw wherein the matter of borrowing money from the ANZ Bank on security of the Footscray and Hillside properties was discussed. He says that Ms Shaw was asked whether moneys could still be borrowed from the ANZ Bank. He says that Ms Shaw said that money could be borrowed. He deposes that after loans were obtained from the ANZ Bank, Ms Shaw was informed of the borrowings.[206] Ms Shaw is now in Canada and was not called as a witness. Sheela Tiwari was not called though she was available to be called.
195 I do not accept the evidence of Mr Tiwari on this issue. I find that his recollection is at best mistaken. The submissions of Mr Velos examine in detail Mr Tiwari's changing evidence on this issue.[207] I accept these submissions in their entirety. I also observed Mr Tiwari's demeanour in the witness box. He did not strike me as a reliable witness. He seemed far too willing to adapt his evidence to fill gaps in his case when he was presented with inconsistencies in his evidence. It is unnecessary for me to find whether Mr Tiwari's unreliability as a witness was due to him speculating, reconstructing or worse, being deliberately untruthful. It is sufficient for me to say that I do not accept his evidence on this issue unless it is independently corroborated. Taking into account his evidence and the submissions of Mr Velos, I am led to the conclusion that I ought not to accept his evidence that he told Kamilla Shaw or any other agent of Mr Velos of the ANZ Bank unregistered mortgages.
196 Thus, I accept that when Mr Velos took his interest, he was not aware of the ANZ Bank's unregistered mortgages and that he relied on the title search which disclosed no caveat by the ANZ Bank. I accept that he did not study the mortgage debenture. Mr Velos gave evidence that it was almost invariable bank practice to lodge a caveat to give notice of any unregistered interest. He said that he was guided by that practice in relying on the absence of a caveat.
197 The Tiwari April Submissions contend that Mr Velos should have inferred from the fact that the ANZ Bank had loaned moneys to S&D that the loan was probably secured on S&D's only properties.[208] The force of this contention is reduced by the fact that the Tiwaris told Kamilla Smith and Jonathan Evans that this loan was secured on the Point Cook property it was used to buy. I have otherwise fully taken into account Mr Tiwari's submissions on this issue.[209]
198 In Jacobs case there were good reasons for the prior interest holder not lodging a caveat. The prior interest holder was the daughter of the owner and expected that her father would not do anything to prejudice her interest without her being consulted. No such circumstances exist here to deny that the better interest or equities lie with Velos & Davis. The conduct of the ANZ Bank may only be the failure to lodge a caveat, but that by itself may be sufficient to defer priority if the circumstances otherwise make it fair and just to do so, particularly here where Mr Velos relied on the absence of a caveat and acted to his detriment in reliance. No explanation was offered by the ANZ why it did not follow usual practice and lodge a caveat notifying its unregistered mortgages. I can take judicial notice that the ANZ Bank is a major banking corporation and well aware of conveying practice and that of the purpose and function of caveats.
199 Thus, taking into account the relevant circumstances surrounding Mr Velos taking his interest subsequent to the ANZ Bank, I find that on either an estoppel basis or on the broad principle in the joint judgment of Mason and Deane JJ in Heid's case, that the fairness and justice of the situation are such that the earlier interest of the ANZ Bank ought to be postponed to the later interest of Mr Velos. Further, I am satisfied that the failure by the ANZ to lodge a caveat has led the holder of the later interest (Velos & Davis) "to acquire their interest upon the supposition that the earlier did not exist" and that they suffered detriment by reason of the ANZ to caveat by running up further legal fees and expenses. [210]
200 In the circumstances, there is no need to consider the further submission of Mr Velos that Mr Tiwari's conduct should be cumulatively considered with that of the ANZ Bank's.[211]
IS MR TIWARI ENTITLED TO CLAIM UNDER THE ANZ BANK MORTGAGE?
201 Mr Tiwari claims that by a deed of assignment of 9 July 2008, the ANZ Bank assigned absolutely its right title and interest in the ANZ Bank mortgage over the Footscray and Hillside properties to Mr Tiwari.[212] He further alleges that by reason of this assignment, he assumed absolutely the right, title and interest of the ANZ Bank in the ANZ Bank mortgage.
202 He alleges that as at 10 July 2008, the amount of the S&D debt to the ANZ Bank was $356,080.85. Mr Tiwari claims to be therefore entitled to the proceeds of sale of the properties next after MIG and seeks orders accordingly.
203 Mr Tiwari contends that there was no act of himself which caused Velos & Davis to assume the non-existence of the ANZ mortgages. As discussed above, ANZ Bank lost its priority to Mr Velos in 2004. Mr Tiwari did not acquire the ANZ Bank's interest until 2008. Mr Tiwari did not contend that he took the ANZ Bank's equitable mortgage free from the equities and infirmities of the ANZ Bank's title; in other words free from the ANZ Bank's loss of priority to Mr Velos through its conduct. In Redman v Permanent Trustee Co of NSW,[213] Griffith CJ and Barton J said:
The assignee of an equitable interest, even for valuable consideration, takes subject to all the equities and infirmities of his assignor's title. It is one of the infirmities of the title of the assignor of an equitable interest that his right to it may be disputed and defeated by litigation in a competent Court between competent parties.
204 Accordingly, I find that Mr Tiwari is able to enforce the ANZ Bank mortgages but, subject to Mr Malhotra's equal joint ownership of the Footscray and Hillside properties and their proceeds, the interest, if any, of Mrs Tiwari and subject to the Velos & Davis charges.
CLAIMS BY PLAINTIFFS AGAINST MR TIWARI: INTRODUCTION
205 The plaintiffs claim damages from Mr Tiwari in respect of losses allegedly suffered by S&D. Firstly, the plaintiffs claim damages arising from S&D giving the ANZ Bank mortgages, taking the business loan and making the advances to Mrs Tiwari to assist her in purchasing the Point Cook property. Secondly, the plaintiffs claim damages arising from S&D agreeing to be liable for and meeting Mrs Tiwari's legal costs in defending Mr Malhotra's Supreme Court proceedings.
206 Each of the claims is made on two bases: a Barnes v Addy claim that Mr Tiwari was knowingly concerned in a breach of trust by S&D and that Mr Tiwari breached duties he had under the Corporations Act 2001.
207 Mr Tiwari contends he has a complete defence to any claim arising out of S&D assisting Mrs Tiwari to purchase the Point Cook property under a release given to him by the plaintiffs. As it is, I have decided that Mr Tiwari does indeed have this complete defence.
208 That raises the issue of whether or not I should decide whether or not the plaintiffs did have a good claim against Mr Tiwari but for the release. It is not the duty of a judge to decide every matter which is raised in argument.[214] As Mahoney JA said in Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd:
It is not the duty of the judge to decide every matter which is raised in argument. He may decided a case in a way which does not require the determination of a particular submission: in such a case he may put it aside or, as Lord Scarman said, merely salute it in passing: R v Barnet London Borough Council: Ex parte Nilish Shah [1983] 2 AC 309 at 350. A judge will, of course, appreciate the possibility of points being taken or decided on appeal which were not taken or decided below and for this reason he may decide, and give reasons for his decision on, matters which in strictness he need not decide.
However, the decision of a particular submission may be an essential part of the judge's reasoning to his final conclusion. This may be so because it is necessarily so, ie, because he cannot come to his final conclusion without deciding it; or because the reasoning which in fact he follows makes it so. In such a case, the duty of the judge will vary according to the way in which the case has been conducted and according to the reasoning which he has followed.[215]
209 In Kuru v New South Wales,[216] the High Court emphasised the importance of intermediate appeal courts dealing with every ground of appeal so that the High Court can ultimately dispose of the matter without referring it back to the Court of Appeal. Gleeson CJ, Gummow, Kirby and Hayne JJ said:
This Court has said on a number of occasions[217] that, although there can be no universal rule, it is important for intermediate courts of appeal to consider whether to deal with all grounds of appeal, not just with what is identified as the decisive ground. If the intermediate court has dealt with all grounds argued and an appeal to this Court succeeds, this Court will be able to consider all the issues between the parties and will not have to remit the matter to the intermediate court for consideration of grounds of appeal not dealt with below.
210 Whether an issue argued in the case should be ruled on where it is not necessary to decide it to reach a finding on the ultimate issue is a matter for the trial judge. Clearly, factors such as those referred to by the High Court would be relevant matters for the trial judge to consider. It would be convenient in the event of an appeal to have decided all factual matters in dispute. On the other hand, it may be inappropriate to find on issues of credit and misconduct alleged against a party where such a finding is not essential to decide the case.
211 As it is, I took submissions from counsel on this issue. The plaintiffs urged that I do rule on the merits of their claim against Mr Tiwari even if the defence is made out. Mr Tiwari's counsel urged that I not do so but properly conceded that there was good sense in doing so. In view of the significant time spent on the issue of Mr Tiwari's conduct, I propose to give my decision on the plaintiffs' claim against him relating to the Point Cook property.
DID S&D BREACH ITS DUTIES AS A TRUSTEE?: THE ANZ BANK MORTGAGES
212 For the reasons given below, I find that S&D breached its duties as a trustee in giving the ANZ Bank mortgages, taking the business loan and making the advances to Sheela to assist her to buy property.
213 On 8 April 2002, Mr Tiwari was appointed a director of S&D to join his parents, the existing directors of S&D. He had just completed his Victorian Certificate of Education (VCE) [218] and was attending his first year at university.[219] He claims that he was advised to become a director by Velos & Davis because his mother had limited knowledge of English and Mr Tiwari was not authorised to sign or act on behalf of the company.[220] He was 18 years of age and had no previous experience as a director of a company or in running a business. Mr Tiwari said that at that time he had no idea what the caveat was or what was going on.
214 When asked about his role in the company when he became a director, he said he was required to communicate with people dealing with the company as his mother's English was quite poor. I infer that previously Mr Malhotra would have fulfilled this task. He freely admitted he didn't know what the role of a director was when he became a director and didn't become entirely aware until some years later.[221] At the time, he didn't distinguish between the business and the company[222] and did not understand what his responsibilities were in relation to the Unit Trust.[223] He did not understand the difference between a trust and a company.[224] He understood that everything belonged to the family business.[225] He said he had no idea of minutes of meetings and resolutions of directors.[226] Mr Tiwari said he did not know how much money his mother was taking from the company[227] or how much was owed to her.[228]
215 Taking into account this evidence as a whole, I find that Mr Tiwari was appointed a director when just out of school without any real idea of the responsibilities involved. He was appointed to help Mrs Tiwari in her dealing with lawyers and others after the dispute with Mr Malhotra arose. Mr Tiwari did not understand the corporate structure and drew no distinction between being a director of a company that was a trustee and simply owning what he called the family business. He had no idea of company procedures or what directors were obliged to do and particular when a director of a trustee company. He did not understand the difference between a trust and a company. He had no knowledge of what moneys his mother was drawing from the company and whether or not she was in fact owed any moneys by the company.
216 On 18 April 2002, Mr Malhotra lodged his caveats. On 26 April 2002, Mr Malhotra was locked out of the Footscray property and took no further part in the running of the grocery business from that point onwards. Soon thereafter, Sheela Tiwari, in the company of her son Mr Tiwari, consulted Velos & Davis about removing the caveats. At this time, Mr Tiwari claims Velos & Davis were also asked whether money could be borrowed from the ANZ Bank despite the caveats. Mr Tiwari claims that Ms Kamilla Shaw said that money could be borrowed.[229] As mentioned above, she was not called as a witness and she now lives in Canada. As indicated above, I have not accepted Mr Tiwari's evidence on this issue.
217 On 3 July 2002, Mrs Sheela Tiwari and Mr Tiwari approach Neil Hampton of the ANZ Bank requesting finance to purchase the Point Cook property. On 4 July 2002 the ANZ Bank searched the titles of the Footscray and Hillside properties and became aware of Mr Malhotra's caveats.[230] On 11 July 2002, Mrs Tiwari and Mr Tiwari executed an unlimited joint guarantee in favour of the ANZ Bank, guaranteeing S&D's obligations to the bank.[231] Also on 11 July 2002, S&D gave a mortgage debenture to the ANZ Bank to secure the business mortgage loan.[232] The common seal of S&D was affixed to the mortgage and witnesses by Pradeep Tiwari and Sheela Tiwari as director and secretary. The charged property included the company's undertaking and all its assets both present and future including all assets held by the company as a trustee. The mortgage debenture applied to S&D in its own capacity and as trustee of the Unit Trust.[233] Details of the charge were notified to ASIC.[234]
218 On 12 July 2002, Sheela opened a home loan account with ANZ Bank and $275,000 was withdrawn.[235] S&D opened a business mortgage loan account and $200,000 was immediately withdrawn and deposited into the company's cheque account. $226,358.60 was withdrawn from the company's cheque account and used to buy the Point Cook property.[236] Sheela Tiwari gave the ANZ Bank first and second ranking mortgages over the Point Cook property (stamped to $275,000 and $200,000 respectively).[237]
219 On 15 July 2002, the purchase of Point Cook settled. The purchase price paid was $474,242.35. $27,116.25 was paid as the cost of establishing the home loan account. $275,000 was paid from Sheela Tiwari's home loan account. $199,242.35 from S&D's business mortgage loan account was applied in payment of the purchase price, and $27,116.25 from this same account was applied in payment of the establishment cost.[238]
220 On 22 July 2002, S&D granted an all moneys mortgage debenture of the assets and undertaking of S&D to the ANZ Bank. On 29 July 2002, S&D (Pradeep Tiwari and Sheela Tiwari signing) executed mortgages over the Footscray property and the Hillside property in favour of the ANZ Bank (unregistered and second ranking).[239] On 28 July 2005, the ANZ Bank lodged caveats with respect to the unregistered mortgages and the interest created by the mortgage debenture.[240]
221 On 19 August 2002, Malhotra commenced commences proceeding[241] against Sheela Tiwari and S&D seeking a declaration that he was an equal joint beneficial owner of the Footscray property, the Hillside property, the grocery business, the issued shares in S&D and the issued units in the Unit Trust.[242]
222 On 25 September 2002, Malhotra filed and served his statement of claim under which he claimed, inter alia, that he was a joint beneficial owner of the Footscray and Hillside properties and the business.[243]
223 As detailed above, S&D contributed some $226,358.60 to the moneys used by Sheela to purchase Point Cook and gave mortgages to secure borrowings of $200,000 from the ANZ Bank. As indicated above, at first, the ANZ did not seek to register the mortgages but eventually on 28 July 2005, lodged caveats notifying their unregistered mortgages.[244]
224 Mr Tiwari claims that the $200,000 ANZ Bank loan to S&D was obtained to discharge moneys owed to Sheela. To establish moneys were owing to Sheela Tiwari Mt Tiwari relies on a purported balance sheet of S&D (as trustee) for the year ended 30 June 2002, that disclosed a debt due to Sheela of $137,287.27. That balance sheet is incorporated in an unaudited document prepared by David Mond & Associates bearing no date and entitled "S&D International Unit Trust Financial Statements for the year ended 30 June 2003".[245] The balance sheet for the trust for the year ended 30 June 2003 included the previous years' figures as well. It showed a loan from Sheela Tiwari of $137,287.27.
225 Mr Tiwari had previously in his Tiwari Reply alleged that the debt due by the trustee to Mrs Tiwari was $184,280.64. He exhibited what he thought was the balance sheet of S&D for 30 June 2002 which showed the loan as $184,280.64.[246] He deposed that he had been informed and believed that this document was a draft and that the true figure was $137,287.27.[247] He said he was told this by another accountant working for Mr Mond, Phillip Sullman. Mr Sullman was not called.
226 In cross examination, counsel for Mr Velos put further purported balance sheets to Mr Tiwari. The plaintiff also tendered various tax returns and financial reports for S&D that had not been audited and required some explanation to reconcile them.[248] For example, exhibit P 16 is a purported balance sheet of the Unit Trust as at 30 June 2002. It is materially different to the balance sheet tendered by Mr Tiwari as exhibit PT 5. In the absence of evidence from any of the accountants that drew up the various balance sheets, tax returns and financial reports I am unable to place much reliance on any of them.
227 Mr Tiwari says that insofar as the loan exceeded the debt it was intended to make up the deficit from Sheela's future earnings from the business (whether as wages or distribution of profits). The balance sheet for the following year 30 June 2003, shows no liability to Sheela Tiwari.
228 Shortly prior to the end of the 2003 financial year, on 24 June 2003, the Tiwari Family Trust was established with Sheela Tiwari appointed trustee. Mrs Tiwari thereafter held the units in the Unit Trust as assets of the Tiwari Family Trust.
229 Mr Tiwari claims he relied on these accounts. I do not accept that evidence. It is extremely unlikely that the accounts for 30 June 2002 would have been completed by 11 July 2002 when the security documents were being executed with the ANZ Bank.
230 In July 2002, Mr Tiwari concedes he had no personal knowledge of whether or not the accounts were accurate. He says further that he had no personal knowledge of the payment of wages or the distribution of profits by the Unit Trust and no personal knowledge of his mother's entitlements from S&D.
231 Mr Tiwari claims that the idea of S&D borrowing $200,000 and using it to repay current and future loans to Sheela Tiwari came from a meeting with his mother's accountant Nicholas Bantrauhas. Mr Tiwari did not call Mr Nicholas Bantrauhas or Sheela Tiwari. Mr Tiwari said his mother lived in the Footscray area. He said he asked her to make an affidavit at the beginning of the proceedings and she said she didn't want to have anything to do with court or solicitors.[249] I assume their evidence would not have assisted Mr Tiwari. He could not say how the debt shown in the books of $137,287.27 was calculated and particularly what was due to wages or the distribution of the profits to the unit holders. The accounts did not include any sum due to Mr Malhotra. If the sum represented the distribution of profits to unit holders it is probable that, in accordance with Balmford J's decision that half of the $137,287.27 was due to Mr Malhotra.
232 Mr Tiwari conceded in cross examination that in 2002 and 2003 his mother drew money from S&D to cover living expenses for the family which consisted of herself, her former husband Markandey Tiwari, three daughters and her son. These expenses included clothing, private school fees for her children, maintaining several vehicles and for trips to India and America. The total recorded wages paid to the members of the Tiwari family during the financial year ended 30 June 2002 was only $17,371 which would not have been enough to cover these living expenses. Mr Tiwari said he had three sisters, two of whom were at school in 2002.[250] Mr Tiwari had been at Westbourne Grammar in Werribee until the end of 2001.[251] He also conceded that he had no personal knowledge of how much in fact was owed to his mother. No evidence was led of any inquiries made by Mr Tiwari to satisfy himself of whether any moneys were in fact owed to his mother.
233 The trustee was to hold the assets of the trust for the registered unit holders and upon the terms and subject to the provisions of the Trust Deed[252] and to use its best endeavours to ensure that the management of the Trust Deed was carried on and conducted in a "proper and efficient manner."[253] At law the trustee as a fiduciary was also obliged to exercise its powers honestly and in the best interests of the beneficiaries of the trust. In Cowan v Scargill, Sir Robert Megarry V-C said:[254]
The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries. This duty of the trustees towards their beneficiaries is paramount. They must, of course, obey the law; but subject to that, they must put the interests of the beneficiaries first. When the purpose of the trust is to provide financial benefits to the beneficiaries, as is usually the case, the best interests of the beneficiaries are normally their best financial interests. In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return to the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment.
He said further that a trustee's powers: [255]
must be exercised fairly and honestly for the purposes for which they are given and not so as to accomplish any ulterior purpose, whether for the benefit of the trustees or otherwise.
234 There is a clear distinction between the extent of the trustee's powers and the propriety of their exercise. In particular, it is not sufficient merely to establish that S&D had the power to borrow from the ANZ Bank and grant mortgages over its property. S&D was also bound to exercise those powers fairly and honestly, as the Trust Deed itself acknowledged.
235 The plaintiffs also allege that trustee's powers could only be exercised for a purpose for which they were conferred. The plaintiffs assert that the Unit Trust was established to conduct the Indian grocery business for the benefit of the unit holders. They submit that the Hillside property was acquired and held as a possible home site for Mr Malhotra and Sheela Tiwari.[256]
236 Corporations do not have a consciousness. Nevertheless, knowledge and state of mind can be attributed to a corporation.[257] Usually, the knowledge of the directing mind and will of the company will be attributed to the company.[258] At the time of the mortgages, the directing mind and will of S&D was that of Sheela Tiwari's. Her knowledge was S&D's knowledge. Pradeep Tiwari conceded he had little knowledge of unit trusts. He had no independent knowledge of the accuracy of the accounts. Neither Mr Bantrauhas, Mr Sullman or Mr Mond, the relevant accountants, were called by Mr Tiwari. As I stated above, I can only assume their evidence would not have assisted Mr Tiwari.
237 I am satisfied that Mr Tiwari did what he did at the request of his mother. There is no evidence that Markandey Tiwari played any material role in the administration of the company. Consistently, with Balmford J's decision, S&D held an equal joint beneficial interest for Mr Malhotra pursuant to the representations of Mrs Tiwari and S&D. If follows that Mrs Tiwari knew this. She knew that S&D had no right to mortgage Mr Malhotra's interest without his consent and S&D must be taken to know this as well. These findings are sufficient to conclude that S&D acted in breach of the trust on which it held Mr Malhotra's interest in giving the ANZ Bank mortgages and borrowing $200,000.
238 If, contrary to my finding, Mr Malhotra only had an interest in the properties through being beneficially entitled to one of the two units in the Unit Trust, Balmford J found that Mrs Tiwari and S&D were aware of that. It was not in Mr Malhotra's interests for the properties to be mortgaged and $200,000 to be borrowed and paid to Sheela Tiwari. Any honest trustee acting impartially and in the best interest of the beneficiaries in the position of S&D would have been aware of that. It was suggested that if Mr Malhotra was entitled to one of the two units in the Unit Trust, he was not the registered unit holder and that would excuse the trustee from considering his interests under the terms of the Unit Trust. In my view, that does not relieve S&D from acting honestly and having regard to his interests in exercising its powers and duties as a trustee, as it knew that Mr Malhotra was in fact the true beneficial owner of the unit. To find so would lead to form triumphing over substance a matter that equity would not countenance.
239 In defence of S&D's actions, Mr Tiwari has sought to establish that as at 30 June 2002 Mrs Tiwari was owed some $137,000 by S&D and would likely to be owed more in the following financial year. He relies on the accounts and little else. He has not satisfied me that the accounts were accurate. As mentioned above, the relevant accountants were not called.
240 The accounts were prepared on the basis that Mrs Tiwari was entitled to the whole of the net income of the trust rather than one half. Secondly, the accounts were prepared on the basis that Mrs Tiwari only drew $17,371 from S&D to support herself and her family of five.[259] As mentioned above, the suggestion that the family lived off $17,371 under these circumstances is not credible. I have little confidence in the accuracy of the accounts.
241 If S&D did owe moneys to Sheela Tiwari, which I do not find, then I am satisfied that they were far less than the $226,358.60 she obtained from S&D to assist her in the purchase of the Point Cook property. The evidence suggests the sum may have been about $70,000, being half of the $137,287.27. The fact that she may have been owed some moneys by S&D does not convert S&D's actions from being in breach of trust to being made honestly and impartially in the best interests of the beneficiaries.
242 If it is relevant in judging S&D's actions, to have regard to Mr Tiwari's role, I do not accept that Mr Tiwari brought any independent judgment to bear on whether or not S&D should grant the mortgages to the ANZ Bank to allow S&D to borrow $200,000 from the ANZ Bank to pay to his mother to buy the Point Cook property. He was aware of Mr Malhotra's claim to the properties. He says he discussed the caveats with Kamilla Shaw before the loan was made by the ANZ Bank.[260] He was aware that Mr Malhotra had been living at the Footscray property and working in the business for many years. He was aware that Mr Malhotra had been married to his mother. He made no reasonable inquiries as to the basis of Mr Malhotra's claim. A trustee acting honestly in the best interests of and impartially between the beneficiaries would have not have acted on the basis that Mr Malhotra's claim was baseless without making reasonable inquiries.
243 For these reasons, I find that S&D did not act honestly and impartially in the best interests of the beneficiaries in using the Unit Trust assets to provide Sheela Tiwari with $226,358.60 toward the Point Cook property. I find that S&D breached its duties as trustee in granting the mortgages to the ANZ Bank and in advancing the $226,358.60 to Sheela Tiwari.
DID PRADEEP TIWARI KNOWINGLY ASSIST IN S&D'S BREACH OF DUTY?
244 Subject to the issue of the release discussed below, for the following reasons, I find that Mr Tiwari is liable as a constructive trustee for the loss and damage suffered by S&D. Before dealing with the Barnes v Addy claim, I need to say something about the losses claimed to be suffered by S&D.
245 In July 2002, S&D advanced $226,358.60 to Sheela to assist her with purchasing the Point Cook property. Of that, $200,000 was borrowed by S&D from the ANZ Bank and $26,358.60 was from other sources of S&D. The plaintiffs describe these sums as the "Sheela advance".[261] The plaintiffs allege that S&D breached its duty as trustee in making the Sheela advance. However, when the plaintiffs plead the loss suffered by S&D they do not expressly refer to the Sheela advance.[262] Rather, they say, relevantly, that the Unit Trust has suffered loss and damage, being the amounts secured by the Footscray mortgage and the Hillside mortgage.[263] As it is the Footscray and Hillside mortgages did not secure that part of the Sheela advance that did not come from the ANZ Bank loan but came from S&D's own resources (that is the $26,358.60). When dealing with the alleged liability of Mr Tiwari under the second limb of Barnes v Addy, the plaintiffs likewise allege that he knowingly assisted in making the Sheela advance.[264] Under the Barnes v Addy claim, the plaintiffs allege that Mr Tiwari is liable to compensate the Unit Trust in respect of the "said loss and damage flowing from the said equitable frauds" which does cover the Sheila advance.[265] In dealing with the allegations that Mr Tiwari breached his duty as a director, the plaintiffs allege he did so, inter alia, in causing or suffering S&D to make the Sheela advance[266] and by reason thereof S&D has suffered loss and damage, relevantly, the amounts secured by the Footscray mortgage and the Hillside mortgage.[267] After discussion with counsel for the parties, I have accepted that the damage also includes the Sheela advance of $236,758.60.
246 I now turn to the Barnes v Addy claim and following that, the claim that that Mr Tiwari breached his duties as a director. The plaintiffs claim that the granting of the Sheela advance and the giving of the mortgages constituted equitable frauds on the Trust and that Mr Tiwari is therefore liable as he knowingly assisted in these frauds. They allege that he had actual notice of them or he deliberately shut his eyes to them, or abstained in a calculated way from making such enquiries as an honest and reasonable man would.[268] Accordingly, the plaintiffs claim that Tiwari is liable to compensate the Unit Trust in respect of the loss and damage flowing from the equitable frauds.
247 I have already found that S&D breached its duties as trustee in granting the ANZ Bank mortgages, borrowing $200,000 and in making the Sheela advances. Under the principle set out in Barnes v Addy,[269] Mr Tiwari will not be liable as a constructive trustee unless he assists with knowledge in a dishonest and fraudulent design on the part of the trustee. The breach of duty was dishonest. S&D knew that Mr Malhotra had an interest in the properties and the Unit Trust. The critical issue is whether Mr Tiwari had the requisite degree of knowledge of the breach of trust.
248 In Farah Constructions Pty Ltd v Say-Dee Pty Ltd,[270] the High Court held that "knowledge" for the purposes of the second limb may be constituted by:
(c) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
(d) knowledge of circumstances which would indicate the facts to an honest and reasonable man.[271]
249 The plaintiffs concede that the seriousness of an allegation of knowing assistance in a fraudulent design calls for the application of the Briginshaw standard of proof, which is the civil standard subject to a higher "level of persuasion".[272]
250 The plaintiffs submit that the design in giving the ANZ mortgages over the Footscray and Hillside properties was "dishonest" in that the purpose of the mortgages was not a purpose of the Unit Trust, but rather a collateral purpose of assisting Sheela's purchase of Point Cook. They argue an ordinary, decent person, in the position of S&D, having regard to his responsibilities as trustee of the Unit trust, and conscious of Malhotra's claims (notwithstanding that they had yet to be adjudicated upon), would not have consented to the charging of the trust property for that purpose.
251 The plaintiffs submit that there is no question that Mr Tiwari actively assisted in the dishonest design in that he consented to the mortgages and executed them. Further, at the time of the execution of the mortgages, he had actual knowledge that:
(b) the Unit Trust was the structure through which a business (namely the Indian grocery) was conducted;
(c) the Footscray and Hillside properties were assets of the Unit Trust;
(d) the business was operated at the Footscray property;
(e) Mr Malhotra was claiming an equal joint interest (with Sheela) in the Footscray and Hillside properties and had lodged caveats on the titles to protect his claims;
(f) Sheela's purchase of Point Cook was for herself, and not for the purposes of the business; and
(g) the purpose of the mortgages was to assist that purchase, not to advance the interests of the business.
252 The plaintiffs contend that if Mr Tiwari did not have actual knowledge of any of these facts, at the very least he wilfully turned a blind eye to them or failed to make such inquiries as an honest and reasonable man would make. They say it is not apparent that he received advice as to the weaknesses in Mr Malhotra's claims until sometime after the Malhotra proceeding was commenced in September 2002, most likely after Sheela's counsel conducted a search of the affidavits filed by Malhotra in response to Kapoor's Family Court proceedings.[273] The plaintiffs submit that importantly, not only did he not seek legal advice as to the propriety of giving the mortgages, he actively concealed them from Mr Velos (according to Mr Velos's case).
253 There is much to the plaintiffs' submissions. At the very least, I am satisfied, Mr Tiwari wilfully or at least recklessly failed to make inquiries that an honest and reasonable man would make in the circumstances and thus should be taken to have the relevant knowledge of the dishonest breach of trust.
254 Mr Tiwari contends that in considering the inquiries that an honest and reasonable man ought to have made, the court should take into account the particular circumstances pertaining to the company and to Mr Tiwari. He says it was a small private company with one shareholder and three directors: one of whom was a 36 year old woman who had emigrated from India and the other was her 18 year old son with no prior experience or skill as a company director or in business and who had recently completed his VCE. The third director was Markandey Tiwari, Pradeep Tiwari's father. The company operated as trustee of a trust which ran a shop in Barkly Street, Footscray, selling Indian groceries and like products. The directors were each members of the Tiwari family, comprised of the mother, Markandey and four children who lived in a modest residence behind the shop. Markandey had undertaken a kidney transplant and was unable to work.
255 Mr Tiwari contends that so far as the formal legal and accounting arrangements for the structure through which the company operated the shop went, he and the other directors were heavily reliant on the advice of the company's accountants, Jack Yacoub & Associates from 1996 to about April, 2002 and then David Mond & Associates.
256 As at July, 2002, he submits that he had no reason to believe that the financial statements were not in order and that his mother was not owed money by S&D. He contends that he was entitled to rely on others, at least except where he knew or, by the exercise of ordinary care, should know facts which would invalidate reliance. Given his age, inexperience and recent appointment (he had been a director for about three months), Mr Tiwari contends he was entitled to rely heavily on what he was told by the other director(s) and by the company's accountants. Mr Tiwari contends that he was entitled to rely on his parents and what they told him.
257 In my view that is not an answer to the issue. The issue is did he wilfully and recklessly fail to make such inquiries as an honest and reasonable man would make that would have put him on notice of the breach of trust. If he wilfully and recklessly fails to do so, he is taken to have knowledge of the breach of trust.
258 Mr Tiwari was one of three directors of S&D. The other directors were his mother and father. His mother had directed him to buy a property using S&D assets. Mr Tiwari was well aware of Mr Malhotra's claim. He had been present with his mother when Velos & Davis were approached to remove the caveats. He was aware that Mr Malhotra had lived at the Footscray property and worked in the business since 1991 when Mr Tiwari had been about seven. He knew that Mr Malhotra had been married to his mother. He knew that Mr Malhotra had built up the business and was shut out after a dispute with his mother that corresponded with him lodging his caveats. He knew that S&D held the assets on trust, that is for the benefit of others. He knew that the company's assets were being used to provide finance for his mother's own home. He knew that Mr Malhotra was not informed that the properties he laid claim to were being used to help Mrs Tiwari purchase a home in Point Cook and that his mother was keeping that information from him. He failed to make any inquiries of Mr Malhotra. He did not tell him that S&D was mortgaging its assets and borrowing money to enable Mrs Tiwari to purchase the Point Cook property. I find his failure to inform Mr Malhotra was deliberate.
259 In those circumstances, I find that he wilfully and/or recklessly failed to make inquiries of Mr Malhotra generally that if made would have disclosed the likely breach of trust by S&D by taking the step of mortgaging the properties, borrowing $200,000 and making the Sheela advance. In those circumstances, I find that he was knowingly concerned in the breach of trust.
260 I find that S&D suffered loss and damage by granting the ANZ Bank mortgages, taking the business loan and making the Sheela advances.
261 The plaintiffs allege that the loss caused to the Unit Trust by S&D's breach of its duty as trustee in improperly giving the ANZ Bank mortgages is equal to the amount by which the value of the interests of the beneficial unit holders in the trust property has been and remains diminished. They say that but for the giving of the ANZ Bank mortgages, Mr Tiwari (standing in the shoes of the ANZ Bank) would not now have claims over the funds in court (or at least, Malhotra's share of them).
262 In fact, it has eventuated that Mr Tiwari does not have a claim over Mr Malhotra's share of the funds in court for the reasons given above. Any interest he has in the mortgages is subject to Mr Malhotra's prior equitable interest. Subject to the prior interests of the CBA and Mr Malhotra discussed above (and the interest of Mrs Tiwari, if any), I have not found that the ANZ Bank mortgages were invalid or ineffective when granted. On that basis Mr Tiwari may have a claim over the balance of the moneys that represent the properties and their traceable product paid into court.
263 The ANZ Bank mortgages that are now owned by Mr Tiwari include the $200,000 borrowed by S&D and lent to Mrs Tiwari to buy her home. There is also the balance of the Sheela advance of $26,378.60. As it is for reasons given below, I have found that Mr Tiwari is released from this claim. Accordingly, it is unnecessary for me to decide the orders that might have been made against Mr Tiwari but for the release.
DID MR TIWAIRI BREACH DIRECTOR'S DUTIES: ANZ BANK MORTGAGES?
264 For the reasons that follow, I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating the grant of the ANZ Bank mortgages, taking the business loan and making the Sheela advances.
265 The plaintiffs claim that by allowing and authorising the ANZ Bank mortgages, Mr Tiwari breached his duties as a director under ss 180, 181 and 182 of the Corporations Act 2001 and at law, thereby causing loss and damage to S&D by exposing it to liability including the amount secured by the Footscray and Hillside mortgages and the amount of the Sheela advance. The plaintiffs allege that by reason of the operation of s 1317H of the Corporations Act 2001, Mr Tiwari is liable to compensate and indemnify S&D in respect of the loss and damage and S&D is entitled, in equity or pursuant to s 553C of the Act, to set-off the amount of that loss and damage against any amount which Mr Tiwari is entitled to claim under the ANZ Bank mortgages.
266 The plaintiffs allege that Mr Tiwari owed duties as a director to S&D and that he breached those duties by, inter alia, causing and authorising S&D to make the Sheela advance and by authorising, causing or suffering S&D to give the Footscray and Hillside mortgages, and that as a result S&D suffered loss and damage. In the plaintiffs' written submissions they contend the breaches of Mr Tiwari's duties as a director exposed S&D to claims against it for breaches of its own duties to the beneficiaries of the Unit Trust (namely, Malhotra).[274]
267 Section 180 of the Corporations Act 2001 required Mr Tiwari to exercise and discharge his duties as a director with the degree of care and diligence that a reasonable person would exercise if he or she were a director or officer of a corporation in S&D's circumstances, including its position as trustee of the Unit Trust; and occupied the office held by, and had the same responsibilities within S&D as, Mr Tiwari. Section 181 of the Corporations Act 2001 required Mr Tiwari to exercise his powers and discharge his duties as director of S&D in good faith and in the best interests of S&D and for proper purposes. Section 182 of the Corporations Act 2001 required Mr Tiwari not to use his position improperly to gain an advantage for himself or someone else or to cause detriment to S&D. The plaintiffs also allege these duties were owed at law.
Section 180 Care and diligence - civil obligation only
Care and diligence - directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:
(a) were a director or officer of a corporation in the corporation's circumstances; and
(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
Business judgment rule
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
(3) In this section: business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.
Section 181 Good faith - civil obligations
Good faith - directors and other officers
(1) A director or other officer of a corporation must exercise their powers and discharge their duties:
(a) in good faith in the best interests of the corporation; and
(b) for a proper purpose.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
Section 182 Use of position - civil obligations
Use of position - directors, other officers and employees
(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.
DID MR TIWARI BREACH HIS DUTIES UNDER S 180?
1"> 269 Mr Tiwari had a duty to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in S&D's circumstances; and occupied the office held by, and had the same responsibilities within S&D as, Mr Tiwari. In ASIC v Maxwell,[275] Brereton J of the Supreme Court of New South Wales said that the statutory duties imposed by ss 180, 181 and 182 reflect and to some extent refine that which obtains at common law.[276] As to s 180 (1), he said:
In determining whether a director has exercised reasonable care and diligence, as s 180(1) expressly contemplates, the circumstances of the particular corporation concerned are relevant to the content of the duty. These circumstances include the type of company, the provisions of its constitution, the size and nature of the company's business, the composition of the board, the director's position and responsibilities within the company, the particular function the director is performing, the experience or skills of the particular director, the terms on which he or she has undertaken to act as a director, the manner in which responsibility for the business of the company is distributed between its directors and its employees, and the circumstances of the specific case: Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 427; (Romer LJ); Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 at 125 (Tadgell J); Australian Securities Commission v Gallagher (1993) 11 WAR 105 ; 10 ACSR 43 ; 11 ACLC 286; Daniels v Anderson at NSWLR 504-5; FLR 310; ADSR 667-668; ASIC v Adler at [372]; explanatory memorandum to the CLERP Bill 1999: para 6.75.[277]
270 In ASIC v Gallagher,[278] Pidgeon J of the Full Court of the Supreme Court of Western Australia (with whom Franklyn and Walsh JJ agreed) said in regard to duty of a director to exercise reasonable care that "the test is basically an objective one in the sense that the question is what an ordinary person, with the knowledge and experience of the defendant, might be expected to have done in the circumstances if he was acting on his own behalf." The duty of care is owed to the company and the potential damage must be assessed from the company's point of view.[279] In Vines v ASIC,[280] Ipp JA of the New South Wales Court of Appeal (with whom Spigelman CJ agreed) held that a duty of a director cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company as well as the prospective benefit from the conduct in question, and cited with approval the judgment of Ipp J in Vrisakis v ASIC,[281] where his Honour said:
Under s 229(2), however, there is no reference to damage suffered by the company, and an offence may notionally be committed under that section without any damage having been sustained. The question is merely whether the defendant director has exercised a reasonable degree of care and diligence in the exercise of his powers in the discharge of his duties. Nevertheless, a criminal offence will not have been committed if an omission to take care did not carry with it a foreseeable risk of harm to the company. No act of commission or omission is capable of constituting a failure to exercise care and diligence under s 229(2) unless at the time thereof it was reasonably foreseeable that harm to the interests of the company might be caused thereby. That is because the duty of a director to exercise a reasonable degree of care and diligence cannot be defined without reference to the nature and extent of the foreseeable risk of harm to the company that would otherwise arise.
Further, the mere fact that a director participates in conduct that carries with it a foreseeable risk of harm to the interests of the company will not necessarily mean that he has failed to exercise a reasonable degree of care and diligence in the discharge of his duties. The management and direction of companies involve taking decisions and embarking upon actions which may promise much, on the one hand, but which are, at the same time, fraught with risk on the other. That is inherent in the life of industry and commerce. The legislature undoubtedly did not intend by s 229(2) to dampen business enterprise and penalise legitimate but unsuccessful entrepreneurial activity. Accordingly, the question whether a director has exercised a reasonable degree of care and diligence can only be answered by balancing the foreseeable risk of harm against the potential benefits that could reasonably have been expected to accrue to the company from the conduct in question.
The proper test to be applied in determining whether directors have exercised a reasonable degree of care and diligence in accordance with the requisite standard is that laid down more than a century ago by Lord Hatherley LC in Overend & Gurney Co v Gibb (1872) LR 5 HL 480 at 486-7 and referred to by Romer J in Re City Equitable Fire Insurance Company at 428, namely whether:
... they (ie the directors) were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into.
It was put this way by Pidgeon J (with whom Franklyn and Walsh JJ agreed) in ASC v Gallagher (1993) 10 ACSR 43:
The test is basically an objective one in the sense that the question is what an ordinary person with the knowledge and experience of the defendant might be expected to have done in the circumstances if he was acting on his own behalf.
Inherent in this test is the balancing exercise, to which I have referred, involving the risk of harm (on the one hand) and potential benefits (on the other).
271 Mr Tiwari contends that in considering s 180, the court should take into account the particular circumstances pertaining to the company and to Mr Tiwari, being the circumstances already set forth above.
272 Again as already mentioned in relation to other claims, Mr Tiwari contends that so far as the formal legal and accounting arrangements for the structure through which the company operated the shop, it is likely that the directors were heavily reliant on the advice of the company's accountants, Jack Yacoub & Associates from 1996 to about April, 2002 and then David Mond & Associates. He submits that he was not required to exhibit a greater skill in the performance of his duties than may reasonably be expected for persons of commensurate knowledge and experience, in the relevant circumstances i.e. an 18 year old young man with no previous experience as a director, who had just completed VCE.
273 Further, as at July, 2002, he submits that he had no reason to believe that the financial statements were not in order and that his mother was not owed money by S&D. He contends that he was entitled to rely on others, at least except where he knew or, by the exercise of ordinary care, should know facts which would invalidate his reliance. Given his age, inexperience and recent appointment (he had been a director for about three months), Mr Tiwari was entitled to rely heavily on what he was told by the other director and by the company's accountants. Mr Tiwari contends that he was entitled to rely on his parents and what they told him. In my view, that is not a complete answer to the issue. The issue is what he should have done in the circumstances where Mr Malhotra claimed to be entitled to half the properties.
274 As I have already discussed earlier, Mr Tiwari was one of three directors of S&D. The other directors were his mother and father. His mother had decided to buy a property. She was the sole registered unit holder. I have no doubt that Mr Tiwari merely did what his mother requested. He was only 18 and had no experience in running a company. Mr Tiwari was well aware of Mr Malhotra's claim. He had been present with his mother when Velos & Davis were approached to remove the caveats. He was aware that Mr Malhotra had lived at the Footscray property and worked in the business since 1991 when Mr Tiwari had been about seven. He knew that Mr Malhotra had been married to his mother.
275 The plaintiffs contend that it was incumbent on Mr Tiwari, in considering whether or not to enter into the $200,000 loan from the ANZ Bank in mid-2002, to take into account Mr Malhotra's claims and the possibility that they might be vindicated and the consequences of that outcome for S&D. The plaintiffs submit that there is no evidence to suggest that he gave any consideration to these matters. They contend that an ordinary prudent business man, in his position in mid-2002, would not have countenanced the giving of the mortgages, taking into consideration the circumstances of S&D.
276 As indicated above, it is necessary to assess what were the reasonably foreseeable benefits to S&D and what was the reasonably foreseeable risk of harm and to then ask the question - what could an ordinary person with the knowledge and experience of the defendant have been expected to do in the circumstances if he was acting on his own behalf? In this instance, S&D acted as a trustee of the Unit Trust and the best interests of the company were clearly to act properly in accordance with the Unit Trust. In other words, to ensure that the Trustee exercised its powers honestly and in the best interests of the beneficiaries of the trust. Part of the assets held by S&D as trustee were the Footscray and Hillside properties. Mr Malhotra, a person long associated with the business and formerly married to Mr Tiwari's mother, claimed to be a half joint beneficial owner of those assets. Although Mr Malhotra did not say who owned or controlled the other half, it was clearly Sheela Tiwari.
277 Was it in the interests of S&D to mortgage the properties to secure a loan of $200,000 to enable Sheela Tiwari to purchase a home? What prospective benefit was there to the company as trustee in entering into these transactions? What was the reasonably foreseeable risk of harm? Mr Tiwari contends the benefit to S&D of the mortgage was to borrow $200,000 to discharge the debt owed to Sheela Tiwari by S&D as trustee. As it was that debt was only $137,000 at the most. In my opinion a reasonable person acting on their own behalf would not have entered into the transaction. The benefits to the company were little, if any. The risks were not insignificant.
278 In my view, a prudent and honest director with the knowledge and experience of Mr Tiwari and in the circumstances of S&D, exercising reasonable care, would have not permitted the assets of the trust to be used to buy a house for Sheela, one of the beneficiaries who ran the business, without satisfying himself that the claims of Mr Malhotra were without foundation. As indicated above, Mr Tiwari knew of Mr Malhotra's association with his mother and the business. Nevertheless, Mr Tiwari did not satisfy himself that the claims of Mr Malhotra were without foundation. He made no inquiries of him. He did not even tell him that S&D was borrowing moneys and making other moneys available to his mother to buy the Point Cook property.
279 I do not accept that S&D entered into the ANZ Bank transactions to discharge an obligation owed to Sheela. I consider the purpose of the transactions was to provide moneys to Sheela to buy the Point Cook property. As it was some $226,000 was advanced. The amount borrowed and advanced was well in excess of that owed on any view. I am satisfied that Mr Tiwari failed to discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were a director of a corporation in S&D's circumstances and had the same responsibilities within S&D as Mr Tiwari and that this was in contravention of s 180 of the Corporations Act 2001.
DID MR TIWARI BREACH S 181 OF THE CORPORATIONS ACT 2001?
280 Mr Tiwari had a duty to exercise his powers and discharge his duties as a director: in good faith in the best interests of the company; and for proper purposes. Although these are treated as separate duties they are closely connected.[282] Powers may only be exercised for the purpose for which they are given.[283] It is necessary therefore to ascertain the substantial purpose for which they were exercised and then reach a conclusion as to whether that purpose was proper or not.[284] In The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9),[285] Owen J explained the approach that should be taken by the court as follows:
The first task of the court is to construe the power and to determine the limits within which it may be exercised. This is a question of law. Having done that, the court turns to a question of fact; namely whether, in all of the circumstances, the purported exercise goes beyond the constitutional powers of corporation or is otherwise an abuse of the power so construed. Put simply, the court must identify the nature and scope of the power and the purpose for which it was exercised and then decide whether the purpose was permissible or impermissible.
281 Mr Tiwari contends that a breach of the obligation to act bona fide in the interests of the company involves a consciousness by the director that what is being done is not in the interests of the company, and deliberate conduct in disregard of that knowledge. He relies on ASIC v Maxwell[286] and ASIC v Macdonald (No 11)[287] which followed Marchesi v Barnes,[288] a decision of Gowans J of the Supreme Court of Victoria requiring subjective dishonesty. Marchesi v Barnes was a criminal case. However, in ASIC v Sydney Investment House Equities,[289] Hamilton J of the Supreme Court of New South Wales said of s 181 that "unlike the former s 232 of the Corporations Law, there is no requirement that the director act honestly. Section 181, when read with s 184, makes it clear that there can be a breach of s 181 where the conduct of the director is not in the interests of the corporation, even if there is no subjective dishonesty."[290]
I will try now to summarise what I see as the relevant legal principles that must be brought to bear in deciding these questions:
(1) The test whether directors acted bona fide in the interests of the company as a whole is largely (though by no means entirely) subjective. It is a factual question that focuses on the state of mind of the directors. The question is whether the directors (not the court) consider that the exercise of power is in the best interests of the company.
(2) Similar principles apply in ascertaining the real purpose for which a power has been exercised.
(3) It is the directors who make business decisions and courts have traditionally not pronounced on the commercial justification for those decisions. The courts do not substitute their own views about the commercial merits for the views of the directors on that subject.
(4) Statements by the directors about their subjective intention or belief are relevant but not conclusive of the bona fides of the directors.
(5) In ascertaining the state of mind of the directors the court is entitled to look at the surrounding circumstances and other materials that genuinely throw light upon the directors' state of mind so as to show whether they were honestly acting in discharge of their powers in the interests of the company and the real purpose primarily motivating their actions.
(6) The directors must give real and actual consideration to the interests of the company. The degree of consideration that must be given will depend on the individual circumstances. But the consideration must be more than a mere token: it must actually occur.
(7) The court can look objectively at the surrounding circumstances and at the impugned transaction or exercise of power. But it does so not for the purpose of deciding whether or not the there was commercial justification for the decision. Rather, the objective enquiry is done to assist the court in deciding whether to accept or discount the assertions that the directors make about their subjective intentions and beliefs.
(8) In that event a court may intervene if the decision is such that no reasonable board of directors could think the decision to be in the interests of the company.[292]
283 I shall apply the approach adopted by Owen J. The basic common law duty of a director is that he or she must act bona fide in what he or she believes is in the best interests of the company as a whole. This duty is encompassed in s 181. In this instance, S&D acted as a trustee of the Unit Trust and the best interests of the company were clearly to act properly in accordance with the Trust Deed and in the interests of the Unit Trust. In other words to ensure that the trustee exercised its powers honestly and in the best interests of the beneficiaries of the trust. Part of the assets held by S&D as trustee were the Footscray and Hillside properties. Mr Malhotra, a person long associated with the Unit Trust, claimed to be a half joint beneficial owner of those assets. Although he did not say who owned or controlled the other half, it was clearly Sheela.
284 In my view, the real purpose motivating Mr Tiwari's actions was to assist his mother to buy a home at Point Cook. I do not accept that Mr Tiwari had any regard to the interests of S&D as a trustee where the true beneficiaries of the assets it held was in doubt and had not as yet been resolved. He did not properly satisfy himself that the claim was unsustainable. As discussed above, despite his knowledge of Mr Malhotra's association with his mother and the business, he did not make any inquiries of Mr Malhotra.
285 I accept the plaintiffs' submissions that the paramount purpose of the ANZ Bank transactions was to fund Mrs Tiwari's purchase of the Point Cook property. I accept that was not a legitimate purpose of the Unit Trust and the action was only justifiable if all the beneficial owners of the trust consented.
286 I find that Mr Tiwari as a director of S&D did not exercise his powers and discharge his duties in good faith in the best interests of the corporation and for a proper purpose, in contravention of s 181.
DID MR TIWARI BREACH HIS DUTIES UNDER S 182 OF THE CORPORATIONS ACT 2001?
287 Did Mr Tiwari as a director of S&D improperly use his position to gain an advantage for himself or someone else; or cause detriment to S&D?
Impropriety does not depend on an alleged offender's consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case. When impropriety is said to consist in an abuse of power, the state of mind of the alleged offender is important: the alleged offender's knowledge or means of knowledge of the circumstances in which the power is exercised and his purpose or intention in exercising the power are important factors in determining the question whether the power has been abused. But impropriety is not restricted to abuse of power. It may consist in the doing of an act which a director or officer knows or ought to know that he has no authority to do. (citations omitted)
289 In my view, Mr Tiwari approved the transaction to benefit his mother. Any prudent director who was concerned for the interests of the trustee would not have permitted the assets of the trust to be used for Sheela's private interests before the true beneficiaries were identified and their consent obtained.
290 I accept the plaintiffs' contentions that in entering into the ANZ Bank transactions and making the Sheela advance, Mr Tiwari was not intending to benefit S&D or the Unit Trust, but rather was helping his mother to buy the Point Cook property. I find that Mr Tiwari as a director of S&D improperly used his position to gain an advantage for Sheela Tiwari and cause detriment to S&D, in contravention of s 182.
291 In my view, S&D as trustee was damaged by Mr Tiwari's breaches of duty in facilitating and authorising S&D granting mortgages to the ANZ Bank, S&D borrowing $200,000 from the ANZ Bank and S&D making the Sheela advance . S&D is liable to compensate and indemnify the Unit Trust for the damage thereby sustained. The loan to the ANZ Bank now stands at over $300,000. I find that S&D has suffered damage in the amount the ANZ Bank loan now stands at, all repayments of principal and interest made by S&D and the balance of the Sheela advance plus interest thereon.
292 Should I exercise the court's discretion to order Mr Tiwari to compensate S&D for that damage? In my view, a relevant consideration is that Mr Tiwari himself is now the beneficial owner of the ANZ Bank loan. I consider it is also relevant that s 553C of the Corporations Act 2001 is activated as Mr Tiwari does seek to have a debt admitted against S&D for the ANZ Bank loan.
293 As it is, I find that Mr Tiwari has been released from this claim. In the circumstances it is not necessary to formulate what orders I would make but for the release.
SHOULD TIWARI PAY OR INDEMNIFY S&D FOR ANY AND WHAT LOSS?
294 The plaintiffs seek a declaration under s 1317E and orders under s 1317H and s 553C of the Corporations Act 2001. Section 553C provides:
Insolvent companies - mutual credit and set-off
(1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company:
(a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and
(b) the sum due from the one party is to be set off against any sum due from the other party; and
(c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be.
(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent.
Section 1317E relevantly provides:
Declarations of contravention
(1) If a Court is satisfied that a person has contravened 1 of the following provisions, it must make a declaration of contravention:
(a) subsections 180(1) and 181(1) and (2), 182(1) and (2), 183(1) and (2) (officers' duties); ....
Section 1317H provides:
Compensation for damage suffered
(1) A Court may order a person to compensate a corporation or registered scheme for damage suffered by the corporation or scheme if:
(a) the person has contravened a corporation/scheme civil penalty provision in relation to the corporation or scheme; and
(b) the damage resulted from the contravention.
The order must specify the amount of the compensation.
295 As provided under s 1317E, if I am satisfied that Mr Tiwari has contravened ss 180(1), 182(1) and 183(1), I must make a declaration of contravention. As to compensation, the Court's discretion to order a person to compensate a corporation for damage suffered by the corporation is enlivened if the person has contravened a civil penalty provision in relation to the corporation and the damage resulted from that contravention.
296 As it is, I find that Mr Tiwari has been released from this claim. In the circumstances it is not necessary to formulate what orders I would make but for the release.
WAS TIWARI RELEASED FROM CLAIMS?: ANZ BANK MORTGAGES
297 For the following reasons, I find that Mr Tiwari has been released by the plaintiffs from any claims arising out of the loan of moneys to Sheela Tiwari in relation to the Point Cook property.
298 In defence of the plaintiffs' claims against him, Mr Tiwari relies on the release granted to him in the deed of settlement executed by the plaintiffs on 15 February 2008 (the "Deed of Settlement").[294] The deed came about as follows. In a statement of claim filed in the Federal Court of Australia on or about 31 January 2008, the plaintiffs alleged that S&D contributed $79,500 towards Mr Tiwari's purchase of the Hoppers Crossing property made up of two payments in July and September 2004. The plaintiffs allege that by reason of these contributions, Mr Tiwari holds the Hoppers Crossing property on a resulting or alternatively, an implied trust for S&D. Alternatively, the plaintiffs allege that $79,500 was loaned to Mr Tiwari and remains outstanding to S&D. Alternatively to these claims, the plaintiffs allege that the two payments to or for the benefit of Mr Tiwari were unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act 2001 and are voidable under the Act. The plaintiffs further allege against Sheela Tiwari that S&D advanced to Sheela Tiwari a total sum of $303,660.77, including $226,358.60 lent on 12 July 2002 to fund the purchase of the Point Cook property which Mrs Tiwari has not repaid.[295]
299 Finally, the plaintiffs allege that each of Mr Tiwari and Sheela Tiwari owed duties as directors of S&D under ss 180, 181 and 182 of the Corporations Act 2001. The plaintiffs allege that if any of the advances made to Mr Tiwari or Sheela Tiwari (that is the $79,500 in relation to the purchase of the Hoppers Crossing property and the $313,620.77 advance to or for the benefit of Sheela Tiwari) were loans, then Mr Tiwari and Sheela Tiwari breached their duties as directors and S&D has suffered loss and damage. The plaintiffs claim the relief set out in the application.
300 Sheela was not a party to the Deed of Settlement. Recital D of the deed provided:
In order to avoid the uncertainty, cost, inconvenience, delay and expense of litigation, and without any admission as to liability the parties have agreed to settle the disputes between them the subject of the Proceeding on the terms contained herein.
301 In clause 7.1 of the Deed of Settlement, the plaintiffs agreed to the following:
Conditional upon and subject to receipt of the Settlement Sum and any other sums owing pursuant to this to Deed, the Applicants release and forever discharge Pradeep from all claims, liabilities and causes of action which but for this Deed they had, now have or at any time in the future may have against Pradeep arising as a result of:
(a) the First Payment; and
(b) the Second Payment;
(c) the allegations referred to in Recital B.
302 The "First Payment" was a reference to a payment of $39,500 which had been paid by S&D on behalf of Mr Tiwari as a deposit on the purchase of the Hoppers Crossing property.[296] The "Second Payment" was a reference to a loan of $40,000 made by the company to Mr Tiwari in September 2004.[297] These transactions are not presently relevant. Relevantly, the "allegations referred to in Recital B" include allegations, "amongst other things", that Mr Tiwari:
(b) entered into a contract to purchase the property at 25 Richards Road, Hoppers Crossing in July 2004;
(c) became the registered proprietor of the Hoppers Crossing property on or about 9 October 2004;
(e) held part of his interest in the Hoppers Crossing property on a resulting or implied trust for S&D;
(g) alternatively, received the benefit of the First Payment and the Second Payment as unreasonable director-related transactions;
(h) alternatively, breached his duties under sections 180, 181 and 182 of the Corporations At 2001 by authorizing the First Payment and the Second Payment.
Pradeep
(i) asserts that the Company was the trustee for the S&D International Unit Trust;
(ii) asserts that, as trustee for the Tiwari Family Trust, he is the holder of 50 per cent of the units in the S&D International Unit Trust;
(iii) asserts that the First Payment was a distribution of income to him as trustee for the Tiwari Family Trust;
(iv) admits that the second payment was a loan to him by the Company;
(v) otherwise denies the allegations and the claims referred to in Recital B above.
303 Mr Tiwari contends that by reason of the words "amongst other things" in the opening words of Recital B, the release is wide enough to include claims against him for breaches of his duties as a director of S&D insofar as he permitted the advancing of $226,358.60 to assist his mother's purchase of the Point Cook property, even though there is no specific reference to that claim in Recital B.[298] Insofar as there is any ambiguity in the terms of the release, he relies on the contra preferentem rule of construction.
304 The plaintiffs submit that the allegation made in paragraph 16 of the Federal Court statement of claim (as to the advancing of $226,358.60 in 1992 to fund the purchase of Point Cook) was an allegation against Sheela, not Mr Tiwari. They say that the object of the settlement deed was to release Mr Tiwari from the claims made against him "arising as a result of" the allegations referred to in Recital B. The plaintiffs contend that all of the allegations listed in Recital B are allegations against Mr Tiwari relating to his acquisition of the Hoppers Crossing property in 2004.
305 The plaintiffs contend that the words "amongst other things" should be construed accordingly as a reference to allegations made in the Federal Court proceeding against Mr Tiwari. They contend that insofar as the release relates to breaches of Mr Tiwari's statutory duties as a director, it is concerned with the "First Payment" and the "Second Payment" made in 2004, not with the advancing of money to Sheela in 2002.
306 As indicated above, there are separate claims against Mr Tiwari in relation to the "First Payment" and the "Second Payment", and against Sheela Tiwari in relation to the $303, 620.77. On the other hand, the alleged breaches of duty against Mr Tiwari include the assertion that Mr Tiwari was appointed a director on 8 April 2002, that is before the advances to Sheela Tiwari commenced. Further, the statement of claim alleges that Mr Tiwari breached his duties in relation to "the sums, referred to in paragraphs 8 to 16 inclusive." Paragraph 16 deals with the advances to or for the benefit of Sheela Tiwari.
307 I acknowledge that Recital B only expressly sets out the allegations relating to the "First Payment" and "Second Payment". On the other hand, Recital D expressly states that the purpose of the settlement is "to settle the disputes between them the subject of the Proceeding on the terms contained herein." These disputes include the allegation that Pradeep Tiwari had breached his duties as a director in relation to the advances made to his mother and by reason thereof S&D had suffered loss and damage.
308 The plaintiffs contend that the relevant allegation in the present proceeding is not that S&D advanced $226,358.60 to Sheela, but that Mr Tiwari permitted S&D to mortgage the Footscray and Hillside properties. As discussed above, I have assumed from the breaches alleged that S&D do allege that Mr Tiwari is liable for his breaches of director's duties for the Sheela advance and the plaintiffs expressly make that allegation under the Barnes v Addy claim.
309 In my opinion, "amongst other things" must be read in context. The context here includes the purpose of the release referred to in Recital D. The context also includes a claim against Mr Tiwari that relates to the advance of moneys to Sheela Tiwari to purchase the Point Cook property. The release contemplates causes of action that have not as yet been formulated. It provides that the "Applicants release and forever discharge Pradeep from all claims, liabilities and causes of action which but for this Deed they had, now have or at any time in the future may have against Pradeep arising as a result of" the allegations against him in the statement of claim. I agree that the express claims, and Pradeep's defence thereto relating to the "First Payment" and "Second Payment" are set out in detail. But I find that the intention of the parties as expressed in the document was to release him from all claims by S&D arising out of all the payments pleaded including the payment of $226,000 for the purchase of the Point Cook property.
310 In my view, the release releases Mr Tiwari for any liability arising out of S&D's advance to Sheela Tiwari of $226,000 which she used to purchase the Point Cook property. The mortgages by themselves do not cause any loss to S&D. Rather, it is the debts secured by them that causes the loss. The debts secured include the moneys advanced to Sheela Tiwari. Accordingly, I find that Mr Tiwari has been released from the claims made against him by the plaintiffs under the Corporations Act 2001 and Barnes v Addy.
DID S&D BREACH ITS DUTIES AS A TRUSTEE?: THE VELOS CHARGES
311 For the following reasons, I find that S&D breached its duties as trustee in giving the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.
312 In about April 2002, after around the time Mr Malhotra had lodged his caveats, Velos & Davis were retained by Sheela to have the caveats removed.[299] Mr Velos alleges that his firm was also retained by S&D. As a result of the steps taken by Velos & Davis to have the caveats removed, on 19 August 2002, Mr Malhotra began his Supreme Court proceedings against Sheela and S&D. He filed his statement of claim on 25 September 2002. In October 2002, Sheela's counsel discovered affidavits which Malhotra had filed in Kapoor's Family Court proceedings against him, in which he had disavowed any interest in the properties or the Unit Trust. Velos & Davis acted for Sheela and S&D throughout the proceeding until its conclusion marked by Balmford J's judgment which was delivered on 16 February 2005.
313 By October 2004, Velos & Davis were owed fees of $41,236.58 for work done on Mr Malhotra's proceeding. Velos & Davis were pressing for payment and for provision to be made for the trial which was about to start. On 6 October 2004, David Mond, the Tiwari's accountant, telephoned Mr Velos to discuss the funding of the defence of the Malhotra proceeding.[300] Later the same day, Mr Tiwari telephoned Mr Velos and made a proposal, which Mr Velos rejected.[301] In a letter addressed to "Mrs Sheela Tiwari, Mr Markandy Tiwari & Pradeep Tiwari" dated 7 October 2004, Velos & Davis proposed that they make certain payments on account of outstanding charges and otherwise "agree to us lodging an equitable charge over all your properties in order to secure our fees and that of the barrister".[302] The Tiwaris agreed to this.[303] Although the proposal made no specific mention of the Footscray property, the Hillside property or other property of S&D, on 8 October 2004, Sheela and Mr Tiwari executed two documents purporting to charge the Footscray and the Hillside properties with payment of Velos & Davis' costs for Mr Malhotra's proceeding.[304] Mr Tiwari said that the documents were presented to him as a fait accompli without any advice in relation to the giving of charges over the Unit Trust's properties.[305] He said he did not know what security over assets meant at the time.[306] He claimed that he never turned his mind to the effect of the charges should Malhotra's claims succeed, because he was told that there was no possibility that his mother and S&D would lose the case.[307] As at 8 February 2010, the amount claimed by Velos as being secured by the equitable charges was $218,550, including interest of $71,627.29.[308]
314 Obviously, Velos & Davis were fully aware of Mr Malhotra's caveats. They were central to the case they were conducting for the Tiwaris. S&D was a defendant to the proceeding. The plaintiffs claim that S&D was joined only as a matter of form to bind it. The plaintiffs say that in substance the only dispute at issue was between Mr Malhotra and Sheela. Mr Malhotra claimed that by reason of representations and agreements Sheela had made to and with him that he was entitled to, inter alia, a declaration that he was a joint beneficial owner of the Footscray property, the Hillside property and the business.
315 Mr Velos claims that the orders sought by Malhotra in the Malhotra proceeding had the "potential to impose financial penalties on the company and also to deal with and dilute the trusts assets, which the company, as trustee, had a duty to protect and preserve".[309] Accordingly, he argues that it was "necessary for [S&D] to be defended and to be legally represented in the proceeding to protect its interests."[310] Similarly, Mr Tiwari contends that because the proceeding had been commenced against it, S&D had "a duty/obligation to defend itself if it was advised that the claims made against it in the proceeding were without merit."[311]
316 I find that S&D's own interests were not in issue. The matters in dispute went entirely to the beneficial ownership of the assets it held on trust. The competing beneficiaries were Sheela Tiwari and Mr Malhotra. Of course, a trustee usually has the duty to preserve and protect the trust assets. In this case the trust assets were not at risk. S&D's right to hold the legal title on trust was not at issue. There was no threat to the assets by a third party. Rather, there was only a fight between a former husband and wife as to who were the ultimate beneficiaries of the assets that S&D held on trust. If Mr Malhotra succeeded, then he did seek orders for the sale of the assets, but that was only as a consequence of a finding as to his beneficial ownership.
317 There are strict limits on a trustee seeking access to trust assets to indemnify the trustee for legal expenses it has incurred. Where a trustee has brought or defended legal proceedings, its personal obligation to meet those costs is a distinct issue from whether or not it is entitled to be indemnified out of the trust assets. In Adsett v Berlouis it was held:
The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate: Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate.[312]
318 A trustee is only entitled to be indemnified if the legal expenses have been "properly" incurred. In fact, the trustee cannot justify the improper incurring of legal expenses merely because it has acted on legal advice. In Re Beddoe,[313] Bowen LJ said:
The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word 'properly' means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of the trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that the trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him.[314]
319 S&D, under the control of Sheela Tiwari, was fully aware that the sole issue in the dispute was whether Sheela Tiwari was the sole beneficiary of the assets it held on trust or whether Sheela Tiwari and Mr Malhotra each held an equal interest in the trust assets. The trust assets were not at risk. There was no justification for S&D securing the very trust assets that Malhotra claimed an interest in to meet the costs incurred by Sheela Tiwari in resisting the claim. The orders that Mr Malhotra sought were all sought as a beneficiary and only as between himself and Sheela Tiwari.
320 Insofar as Malhotra sought as against S&D (as well as Sheela Malhotra):
(a) compensatory damages and/or equitable compensation[315];
(b) damages pursuant to the Fair Trading Act 1999 and section 82 of the Trade Practices Act 1974[316];
(d) interest pursuant to statute and costs[318]
the plaintiffs submit that such claims were based on the premise that S&D, in denying Mr Malhotra's beneficial rights, had acted in breach of its obligations as trustee. They contend that such orders, had they been made, would need to be satisfied by S&D (to the extent they were not satisfied by Sheela) out of its own resources. They contend that S&D would not be permitted to draw on trust property to satisfy orders directed at remedying its breaches of trust. Nor was it entitled to fund its defence of such claims out of trust property. I accept these submissions.
321 I find that S&D improperly exercised its powers as trustee and in breach of trust in giving equitable charges over the Footscray and Hillside properties to secure Velos & Davis' costs in defending the proceeding. By so encumbering the properties, S&D failed to act honestly and in the best interests of the beneficiaries. In particular, it failed to act impartially and consistently with the interests of all of the beneficiaries of the trust funds. In my view, a trustee acting reasonably and honestly in the face of a dispute between two persons claiming to be the true beneficiaries, who had both been involved in the acquisition of the assets, would not pledge the very assets in dispute in support of one of the parties to the dispute. Its proper function was to abide by the decision of the court on the identity of the beneficiaries and the extent of their interests.
DID TIWARI KNOWINGLY ASSIST IN S&D'S BREACH OF DUTY?
322 For the following reasons, I find that Mr Tiwari is liable as a constructive trustee for the breach of fiduciary duty of S&D in giving in giving the equitable charge to Velos & Davis to secure all the legal costs of Sheela and S&D (whether indemnifiable by the trust or not).
323 The breach was a dishonest breach as it involved benefiting Sheela at the expense of the trust. In my view, Mr Tiwari should be taken as having the requisite knowledge of the breach as a reasonable and honest person knowing what Mr Tiwari did would have known of the breach.
DID S&D SUFFER ANY AND WHAT LOSS?: VELOS CHARGES
324 I find that S&D suffered loss and damage by the giving of the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.
DID MR TIWARI BREACH DIRECTOR'S DUTIES?: THE VELOS CHARGES
325 For the following reasons, I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating the giving of the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.
326 I have already discussed these sections and the relevant tests. By the time S&D was asked to give security to Velos & Davis, Mr Tiwari had been advised by Velos & Davis, and three members of counsel, that Mr Malhotra's claims were hopeless. On the other hand, Mr Tiwari was aware that the dispute was one between his mother and Mr Malhotra. Mr Tiwari claims that he was advised Velos & Davis to give the security.[319]
327 In his evidence, Mr Tiwari sought to justify his actions on the basis that there were claims made against S&D. After carefully observing him in the witness box, I did not find him a reliable witness. His evidence struck me as being a reconstruction to support a possible defence to the claims made against S&D and himself. I am not satisfied that the existence of the claims made against S&D in Mr Malhotra's claims played any material part in his decision to authorise and facilitate S&D granting the securities. I do not accept that he considered the interests of S&D independently or as a trustee that was obliged to act honestly and for the benefit of the beneficiaries. He gave no evidence of having taken advice on whether or not to authorise the granting of the securities. Velos & Davis do not appear to have given any advice on the matter, and would have had a hopeless conflict of duty and interest had they done so. They were plainly motivated to recover outstanding fees and to secure payment in advance of costs for the trial. The interests of S&D were not advanced by granting the securities to meet all the costs of the proceedings. I do not accept Mr Tiwari's evidence that Velos & Davis advised Mr Tiwari that S&D should give the securities. S&D as trustee was duty bound to act honestly and in the best interests of the beneficiaries. The identity of the beneficiaries and the extent of their interests was to be decided by the court. Any honest and prudent trustee would not have elected to finance the costs of one beneficiary in such litigation.
328 Although the test for whether a director has acted honestly and bona fide is to be ascertained subjectively by asking whether the director acted bona fide in what he or she believed to be the best interests of the company as a whole, the court is able to assess the actions of the director objectively in deciding whether or not to accept his or her protestations that he or she did so. In doing so, the court is entitled to take into account whether a reasonable and honest director could have formed that belief. In my view, no reasonable director of S&D as trustee, knowing what Mr Tiwari knew, could have reasonably considered it was in the best interests of the trust to finance the costs of one claimant to the trust fund over another claimant, particularly in the circumstances of this case where both claimants, who were parties to the proceeding, had together built up the assets of the trust and the true entitlements of each was the very matter being decided in the case to financed. His actions purely benefited one person, being his mother. They were of no material benefit to S&D.
329 Even if S&D could have incurred some legal costs to ascertain its interests and be properly indemnified out of the trust funds to ascertain its position, there was no justification for pledging the main assets of the trust funds to meet Sheela Tiwari's costs. In any event, for reasons previously given, the proceedings presented no risk to the trust assets. Any risk to S&D was a matter for its own moneys.
330 I therefore find that Mr Tiwari contravened ss 180, 181 and 182 of the Corporations Act 2001 and I will make an appropriate declaration. Before considering the question of compensation, I will consider the Barnes v Addy claim against Mr Tiwari.
331 As determined above, S&D breached its duties as a trustee in financing Mrs Tiwari's legal costs. Mr Tiwari was a party to the decision to agree to do so and signed the equitable charges to secure those costs. He did so knowing that the dispute was between Mr Malhotra and his mother over the beneficial ownership of the assets held by S&D as trustee. He was a knowing participant to the breach of duty. He was well aware that the proceedings presented no risk to the interests of S&D itself. For the reasons set out above, I find that Mr Tiwari was liable as a constructive trustee for S&D paying and agreeing to pay Mrs Tiwari's legal costs to Velos & Davis.
332 S&D agreed to accept joint and several liability for all the fees incurred on behalf of Sheela as well as itself. The loss is the amount paid by S&D to Velos and Davis and the amount S&D is liable to pay Velos & Davis in relation to the litigation between Mr Malhotra and Sheela Tiwari.
SHOULD MR TIWARI PAY OR INDEMNIFY S&D FOR ANY LOSS AND, IF SO, WHAT LOSS?
333 I propose to make orders that under the Corporations Act 2001 and otherwise as a constructive trustee Mr Tiwari shall pay compensation to S&D for the said loss and damage and I will make appropriate orders, if necessary, for the ascertainment of that sum.
334 I will hear the parties on the orders that should be made and on costs.
[1] Re S&D International Pty Ltd (in liquidation) (receivers and managers appointed) [2009] VSC 225 ("Re S&D International Pty Ltd (No 1)").
[6] Affidavit of Bill Velos of 16 October 2008, court file (20) [7].
[9] Exhibit PV-1, Court Book ("CB") A 7, 2507 (hereafter Court Book references will follow the format: CB, letter designating Court Book series, volume number, page number. Court Books B and C are one volume each only so have no volume number).
[11] Affidavit of Paul Vartelas of 3 February 2009, CB A 7, 2474 [19].
[13] Tiwari's points of claim refer only to the mortgage over the Footscray property (CB B 50). Since these were delivered the Hillside property has been sold and the proceeds paid into court. I have assumed that Tiwari makes a similar claim in respect of the ANZ Bank mortgage over the Hillside property.
[14] The pleadings and other documents setting out the parties claims are as follows:
• Plaintiffs' further amended originating process, filed 2 February 2009, court file (43)
• Plaintiffs' further amended points of response and cross-claim against Velos, 16 October 2009, court file (74) ("Plaintiffs Claim Against Velos")
• Plaintiffs' further amended points of response and cross-claim against Tiwari, 16 October 2009, court file (75) ("Plaintiffs Claim Against Tiwari")
• Contention of facts and law, 21 January 2009, CB B 74 ("Malhotra Contentions")
• Points of claim, 27 January 2009, CB B 26 ("Malhotra Points of Claim")
• Third defendant submissions, 5 February 2009, court file (47A) ("Malhotra 5 February 2009 submissions").
• Outline of argument, 4 February 2010, court file (78A)
• Points of cross-claim, 29 January 2009, CB B 40 )("Velos Cross-Claim")
• Reply and response, 13 November 2009, court file (77) ("Velos Reply")
• Points of cross-claim of the fifth defendant, 19 December 2008, CB B 50 ("Tiwari Cross-Claim")
• Reply of the fifth defendant to the plaintiffs' further amended points of response and cross-claim, 9 February 2010, court file (80) ("Tiwari Reply")
[15] As indicated in the foot note above, Mr Malhotra's claims are made in four documents. The first in time being The Malhotra Contentions. These were filed pursuant to the order of Justice Judd made on 28 November 2008 (CB, B, 74-101). The second is in the Malhotra Points of Claim (filed pursuant to an order I made 11 December 2008 - CB, B, 26-39). The Malhotra Points of Claim refer to and rely on the contentions of law and fact, in particular to various allegations. In his Malhotra 5 February submissions, Mr Malhotra relies on both the Malhotra Points of Claim and notice of contentions of fact and law.
[16] Malhotra Points of Claim [50]; see also Malhotra Contentions [125].
[19] Plaintiffs' closing submissions against the fourth and fifth defendants, 27 April 2010 ("Plaintiffs April Submissions").
[21] Plaintiffs Claim Against Tiwari [15O].
[26] Plaintiffs Claim Against Velos [28].
[29] Closing submissions of the fourth defendant, 26 April 2010, court file (102) ("Velos April Submissions") [98]-[120].
[30] Velos April Submissions [124]-[127].
[31] Closing Submissions of the Fifth Defendant, 16 April 2010, court file (100) ("Tiwari April Submissions") [122].
[32] Plaintiffs' Claim Against Tiwari [38].
[42] Plaintiffs Claim Against Tiwari [35].
[50] Velos April Submissions [17]-[66].
[51] Ibid [67]-[71]; [72]-[94] and [95]-[97].
[55] Closing submissions of Mr Malhotra,14 June 2010 [57]-[60].
[58] Malhotra's Contentions, CB B, 76 [9].
[68] [2005] VSC 25, [4].
[70] [2005] VSC 25, [1].
[71] [2005] VSC 25, [4].
[77] Exhibit BV 25 to the affidavit of Mr Velos of 22 September 2009, court file (70B).
[78] [2005] VSC 25, [111].
[82] [1979] AC 411 at 421.
[84] Order 23.05; See generally discussion of the equitable remedy of declaration in Meagher, Gummow and Lehane, Equity: Doctrines and Remedies, 4th edition, ch 19.
[85] Bridges v Mees [1975] Ch D 475.
[86] [2005] VSC 25, [111].
[90] Exhibit BV 22, to the affidavit of Mr Velos of 22 September 2009, court file (70B).
[91] Affidavit of Jonathan Evans of 12 March 2010, court file (81B) [2].
[92] [2005] VSC 25, [4].
[96] Transcript 8 February 2010, 143 and 190.
[97] Re S&D International Pty Ltd (No 1); Malhotra v Tiwari [2005] VSC 496 ("Mandie J judgment"), [5]; CB A 3, 1144.
[101] Under s 90(3) of the Transfer of Land Act 1958.
[102] S&D International Pty Ltd (in liq) v Malhotra [2006] VSC 280 ("Gillard J judgment"), [17].
[105] Velos April Submissions [17]-[66].
[106] Plaintiffs April Submissions [73].
[108] Tiwari April Submissions [117]-[120].
[109] Velos April Submissions [64]-[65].
[111] [1954] HCA 16; (1954) 90 CLR 598 at 609.
[114] [1998] HCA 4; (1998) 192 CLR 226 at 246, [48].
[116] Plaintiffs April Submissions [72].
[117] [2005] HCA 53; (2005) 224 CLR 98, 111 [22].
[118] [1915] HCA 57; (1915) 20 CLR 490, 497.
[119] [2005] HCA 53; (2005) 224 CLR 98, 112 [25].
[120] [1986] VicRp 9; [1986] VR 90, 96.
[123] [2009] VSC 360, [53]-[55].
[124] (2006) 64 ATR 654, [50].
[125] [2009] VSC 360, [55].
[129] [2005] HCA 53; (2005) 224 CLR 98, 111 [20].
[131] [2005] HCA 53; (2005) 224 CLR 98, 114 [31].
[134] [2005] HCA 53; (2005) 224 CLR 98, 118 [41].
[137] [2005] HCA 53; (2005) 224 CLR 98, 120 [49].
[140] [1998] HCA 4; (1998) 192 CLR 226, 246.
[142] [2005] HCA 53; (2005) 224 CLR 98, 121 [52].
[143] Transcript 16 March 2010, 147 [20-21], [28-29] and 148 [2-3].
[147] Ibid. Mr Tiwari could not recall this amount: Transcript 16 March 2010, 149 [1-4].
[150] Tiwari's points of claim refer only to the mortgage over the Footscray property (CB B 50). Since these were delivered the Hillside property has been sold and the proceeds paid into court. I have assumed that Tiwari makes a similar claim in respect of the ANZ Bank mortgage over the Hillside property.
[151] Plaintiffs Claim Against Tiwari [15O] and [15P].
[152] Ibid [15P] and prayer for relief A.
[159] Plaintiffs Claim Against Tiwari [15O].
[163] Plaintiffs Claim Against Tiwari [15Q].
[164] Moffett v Dillon (1999) VSCA 32 at [81]- [86]
[166] Velos April Submissions [67]-[71]; [72]-[94] and [95]-[97].
[167] Plaintiffs Claim Against Velos [28].
[168] Plaintiffs Claim Against Velos, prayers for relief.
[169] (1874) LR 9 Ch App 244, 251-252.
[170] Velos April Submissions [98]-[120].
[171] Plaintiffs Claim Against Velos [29].
[172] Velos April Submissions [98]-[120].
[173] Shropshire Union Railways and Canal Company v The Queen (1875) LR 7 HL 496, Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq)[1965] HCA 17; , (1965) 113 CLR 265, 276 per Kitto J.
[174] Transcript 9 February 2010, 263-267.
[175] [1965] HCA 17; (1965) 113 CLR 265 at 276.
[176] Velos April Submissions [98]-[120].
[178] Transcript 23 March 2010, 553 [4-6].
[179] Velos April Submissions [124-127].
[180] Plaintiffs Claim Against Tiwari [35].
[182] Abigail v Lapin [1934] AC 491 at 504; Jacobs v Platt Nominees Pty Ltd [1990] VicRp 14; [1990] VR 146 ("Jacobs case").
[183] Velos April Submissions [130-132].
[187] [1983] HCA 30; (1983) 154 CLR 326 ("Heid's case").
[191] [1999] VSCA 32, [81]-[86].
[194] Hili Mimi Millennium Developments Pty Ltd [2003] VSC 260 per Nettle J.
[197] See also discussion in T D Castle " Caveats and priorities: the "mere failure to caveat' ", 68b ALJ 147.
[198] [2003] VSC 260 at [27] per Nettle J.
[199] (1996) 42 NSWLR 409 at 423.
[200] [2003] VSC 260 at [32]; see also Jacobs' case at 153
[203] Exhibit BV 39(a) and BV 39(b) to the affidavit of Bill Velos of 22 September 2009, court file (70B).
[204] Affidavit of Pradeep Tiwari of 10 February 2009, court file (52B).
[205] Affidavit of Mr Evans of 5 October 2009, court file (73) [15].
[206] Affidavit of Pradeep Tiwari of 10 February 2009, court file (52B).
[207] Velos April Submissions [147]-[150].
[208] Tiwari April Submission [107].
[210] Hili Mimi Millennium Developments Pty Ltd [2003] VSC 260 at [27] and [32]per Nettle J.
[211] Velos April Submissions [133].
[214] Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378, 385-386 per Mahoney JA; affirmed Tatmar Pastoral Co Pty Ltd v Housing Commission of New South Wales (1984) 54 ALR 155.
[215] Ibid; see also the observations of Meagher JA in Beale v Government Insurance Office of NSW (1997) 48 NSWLR 430, 442-444.
[217] Cornwell v The Queen [2007] HCA 12; (2007) 231 CLR 260, 300-301 [105]; Lockwood Security Products Pty Ltd v Doric Products Pty Ltd [2004] HCA 58; (2004) 217 CLR 274, 312 [105]; Kimberly-Clark Australia Pty Ltd v Arico Trading International Pty Ltd [2001] HCA 8; (2001) 207 CLR 1, 19-20 [34]-[35].
[220] Transcript 16 March 2010, 183 [2-9].
[229] Affidavit of Pradeep Tiwari of 10 February 2009, court file (52B) [12].
[231] Exhibit GNH-49 to the affidavit of Geoffrey Niels Handberg of 22 September 2009, CB A 2, 503 - 523.
[232] Exhibit GNH-16 to the affidavit of Geoffrey Niels Handberg of 12 August 2008, CB A 1, 240 - 272.
[233] Exhibit GNH-16 to the affidavit of Geoffrey Niels Handberg of 12 August 2008, CB A 1, 245.
[234] Exhibit GNH-16 to the affidavit of Geoffrey Niels Handberg of 12 August 2008, CB A 1, 241.
[235] Exhibit GNH-50 to the affidavit of Geoffrey Niels Handberg of 22 September 2009, CB A 2, 524-525.
[236] Exhibits GNH-51 and 52 to the affidavit of Geoffrey Niels Handberg of 22 September 2009, CB A 2, 526-529.
[237] Exhibit GNH-51 to the affidavit of Geoffrey Niels Handberg of 22 September 2009, CB A 2, 526-527 and Exhibit GNH-54 to the affidavit of Geoffrey Niels Handberg of 22 September 2009, CB A 2, 532-534.
[238] Exhibit GNH-55 to the affidavit of Geoffrey Niels Handberg of 22 September 2009, CB A 2, 535-536.
[239] Exhibits GNH-17 and 18 to the affidavit of Geoffrey Niels Handberg of 12 August 2008, CB A 1, 234-274 and 275-276 and CB C, 146.
[241] Victorian Supreme Court proceedings 6869 of 2002.
[245] Exhibit PT 5 to the affidavit of Pradeep Tiwari of 8 October 2009.
[246] Exhibit PT 6 to the affidavit of Pradeep Tiwari of 8 October 2009.
[247] Affidavit of Tiwari of 8 October 2009 [10].
[252] CB C, 14 (Trust Deed, clause 4).
[253] Ibid (Trust Deed, clause 7.1(a)).
[254] [1985] Ch 270, 286-287.
[256] Plaintiffs Claim Against Tiwari [12].
[257] The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 225 FLR 1, 597 [6142].
[259] Exhibit P 16 (wages for the year ended 30 June 2002 were $17,371).
[260] Affidavit of Pradeep Tiwari of 10 February 2009, court file (52B) [12].
[261] The Sheela advance is defined in para 23 of the Plaintiffs Claim Against Tiwari. Para 23 has been deleted but the term "Sheela advance" is still used subsequently in the document.
[262] Plaintiffs Claim Against Tiwari [3].
[263] Plaintiffs Claim Against Tiwari [39].
[264] Plaintiffs Claim Against Tiwari [40].
[265] Plaintiffs Claim Against Tiwari [44].
[266] Plaintiffs Claim Against Tiwari [49].
[267] Plaintiffs Claim Against Tiwari [51].
[268] Plaintiffs April Submissions [158]-[163].
[269] (1874) LR 9 Ch App 244, 251-252.
[272] Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362, The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 225 FLR 1, 532 [4729]-[4732].
[273] See paragraph Error! Reference source not found. above.
[274] Plaintiffs' April Submissions [123].
[278] (1993) 11 WAR 105, 116.
[279] ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373 [104].
[281] (1993) 11 ACSR 162, 212.
[282] The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 225 FLR 1, 473 [4456].
[283] Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821.
[284] The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 225 FLR 1, 474 [4458].
[287] [2009] NSWSC 287; (2009) 230 FLR 1, 111 [662].
[293] [1995] HCA 1; (1995) 183 CLR 501, 514.
[294] Exhibit PT-11 to Pradeep Tiwari's affidavit of 8 February 2010 (not in CB). See Tiwari's Reply [53-63].
[295] Exhibit PT-10 to Mr Tiwari's affidavit of 8 February 2010 (not in CB) [16] and Schedule 1.
[296] See Recital B(iv) in the Deed of Settlement.
[297] See Recital B(v) in the Deed of Settlement.
[298] The plaintiffs presume that the reference to "ss 181, 182 and 183" in paragraph 60 of Mr Tiwari's Reply is intended to be a reference to ss 180, 181 and 182.
[299] Mr Tiwari alleges that Velos & Davis advised him that he should be appointed a director of S&D. This allegedly took place on 8 April 2002.
[305] Transcript 16 March 2010, 185 [18-25].
[307] Transcript 16 March 2010, 185 [31], 186 [7].
[308] Exhibit D4-2; Transcript 9 February 2010, 261 [21] - 262 [11].
[312] Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, 210.
[313] [1893] 1 Ch 547, 562.
[314] Ibid 560 per Bowen LJ, quoted with approval by the Full Court in Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201, 211.
(1992) 37 FCR 201
(1993) 11 WAR 105
(2009) 230 FLR 1
(1997) 48 NSWLR 430
(2008) 225 FLR 1
(1938) 60 CLR 336
(1954) 90 CLR 598
(1998) 192 CLR 226
(2007) 231 CLR 260
(2005) 224 CLR 98
(2007) 230 CLR 89
(1915) 20 CLR 490
(2007) 229 CLR 545
(1988) 166 CLR 121
(1983) 154 CLR 326
(1971) 125 CLR 546
(2001) 207 CLR 1
(2004) 217 CLR 274
(1995) 183 CLR 501
(1984) 54 ALR 155
(1972) 21 FLR 159
(1965) 113 CLR 265
(1996) 42 NSWLR 409
(1916) 22 CLR 84