Riva NSW Pty Limited v Official Trustee in Bankruptcy

The Earlier Proceedings

These proceedings are not the first in which an attempt has been made to impugn the conduct of the Official Trustee in relation to the Property. Before dealing with the reasons of the primary judge, it is necessary to recount briefly the earlier proceedings.
In September 2006, Agusta and the Ferellas commenced proceedings in the Equity Division against the Official Trustee seeking declarations that Agusta was the trustee of the Trust and that the proceeds of sale of the Property received by the Official Trustee constituted an asset of the Trust and an order that the Official Trustee pay the amount of the proceeds of sale of the Property to Agusta as trustee of the Trust. By way of cross claim, the Official Trustee sought orders confirming its entitlement to retain from the proceeds of sale a sufficient amount for security in respect of the Ferellas' right of indemnity against the property of the Trust in respect of liabilities incurred by the Ferellas in their capacity as trustees of the Trust.
For reasons published on 8 July 2008, Nicholas J concluded that the Property was property of the Trust and that Riva had been appointed as trustee on 19 April 2005, although the assets of the Trust had not vested in Riva. [1] While Agusta accepted that the Official Trustee was entitled to a lien over the proceeds of sale in respect of claims by certain creditors of the Trust, and the Official Trustee did not press other claims, there remained several claims in respect of which Agusta disputed the Official Trustee's entitlement to a lien. [2] Nicholas J also concluded that the Official Trustee had established an entitlement to a lien over the proceeds of sale as security for the Ferellas' right of indemnity in respect of the disputed liabilities. [3]
On appeal to this Court in 2009, the orders made by Nicholas J were varied. [4] The Court noted that the case conducted by the Official Trustee at trial before Nicholas J differed significantly from the manner in which it approached the issues on the appeal. [5] In addition, the issues raised by the parties at trial for determination by Nicholas J differed from those raised by Agusta in the appeal, which were ultimately conceded by the Official Trustee. The Court noted that, while the appeal was to be allowed, it was not because of any relevant error on the part of Nicholas J. However, the determination that the Property was held on the terms of the Trust was not disturbed by this Court.
The net result was that, following further determination by Nicholas J, part of the proceeds of sale of the Property were retained by the Official Trustee representing the bankrupts' entitlement to indemnity from the estate of the Trust. The balance was paid to Riva as trustee of the Trust.
In November 2009, the Ferellas applied to the Federal Court of Australia under s 179 of the Bankruptcy Act for an inquiry into the conduct of the Official Trustee in relation to the bankruptcy of the Ferellas. One of the complaints made in those proceedings was that, in the litigation before Nicholas J, the Official Trustee had acted on a substantially misconceived basis and in a manner that was unnecessary and extravagant. In his reasons published on 6 June 2011, [6] Yates J concluded that the Official Trustee was justified in contesting the claims made by Agusta before Nicholas J in the way that it did. His Honour considered that the Official Trustee had a sound basis for concluding that Agusta was not the trustee of the Trust and had a clear interest in defending its position.
Yates J also considered that the Official Trustee had a sound basis for claiming that, if the Property had been an asset of the Trust, the Official Trustee was entitled to exercise a right to be indemnified out of the proceeds of sale. Yates J rejected the contention that the Official Trustee had engaged in litigation on a substantially misconceived basis or in a manner that was unnecessary or extravagant. His Honour was satisfied that the Official Trustee was justified in defending the proceedings in the way that it did and prosecuting its claim to be entitled to be indemnified from the proceeds of sale of the Property. His Honour was not satisfied there was any sound basis to order a general inquiry into the conduct of the Official Trustee. On 7 May 2013, an appeal to the Full Court of the Federal Court dismissed an appeal from the decision of Yates J. [7]
In August 2015, Riva and the Ferellas commenced further proceedings against the Official Trustee in the Equity Division (the 2015 Proceedings). On 29 October 2015, after the Official Trustee had filed a defence to the statement of claim, the 2015 Proceedings were transferred to the Federal Court of Australia.
In the 2015 Proceedings, Riva and the Ferellas made complaints concerning the conduct of the Official Trustee that are similar to the complaints made in the present proceedings. Thus, they alleged that the Official Trustee had improperly made representations to the effect that the Property was vested in the Official Trustee and that Riva and the Ferellas were not authorised to deal with the Property, causing the refinancing arrangements with Provident not to proceed. The representations were alleged to have been made by officers of the Official Trustee to Bersten Pain, who were acting for Provident, and by the lodging of a caveat in respect of the Property. The statement of claim alleged that, by making representations and lodging the caveat, the Official Trustee became a trustee de son tort in respect of the Trust and its beneficiaries. The statement of claim also alleged that the Official Trustee became the fiduciary of the Ferellas and also became the fiduciary of Riva in its capacity as trustee of the Trust. The statement of claim alleged that in making or causing the representations to be made and in lodging the caveat, the Official Trustee breached its duty to the beneficiaries of the Trust as trustee de son tort and breached the fiduciary duties owed by it to Riva or the Ferellas.
On 8 December 2015, the Official Trustee filed an interlocutory application seeking orders under s 31A of the Federal Court of Australia Act 1976 (Cth) (Federal Court of Australia Act) and r 26.1 of the Federal Court Rules 2011 (Cth) that judgment be given for the Official Trustee. Section 31A of the Federal Court of Australia Act relevantly provides that the Court may give judgment for a party defending a proceeding if the Court is satisfied that the other party has no reasonable prospect of successfully prosecuting the proceeding. [8] For the purposes of that provision, a proceeding need not be hopeless or bound to fail for it to have no reasonable prospects of success. [9]
On 3 March 2017, for reasons published on that day, Perry J ordered that judgment be given for the Official Trustee pursuant to s 31A of the Federal Court of Australia Act and that Riva and the Ferellas pay the Official Trustee's costs of the proceedings. [10]
Perry J considered that the submissions made on behalf of the Ferellas and Riva did not attempt to grapple with the principles as to the circumstances in which a trustee de son tort may arise. [11] Specifically, her Honour accepted that the obligation imposed on a trustee de son tort can ordinarily come into existence only where there is not already a person in whom the relevant legal right is vested. [12] Her Honour concluded that the claim that the Official Trustee owed the obligations of a trustee de son tort in relation to the Trust and its beneficiaries could not succeed. Her Honour held that, since there had been no transfer of the legal title to the Property to the Official Trustee, the only interest that the Official Trustee could have endeavoured to vindicate and protect by the lodging of the caveat was the asserted equitable interest in the Property vested by the operation of s 58 of the Bankruptcy Act pending any transfer of the Property to the Official Trustee by transmission under the Real Property Act. Section 58(2) of the Bankruptcy Act relevantly provides that where a State law requires the transmission of property to be registered and enables the trustee of the estate of a bankrupt to be registered as the owner of any such property, that is the Property of the bankrupt, that property does not vest at law until the requirements of the State law have been complied with and notwithstanding that it vests in equity in the trustee under s 58. [13]
Perry J considered that the representations alleged to have been made did not evince any intention on the part of the Official Trustee to hold the Property as trustee for the beneficiaries of the Trust. Rather, to the extent that the representation was in fact made, it was that there was no trust and that the Property had vested in the Official Trustee. Her Honour considered that, by proving the alleged representation, Riva and the Ferellas would have proven that the Official Trustee was not holding the Property as trustee for the beneficiaries of the Trust but rather adverse to the interests of the beneficiaries of the Trust. That is to say, the alleged representations were inconsistent with the proposition that the Official Trustee intended to hold the Property on trust for the Trust and its beneficiaries. [14]
The Official Trustee also submitted to Perry J that the 2015 Proceedings should be dismissed because they were barred by the Limitation Act 1969 (NSW) (Limitation Act) or by analogy to that statute. [15] Section 48 of the Limitation Act provides that an action on a cause of action in respect of a breach of trust is not maintainable if brought after the expiration of, relevantly, a limitation period of six years running from the date on which the cause of action first accrued. Her Honour referred to the contentions on behalf of the Ferellas and Riva that the Official Trustee's conduct should be treated as analogous to a fraudulent breach of trust or conversion of trust property so as to give rise to a limitation period of 12 years under s 47 of the Limitation Act. However, since there was no allegation of fraudulent concealment or actual fraud in the statement of claim, her Honour concluded that the claims were statute barred. [16]
A possible difficulty with that last conclusion, however, is that it would have been a matter for the Official Trustee to plead the limitation defence, in respect of which it would have the onus. It would then have been open to Riva and the Ferellas to plead fraud by way of reply. [17] It is very seldom appropriate for limitation questions to be decided on a summary basis. [18]

Grounds of Appeal

In the draft notice of appeal [24] , Riva seeks to raise the following grounds: 1. The primary judge erred in finding that the issues raised in Riva's statement of claim amounted to a re-litigation of issues dealt with in the earlier proceedings. 2. The primary judge erred in finding that Riva's statement of claim contained merely minor and immaterial differences to, or was not materially different from, the pleading in the 2015 Proceedings. 3. The primary judge erred in finding that, in so far as Riva relied on the allegation that the Official Trustee had acted with reckless disregard and wilful blindness and in fraudulent disregard of its duty as trustee, the allegation had no prospects of success. 4. The primary judge erred in finding that the proceedings brought by Riva were an abuse of process. 5. The primary judge erred in striking out the statement of claim in the proceedings below. 6. The primary judge erred in giving judgment for the respondent in the proceedings below. 7. The primary judge erred in permanently staying the proceedings below.
It is true that many of the allegations of fact made in the statement of claim filed in the current proceedings are alleged in the same or almost identical terms in the statement of claim in the 2015 Proceedings. However, it may well be reasonably arguable that the formulation of Riva's claim in its statement of claim in the present proceedings is different from the claim made in the 2015 Proceedings. To that extent, the primary judge may have erred in concluding that the claim made in the current proceedings is substantially the same as that made in the 2015 Proceedings. Accordingly, it may be that leave to appeal should be granted, particularly in circumstances where it is arguable that there has not been any final determination of the complaints made on behalf of the Trust.
However, the difficulty for Riva is in demonstrating that the refusal of leave to appeal may give rise to a substantial injustice. Counsel for Riva frankly acknowledged that any claim other than a claim for fraudulent breach of trust would be barred by the operation of the Limitation Act. For example, the facts pleaded may have given rise to a cause of action at law for slander of title. However, any such claim is clearly barred by the Limitation Act.
The fatal deficiency in the present pleading is that it does not identify the property that is said to be the subject of a constructive trust binding the Official Trustee. That is to say, Riva has not demonstrated that, at some point, the Official Trustee became a constructive trustee in respect of some property belonging to the Trust. Counsel for Riva was invited, in the course of argument, to identify the property that is said to be the subject of the alleged constructive trust. He was unable to do so.
At the time of the sequestration orders, the Ferellas were the registered proprietors of the Property. However, they held the legal estate, on the terms of the Trust, for the benefit of the beneficiaries of the Trust. Having ceased to be trustees of the Trust, the Ferellas, as registered proprietors of the Property, were bare trustees for Riva, as the new trustee of the Trust.
Under s 58(1) of the Bankruptcy Act, where a debtor becomes a bankrupt, the property of the bankrupt vests forthwith in the Official Trustee. Under s 5 of the Act, the property of the bankrupt includes property divisible amongst the bankrupt's creditors and any rights in relation to that property that would have been exercisable by the bankrupt if the bankrupt had not become a bankrupt. Section 116(1) relevantly provided that all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy is property divisible amongst the creditors of the bankrupt. However, under s 116(2)(a), s 116(1) does not extend to property held by a bankrupt in trust for another person. Thus, property held by the Ferellas in trust for the beneficiaries of the Trust, including the Property, did not vest in the Official Trustee.
Nevertheless, as Nicholas J determined, the Official Trustee had an interest in the Property to the extent of the Ferellas' right of indemnification or exoneration out of the property of the Trust. Therefore, the Official Trustee had an interest in the proceeds of sale of the Property, to the extent that the Ferellas, notwithstanding their bankruptcy, were entitled to be indemnified or exonerated out of the property of the Trust in respect of liabilities that they incurred in their capacity as trustees of the Trust. Nevertheless, whatever might be the appropriate characterisation of the interest of the Official Trustee in the Property, and the proceeds of sale of the Property, it is simply not possible to identify any property of the Trust in which the Official Trustee had an interest, such that it could be said that that property had become the subject of a constructive trust binding the Official Trustee.
That is to say, the Ferellas' right of exoneration or indemnification was vested in the Official Trustee by the operation of s 58 of the Bankruptcy Act. The balance of the interest of the Ferellas' in the Property of the Trust was unaffected by the operation of the Bankruptcy Act and did not vest in the Official Trustee. The legal title to the Property remained with the Ferellas. Because the Property was held on the terms of the Trust, the Official Trustee was not entitled to have transmitted to it from the Ferellas the legal estate to the Property. On the other hand, the Official Trustee had an interest in the Property that was capable of supporting a caveat that would have the effect of restraining a dealing with the Property by the Ferellas that would have defeated the Official Trustee's entitlement to the Ferellas' right to exoneration or indemnification. To the extent that that right vested in the Official Trustee, by the operation of the Bankruptcy Act, there is no basis for suggesting that the Official Trustee was a constructive trustee for anyone else in respect of that right. The right was property of the Ferellas that was divisible amongst their creditors.
The lodging of the caveat by the Official Trustee could not have the effect of vesting in the Official Trustee any interest in the Property. It certainly did not vest the legal estate in the Official Trustee. The right of indemnification and exoneration, which vested in the Official Trustee, could not be the subject of a constructive trust, even if the statement of claim asserted that it was. There was simply no property of the Trust in respect of which it could be said the Official Trustee had become a constructive trustee.
Of course, in so far as the Official Trustee asserted that it had a right to that legal title or rights incidental to that legal title, those assertions were false. That was established by Nicholas J, subject to the right of indemnification and exoneration that was conceded by the Official Trustee. In so far as the Official Trustee, made allegations about a lack of title on the part of the Ferellas or Agusta, as trustees of the Trust, the Official Trustee may have been liable for slander of title. However, any claim in respect of that liability is conceded by Riva to be barred by the Limitation Act.
Riva's statement of claim does not characterise the constructive trust alleged as either an "institutional" constructive trust or a "remedial" constructive trust. The statement of claim simply asserts that, at all times between 14 October 2005, when the sequestration orders were made, and the final distribution of proceeds of the sale of the Property by Key, the Official Trustee: "… was a constructive trustee for [Riva] in respect of the legal title to the [Property] and all rights incidental to that title." That formulation suggests an institutional constructive trust, arising from the operation of the Bankruptcy Act, rather than the imposition of a remedy as a consequence of a breach of some fiduciary duty.
The remedy sought by Riva is a declaration that the Official Trustee held all rights to the title to the Property and all rights incidental to that title as a constructive trustee for Riva in its capacity as trustee of the Trust. In addition, Riva claims equitable damages and compensation in respect of alleged breaches of that constructive trust. However, as indicated above, legal title to the Property has never vested in the Official Trustee and the Official Trustee has no right to have legal title to the Property vested in it. On its face, the statement of claim makes no allegation that could justify the conclusion that the legal title to the Property, and all rights incidental to that legal title, vested in any way in the Official Trustee. On that basis the claim would be destined to fail.

At a glance

Court

Decision date

Before

Source

Judgment (8 paragraphs)

Parties

Legislation Cited (7)

Cases Cited (11)

Cited By (2)