AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd
[2020] VSCA 235
•11 September 2020
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S EAPCI 2019 0120
| AE BRIGHTON HOLDINGS PTY LTD (ACN 166 492 306) | Applicant |
| v | |
| UDP HOLDINGS PTY LTD (ACN 167 100 692) | First Respondent |
| REGISTRAR OF TITLES | Second Respondent |
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| JUDGES: | KYROU, KAYE and SIFRIS JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 31 August 2020 |
| DATE OF JUDGMENT: | 11 September 2020 |
| MEDIUM NEUTRAL CITATION: | [2020] VSCA 235 |
| JUDGMENT APPEALED FROM: | [2019] VSC 688 (Ginnane J) |
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REAL PROPERTY – Caveat – Arbitral award declared that a company held funds it received from first respondent on constructive trust for first respondent – Award recognised by Court order – Applicant not party to award – Sole director of the company and applicant gave evidence at public examination that funds received from first respondent given to applicant and used by it to purchase properties subject to first respondent’s caveat – Whether first respondent established prima facie case of existence of caveatable interest – Transfer of Land Act 1958 s 90(3) – Application for leave to appeal refused.
CONSTRUCTIVE TRUST – Trust arising where recipient of funds has knowledge that funds were paid under mistake of fact – Tracing – Principles to be applied.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr J Levine | The Law Professionals |
| For the First Respondent | Mr C Young SC with Mr P Annabell | Ashurst |
| For the Second Respondent | No appearance |
KYROU JA
KAYE JA
SIFRIS JA:
Introduction and summary
The applicant, AE Brighton Holdings Pty Ltd (‘AE’), seeks leave to appeal against a decision of a judge in the Trial Division refusing to order the removal of a caveat lodged by the first respondent, UDP Holdings Pty Ltd (‘UDP’), on the titles to four properties owned by AE.[1]
[1]AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2019] VSC 688 (‘Reasons’).
For the reasons that follow, the application for leave to appeal will be refused.
Facts
Esposito Holdings Pty Ltd (‘Esposito Holdings’) was the holding company of 5 Star Foods Pty Ltd, which carried on a business of manufacturing and supplying milk and dairy products (‘Business’). Antonio Esposito was the sole director and shareholder of Esposito Holdings.
Share sale agreement and related arbitration
On 11 December 2013, Esposito Holdings and UDP entered into a share sale agreement (‘SSA’) pursuant to which Esposito Holdings sold to UDP its shares in 5 Star Foods Pty Ltd. The other parties to the SSA were Mr Esposito, 5 Star Foods Pty Ltd and William Hui, a director of UDP. The SSA was completed on 31 January 2014, but only part of the purchase price was paid to Esposito Holdings on completion, being an amount of $22,422,356.06. The balance, including adjustments, was to be paid over the year that followed (‘deferred amounts’). Pursuant to cl 15 and sch 6 of the SSA, Esposito Holdings gave certain warranties to UDP about the Business and its financial performance. Clause 16.13 provided that, to the maximum extent permitted by law, any amount paid by Esposito Holdings to UDP in respect of a claim for breach of warranty ‘operates as a decrease in the Purchase Price’.
On 30 October 2014, Esposito Holdings commenced an arbitration proceeding against UDP, Mr Hui, and 5 Star Foods Pty Ltd claiming payment of the deferred amounts of the purchase price under the SSA.[2] UDP counterclaimed against Esposito Holdings and Mr Esposito claiming that they had engaged in misleading or deceptive conduct contrary to s 18 of the Australian Consumer Law (‘ACL’),[3] including by overcharging one of the principal customers of the Business over several years. UDP contended that this conduct had the effect of materially overstating the value of the Business, thereby breaching numerous warranties in the SSA.
[2]For further details of the initial stages of the arbitration proceeding, see Hui v Esposito Holdings Pty Ltd (2017) 345 ALR 287, 292–301 [8]–[69]; [2017] FCA 648.
[3]See sch 2 to the Competition and Consumer Act 2010 (Cth).
On 21 September 2018, the arbitrator published an interim award (‘Interim Award’) and on 1 October 2018, he published his final Award (‘Final Award’). The arbitrator found that Esposito Holdings had deliberately engaged in the misleading and deceptive conduct alleged by UDP, and that this conduct had caused UDP to suffer loss. The arbitrator also found that Mr Esposito was the ‘driving force’ behind the misleading and deceptive conduct and was thus involved in Esposito Holdings’ contraventions of s 18 of the ACL.[4] The arbitrator held that UDP breached numerous warranties in the SSA and that the loss suffered by UDP operated to reduce the ‘Purchase Price’ under the SSA in accordance with cl 16.13.
[4]Interim Award [80].
Paragraph 6 of the Final Award declared that, ‘on and from Completion [that is, 31 January 2014], [Esposito Holdings] held the Purchase Price on a constructive trust for [UDP]’. The arbitrator’s reason for the declaration of constructive trust appears to be that UDP was entitled to recover the amounts it had overpaid for the purchase price for the shares in 5 Star Foods Pty Ltd under a mistake of fact.[5]
[5]Interim Award [85].
On 5 October 2018, a judge in the Trial Division made an order giving effect to the Final Award as a judgment of the Supreme Court (‘Award recognition judgment’).
Purchase of properties by AE and UDP’s caveat
On 2 December 2013, AE became the registered proprietor of a property at 2 Kinane Street, Brighton. Mr Esposito was then the sole director and shareholder of AE.
On 4 August 2014, AE became the registered proprietor of a property at 101 Trunk Lead Road, Bunkers Hill.
On 10 September 2014, AE became the registered proprietor of a property at 92 Esplanade, Brighton, which is adjacent to the Kinane Street property. We will refer to the Kinane Street property and the Esplanade property collectively as ‘the Brighton properties’.
In November 2014, receivers and managers were appointed to the UDP group of companies.
On 2 March 2015, AE became the registered proprietor at 649 Williams Road, Werona.
On 9 November 2015, Mr Esposito was the subject of a public examination in a proceeding in the Supreme Court of Victoria that appears to have been commenced by the receivers and managers of the UDP group of companies (including 5 Star Foods Pty Ltd). During the public examination, he was asked about the source of the funds that AE used to purchase the four properties. Mr Esposito claimed the privilege against self-incrimination in respect of his answers. The following questions and answers are presently relevant:
The funds that were received that we have on the screen, that is the 5.6 [million] and the 4.6 [million] and the 13.5 [million], went into an Esposito Holdings bank account; is that right?---Privilege. Yes.
I’m corrected. The 4.6 [million] is part of the 5.6 [million]. Then the funds were paid out, were they, from an Esposito Holdings bank account to other places after that?---Privilege. Yes.
…
You have set up another business since; is that right?---Correct.
What’s that business called?---Privilege. National Dairy Products.
…
And how is that business funded?---Privilege. Through my cash flow.
Your cash flow?---My cash flow.
When you say your cash flow, do you mean money that was received in settlement of this sale that we are looking at on the screen?---Privilege. Yes.
…
What became of the money that your new business received from Esposito Holdings? What did it do with it?---Privilege. Bought properties.
Properties. Which properties?---Privilege. I think there’s a property in Ballarat, Daylesford and Brighton.
…
Mr Esposito, we were talking about where the $7 million, give or take, that went to your new company has been invested and you were about to give me some addresses for properties that have been purchased. Could you do so, please?---Privilege. 2 Kinane Street in Brighton. 92 The Esplanade in Brighton. I’m actually not sure if that’s 92 or 98, but it’s one of those two.
We might just stop and do them one at a time. So there’s 2 Kinane Street, Brighton, which is owned by a company called AE …?---Mm-hm.
…
Then I think you were going to 92 The Esplanade, Brighton. That is also owed by AE … and I think you said that was purchased with the sale proceeds from here; is that correct?---Correct.
…
Is there also a property at 639 and 649 Williams Road, Werona?---Privilege. Yes.
And that was a property that was purchased when?---Privilege. It would have been last year.
What kind of property is that?---Privilege. It’s a holiday house farm. Farmhouse.
What was the purchase price?--- Privilege. Approximately 1.9 to 2 million.
…
We will go back to Kinane. I should have asked you this before. The purchase price of Kinane Street was how much? About 11 million?---Close to, yes. Privilege.
…
Then The Esplanade, 92 The Esplanade property as I understand it is an adjoining property?---(Witness nods.)
Yes?---Privilege. Yes.
…
I think the purchase price for that was about 3.8 million?---Privilege. Correct.
…
Is there also a property at 101 Trunk Lead Road, Bunkers Hill, that is owned by AE …?---Privilege. Correct.
Purchased for how much, do you recall?---Privilege. Approximately 1.5 [million], I think.
Was that funded out of the proceeds of the sale of the UDP business?---Privilege. Yes.[6]
[6]Transcript of Proceedings (9 November 2015) 33.26–33.31, 34.3–34.6, 34.25–34.30, 35.25–35.29, 36.4–36.13, 37.1–37.4, 37.25–38.1, 38.8–38.11, 38.14–38.17, 38.20–38.21, 40.16–40.22.
In summary, Mr Esposito gave evidence that $5,600,000 and $13,500,000 of the purchase price paid by UDP under the SSA was paid into Esposito Holdings’ bank account and that those funds were, in part, used by AE to acquire the four properties. Mr Esposito signed the transcript of his evidence.
On 14 April 2016, Mr Esposito’s partner, Violetta Esposito, replaced him as the sole director of AE.
On 1 July 2017, UDP lodged a caveat on the titles to the four properties (‘Caveat’). Although the Caveat claimed an interest under ‘an implied, resulting or constructive trust’, UDP only relied upon a constructive trust.
On 5 December 2018, Esposito Holdings was placed into liquidation.
On 9 February 2019, AE signed separate contracts for the sale of the Kinane Street property and the Esplanade property to Zhenni Yang for $10,000,000 and $5,006,789, respectively. The settlement date under both contracts was specified as 28 August 2019. Unless the Caveat was removed, it would prevent settlement taking place.
On 3 July 2019, Mr Esposito transferred his shares in AE to Ms Esposito.
On 8 August 2019, Mr Esposito was made bankrupt.
At the hearing of the application for leave to appeal, the Court granted leave to UDP to rely on an affidavit sworn on 26 August 2020 by its solicitor, Michael Sloan, which relevantly stated:
(a)UDP took an assignment of a mortgage registered on the Brighton properties and took possession of the properties;
(b)as mortgagee in possession, UDP rescinded the contracts of sale to Ms Yang and sold the Brighton properties to a third party for $16,500,000, with settlement due on 4 September 2020; and
(c)the net proceeds of sale of the Brighton properties would be paid into court pending resolution of UDP’s proceeding referred to at [36] and n 24 below.
The Court was informed that AE had commenced a proceeding in the Trial Division seeking an injunction to prevent the settlement from taking place on 4 September 2020. AE’s application for an injunction was unsuccessful.[7] The Court has not been informed whether the sale of the Brighton properties was completed on 4 September 2020.
[7]See AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSC 564; AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 236.
Relevant legal principles
Central to an understanding of the judge’s decision and the resolution of the application for leave to appeal against that decision are the legal principles relating to the removal of a caveat, constructive trusts and tracing. Accordingly, we will briefly summarise those principles before considering the proceeding in the Trial Division and the grounds of appeal.
Section 90(3) of the Transfer of Land Act 1958 (‘TLA’) provides that ‘[a]ny person who is adversely affected by [a] caveat may bring proceedings in a court against the caveator for the removal of the caveat and the court may make such order as the court thinks fit’. It was common ground that the judge was required to apply the following two stage test in determining the application for removal of the Caveat:
(a)First, the caveator must establish that there is prima facie case — in the sense that the case has a sufficient likelihood of success to justify the maintenance of the caveat — that he or she has the estate or interest which he or she claims in the land in question.[8]
(b)Secondly, the caveator must establish that the balance of convenience favours the maintenance of the caveat.[9]
[8]Piroshenko v Grojsman (2010) 27 VR 489, 491 [7], 494 [21]–[22]; [2010] VSC 240 (‘Piroshenko’), cited with approval in 63 Buckley Street Pty Ltd v Keeron Nominees Pty Ltd [2011] VSCA 289, [11]; Carbon Black Lab Pty Ltd v Launer [2015] VSCA 126, [35]–[36] (‘Carbon Black’); Lawrence & Hanson Group Pty Ltd v Young [2017] VSCA 172, [36]–[38].
[9]Piroshenko (2010) 27 VR 489, 491 [7]; [2010] VSC 240.
An application for the removal of a caveat does not ordinarily present an occasion for the final determination of disputed factual issues or of the claims which the caveat seeks to protect.[10] A prima facie case may be capable of being sustained by supporting evidence, without the need for the Court to answer the question whether or not that evidence should be accepted.[11] The position may be different when no substantial issue of fact appears and the Court is able to have the claims in question fully argued and decided.[12]
[10]Carbon Black [2015] VSCA 126, [38].
[11]Carbon Black [2015] VSCA 126, [38].
[12]Carbon Black [2015] VSCA 126, [38].
The power of the Court under s 90(3) of the TLA includes discretionary considerations.[13] A successful challenge to the exercise of a judicial discretion requires that error of the kind identified in House v The King[14] be established.
[13]Piroshenko (2010) 27 VR 489, 491–2 [11]; [2010] VSC 240; Carbon Black [2015] VSCA 126, [39].
[14](1936) 55 CLR 499, 505; [1963] HCA 40.
Only a legal or equitable interest in land can sustain a caveat. In Boensch v Pascoe, Bell, Nettle, Gordon and Edelman JJ stated that a mere statutory right to take steps to avoid a transaction does not confer an interest in land that can sustain a caveat.[15] They approved of the following statement made by Green CJ in Martin v Official Trustee in Bankruptcy:
The interest asserted must be in existence at the time of the lodgement of the caveat. The assertion by a caveator who at the time of the lodgement of the caveat does not have an estate or interest in the land that he has commenced proceedings which may result in such an interest being vested in him does not disclose a sufficient caveatable interest.[16]
[15](2019) 375 ALR 15, 41 [104]; [2019] HCA 49 (‘Boensch’), citing Martin v Official Trustee in Bankruptcy [1990] Tas R 65, 68–9.
[16]Boensch (2019) 375 ALR 15, 41 [104]; [2019] HCA 49. See also Stacey v Stacey [2010] WASC 85, [12].
An equitable interest in land is a proprietary interest which is recognised by equity but not by the common law. By contrast, a mere equity is not a proprietary interest in land. A mere equity has been defined in various ways, including ‘a right, usually of a procedural character, which is ancillary to some right of property, and which limits it or qualifies it in some way’.[17]
[17]Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [1994] 1 VR 672, 675.
A constructive trust of the type upon which UDP relied in the present case is an institutional trust which arises from the retention of funds known to have been paid by mistake. Such a trust will arise at the point in time when the person who received the funds acquired knowledge of the mistake. The recipient’s conscience is bound at that time and it would be against conscience for the recipient to use the funds as his or her own.[18] In Wambo Coal Pty Ltd v Ariff, White J stated:
I do not see why, in principle, a constructive trust arising from the retention of moneys known to have been paid by mistake, and for which there was no consideration, would not arise from the time the payee acquired such knowledge, if the moneys paid could still be identified at the time such knowledge was acquired. Such a trust is as much an institutional trust as a trust imposed on property in the hands of [a] thief.[19]
[18]Wambo Coal Pty Ltd v Ariff (2007) 63 ACSR 429, 437–8 [40]–[43]; [2007] NSWSC 589 (‘Wambo’).
[19](2007) 63 ACSR 429, 437 [42]; [2007] NSWSC 589. See also Shields v Westpac Banking Corporation [2008] NSWCA 268, [19]–[20]; Credit Union Australia Ltd v Lyons [2009] NSWSC 1188, [29]–[30]; Focus Metals Pty Ltd v Babicci [2014] VSC 380, [111]–[115], [169], [176] (‘Focus Metals’).
The payee in the above circumstances will be treated as having the requisite level of knowledge as to the mistake if he or she: has actual knowledge; wilfully shuts his or her eyes to the obvious; wilfully and recklessly fails to make such inquiries as an honest and reasonable person would make; or has knowledge of circumstances which would indicate the facts to an honest or reasonable person.[20]
[20]Wambo (2007) 63 ACSR 429, 438 [44]; [2007] NSWSC 589. See also Focus Metals [2014] VSC 380, [112]–[113].
A third party may be liable to account as a constructive trustee where it receives trust property with notice that it was being dealt with in a manner that involved a breach of trust.[21]
[21]Barnes v Addy (1874) LR 9 Ch App 244, 251–2; Argyle Building Services Pty Ltd v Franek [2020] VSCA 196, [59]–[60].
In accordance with the equitable principle of tracing, the beneficial owner of misappropriated property can recover it or its traceable proceeds from a person holding the asset, subject only to the defence that the holder is a bona fide purchaser for value without notice.[22] In Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd, Hargrave J relevantly stated:
Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money. It does not matter whether the trustee mixed the trust money with his own in a single fund before using it to acquire the asset, or made separate payments (whether simultaneously or sequentially) out of the differently owned funds to acquire a single asset.[23]
[22]Sino Iron Pty Ltd v Worldwide Wagering Pty Ltd (2017) 52 VR 664, 762 [363]; [2017] VSC 101, citing Foskett v McKeown [2001] 1 AC 102, 108–9, 115, 129–31.
[23](2017) 52 VR 664, 763 [366]; [2017] VSC 101 (emphasis in original), quoting Foskett v McKeown [2001] 1 AC 102, 131.
Proceeding in the Trial Division for removal of the Caveat
The proceeding in the Trial Division which is the subject of the application for leave to appeal (‘Caveat removal proceeding’) was commenced by AE in September 2019. In that proceeding, AE sought an order for the removal of the Caveat pursuant to s 90(3) of the TLA.
UDP submitted that it had a caveatable interest in the four properties on the basis that:
(a)Esposito Holdings had, in breach of the constructive trust the subject of the Award recognition judgment, transferred trust funds to AE to enable it to purchase the four properties; and
(b)UDP was entitled to trace those funds to the four properties.
UDP informed the judge that it intended to commence a proceeding against AE (‘UDP’s proposed proceeding’) and tendered a draft statement of claim.[24] The draft statement of claim contained the following relevant allegations:
[24]On 21 October 2019, UDP commenced the proposed proceeding and relied on a statement of claim substantially in the form of the draft statement of claim. For ease of reference, we will refer to UDP’s proceeding as its proposed proceeding notwithstanding that the proceeding has been commenced.
8On and from 31 January 2014, Esposito Holdings … held the ‘Purchase Price’ [it received from UDP under the SSA] on a constructive trust for UDP ….
Particulars
The constructive trust was the subject of paragraph 6 of [the Final Award] and the [Final Award] was subsequently given effect as an order of the Supreme Court by the [Award recognition judgment].
9Amongst the findings made by the arbitrator in the [Interim] Award that supported the constructive trust were findings that:
(a)Mr Antonio Esposito was aware, before 31 January 2014, of overcharging by … a subsidiary of 5 Star Foods Pty Ltd, of its largest customer, National Foods Australia Pty Ltd ([Interim] Award at [66], [67]);
(b)Mr Antonio Esposito gave directions to employees to carry out the overcharging ([Interim] Award at [39], [67], [78]);
(c)Mr Antonio Esposito was aware that there was no entitlement to overcharge under the contract with that customer ([Interim] Award at [79]);
(d)The overcharging resulted in there being breaches of nine warranties of the [SSA] ([Interim] Award at [44], [46], [47]);
(e)UDP … did not know about the overcharging until after 31 January 2014 and the overcharging was not disclosed to UDP … ([Interim] Award at [43], [47], [67], [74], [77]);
(f)Mr Antonio Esposito was aware the result of the overcharging was to increase dramatically the value of shares in the business being sold by increasing the EBITDA that was being used for the purpose of valuation ([Interim] Award at [79]–[80]);
(g)UDP … paid the Purchase Price under a mistake of fact being unaware of the matters in paragraphs (a)–(d) and (f) hereof ([Interim] Award at [85]).
10At all material times, Mr Antonio Esposito was the sole director and controlling mind of … 5 Star Foods Pty Ltd; … Esposito Holdings …; and … AE …
11On a date or dates presently unknown to [UDP], Mr Antonio Esposito procured Esposito Holdings … to give [the payments it received from UDP totalling $22,422,356.06] to AE … and Mr Antonio Esposito procured AE … to use the money to buy [the four properties].
Particulars
UDP … refers to answers given by Mr Antonio Esposito [at the public examination], particularly at pages 32–45 of the signed transcript.
12The giving of the money alleged in the preceding paragraph was in breach of the trust alleged in paragraph 8 above.
13AE … received the money alleged in paragraph 11 above:
(a) as a volunteer; and
(b)with actual knowledge of the facts alleged in paragraph 9 above; and
(c)knowing it was proceeds of Esposito [Holdings’] breach of trust.
Particulars
By reason of the matters alleged in 9 and 10 above, [AE’s] knowledge was the same as Mr Antonio Esposito’ s knowledge.
…
AND [UDP] CLAIMS:
AA declaration that [UDP] is entitled to trace the sum of $22,422,356.06 into and has equitable title to the [four properties] to that extent, and that [AE] holds the [four properties] on trust for [UDP] to that extent.
…
AE did not file any affidavit by Mr Esposito in support of its application to remove the Caveat.
Judge’s reasons
On 15 October 2019, the judge decided that UDP had established a prima facie case that it had a caveatable interest in the four properties for the following reasons:
In my opinion, Mr Esposito’s answers [at the public examination] provide prima facie evidence that the purchase price for the … four properties was provided, with one possible qualification, from the money obtained from UDP under the [SSA]. The money may first have been paid to National Dairy Products, but was then paid to AE …, which purchased the properties. The qualification is the timing issue, to which I will return.
…
As mentioned, there was a timing issue in respect of the purchase of 2 Kinane Street. The [Final Award] declared that the constructive trust arose on and from the completion which occurred on 31 January 2014; whereas the purchase of the Kinane Street property seems to have been settled or the title transferred to AE … on 2 December 2013. [AE’s] argument is therefore that the constructive trust could not apply to that property. But I consider that by Mr Esposito’s answers … there is, at least, prima facie evidence that the money obtained from the [SSA] was used to purchase 2 Kinane Street.
How that may have occurred is not shown from the transcript but, in my opinion, Mr Esposito’s evidence suggests that part of the money from the [SSA] found its way, perhaps at a later time, to assist in the purchase of 2 Kinane Street. … Mr Esposito mentioned 2 Kinane Street as a property in Brighton which had been purchased, having previously said that properties, including in Brighton, had been purchased with money obtained from Esposito Holdings. Whether the [SSA] money was used to assist in the purchase of the Kinane Street property through repayment of an earlier loan or otherwise does not appear. … [T]here is no affidavit from Mr Esposito about any of the answers that he gave.
…
[W]hile the evidence in the arbitration may not bind AE …, it can be relevant in determining whether a prima facie case of constructive trust arises.
…
The findings of the arbitrator and the evidence that UDP used to obtain the [Final Award] when read with Mr Esposito’s evidence, leads to the conclusion that UDP has a prima facie case that Esposito Holdings held the purchase money on trust for UDP. There is a prima facie case that Esposito Holdings breached its trust obligations to UDP by paying that money to AE …, which used it to purchase the four properties. I take into account in reaching that prima facie view the fact that Esposito Holdings and AE … have common ownership and Mr Esposito’s evidence upon his examination.
…
[The evidence] provides a prima facie case that UDP can establish a constructive trust under which it is a beneficiary and therefore has an estate or interest in the [four] properties. As I have said, there is prima facie evidence that money obtained in breach of that trust was used to purchase the four properties.[25]
[25]Reasons [23], [25]–[26], [36], [38], [40].
The judge found that the balance of convenience favoured the maintenance of the Caveat on terms that required UDP to commence its proposed proceeding. In making this finding, the judge rejected a submission by AE that the balance of convenience favoured removal of the Caveat in respect of the Brighton properties because of the contracts of sale to Ms Yang. He did so because the Caveat preceded those contracts.
On the same day, the judge made an order dismissing AE’s application for the removal of the Caveat and ordering AE to pay UDP’s costs. Paragraph 2 of the order stated that ‘[w]ithin seven days, [UDP] commence proceedings in the Court’s Property List to substantiate its alleged interest in the [four] properties …’.
Grounds of appeal
AE has sought leave to appeal against the judge’s order on the following grounds:
1The Trial Judge should have held that [UDP’s] interest in the [four properties] was a mere equity that could not maintain a caveat.
2The Trial Judge erred in holding the [Final Award] and the evidence adduced therein could be used to determine whether a constructive trust was established.
3The Trial Judge denied [AE] natural justice in holding that the [Final Award] and the evidence adduced therein was relevant to determine whether a constructive trust was established.
4The Trial Judge erred in holding there was prima facie evidence the purchase money was paid to [AE] in breach of trust.
5The Trial Judge should not have held there was a prima facie case that payments of the purchase price were made by Esposito Holdings … to [AE].
As the grounds are interrelated, we will consider them together.
Parties’ submissions
AE submitted that UDP’s claim against Esposito Holdings gave rise to no more than a statutory right under the ACL to apply for relief — in the form of a refund of the purchase price paid under the SSA — in respect of alleged misleading or deceptive conduct. AE contended that UDP’s claim was analogous to a statutory cause of action to avoid a transaction pursuant to ss 120 and 121 of the Bankruptcy Act 1966 (Cth), which the High Court held in Boensch was insufficient to constitute an equitable interest that could support a caveat. Accordingly, so it was said, the claim was contingent and in the nature of a mere equity rather than an equitable interest that could be traced to the four properties. AE acknowledged that UDP’s mere equity could be converted into an equitable interest by virtue of a future court order but such a court order had not been made at the time UDP lodged the Caveat.
AE emphasised that cases such as Boensch have made clear that, in order for an equitable interest to be capable of supporting a caveat, it must exist at the time the caveat is lodged and that this requirement is not satisfied where an equitable interest depends on the making of a court order in the future. That was said to be so even if a court order gives retrospective effect to the equitable interest. AE submitted that this requirement was not satisfied in the present case because UDP must obtain a court order in the proposed proceeding to enliven its putative equitable interest. AE argued that para 2 of the judge’s order recognised this because it required UDP to commence proceedings ‘to substantiate its alleged interest in the [four] properties’.
AE submitted that, contrary to the judge’s decision, neither the Final Award nor the evidence adduced in the arbitration could be relied upon to support a finding that UDP had an equitable interest at the time it lodged the Caveat. AE contended that the Final Award could not be relied upon because AE was not a party to the arbitration and was therefore not bound by the Final Award.[26] AE argued that the judge could only make findings of fact or draw inferences on the basis of the evidence before him, and that the evidence in another proceeding (the arbitration) could not be used for this purpose. According to AE, the evidence adduced in the arbitration and any findings of fact by the arbitrator on the basis of that evidence were inadmissible under s 91 of the Evidence Act 2008. That section provides as follows:
91 Exclusion of evidence of judgments and convictions
(1) Evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding is not admissible to prove the existence of a fact that was in issue in that proceeding.
(2)Evidence that, under this Part, is not admissible to prove the existence of a fact may not be used to prove that fact even if it is relevant for another purpose.
[26]AE cited Maritime Unionof Australia v Patrick Stevedores Operations Pty Ltd [1998] 4 VR 143, 159 in support of this proposition.
AE contended that the judge denied it procedural fairness by relying on the evidence adduced in the arbitration without giving AE prior notice of his intention to do so, identifying the evidence and affording AE an opportunity to make submissions on the evidence. AE argued that it is not relevant that it will have an opportunity to challenge the evidence in UDP’s proposed proceeding, as procedural fairness required that it be given that opportunity in the Caveat removal proceeding.
AE submitted that the judge erred in finding that UDP had established a prima facie case that trust funds were used to purchase the four properties, in breach of trust, on the basis of Mr Esposito’s evidence in the public examination. That was said to be so for the following reasons:
(a)Mr Esposito’s evidence, at best, established that there had been a flow of money from Esposito Holdings to AE and there was no basis for a finding that the money was paid in breach of trust as distinct from the ordinary course of business.
(b)The fact that Mr Esposito owned all the shares in Esposito Holdings as well as AE at the relevant time was insufficient to establish a breach of trust.
(c)The probative value of Mr Esposito’s evidence was reduced because he was asked leading questions and he seemed willing to accede to most suggestions put to him.
(d)In any event, Mr Esposito’s evidence could not establish that funds received from Esposito Holdings by AE were used to fund the purchase of the Kinane Street property. That was because AE became the registered proprietor of that property on 2 December 2013, prior to the SSA being executed on 11 December 2013 and the constructive trust taking effect on 31 January 2014.
Accordingly, so AE contended, the judge erred in deciding that there was sufficient evidence for a finding that UDP had a prima facie case to trace the payments it had made to Esposito Holdings, to the four properties.
UDP submitted that the interest claimed by it was not a mere equity but an equitable interest based upon the facts and legal reasoning pleaded in its proposed statement of claim set out at [36] above. UDP emphasised that the fact that AE was not a party to the arbitration and was not bound by the Final Award was immaterial to the existence of the constructive trust, as a matter of law, from 31 January 2014. It also emphasised that Mr Esposito was a party to the arbitration, had knowledge of all the facts that gave rise to the declaration of trust and that his knowledge could be attributed to both Esposito Holdings and AE.
UDP submitted that the constructive trust, and the facts which enabled UDP to trace the trust funds to the four properties, preceded the lodgement of the Caveat and therefore UDP had a caveatable interest in the four properties at that time.
UDP argued that the fact that AE acquired the Kinane Street property prior to the commencement of the constructive trust was not determinative because Mr Esposito’s evidence established a prima facie case that trust funds were used in connection with AE’s ownership of the property. According to UDP the fact that the precise manner in which the trust funds were so used — such as by paying down a mortgage — did not matter for the purpose of applying the test for determining whether there was a prima facie case that UDP had a caveatable interest in the property.
UDP contended that the principles of procedural fairness had not been infringed because AE did not object to the evidence upon which UDP relied and had ample opportunity before the judge to deal with it. According to UDP, AE could have called contradictory evidence, including from Mr Esposito, but did not do so.
UDP submitted that the judge did not err in finding that Mr Esposito’s evidence at the public examination constituted prima facie evidence that funds received by Esposito Holdings from UDP under the SSA were used to acquire the four properties. That was said to be particularly so in the light of the fact that AE had not led any evidence from Mr Esposito in the Caveat removal proceeding to contradict the evidence he had given at the public examination.
Decision
In our opinion, in the unique circumstances of this case, the judge was right to refuse to order the removal of the Caveat.
The case is unique because there were two features that are usually absent in a case in which a caveator claims an interest under a constructive trust. The first feature was that there was a declaration, recognised by a court order, that a constructive trust was in existence prior to the lodgement of the impugned caveat. The second feature was that the sole director of the corporate registered proprietor of the properties the subject of the impugned caveat gave sworn evidence that funds which were the subject of the constructive trust were used to purchase the properties. The combination of those two features was sufficient to establish that there was a prima facie case that the beneficiary of the constructive trust had an equitable interest in the properties, in accordance with the principles of tracing.
The distinction between a mere equity and an equitable interest, upon which AE relied, is not relevant in the present case because by virtue of the Final Award and the Award recognition judgment, there was a constructive trust in favour of UDP from 31 January 2014. As beneficiary of the constructive trust, UDP had an equitable interest in the funds the subject of the trust. At the time UDP lodged the Caveat on 1 July 2017, it did not need a court order to make good the existence of a constructive trust because a constructive trust was deemed to be in existence as at that time by virtue of the Final Award and the Award recognition judgment.
It follows that cases such as Boensch, upon which AE relied, which deal with contingent rights that depend for their efficacy upon a future court order being made after the lodgement of the impugned caveat, are not apposite.
The fact that AE was not a party to the Final Award did not preclude UDP from relying on it to establish that there was a prima facie case that it had a caveatable interest. The Award recognition judgment had the effect of declaring as a matter of law that Esposito Holdings held the purchase price paid by UDP under the SSA on constructive trust for UDP from 31 January 2014. The conduct that gave rise to the constructive trust was committed by Mr Esposito. He was aware of all the facts that gave rise to the constructive trust. As he was the sole director of Esposito Holdings, his knowledge was attributable to that company. It was its knowledge of those facts, which operated on its conscience, that could give rise to an institutional constructive trust without the need for a court order and which enabled the arbitrator to declare the existence of a constructive trust from 31 January 2014. Importantly, as Mr Esposito was also the sole director of AE, his knowledge was attributable to AE.
The judge did not rely on the existence of the Final Award or the evidence adduced in the arbitration to determine on a final basis any contested factual or legal issue. Rather, he determined whether the Final Award and the evidence were sufficient to establish a prima facie case of the existence of a caveatable interest in the four properties. The judge was entitled to use the Final Award and the evidence for this purpose.
Section 91 of the Evidence Act did not preclude the judge from relying on the Final Award and the evidence adduced in the arbitration for this purpose. That is because they were not being used to prove the existence of any fact. Rather, they were considered as part of the primary material to enable the Court to assess whether there was sufficient evidence to enable UDP to establish a prima facie case of the existence of a caveatable interest in the Caveat removal proceeding.
We reject AE’s submission that the judge denied it procedural fairness by not giving it an opportunity to challenge any evidence upon which UDP relied. AE had the opportunity to file any evidence available to it in support of its contention that UDP did not have a caveatable interest in the four properties at the time it lodged the Caveat. In any event, the judge’s function in the Caveat removal proceeding was not to determine contested factual issues on a final basis. AE would be entitled to challenge the evidence relied upon by UDP at the hearing of UDP’s proposed proceeding.
For the above reasons, grounds 1–3 must be rejected.
In our opinion, grounds 4 and 5 must also be rejected.
Mr Esposito’s evidence at the public examination was direct evidence on oath, by the person who then controlled both Esposito Holdings and AE, as to the source of the funds used to purchase the four properties. That evidence was more than sufficient to establish a prima facie case that funds held by Esposito Holdings on constructive trust for UDP were used to purchase the four properties.
There is no substance to AE’s contention that Mr Esposito’s evidence lacked probative value because he was asked leading questions and he seemed willing to accede to most suggestions put to him. We have read the transcript of Mr Esposito’s evidence. Rather than acceding to most suggestions put to him, he frequently stated that he had no recollection of events and communications about which he was being questioned. In any event, AE had the opportunity to file in the Caveat removal proceeding an affidavit by Mr Esposito qualifying any of the evidence he gave at the public examination, but it did not do so.
We accept that the funds held by Esposito Holdings on trust for UDP could not have been used to contribute to the payment of the purchase price of the Kinane Street property to the vendor because that property was acquired prior to Esposito Holdings receiving those funds. However, Mr Esposito’s evidence that those funds were used to purchase that property does not lend itself to only one interpretation, namely that the funds contributed directly to the purchase price. Other interpretations are available, including that the funds were used to discharge or reduce a loan that contributed to the purchase price. The judge taking into account alternative interpretations of Mr Esposito’s evidence did not involve impermissible speculation. Rather, it involved consideration of whether the evidence was sufficient to establish a prima facie case that the funds contributed to AE’s ownership interest in the property.
Conclusion
Our discussion of the grounds of appeal demonstrates that they were devoid of merit and had no real prospect of success. Accordingly, the application for leave to appeal will be refused.
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