Silversides Superfunds Pty Limited v Silverstate Developments Pty Limited

LEGISLATION CITED : Civil Procedure Act 2005 Uniform Civil Procedure Rules

Barnes v Addey (1874) LR 9 Ch App 244 Dey v Victorian Railways Commissioners (1949) 78 CLR 62 General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125 Glandon Pty Limited v Strata Consolidated Pty Limited (1993) 11 ACSR 543 CASES CITED : Piccardi v Caldekia Pty Limited (Supreme Court of New South Wales, 18 September 1998, unreported) Brunninghausen v Glavanics [1999] NSWCA 199; (1998 -1999) 46 NSWLR 538 Denara Nominees Pty Limited v Scolaro [2002] WASC 252 McEwen v Combine Coast Cranes Pty Limited (2002) 44 ACSR 244 Farah Constructions Pty Limited v Say Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89

Silversides Superfunds Pty Limited (First Plaintiff) Hallinan Super Fund Pty Limited (Second Plaintiff) PARTIES : Gregory John Silversides (Third Plaintiff) Terrence Michael Hallinan (Fourth Plaintiff) Silverstate Developments Pty Limited (First Defendant) Cameron Patrick Anderson (Second Defendant)

COUNSEL : Mr C. Harris SC and Ms C. Champion (Plaintiffs) Mr A. McInerney and Mr D. Barnett (Defendants)

SOLICITORS : Matthews Folbigg Pty Limited (Plaintiffs) Ellison Tillyard Callanan (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5353 of 2007 SILVERSIDE SUPERFUNDS PTY LIMITED and ORS -v- SILVERSTATE DEVELOPMENTS PTY LIMITED and ANOR JUDGMENT 1 HIS HONOUR: By notice of motion filed on 31 March 2008 the First and Second Defendants, Silverstate Developments Pty Limited and Cameron Patrick Anderson claim an order that the statement of claim, in whole or in part, be struck out; and, in the alternative, an order that the statement of claim, in whole or in part, be dismissed. 2 At the outset of the hearing the foregoing relief was clarified by the Defendants, to the extent that the claim for dismissal (being a claim for dismissal of the proceedings, rather than a claim in respect to the pleading) was no longer being pursued, and that the relief presently sought by the Defendants was an order for the striking out, in whole or in part, of the statement of claim. That application was brought pursuant to the provisions of Part 14, rule 28 of the Uniform Civil Rules 2005. 3 The substantive proceedings were instituted by summons filed by the Plaintiffs, Silversides Superfunds Pty Limited ("Silversides"), Hallinan Superfund Pty Limited ("Hallinan"), Gregory John Silversides and Terrence Michael Hallinan, on 5 November 2007. The Plaintiffs filed an amended summons on 8 February 2008. 4 Subsequently, a statement of claim was filed on 8 February 2008. It is that document which is the subject of the present application. 5 According to the statement of claim, the First Defendant is the trustee of Silverstate Development Trust ("the Trust"), which was established by a deed of trust dated 17 December 2001. The Second Defendant is and has at material times been the sole director of the First Defendant, is and has been the majority shareholder in the First Defendant, and is and has been the person having the day to day management and control of the First Defendant. The First Plaintiff is and has at all relevant times been the trustee of the Silversides Superfund. The First Plaintiff is the owner of 216,681 units in the Trust, the beneficial interest in which units is held by the First Plaintiff for the Silversides Superfund. The Second Plaintiff is the trustee of the Hallinan Superfund, and is the owner of 187,795 units in the Trust. The Second Plaintiff holds those units for the Hallinan Superfund. 6 The causes of action asserted by the Plaintiffs in the statement of claim relate to various distributions which are alleged to have been made by the First Defendant or which it is alleged the First Defendant failed to make, being distributions to the First and Second Plaintiffs. 7 The Defendants bring their present application upon the grounds that the statement of claim discloses no reasonable cause of action; has a tendency to cause prejudice, embarrassment or delay in the proceedings; or is otherwise an abuse of the process of the Court. 8 I have had the benefit of receiving a written outline of submissions from Counsel for the respective parties. Those documents will be retained in the Court file. 9 It will be appreciated that, in consequence of the clarification by Counsel for the Defendants at the outset of the hearing (to which clarification I have already made reference), the present application made by way of the notice of motion of 31 March 2008, to the extent that the relief sought therein is being pursued by the Defendants, is an application concerning the form of the pleading, and is not an application for summary dismissal of the proceedings. 10 Irrespective of the outcome of the present application, the proceedings will remain on foot. If the present application is successful, the statement of claim in its present form will be struck out, in whole or in part, and a normal consequence of such a striking out of the pleading would be that leave be granted to the Plaintiffs to file an amended statement of claim. 11 To the extent that the present strike out application is grounded upon the assertion that the pleading discloses no reasonable course of action, it is proper for the Court to proceed upon the basis that the Plaintiffs, at a final hearing, will be able to establish the various factual matters asserted in the statement of claim. It is not appropriate, therefore, in the present application for the Court to give consideration to any question regarding the strength or the weakness of the Plaintiffs' case. 12 The present application is to be determined upon the claim of the Plaintiffs as pleaded in the statement of claim. No evidence has been placed before the Court by any party in the hearing of the present application. 13 The complaint of the Defendants concerning the form of the statement of claim falls into three broad categories. 14 First, that the statement of claim (paragraphs 6 and 7) contains allegations which disclose no reasonable cause of action, namely, allegations that the relevant units in the Silverstate Development Trust were "owned" by certain trusts. 15 Second, that the statement of claim (paragraphs 51 to 53) contains pleadings of fraud ("a dishonest and fraudulent design"), which disclose no reasonable cause of action on the facts pleaded in the statement of claim. 16 Third, that paragraphs 54 to 56 allege that the Second Defendant, as director of the First Defendant, owed fiduciary duties directly to the Plaintiffs as beneficiaries of the Silverstate Development Trust, and that such allegations disclose no reasonable cause of action on the facts pleaded. 17 In addition, it was submitted on behalf of the applicant Defendants that the statement of claim does not facilitate, and is contrary to, the "just, quick and cheap resolution of the real issues in the proceedings" (within the meaning of section 56 of the Civil Procedure Act 2005), and is contrary to the Uniform Civil Procedure Rules, in that, in particular, in addition to the foregoing complaints concerning the form of the pleading, the statement of claim: (a) contains numerous allegations of matters of evidence relating to the course of correspondence between the parties, and that such allegations do not constitute allegations of any material fact (paragraphs 12, 14, 20 - 39);

(b) makes allegations that are irrelevant to the claims for relief sought in the amended summons and disclose no reasonable cause of action (paragraph 42 - 46, 49 -50 and 58- 65). 18 It should here be recorded that at the outset of the hearing the Plaintiffs conceded that paragraphs 6 and 9 are defective in form, and that, in regard to the beneficial interest in the units held by the First Plaintiff and the Second Plaintiff respectively, the reference to "Silverside Superfund" should be replaced by a reference to the First Plaintiff or the Second Plaintiff, and the reference to "Hallinan Superfund" should be replaced by a reference to the Third Plaintiff or the Fourth Plaintiff. I propose, therefore, to grant to the Plaintiffs leave to amend paragraphs 6 and 9 accordingly. 19 Paragraph 51 alleges that the conduct of the First Defendant identified therein was "pursuant to a dishonest and fraudulent design", which design was then described in greater detail in paragraph 52, wherein the Plaintiffs complain that the Second Defendant caused the First Defendant to act in a certain fashion and "for the purpose of the dishonest and fraudulent design identified in paragraph 51 above". 20 By paragraph 53 it is pleaded that the conduct of the Second Defendant complained of in paragraph 52 occurred in circumstances, described in paragraph 53, which included, conduct "for the purpose of the dishonest and fraudulent design identified in paragraph 51 above". 21 To the extent that the causes of action pleaded in paragraphs 50, 51, 52 and 53 are grounded upon the "dishonest and fraudulent design" referred to in each of those paragraphs and constitute causes of action in fraud, it is (as I understand it) the complaint of the Defendants, first, that the matters pleaded in those paragraphs do not disclose a reasonable cause of action in fraud, and, second, that, in any event, such a cause of action in fraud is not sufficiently particularised. 22 The two foregoing complaints, although distinct, are closely inter-related. Not only does Part 15 rule 3 of the Uniform Civil Procedure Rules require, in respect to an allegation of fraud, that such an allegation be sufficiently particularised, but, further, it is not possible to establish, upon the face of the pleading, whether a reasonable cause of action is disclosed, unless sufficient particulars are provided in the pleading. 23 The principles regarding the striking out of a pleading upon the ground that no reasonable cause of action is disclosed are well recognised. The Plaintiffs need to establish only that it is arguable, upon the facts alleged, that there be such a cause of action. It is not essential that the Plaintiffs be able to establish that, necessarily, such a cause of action must exist, let alone that it must succeed (see Dey v Victorian Railways Commissioners (1949) 78 CLR 62, General Steel Industries Inc v Commissioner for Railways (1964) 112 CLR 125, per Barwick CJ at 128-130). 24 Paragraph 51 itself identifies the alleged "dishonest and fraudulent design" as being "to provide the Second Defendant with access to the Outstanding Distributions in the event that the Third Plaintiff and the Fourth Plaintiff or either of them is found liable in damages in respect to the Alleged Misconduct." (It should here be recognised that the phrase "Outstanding Distributions" is identified and described in paragraph 28 of the statement of claim, and that the phrase "Alleged Misconduct" is identified and described in paragraph 30 thereof.) 25 Further, the cause of action in fraud is in each of paragraphs 51, 52 and 53 clearly associated with the complaint that the First Defendant was acting in "breach of its fiduciary duties" (such duties being further identified, by reference, in paragraph 51, 52, and 53) and that the conduct of the Second Defendant, which was further identified in paragraphs 52 and 53, arose from the position of the Second Defendant "as the sole director and the person having the day to day conduct of the First Defendant" (paragraph 52). 26 The complaint of the Defendants in this regard is that, conformably with the decision of the High Court of Australia in Farah Constructions Pty Limited v Say Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89, the breach of trust alleged against the First Defendant (being the failure of that Defendant to pay to the First and Second Plaintiffs moneys to which those Plaintiffs are alleged to be entitled under the terms of the Silverstate Development Trust) is not of itself a "a dishonest and fraudulent design". 27 However, it is clear from the words of paragraph 51 of the pleadings that what is being alleged against the First Defendant, in that paragraph, is that the conduct of the First Defendant, in acting in breach of its fiduciary duties, was conduct "pursuant to a dishonest and fraudulent design" - that is, what is being alleged is not only a breach of the fiduciary duties alleged to be owed by the First Defendant to the Plaintiff, but, separately, although interconnectedly, conduct "pursuant to a dishonest and fraudulent design", which design is thereafter described and particularised. 28 It does not seem to me that the foregoing decision of the High Court in Farah Constructions, dealing, essentially, with what in the circumstances of the instant case has compendiously been referred to as the second limb of Barnes v Addey (1874) LR 9 Ch App 244, is determinative of whether upon its face, the present pleading discloses a cause of action in fraud. 29 I have already observed, regarding the complaint of the Defendant that the statement of claim does not disclose a reasonable course of action, that where, as here, that complaint is made in respect to the form of the pleading, the Court must proceed upon the basis that the material facts alleged in the pleading can, at a final hearing, be established by the Plaintiff. 30 If the facts asserted at paragraphs 51, 52 and 53 be established, then I am satisfied that the pleading on its face does disclose a reasonable cause of action, such cause of action being grounded in fraud. 31 The other complaint of the Defendants concerning these paragraphs is that the allegation of fraud has not been sufficiently particularised. However, the fraud of the First Defendant is identified in paragraph 51 as being the breach of fiduciary duties pursuant to a dishonest and fraudulent design, which is then described. That allegation is supported by reference to a number of preceding paragraphs in the pleading (in particular, paragraphs 30, 34, and 35), which plead the failure of the First Defendant to provide an explanation for its refusal to pay the Outstanding Distributions. 32 I am satisfied that sufficient particulars have been provided of the alleged fraud, such particulars being contained in the paragraphs identified in paragraph 31 (in particular, paragraphs 30, 34 and 35). The facts pleaded in paragraph 51 are sufficient to support the claim of fraud against the First Defendant, and the facts pleaded in paragraph 52 and 53 are sufficient to support the claim of fraud against the Second Defendant. 33 The complaint of the Defendants concerning the allegations contained in paragraphs 54 to 56 against the Second Defendant, and the submission that those allegations disclose no reasonable cause of action upon the facts pleaded, is a complaint grounded upon the submission that, in the circumstances of the instant case, the Second Defendant, as a director of a trustee company, does not, by virtue of that office alone, owe fiduciary duties to the beneficiaries of which the company is trustee. 34 In support of their foregoing submission the Defendants rely upon the decision of Lord Selborne LC (with whom James and Mellish LJJ agreed) in the Court of Appeal in Chancery, in Barnes v Addey (1874) LR 9 Ch App 244. 35 In Farah Constructions Pty Limited v Say Dee Pty Limited [2007] HCA 22; (2007) 230 CLR 89, the High Court of Australia (in the joint judgment of Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ) accepted the correctness of the following passage from the judgment of Lord Selborne at 251 - 252, which is referred to as the "rule in Barnes v Addy", But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

36 Their Honours in the High Court said, at 140, The form of liability referred to in the first part of the last sentence is often called the "first limb" of Barnes v Addy, and the form of liability referred to in the second part of the last sentence is often called the "second limb". It has become common to describe the first limb as involving "knowing receipt" and the second limb as involving "knowing assistance". Lord Selborne LC did not use the expression "knowing receipt". It seems to have been employed first in 1966 by the editors of Snell's Principles of Equity (26 ed, p202)… However, in 1972 Brightman J adopted the expression in Karak Rubber Co Ltd v Burden [No 2] [1972] 1 WLR 602 at 632 - 633. He said that the labels "knowing receipt or dealing" and "knowing assistance" employed by Snell were "an admirable shorthand description of their different natures". Those labels have been commonly used since then. In contrast, Lord Selborne LC's expression was "receive and become chargeable", at 251. Persons who receive trust property become chargeable if it is established that they received it with notice of the trust. 37 In the instant case the Defendants submit that (consonant with the decision of the Court of Appeal in Chancery in Barnes v Addy, and the foregoing views expressed by the High Court of Australia in approval of the judgment of Lord Selborne), a director of a trustee company does not owe a fiduciary duty to the beneficiaries under the trust of which the trustee company is the trustee. In support of that submission the Defendants also rely upon such cases as Piccardi v Caldekia Pty Limited (Supreme Court of New South Wales, McLaughlin M (as he then was), 18 September 1998, unreported), McEwen v Combine Coast Cranes Pty Limited (2002) 44 ACSR 244 at [54], a decision of Young CJ in Eq, and the decision of the Court of Appeal in Glandon Pty Limited v Strata Consolidated Pty Limited (1993) 11 ACSR 543, especially at 555 -559. 38 It was quite clear from those authorities and also from the decision of the Court of Appeal in Brunninghausen v Glavanics [1999] NSWCA 199; (1998 -1999) 46 NSWLR 538 (especially the judgment of Handley JA, at 558-561, where his Honour conveniently reviewed the various authorities in this area of the law) that it is incorrect to say that there are no circumstances in which a director of a trustee company owes a fiduciary duty to the beneficiary of the trust. The existence of such a responsibility in a director will depend upon the circumstances in each individual case. 39 Further, it will be appreciated that in the instant case it is the assertion of the Plaintiff that the liability of the Second Defendant is a liability of the nature recognised under the second limb of Barnes v Addey, and that the Plaintiffs are asserting actual knowledge on the part of the Second Defendant (in the words of Lord Selborne, "knowledge in a dishonest and fraudulent design on the part of the trustees"). 40 It will also be appreciated that it is not necessary in an application such as the present for the Plaintiffs to establish the existence of such a fiduciary duty on the part of a director of the trustee company. It is necessary, for the purposes of the present application, only that the Plaintiffs establish that it is arguable that such a fiduciary duty exist. (See, for example, Denara Nominees Pty Limited v Scolaro [2002] WASC 252, a decision of the Supreme Court of Western Australia, concerning a similar question of the existence of a fiduciary duty in a director of a trustee company to the beneficiaries of the trust of which the company was a trustee.) 41 It must, however, be recognised that, in the circumstances of the instant case, the Second Defendant was the sole director of the First Defendant and had the day to day control of the First Defendant. For all practical purposes the Second Defendant was the alter ego of the First Defendant. In those circumstances, I can see nothing either in the decision of the Court of Appeal in Chancery in Barnes v Addy or in the views expressed by the High Court of Australia in Farah Constructions, concerning the application of the foregoing principle, which would preclude the Second Defendant from being liable to the Plaintiffs in the circumstances alleged in paragraphs 54 to 56 of the statement of claim. 42 Further, the Court should not overlook the fact that in Barnes v Addy Lord Selborne was dealing with strangers to the improper conduct of the trustee ("…strangers are not to be made constructive trustees…"). 43 The earlier passage from his Lordship's judgment, at 251, should also be borne in mind, That responsibility [that is, the responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort , or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust . 44 In the instant case it will be appreciated that the Second Defendant, as the sole director of the First Defendant, as the person who had the day to day conduct and control of the activities of the First Defendant, and as, for all practical purposes, the alter ego of the Second Defendant, participated in all activities of the First Defendant. Since the statement of claim discloses a cause of action in fraud against the First Defendant, the company (as, in my conclusion, it does), then, in the circumstances of the instant case, I am not persuaded that the principles enunciated by the Court of Appeal in Chancery in Barnes v Addy, as considered and applied by the High Court of Australia in Farah Constructions, preclude the Second Defendant from equally being liable to the Plaintiffs in consequence of the existence of an equivalent fiduciary duty owed by him to the Plaintiffs to that owed to the Plaintiffs by the First Defendant. 45 It follows, therefore, that I am not persuaded that paragraphs 54 to 56 should be struck out as disclosing no reasonable cause of action as against the Second Defendant. 46 The other complaints by the Defendants concerning the statement of claim, are, essentially, that the pleading contains matters of evidence that are not allegations of material facts (for example, paragraphs 12, 14, 20 - 29, those paragraphs essentially dealing with the course of correspondence between the parties); and makes allegations that are irrelevant to the claims for relief sought in the amended summons, and that disclose no reasonable cause of action (paragraphs 42, 46, 49 to 50 and 58 to 65). 47 Concerning the complaint of the Defendants that matters of evidence have been included in the various paragraphs of the statement of claim, the Plaintiffs point to the requirement of Part 14 rule 9 of the Uniform Civil Procedure Rules, which requires that the effect of a document must be stated in the pleading. 48 It seems to me, also, in the circumstances of the instant case, that the various demands made by the Plaintiffs to the Defendants (in particular, to the First Defendant) are relevant to and are a material part of the cause of action asserted by the Plaintiffs against the Defendants regarding the various breaches by the Defendants (at the outset, by the First Defendant) of their fiduciary duties to the Plaintiffs. I do not consider that, on account of those factual matters complained of by the Defendants, the pleading should be struck out as being embarrassing. 49 To the extent that various matters in the statement of claim are asserted by the Defendants as being irrelevant and disclosing no reasonable cause of action, the Plaintiffs respond by submitting that those matters are relevant to the prayers for relief sought by the Plaintiffs. 50 Whilst a Court of Equity can always mould the relief to which a successful plaintiff is entitled, to the circumstances of the particular case, and whilst, to that extent, the prayers for relief do not constitute an essential part of the pleading, nevertheless, it seems to me that where, as here, it is submitted that the facts alleged in the statement of claim are relevant to the relief sought by the Plaintiff, the Court should be reluctant to strike out such allegations of fact merely upon the ground that, ultimately, those facts may not be essential to establishing the entitlement of the Plaintiff to the relief which is being claimed in that pleading. For completeness, I would observe that I am not persuaded that the pleading in its present form has a tendency to cause prejudice, embarrassment or delay in the proceedings; or is otherwise an abuse of the process of the Court. 51 For all the foregoing reasons, I do not consider that the Defendants have established an entitlement to an order that the statement of claim be struck out. As has already been recorded, the Plaintiffs concede that paragraphs 6 and 9 are defective, and seek leave to amend those paragraphs. I will grant that leave. 52 Accordingly, I make the following orders: 1. I grant leave to the Plaintiffs to amend paragraphs 6 and 9 in the statement of claim.

2. I order that the notice of motion filed by the Defendants on 31 March 2008 be dismissed.

3. I order that the Defendants pay the costs of the Plaintiffs of the aforesaid notice of motion. *********

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