Solicitors:
Ashurst Australia (Plaintiff)
File Number(s): 2016/247919
[2]
Judgment - (ex tempore - revised 15 march 2017)
HIS HONOUR: By deed made on 28 July 2007, the plaintiff became the trustee of a discretionary trust then established, known as the Stanton Investment Trust (the trust). On 1 May 2016, Mr Brent Scott Stanton, the "Appointor" under the trust deed and a beneficiary of the trust, arranged for the plaintiff to retire as trustee and for the first defendant to be appointed as new trustee. In between the events to which I have referred, the plaintiff became subject to a judgment of this Court, in what I will call the Prinwalla proceedings, recovered against it by reason of a transaction that (it is both admitted on the pleadings and proved) the plaintiff had entered into in its capacity as trustee.
On the face of things, the plaintiff would appear to have been entitled to be indemnified out of the assets of the trust for the purpose of discharging its liability under the judgment. However, the resignation that was forced upon it, and the appointment of the first defendant as the new trustee, have prevented the plaintiff from doing so directly. Further, the first defendant has refused to acknowledge the plaintiff's right to indemnity, and has instead insisted on what appears to me to be both a mistaken construction of the trust deed and a mistaken understanding of the relevant legal principles.
At the time the judgment was recovered against the plaintiff, the principal asset of the trust was its holding of shares in the capital of the second defendant. The plaintiff, as trustee, held 1,000 shares in the capital of the second defendant: the only shares on issue.
After the change in trustee, Mr Stanton appears to have procured the second defendant to issue a further 19,000 shares. There was no discernible legitimate purpose for that issue, and for reasons that I will explain it was in any event done in defiance of the relevant provisions of the second defendant's constitution. The effect, so long as the issues stand uncorrected, is to dilute by 80% the trust's interest in the undertaking of the second defendant.
There is some evidence that the second defendant has a significant investment in a listed (but presently subject to deed of company arrangement) public company known as Shaw River Manganese Limited (SRR), and has lent a substantial amount of money to SRM. Whilst the worth of the investment and the loan would appear to depend on an assessment of SRR's prospects of emerging from administration and resuming its core business, it cannot be said that the assets in question are valueless.
The plaintiff claims relief in respect of the following matters:
1. its entitlement to be indemnified, for the Prinwalla judgment and any other liabilities it may have as trustee, out of the assets of the trust;
2. what it says was a fraudulent disposition of its legal interest as trustee in the assets of the trust; and
3. what it says is either the unlawful (as being contrary to the constitution) or fraudulent exercise undertaken by the second defendant in diluting the trust's shareholding.
The first and second defendants were until very recently represented. They filed a Commercial List Response to the plaintiff's Commercial List Statement. That Commercial List Statement was amended by leave granted on 15 February 2017. The first and second defendants were directed to file a List Response to it. They have not done so and are thus in breach of the Court's direction.
The third to sixth defendants, who are those to whom further shares in the second defendant were issued, have filed submitting appearances.
I start with the question of the plaintiff's entitlement to indemnity. That right derives from three sources. The first is the general law. The second is the contractual right of indemnity set out in cl 8.4 of the trust deed. The third is s 71 of the Trustees Act 1962 (WA). I should have noted that the schedule to the trust deed expressly stipulates that the governing law is the law of the State of Western Australia.
Those sources of indemnity, and the relevant principles of the law of Western Australia applicable to them, were considered by Buss JA in Franknelly Nominees Pty Ltd v Abrugiato [2013] WASCA 285. McClure P agreed with Buss JA, although her Honour made some additional comments. Newnes JA agreed with Buss JA.
Buss JA considered the right of indemnity, and its sources, at [205] and following of his reasons. His Honour concluded that the right of indemnity, whatever its source, could (under Western Australian law at least) be excluded by the trust instrument or be released by the trustee itself. His Honour noted at [235] that those principles applied "unless...the purpose of the exclusion or release is fraudulently to defeat creditors' rights".
In the present case, the trust deed, although it qualifies the right of indemnity by the requirement that the trustee should have acted in good faith, does not expressly exclude it. I should note that by cl 8.5(3), the right may be released or revoked by the trustee itself. There is no evidence that the trustee (being, relevantly, the plaintiff) did so. To the extent that it may be relevant, there is no evidence that the first defendant ever did so.
I note that, again pursuant to directions of the Court, the first and second defendants were required to produce various documents, including documents going to the question of the release of any such right. They failed to comply adequately with the Court's directions. Although they produced some documents, they did not produce any documents in a number of categories.
Accordingly, the presumption arising from the lack of evidence is, in my view, strengthened. The Court is entitled to infer that there was no such release. I add that the question of release was not expressly pleaded.
The issue that was pleaded, and the error of principle to which I referred earlier, is that the first and second defendants assert that the contractual right of indemnity contained in the trust deed applies only so long as the trustee is a trustee. Thus, they said, the right lapsed when the plaintiff was caused to resign, and the first defendant was appointed in its place.
I do not agree that this is the proper construction of the trust deed. The definition of "trustee" is expressed to be, or to mean, "the Trustee or any subsequent Trustee for the time being of the Trust as named in item 5 of the Schedule as determined under this Deed". The "Trustee" named in item 5 of the Schedule was the plaintiff. Although the syntax of the definition is somewhat obscure, it is I think plain that what is intended is that the plaintiff was, at the time the trust deed was made and until its forced resignation, the trustee, and that anyone appointed thereafter would be, for the purposes of the deed, the trustee.
Whilst the plaintiff acted as trustee, it was entitled to be indemnified out of the trust assets for so acting. There is no reason, so far as the terms of the deed are concerned, why that right of indemnity should lapse simply because the plaintiff was forced to resign.
Regardless, when the Prinwalla liability became binding on the plaintiff (by reason of this Court's judgment), the right of indemnity crystallised. Even if the first and second defendants' construction were correct, it would not in my view affect a crystallised, as opposed to inchoate, right of indemnity. That is by the by, because I think the construction for which those defendants contend is simply wrong. I might add that it finds no support in the reasons of Buss JA in Franknelly Nominees.
It follows, in my view, that the plaintiff has established its right to indemnity, and is entitled to declaratory relief accordingly.
The plaintiff seeks also the appointment of a receiver. Although the summons limited that appointment to enforcement of any lien that the plaintiff was declared to have, there is no reason why it should be so limited. The plaintiff is in liquidation. Its liquidator is Mr Barnden. He has consented to act as receiver. It would seem to me to be convenient, and certainly to have the capacity to minimise expense, if Mr Barnden were appointed, as well, receiver of the property of the trust.
The next group of orders sought relates, as I have said, to the plaintiff's contention that its removal and replacement were undertaken in fraud of creditors. The relevant statutory provision is probably not s 37A of the Conveyancing Act 1919 (NSW), but its equivalent in Western Australia, namely s 89 of the Property Law Act 1969 (WA). It does not really matter which of those two provision is invoked, because their effect is effectively the same, and very clear.
It is plain that a transfer of shares may be a disposition or alienation of property in fraud of creditors. So much is established by the judgment of Palmer J in Hall v Poolman (2007) 215 FLR 243. The real question is whether the transaction was undertaken with the intention of defrauding creditors.
At the time the transaction was undertaken (that is to say, at the time the plaintiff was forced to resign, and the first defendant was appointed), the Prinwalla judgment had been obtained. The judgment creditor had served a statutory demand on the plaintiff. That demand had come to the attention of Mr Stanton, who was the sole director and shareholder of the plaintiff, and of Ms Fernandez, who was its secretary. They conferred, and decided to effect the transactions in question. It is plain from admissions in their evidence that this was done expressly in contemplation of the winding up of the plaintiff.
Taking into account the time at which the transactions occurred, their effectuation with knowledge of the likely imminent winding up of the plaintiff, and the subsequent attitude taken by the first and second defendants - namely, that the plaintiff had lost its right (or any right) to indemnity on the happening of its resignation and the appointment of the first defendant - it is in my view open to infer that those two actions were undertaken for the purpose of defeating the judgment creditors. I should note that the attitude of the first defendant was made crystal clear in correspondence emanating from its solicitors, in response to Mr Barnden's demand (through his solicitors) that his, or more accurately the plaintiff's, right of indemnity be recognised.
It follows, in my view, that the plaintiff has made good its claim to declaratory relief in respect of the transaction whereby the trust assets were divested from the plaintiff and vested instead in the first defendant. Since that transaction was given effect in the records of the second defendant, the plaintiff has made good also its claim for relief under s 175 of the Corporations Act 2001 (Cth), requiring the second defendant to correct its share register.
In reasons given earlier this morning, I noted that the second defendant had very recently become subject to external administration. A Mr Cook was appointed as its administrator, apparently by a resolution made yesterday, but given effect today. In the scheme of things (and taking into account the sequence of events referred to in my earlier reasons), that would appear to provide further support for the proposition that Mr Stanton and his allies are seeking to do whatever they can to frustrate enforcement the plaintiff's right of indemnity out of the trust's assets.
However, the present point is that the orders that I make will, of necessity, need to allow enough time to the second defendant, and to Mr Cook, to consider the second defendant's position. Accordingly, I propose to allow a little longer than the plaintiff requested for the s 175 order to be obeyed.
The next group of orders sought relates to the dilution of the trust's interest in the capital of the second defendant. It is sufficient to say that in my view the share issues that had that effect (or were purported to have that effect) were ineffective, because the relevant provisions of the second defendant's constitution were not complied with.
Clause 133 of the constitution provides that at any meeting of directors (of the second defendant), if there is only one director, resolutions must be passed in accordance with s 248B of the Corporations Act 2001 (Cth). That is to be read in conjunction with cl 121, which empowers a sole director to pass resolutions by means of a written record of those resolutions. Finally, by cl 9, the directors have control of the allotment and issue of otherwise unissued shares in the capital of the second defendant.
There is no evidence of any written resolution of the kind for which cl 133 calls. That is a matter of some significance. Section 248B of the Corporations Act provides that the director of a proprietary company that has only one director may pass a resolution by recording it and signing the record. Although in terms that section might be thought not to be mandatory (to use the old and discredited, but convenient, expression), nonetheless it is made mandatory by cl 133.
The effect of s 249B (which is in relevantly similar terms) was considered by the Court of Appeal of this state in Sheahan v Londish [2010] NSWCA 270. Hodgson JA pointed out that satisfaction of s 249B requires a resolution, of which the sole shareholder makes a record, and which record the sole shareholder signs. Applying that analysis to s 248B, what was required in this case was a resolution, recorded by Mr Stanton, and signed by Mr Stanton. Young JA expressed a similar view (as to s 249B) at [110]. Lindgren AJA expressed a similar view at [208], [209]. Lindgren AJA went further, and expressly conflated (for the purpose of considering) the requirements of ss 248B and 249B.
In the present case, there is simply no evidence of any resolution, let alone of any resolution that complies with the requirements of s 248B as imported by cl 133 of the constitution. Again, that was the subject of the notice to produce, or request for discovery, to which I referred earlier. Again, the first and second defendants' failure to produce any documents leads to the strong inference that no such documents were ever created. That in turn leads to the inference that there was no such resolution.
There is a further basis for concluding that the issue was inconsistent with the constitution. That is found in cl 24, which says that no shares can be issued unless the directors first offer them to the existing shareholders. The clause does provide for the company to resolve in general meeting to issue shares without complying with the requirement.
Again, there is no evidence of any such resolution in general meeting and the failure to produce it, in answer to the request for discovery, leads to the inference that there was none. It is plain that there was no prior offer to existing shareholders.
It therefore seems to me that the issue is either void or voidable in any event.
The alternative ground on which it is said that the issue was void is that it was undertaken in fraud of creditors. Whilst it might be thought to be a little unusual that an issue of shares (as opposed to a transfer of shares) would be a disposition or alienation of property for the purposes of s 37A or s 89 (whichever is applicable), that was the conclusion reached by Palmer J in Hall v Poolman, to which I referred earlier. His Honour expressly considered this issue at [542] and following of his reasons, and concluded that an issue of shares as well as a transfer of shares could come within (in that case) s 37A. His Honour said at [550]:
The purpose of s 37A is to defeat fraud no matter by what device it is implemented. The reach of the section is not foreshortened by technical obstructions placed in the way of recovery proceedings in furtherance of the original fraudulent intent. The words of the section are of the widest possible application; they focus on the effect of what is done, not on the means by which it is done. The word "alienation" encompasses every conceivable means whereby property might be removed from the reach of a person's creditors. The section does not say that the alienation must be by the act of the fraudulent debtor.
Thus, were it necessary to do so, I would have held that the share issues were in any event void, as having been undertaken in fraud of creditors.
The consequence is that the plaintiff has made good its claim to all the relief that it seeks. When I granted leave to continue as against the first defendant and the second defendant, I did so on condition that the judgments or orders not be enforced without the leave of the Court.
In circumstances where giving effect to those judgments or orders will apply only to trust property and not to property beneficially owned by the first defendant, I see no reason now why I should not give that leave. However, in order to give the first and second defendants and Mr Cook time to consider the matter, I will as I have said allow some time for the order under s 175 of the Corporations Act to be obeyed. It would be appropriate in my view that if Mr Cook does wish to avail himself of the liberty earlier reserved, he should do so before the time for compliance with that order arise. The consequence may very well be somewhat unpleasant for him if he does not do so.
For those reasons I make declarations and orders in accordance with paragraphs 1 to 10 as amended of the short minutes of order amended and initialled by me and dated today's date.
I note that those orders include a direction for entry forthwith. I order also that exhibits PX2 and PX3 be handed out but that the remaining exhibits remain with the Court file.
I order the first and second defendants to pay the plaintiff's costs but direct that this costs order not be enforced without the leave of the Court.
[3]
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Decision last updated: 16 March 2017