WASHBURN PTY LTD -v- CARDACI [2022] WASCA 15 (14 February 2022)

3 Mae Cardaci was the plaintiff in the primary proceedings and is the first respondent to this appeal and an associated appeal (CACV 100 of 2021). Mae is the widow of Marco Cardaci (Marc), who died on 7 November 2015.

4 At the time of his death, the principal sources of Marc's wealth were as follows:

1. The Washburn Trust, a discretionary family trust of which Marc was trustee, and of which Marc and Mae were among the beneficiaries. Marc's brother, Filippo Cardaci (Philip), was the guardian and appointer of that trust. Marc, as the trustee for the Washburn Trust, was a 25% shareholder of Contura Mining Pty Ltd (Contura). Contura held many of the Cardaci family's business interests. The other three shareholders of Contura were trustees of the discretionary family trusts of Frank Cardaci (the father of Marc and Philip), Carl Cardaci (Frank's brother) and Philip.[1]

2. The Marco Cardaci Testamentary Trust (Marc's Testamentary Trust), a discretionary family trust established by the will of Marc's mother, Grace Cardaci, who died on 20 November 2014. Ongold Corporation Pty Ltd (Ongold), a company controlled by Marc, was the trustee of Marc's Testamentary Trust at the date of his death.[2]

5 Marc appointed Philip to be the executor and trustee of his will. Marc gave the whole of his property to his trustees to hold under a discretionary family trust, of which Mae and persons in varying degrees of relationship to Mae were beneficiaries.[3]

1. On 24 December 2015, Philip, acting as appointor of the Washburn Trust, appointed Washburn Pty Ltd (Washburn) to be trustee of the Washburn Trust. Washburn is a company controlled by Philip.[4]

2. Philip caused Washburn to sell its shares in Contura to Leone Family Holdings Pty Ltd (Leone) and to enter into the Leone Shareholders Agreement, dated 11 April 2017. The shareholders of Leone were Washburn and the three trustees of family trusts associated with Frank, Carl and Philip. Two of these trustees were controlled by Philip at the time the Leone Shareholders Agreement was executed. The Leone Shareholders Agreement provided: for Philip to be the chairman of Leone; for Philip to determine who were to be the other directors of Leone; and for the board of directors to declare and pay a dividend to shareholders in its absolute discretion. The Leone Shareholders Agreement also provided that, unless the board of directors of Leone determines otherwise in its absolute discretion, a dividend paid to the trustee of the Washburn Trust is an unsecured loan to another company, Construction Equipment Financial Services Pty Ltd (CEFS). This loan was to be for an unlimited term that was repayable by CEFS only to the extent notified by the board of directors of Leone.[5]

3. Philip and his sister Angela Florido, acting as executors of Grace's estate, purportedly removed Ongold as trustee of Marc's Testamentary Trust and appointed Rectangular Pty Ltd (Rectangular), a company controlled by Philip, to be trustee of that trust.[6]

4. Philip, acting as the executor of Marc's will, obtained an order of the Federal Circuit Court that Marc's estate be administered in bankruptcy. The bankruptcy petition contended that Marc's estate was insolvent and owed:

(a) $1,280,714 to Marc's Testamentary Trust. This was on the basis that Ongold repaid a debt owed by Marc to Duporte Pty Ltd (a company in which Marc and Philip each had a 50% interest) for the purchase of a boat (Duporte Payment). Ongold discharged this debt using funds from Marc's Testamentary Trust.[7]

(b) $1,614,153 to Powercity Pty Ltd (Powercity), a company controlled by Marc, which was also a beneficiary of the Washburn Trust, and which had loaned money to Marc as part of a tax minimisation arrangement.[8]

7 For a time after Marc's death, Philip caused advances to be made to Mae. However, there was a disagreement between Mae and Philip. A dispute developed as to whether the advances made to Mae were repayable loans. The trial judge found that, on 18 May 2016, Philip told Mae that he was the trustee of the Washburn Trust, that he would never distribute anything to her from the trust and that he wanted 'all of the wealth' to go into a charitable foundation established in memory of Marc. The trial judge also found that, on 13 July 2016, Philip made a settlement offer to Mae under which she would receive $2 million and the right to retain certain assets in return for her relinquishing any interest or entitlement under Marc's estate, Marc's Testamentary Trust, the Washburn Trust or any Cardaci family entity.[9]

8 On 20 December 2016 and 10 May 2017 respectively, Mae commenced the primary proceedings, being:

1. CIV 3186 of 2016 (the Family Provision action), in which she sought relief including orders for:

(a) further provision from Marc's estate pursuant to the Family Provision Act 1972 (WA);

(b) declaratory relief in respect of the debts said to be owed to Marc's Testamentary Trust and Powercity;

(c) damages or an account from Philip in relation to Marc's estate being administered under the Bankruptcy Act 1966 (Cth); and

(d) removal of Philip as executor and trustee of the trust created under Marc's will.

2. CIV 1750 of 2017 (the Trust action), in which she sought relief including orders removing Washburn and Rectangular as trustees of the Wasburn Trust and Marc's Testamentary Trust respectively and orders appointing Mae as trustee of those trusts. She also sought other relief in relation to the trusts.

10 In the Trust action, Washburn and Rectangular were removed and Mae substituted as trustee of the Washburn Trust and Marc's Testamentary Trust respectively. The court also declared that Washburn, Rectangular and Ongold were not entitled to be indemnified from trust assets against the costs of the primary proceedings. It ordered the corporate trustees to repay amounts paid from trust assets to meet those costs.

11 The trial judge's reasons for making the orders to remove Washburn and Rectangular as trustees may be broadly summarised as follows:

1. At a meeting on 18 May 2016, Philip said to Mae words to the effect that he was the trustee of the Washburn Trust, that as trustee he would never distribute anything to Mae from the Washburn Trust and that he would put all of Marc's wealth from the Washburn Trust into the foundation for Marc.[10] This showed that Philip, as controller of the trustee, had a closed mind with respect to the exercise of the discretionary powers conferred upon the trustee or misunderstood the nature of those powers and the obligations to which the trustee was subject.[11]

2. At a meeting on 13 July 2016, Philip, acting in his personal capacity and as controller of the trustees, made an offer to, in effect, buy out Mae's interest in Marc's estate, Marc's Testamentary Trust and the Washburn Trust. In exchange, Mae would receive a payment of $2 million plus the assets which Mae had received that Philip had characterised as loans. At this meeting, Philip said to Mae words to the effect that he would only distribute from the Washburn Trust to a foundation to be established, and implicitly not to Mae.[12] Philip should have provided, but failed to provide, Mae with all the information that might reasonably bear upon her decision whether to accept the offer, such as the value of the assets of the Washburn Trust.[13] In making the settlement offer, Philip used his position as controller of the trustees of the Washburn Trust and of Marc's Testamentary trust to attempt to buy out Mae's interests in the trusts. Philip did not distinguish between his personal capacity and his capacity as controller of the trustees.[14] This showed that Philip ignored or did not understand the nature of the powers and the obligations to which the trustee was subject.[15]

3. When making the settlement offer, Philip did not consider ensuring that Mae was adequately provided for by discharging his duties and responsibilities as controller of the trustee of the Washburn Trust.[16] This showed that Philip ignored or did not understand the nature of the powers and obligations to which the trustee was subject.[17]

4. Upon Marc's death, Ongold was controlled by Philip as the executor and trustee of Marc's will. Philip approved and ratified the Duporte Payment by Ongold,[18] which was not a loan from Marc's Testamentary Trust to Marc.[19] Philip put himself in a conflict of interest by doing so because:[20]

(a) the payment was not in the best interests of the beneficiaries of Marc's Testamentary Trust; and

(b) the payment was in Philip's interests because it prioritised Duporte, in which Philip had a 50% interest, over other creditors of Marc's estate.

Ongold breached its fiduciary duty in making, ratifying or approving the Duporte Payment and Philip, as controller of Ongold, caused that breach of duty.[21] Philip also acted to the disadvantage of Marc's estate in incorrectly accepting that the Duporte Payment gave rise to a loan without taking legal advice.[22]

5. The terms of the Leone Shareholders Agreement were not in the best interests of the beneficiaries of the Washburn Trust because those terms have the effect of surrendering control of the Contura group to Philip and depriving the beneficiaries of the Washburn Trust of any dividend income from Leone except at Philip's absolute and unfettered discretion.[23] Philip caused Washburn to enter into the Leone Shareholders Agreement without considering whether to do so was in the best interests of the trust and its beneficiaries.[24] By causing Washburn to enter into the Leone Shareholders Agreement, Philip caused Washburn to act contrary to the best interests of the Washburn Trust and its beneficiaries.[25] He also inadvertently caused Washburn to breach the terms of the Washburn Trust deed.[26] This was because the Leone Shareholders Agreement, in effect, applied to CEFS part of the Washburn Trust capital and/or income in breach of the prohibition against doing so for the benefit of a member of the excluded class.[27]

6. The payments made to Mae were not loans.[28] Before 13 July 2016, Philip did not assert that there was a loan agreement, and his conduct from the time of Marc's death on 7 November 2015 until 13 July 2016 was inconsistent with him having believed the payments to have been loans repayable by Mae.[29] From at least 13 July 2016, Philip chose to characterise the payments, which he had previously referred to as drawings or funds available to Mae, as loans.[30] Philip did not adequately or sufficiently explain how or why he decided to characterise the payments as loans rather than cause the trustee to determine or confirm that they were distributions of capital or income.[31]

7. Philip has maintained his intention to distribute the majority, if not all, of the Washburn Trust income to the foundation for Marc, notwithstanding that the foundation is not a charitable foundation and therefore not a beneficiary under the trust deed.[32]

8. This was not a case where the trustee, or its controller, had acted without a full and proper understanding of their duties, responsibilities and obligations and now with the benefit of correct legal advice will properly discharge them in the future. There was a real risk, at the least, that even with correct legal advice and the benefit of the trial judge's reasons, the interests of Mae may not be given real and genuine consideration by Washburn or Rectangular. Under Philip's control, Washburn may simply reinstate the decision not to make income distributions to Mae and, if and when the foundation becomes a beneficiary, to distribute all or most of the trust's income to the foundation.[33]

The welfare of the beneficiaries and an efficient and satisfactory execution of the Washburn Trust and Marc's Testamentary Trust and a faithful and sound exercise of the powers conferred upon the trustees of those trusts is opposed to Washburn and Rectangular continuing as trustees of the Washburn Trust and Marc's Testamentary Trust respectively. Washburn and Rectangular should be removed as trustee of the Washburn Trust and Marc's Testamentary Trust respectively.

13 The trial judge determined that, in all of the circumstances, Mae should be appointed as the new trustee of both the Washburn Trust and Marc's Testamentary Trust.[35] In the course of doing so, the trial judge rejected a submission that Mae's agreement with a litigation funder in relation to the costs of the primary proceedings gave rise to a conflict of interest and duty which made her an unsuitable trustee of the Washburn Trust.[36] The trial judge also had regard to the fact that Mae was the only person who had been proposed as trustee,[37] rejecting the appellant's submission that there had been a 'splitting of the issue concerning the appointment of a replacement trustee'.[38]

14 The trial judge also dealt with a dispute as to the validity of the purported removal of Ongold, and appointment of Rectangular, as trustee of Marc's Testamentary Trust by Philip and Angela on 30 January 2017. The trial judge held that, on their proper construction, the terms of Marc's Testamentary Trust did not authorise the executors of his estate to dismiss the trustee of Marc's Testamentary Trust in circumstances where he died without children. As Marc died without children, the purported dismissal of Ongold, and appointment of Rectangular, as trustee of Marc's Testamentary trust on 30 January 2017 was invalid. That substitution did not validly occur until 15 March 2020, the day before the trial commenced, at which point it was common ground that Rectangular was validly appointed as the new trustee of Marc's Testamentary Trust.[39]

15 In the Family Provision action, Philip was removed as executor of Marc's estate, and the will was varied to award Mae the whole of Marc's estate. The court also declared that Marc's estate was not liable for the amount of $1,280,714, referred to at [6](4)(a) above.

16 The grounds for removing Philip as executor of Marc's estate reflected the reasons for removing the trust companies he controlled as trustees of the Washburn Trust and Marc's Testamentary Trust.[40]

17 The appellants have appealed against all orders made in both the Family Provision action and the Trust action.

18 CACV 100 of 2021 (Family Provision appeal) is the appeal against orders made in the Family Provision action. Philip, Ongold and Rectangular are the appellants in that appeal.

19 CACV 101 of 2021 (Trust appeal) is the present appeal against orders made in the Trust action. Washburn, Rectangular, Ongold, Philip and Angela are the appellants in this appeal.

20 Mae is the first respondent to each of these appeals and the only respondent who is taking part in the appeals.

21 In the Trust Appeal, the appellants appeal on grounds which may be broadly summarised as follows:

1. Grounds 1 - 3 challenge the orders removing Washburn and Rectangular as the trustees of the respective trusts.

2. Grounds 4 - 8 challenge findings made by the trial judge as to Philip's conduct as trustee or controller of trustees of the relevant trusts. Challenging these findings appears to be directed to impugning the orders made removing Rectangular and Washburn as trustees of the respective trusts.

3. Grounds 9 - 10 challenge the orders appointing Mae as trustee of the Washburn Trust and Marc's Testamentary Trust. Ground 9 contends that the trial judge erred in having regard to the fact that no party had proposed an alternative trustee. This is on the basis that the court had previously indicated that it would receive evidence and submissions concerning the appointment of an independent trustee after it had determined whether the corporate trustees should be removed and whether Mae should be appointed. Ground 10 contends that the trial judge erred in not regarding Mae's agreement with the litigation funder as creating a conflict of interest and duty if she were appointed trustee.

4. Ground 11 challenges the finding, referred to at [14] above, that Rectangular was not validly appointed to replace Ongold as trustee of Marc's Testamentary Trust until 15 March 2020.

22 In the Family Provision appeal, the appellants advance a ground of appeal challenging the removal of Philip as executor of Marc's will, generally by adopting grounds advanced in the Trust appeal.

23 Also in the Family Provision appeal, Mae cross-appeals against the orders made in the Family Provision action. Grounds 1 and 2 of the cross-appeal contend that the trial judge erred in failing to find that Philip acted in breach of duty in accepting that Marc's estate was liable to Ongold in the sum of $1,280,714. Ground 3 challenges a finding that Philip should be relieved of liability under s 75 of the Trustees Act 1962 (WA).

The security for costs application in the Trust appeal

24 By application in the Trust appeal filed on 24 December 2021, Mae seeks an order that the appellants pay into court the amount of $125,077 as security for her costs of the Trust appeal. These orders are sought under s 1335(1) of the Corporations Act 2001 (Cth) in the case of Washburn, Rectangular and Ongold, and under r 44(1) of the Supreme Court (Court of Appeal) Rules 2005 (WA) in the case of all appellants.

25 The principles in relation to security for costs were outlined in George 218 Pty Ltd v Bank of Queensland Limited.[41] In summary:

1. The power to order security is exercised to serve the interests of justice.

2. The discretion to order security is unfettered but must be exercised judicially. 'Special circumstances' do not have to be shown before an order for security for costs is made against an appellant.

3. An appellant's inability to satisfy a costs order should the appeal fail is generally a significant factor in favour of an order for security for costs. However, if the respondent has caused the appellant's impecuniosity, that may be a relevant countervailing factor.

4. Impecuniosity is not in itself generally the sole ground for the making of an order for security. Even where the appellant is impecunious, in all the circumstances, the interests of justice may properly be served by not making such an order.

5. Other factors generally include the appellant's prospects of success, whether the appellant would be shut out of the appeal if security for costs were ordered, and whether there has been any delay in the respondent filing the application for security for costs.

6. Ultimately, each case will turn on its own circumstances, and it is not possible to set out an exhaustive list of the relevant considerations.

7. Where security is ordered against an impecunious appellant, the amount ordered should not be greater than is absolutely necessary.

26 Although the application in terms seeks an order for security for costs against all appellants, senior counsel for Mae indicated in his oral submissions that the concern is not with the capacity of Philip and Angela to meet any costs order which may be made against them. It seems to be common ground that Philip and Angela are each the beneficiaries of discretionary family trusts with significant financial resources, which would be sufficient to meet any personal costs liability that they might incur. While there may be considerable impediments to enforcing a costs order against the trust assets, the prospect of Philip and Angela being prepared to be forced into bankruptcy, with automatic disqualification from managing corporations,[42] in order to avoid paying Mae's costs, seems very remote in the circumstances.

27 The application for security for costs is rather directed to the financial position of the former trustee companies, Washburn, Rectangular and Ongold. The evidence indicates that those companies do not hold any significant assets which a costs order could readily be enforced against in their own right. Further, under the orders made by the trial judge in the Trust action, those companies are liable to reimburse the trusts for monies paid towards their legal costs and have no right of indemnity against the assets of the trusts. Washburn and Rectangular are also liable to pay 90% of Mae's costs of the Trust action. In these circumstances there is reason to believe that the former trustee corporations will be unable to pay Mae's costs of the Trust appeal if the appeal is unsuccessful.

28 There are other factors in favour of an order requiring Washburn, Rectangular and Ongold to provide security for Mae's costs in the Trust appeal. Although the first respondent made the application for security for costs after the appellants' case was filed, it was made reasonably promptly. There does not appear to be any real prospect that an order for security for costs would stymie the appeal, as the Cardaci group of companies as a whole appear to have the financial resources to enable security to be provided. It cannot be said that Mae has caused the trustee companies' impecuniosity.

29 The strength of the Trust appeal appears to us to be an essentially neutral factor. We are satisfied that the appeal is reasonably arguable in the relevant sense, but at this preliminary stage would not put it any higher than that. It is inappropriate to delve further into the substantive merits of the appeal at this interlocutory stage.

30 A factor which counts against the award of security for costs is the prospect that Philip and Angela would be jointly and severally liable for Mae's costs if the appeal is unsuccessful. If that were the case, then there would be no need for an order for security for costs on the basis (as explained above at [26]) that the possibility of Philip and Angela not satisfying a costs order seems remote.

31 However, by letter dated 13 December 2021, the solicitors for the appellants contended that any exposure of Philip and Angela to an adverse costs order in the Trust appeal is limited only to the issue involving them personally as raised by ground 11.[43] Without determining whether such a submission would ultimately be accepted, there appears to be a plausible basis on which that position could be advanced, given that grounds 1 - 10 of the Trust appeal are ultimately directed to the orders for the removal and substitution of the corporate trustees of the respective trusts.

32 On balance, we considered it to be in the interests of justice to require Washburn, Rectangular and Ongold to provide security for Mae's costs of the Trust appeal. In the circumstances, and having particular regard to the number, length and nature of the grounds of appeal, $100,000 appeared to us to be a reasonable amount to be paid into court as security for costs.

33 For the above reasons, at the conclusion of the hearing on 11 February 2022, we made an order that, by 25 February 2022, Washburn, Rectangular and Ongold pay into court an amount of $100,000 as security for Mae's costs of the appeal.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] Cardaci v Filippo Primo Cardaci as executor of the estate of Marco Antonio Cardaci [No 5] [2021] WASC 331 (primary decision) [26] - [36].

[7] Primary decision [8], [409] - [411].

[9] Primary decision [140], [162], [397], [399].

[12] Primary decision [379] - [384], [397].

[14] Primary decision [405], [506].

[15] Primary decision [506], [514].

[16] Primary decision [406] - [407].

[18] Primary decision [421], [429].

[19] Primary decision [427] - [428].

[27] Primary decision [455] - [456].

[33] Primary decision [509], [512], [515].

[35] Primary decision [595] - [597].

[36] Primary decision [571] - [583].

[38] Primary decision [530] - [534].

[39] Primary decision [599] - [601], [617] - [620].

[40] Primary decision [744] - [747].

[41] George 218 Pty Ltd v Bank of Queensland Limited [2016] WASCA 56 [41] ‑ [48]; see Oze‑Igiehon v Rasier Operations BV [2017] WASCA 107 [13]; Hill v Zuda Pty Ltd as trustee for The Holly Superannuation Fund [2020] WASCA 87 [42].

[42] Section 206B(3) of the Corporations Act.

[43] Annexure AJM-2 to the affidavit of Alan James Mitchell, affirmed 24 December 2021.