and Lotteries Pty Ltd (ACN 080 215 676) as trustee for the Lotteries Unit Trust v Sarah Volteas andSPIRO Volteas (as executors of the estate of Paul Volteas, deceased)
[2015] VSCA 226
•26 August 2015
SUPREME COURT OF VICTORIA
COURT OF APPEAL
| S APCI 2015 0009 | |
| LOTTERIES PTY LTD (ACN 080 215 676) as trustee for the Lotteries Unit Trust | Applicant |
| v | |
| SARAH VOLTEAS and SPIRO VOLTEAS (as executors of the estate of Paul Volteas, deceased) | Respondents |
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| JUDGES: | WHELAN, FERGUSON and McLEISH JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 27 July 2015 |
| DATE OF JUDGMENT: | 26 August 2015 |
| MEDIUM NEUTRAL CITATION: | [2015] VSCA 226 |
| JUDGMENT APPEALED FROM: | Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq) [2014] VSC 605 |
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EQUITY – Trusts – Applicant invested capital in business – Agreement that capital to be paid out of net proceeds of sale of business – Whether agreement to assign net proceeds of sale to applicant – Palette Shoes Pty Ltd (in liq) v Krohn (1937) 58 CLR 1 discussed – No intention to assign – Application for leave to appeal granted – Appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr M J Colbran QC with Mr J D S Barber | Comlaw Solicitors |
| For the Respondents | Mr P G Crennan | B2B Lawyers |
WHELAN JA:
This proceeding was issued by Lotteries Pty Ltd (‘Lotteries’) against Umbrella Enterprises Pty Ltd (‘Umbrella’) as the first defendant and Paul Volteas as the second defendant. The trial of the proceeding was referred to be determined by an Associate Judge pursuant to r 77.05 of the Supreme Court (General Civil Procedure) Rules 2005. Umbrella went into liquidation, and prior to judgment the proceeding as between Lotteries and Umbrella was settled. Paul Volteas died after giving evidence in the trial but before judgment, and his legal personal representatives were substituted as the second defendant. The Associate Judge’s reasons for decision were published on 4 December 2014.[1] On 16 December 2014 the Associate Judge made orders dismissing the proceeding against the second defendant (the legal personal representatives of Paul Volteas) and ordering Lotteries to pay the second defendant’s costs. Lotteries now seeks leave to appeal against these orders.
[1]Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq) [2014] VSC 605 (‘Reasons’).
Overview
Paul Volteas and George Pezaros began a bakery and café business approximately 15 years ago under the name ‘Degani’s’. Over the years they expanded that business. One of the ways in which they expanded was that they would identify a site for a new bakery and café business and establish and build up that business using finance from an investor. They would then sell the business giving the purchaser a licence to use the ‘Degani’s’ name. The dispute which is the subject of this proceeding concerns a bakery and café business which Mr Volteas and Mr Pezaros established at the World Trade Centre using finance provided under an arrangement made between Mr Volteas and an investor named Abraham Cohen. Lotteries is a company associated with Mr Cohen and his family.
This particular venture did not go as the participants had hoped. The bakery and café business was not successful. Mr Volteas and Mr Pezaros considered that one of the reasons for this was a failure by the landlord to live up to representations and promises made.
The terms of the arrangement made between Mr Volteas and Mr Cohen were controversial but there was no dispute that, in substance, it was agreed between them that Mr Volteas and Mr Pezaros would contribute their skill, knowledge and expertise in establishing and running the business, that Mr Cohen would contribute the necessary finance, and that, upon a sale of the business, Mr Cohen’s financial contribution would be paid out of the net proceeds of sale with the balance being divided equally between, what I will call for present purposes, Mr Cohen’s interests on the one hand and the interest of Mr Volteas and Mr Pezaros’ on the other.
Mr Cohen purported to establish a complex arrangement of trusts, and unit and share holdings, in relation to the venture. The Associate Judge found, in substance, that he had established these structures without any legal authority, and without the knowledge of Mr Volteas and Mr Pezaros. These findings are not challenged.
Umbrella was formed for the purpose of owning and conducting the bakery and café business at the World Trade Centre. Mr Cohen did not want to be a director of Umbrella himself. Mr Volteas and, until 1 September 2012, Mr Pezaros were the directors of Umbrella.
Umbrella conducted the business between approximately February 2009 and June 2011. The business was sold in May 2011 by Umbrella for a sum of $400,000. The purchase price was payable by weekly instalments of $1,500 with a final payment of the balance due in June 2016.
The financial contribution initially made pursuant to the arrangement which Mr Cohen and Mr Volteas had reached was a total of $573,500. Mr Cohen took a sum of $35,249.11 out of Umbrella’s bank account in December 2009 and took a further sum of $25,000 in 2010. After deducting the amounts taken by Mr Cohen, the net financial contribution to the venture was $513,250.89.
Mr Cohen was unhappy at the prospect of a sale of the business at a considerable loss. Before the sale, Lotteries demanded that Umbrella pay the financial contribution which had been made, claiming that it had advanced the money as a loan repayable on demand. Lotteries then issued this proceeding claiming repayment of the alleged loan. Claims were also made against Umbrella and Mr Volteas for what was alleged to be misleading and deceptive conduct.
Umbrella and Mr Volteas defended the proceeding. In particular, they denied that the financial contribution had ever been a loan repayable on demand. In their defence, they alleged a joint venture agreement made between Mr Cohen on the one hand and Mr Volteas on behalf of Umbrella on the other pursuant to which Mr Cohen would pay money to Umbrella which Umbrella would use to establish, conduct and then sell the business with the proceeds of sale then being shared. In their defence, they alleged that Mr Cohen was entitled to receive ‘his contribution before division of the net proceeds of sale’.
During 2011, the following events took place:
·Mr Volteas arranged for the $1,500 weekly payments by the purchaser to be deposited not into Umbrella’s bank account but into the account of another company of which he and Mr Pezaros were directors named Marvel Gem Pty Ltd (‘Marvel Gem’). Mr Volteas said he did this because he had discovered that Mr Cohen had taken sums out of Umbrella’s bank account without authority and that Mr Cohen still had a cheque book for Umbrella’s account.[2] Obligations of other companies associated with Mr Volteas and Mr Pezaros were met out of the Marvel Gem account.
·Umbrella and Mr Volteas incurred legal costs defending the claim brought by Lotteries, then based upon an alleged loan repayable on demand and misleading conduct.[3] The Associate Judge found that Umbrella and Mr Volteas were ‘bound’ to resist that claim.[4] He held the claim that there was a loan repayable on demand had been made ‘speciously’.[5]
·Umbrella took proceedings against the landlord at the Victorian Civil and Administrative Tribunal (‘VCAT’). Umbrella incurred legal costs in doing so. That proceeding was settled at the end of 2011. Umbrella had accepted a rent reduction in relation to the complaints made and the legal advice Umbrella received was that that circumstance undermined any claim for greater compensation.[6]
[2]Ibid [119].
[3]Ibid [123].
[4]Ibid [123].
[5]Ibid [244].
[6]Ibid [125].
On 30 November 2012, the Associate Judge ordered that the sale proceeds after that date be quarantined. It followed that the diversion of the proceeds of sale into the Marvel Gem account which commenced in the first half of 2011 concluded in November 2012.
By the time of the trial, the original claims made by Lotteries against Mr Volteas remained, but new claims were added. It was alleged that by reason of the matters pleaded in the defence (save and except for the fact that Lotteries rather than Mr Cohen was the relevant contracting party) Lotteries had a proprietary interest in ‘the proceeds of sale of the World Trade Centre bakery/café business after payment of expenses of sale’ as a chargee or pursuant to an express trust or a constructive trust. Further, it was alleged that the payments made under the sale contract of the business of $1,500 per week had not been accounted for by Umbrella to Lotteries ‘as chargee or trustee’. The particulars referred to the diversion of the payments to Marvel Gem. It was alleged that Mr Volteas had ‘knowingly assisted’ Umbrella’s ‘breach of trust or breach of equitable obligations as chargee’.[7] In Lotteries’ closing address it was submitted, for the first time, that the agreement to pay money from the proceeds of sale was an equitable assignment of future property giving rise to a trust relationship.
[7]Presumably ‘as chargee’ was meant to be ‘as chargor’.
After the trial, and while judgment was reserved, Umbrella’s liquidator settled with Lotteries, and judgment was entered by consent for the full amount claimed.[8]
[8]Reasons [28].
The application for leave to appeal has nine proposed grounds, which I will set out later. On the application for leave, the grounds were addressed in full on the basis that if leave were granted the Court should then determine the appeal itself.
As the matter was put on the hearing of the application, there are three issues to be determined. They are:
1.Upon the facts as found, did a trust exist in favour of Lotteries over the proceeds of sale, or part of the proceeds of sale? The claim to an entitlement as equitable chargee was abandoned.
2.If a trust did exist, was Mr Volteas liable for knowingly assisting Umbrella’s breach of trust by arranging for the payment of the $1,500 weekly instalments into the account of Marvel Gem?
3.If a trust did exist and if Mr Volteas was liable as an accessory for breach of trust, what relief ought to be granted?
The focus on the existence of a trust arises because the applicant is concerned to establish personal liability in Mr Volteas. The applicant has judgment against Umbrella (in liq) for the full amount advanced. The reason it wishes to establish a trust is so that it can advance a claim against Mr Volteas in relation to the diversion of the weekly instalments to Marvel Gem, based upon the principles set out in Barnes v Addy.[9]
[9](1874) LR 9 Ch App 244.
The Associate Judge’s reasons are lengthy. There were many issues raised in the proceeding before him and those issues changed over time. The focus of argument on the appeal was on the question whether, given the Associate Judge’s findings as to the agreement made between Mr Cohen and Mr Volteas (ignoring for the moment the corporate personalities), the Associate Judge ought to have found that a trust was created in accordance with the principles set out by the High Court in Palette Shoes Pty Ltd v Krohn (‘Palette Shoes’).[10] Given the focus of the application for leave to appeal, it is necessary to set out in some detail what his Honour did find in relation to the agreement made, and how he dealt with the contention that a trust had been created and then breached by Umbrella with Mr Volteas’ knowing assistance.
[10](1937) 58 CLR 1.
The Reasons
Both Mr Volteas and Mr Cohen gave evidence about what the arrangement between them was. The Associate Judge found Mr Cohen’s evidence to be unsatisfactory. He concluded in that regard:
I cannot be satisfied that for any controversial matters in this case, what he was telling me was truly what he and Volteas had discussed …[11]
The trial judge emphatically rejected the contention that the financial contribution made pursuant to the arrangement was a loan repayable on demand.[12] The Associate Judge found that it was an ‘investment … by way of capital and not by way of loan’.[13]
[11]Reasons [55].
[12]Ibid [61].
[13]Ibid [183]. See also [184].
The Associate Judge addressed the terms of the agreement in many places but it seems to me the clearest articulation of his findings as to what the agreement was appears in the following passage:
These are my findings about the agreement, having regard to my opening statements in this judgment about the competing versions:
(a)Cohen’s evidence leaves radical uncertainty about the agreement made between him and Volteas, as distinct from what Cohen merely assumed he was entitled to do;
(b)the salient elements of the agreement were as Volteas has described them in his evidence which was consonant with a typical way in which he and Pezaros undertook such ventures with investors;
(c)it was no part of that agreement that the funding, whether it be called a loan or otherwise, was repayable on demand; that was not discussed nor is it the legal outcome at law if there was no fixed date for repayment or recovery of the investment;
(d)any prospect of early repayment from the sale of some other café was not a matter of agreement, and as a commercial proposition it would go against the idea of joint risk under this joint venture if Cohen could be thereby replaced as financier;
(e)Cohen’s evidence that he was entitled before payment to 100% of the units to empower him to remove Umbrella Enterprises as trustee [and] install someone else was no part of the agreement and is manifestly hostile to the idea of a joint venture;
(f)the agreement was that repayment would be made when the café was sold and after payment of expenses, but there was no discussion or agreement about the nature or type of those expenses although it would have reasonably been assumed to mean at least the costs of sale and liabilities such as outstanding trading debts for such things were inevitable and necessary to be met;
(g)on close analysis, the issue is not what [is] meant by ‘expenses’. At the least there were costs of the sale transaction meeting that description. The expenditure in dispute concerns expenses in another context which the company and Volteas were free to spend unless it could be held that the proceeds were not property of the company because they belonged beneficially to the plaintiff, as lender, under some fiduciary relationship;
(h)in discussions, there is insufficient evidence to show that the plaintiff by name was identified as the investing party with whom legal relations would be created; it is more probable there was never mention of any party at all, as both sides were content to accept that the money was coming from some source within reach of the Cohen family in some way; that is, Volteas was indifferent to where the money was to come from, for under the agreement it was not as if he or Pezaros were somehow personally bound to repay in which case the lender might have had some significance;
(i)there was no agreement (because discussion did not condescend into that) of a unit trust and certainly no discussion let alone agreement that Cohen would own the business and hold 100% of the units until repayment of the advances made;
(j)the trust and confidence reposed in Cohen by Volteas to set up the structure would, even though not explicitly discussed, conceivably permit the creation of the unit trust as a means of giving effect to the 50/50 deal by a 50/50 ownership of units, for that would be faithful to the agreement to have 50/50, and if that was all there was to it, there would be no controversy; and
(k)Cohen reconfigured the arrangement under the trust deed to give him ownership and control of the business which was something inimical to the 50/50 joint venture as agreed.[14]
[14]Ibid [142].
In substance, the Associate Judge found that the agreement was what Mr Volteas had contended it to be, save that he did not accept Mr Volteas’ contention that the contracting party was Mr Cohen personally. He accepted that Lotteries was or became the investor which advanced the funds and which was entitled to the benefit of the arrangement made between Mr Cohen and Mr Volteas.[15]
[15]Ibid [144]–[159].
What Mr Volteas had said in his evidence, the ‘salient elements’ of which the Associate Judge accepted,[16] was set out in the following passage. After referring to Mr Cohen’s version of the agreement, the Associate Judge said:
[16]Ibid [142b].
The evidence from Volteas, in substance, countenanced no such imperious terms for a joint venture. This was Volteas’ account of the agreement concerning the venture to establish the café at 818 Bourke Street:
(a)‘That Abraham would put up the money and then when we sold the business we’d pay out whatever business expenses were. Obviously to the business, if there was any outstanding invoices etc. He would take back his investment and the profit would go 50/50’.
(b)Cohen said there would be no problem with that and ‘our job was just to make sure the shop was obviously built correctly and run the business. That was it.’
(c)There was no discussion of units and unit trusts.
(d)There was no discussion of a company called Lotteries Pty Ltd.
(e)There was no discussion of the terms of a loan being repayable on demand, and had there been, he would never have gone ahead because ‘I can’t be involved in a store and then have over my head any minute someone’s going to ring and they want the money back. You know what I mean, it just doesn’t make sense.’
(f)The money was to be put in by paying the builders on invoice and paying according to progress payments under the building contract.
(g)Cohen never identified any particular companies as advancing those funds as ‘Mr Cohen always insisted that the money was his, his father’s, his families, they don’t need any financing from anyone, they are very wealthy and they’re very astute investors’.
(h)Volteas was not at all concerned with knowing the precise identity of the person who was putting the money in from the Cohen family, and it was of no interest to him.
(i)There was discussion about who would set up the company and conduct the business and on that question ‘Abraham said, I’ll take care of that and I’ll use my accountant to set up the company. There wasn’t any argument from us, he was investing the money, we had no issue with that at all.’
(j)Volteas had left the setting up of the bank account to Cohen; he and Pezaros would run the day to day operation; the money would go into the account and the aim was always to sell the business.
(k)There was discussion about who would be directors of the company to run the business, and Volteas and Pezaros agreed they would be the directors.
(l)The company was to be set up and the shares would be 50/50 ‘just normal’, that is, 50% shareholding and 50% profits.
(m)Ordinarily, Degani’s prefer to set up the shelf company and appoint all the directors and attend to the corporate matters and do that through their own accountants ‘But if the investor wants to do it through their accountants we have – we don’t have an issue with that.’
(n)There was never a discussion about a unit trust, ‘it was just a company set up. That’s all it was. Just easy. Just going to be a basic one company.’[17]
[17]Ibid [85] (citations omitted).
The focus on ‘expenses’ arose because Lotteries contended certain expenses, in particular the legal costs incurred in defending this proceeding, were not properly to be deducted from the proceeds of sale.
At many points in his judgment the Associate Judge refers to the vague nature of the arrangement which had been made.[18] Of particular significance in that context was the absence of discussion or agreement as to the expenses which were to be met from the proceeds of sale, and which had, what I might term, ‘priority’ over the return of Lotteries’ financial contribution. The Associate Judge suggested that the whole question of ‘expenses’ was ‘overtaken by the events that occurred’.[19] He concluded:
My view of the situation that the parties obtained is this: proceeds of sale ‘less expenses’ assumes no other problems or liabilities such as the many that arose here. A different or supervening legal state of affairs arose.The lawfulness of the actual application of the weekly proceeds by Volteas then comes to be considered by reference to the position he was in as director, his duties as director to the company, and the predicament of the company being sued by a joint venturer for what was asserted (speciously as I have found) to be a large debt payable on demand.[20]
[18]See, eg, ibid [1], [51], [58] and [137].
[19]Ibid [242].
[20]Ibid [244] (emphasis in original).
Before the Associate Judge the claim for some form of proprietary interest in the proceeds of sale was put on many different bases. For present purposes, it is only necessary to consider the claim based upon Palette Shoes. That is the only basis contended for on this application. The Associate Judge rejected this claim on the basis that there was nothing in the agreement which could be characterised as an intention to effect an assignment of the proceeds.[21] When addressing the issue of accessorial liability, the Associate Judge also found that if there was a trust over the proceeds of sale ‘it could only arise or attach to the proceeds after the payment of expenses (whatever that meant or whatever they were) and … after the discharge of liabilities’.[22]
[21]Ibid [234]–[236].
[22]Ibid [239].
In relation to the diversion issue, the Associate Judge accepted Mr Volteas’ explanation,[23] found that there was no breach of fiduciary duty[24] and that, even if there was, Mr Volteas had accounted for the diverted funds and had made good any loss to the trust estate.[25]
[23]Ibid [247].
[24]Ibid [244]–[254].
[25]Ibid [255]–[266].
Characterisation of the arrangement as found by the Associate Judge
It seems to me that the arrangement as found by the Associate Judge reflected fairly closely the contractual arrangements often existing in relation to preference shares under which preference shareholders receive back the capital they have subscribed in a winding up (or on a return of capital) before ordinary shareholders.[26]
[26]See, eg, Scottish Insurance Corp Ltd v Wilsons & Clyde Coal Co Ltd [1949] AC 462, 466; Pell v Marshall (1984) 8 ACLR 1015, 1018; LexisNexis Australia, Halsbury’s Laws of Australia (at 22 May 2012) 120 Corporations, ‘III Capital and Membership’ [120–5180]; Australian Securities Exchange, ASX Listing Rules (at 14 April 2014) LR 6.6.
Just as would be the position in relation to such preference shareholders, the creditors are paid first, but capital is returned to the preferred equity holders (the Cohen interests) before any return to other equity holders (the Volteas/Pezaros interests). On this analogy, the question of what expenses are paid prior to the capital return is judged by reference to what are the proper obligations of the company; and, as the Associate Judge said, the directors’ conduct in incurring and meeting obligations to creditors is to be judged by reference to their duties to the company as directors.
Was there a trust? Applicable legal principles.
The principal authority upon which the trust claim was advanced on the application for leave to appeal was the High Court decision in Palette Shoes.[27]
[27](1937) 58 CLR 1.
Palette Shoes concerned a detailed written agreement between a boot and shoe manufacturer and two persons named Krohn and Nodrum under which the manufacturer agreed to sell to Krohn and Nodrum, who were referred to as ‘the purchasers’, all the boots and shoes it manufactured. The agreement then provided that the manufacturer would, on behalf of the purchasers, obtain orders from, and sell the boots and shoes to, customers. Provisions were made under which the manufacturer was to notify the purchasers of invoiced sales and of returns and credits. The agreement provided that the purchasers were to pay to the manufacturer the invoiced amounts as so notified less a discount of five-and-a-half per cent. The agreement then provided:
The manufacturer shall within forty-eight hours after the receipt thereof pay all monies received by it on account of such boots and shoes supplied by it as aforesaid to the credit of such account and at such bank as the purchasers may from time to time appoint ….
The agreement then provided that the manufacturer had to repay amounts referable to bad debts and returns, and the manufacturer guaranteed the debts of the customers.
The manufacturer went into liquidation. The liquidator sought to avoid the agreement with Krohn and Nodrum on the basis that it constituted either an unregistered bill of sale or an unregistered assignment of book debts. The High Court rejected the liquidator’s contentions and in doing so considered the character of the interest which Krohn and Nodrum had in the proceeds of sale, and the means by which that interest had been created. It is that aspect of the case which is relevant to this application.
The judgment relied upon by Lotteries is that of Dixon J (as he then was). Dixon J began by referring to the terms of the ‘carefully drawn agreement’.[28] He observed that the agreement had been framed in such a way as to place the manufacturer, when it sold its products and received the proceeds, in the position of an agent acting for and on behalf of Krohn and Nodrum as unnamed principals.[29] He observed that the payments Krohn and Nodrum made did not take the form of loans to the company.[30]
[28]Ibid 19.
[29]Ibid.
[30]Ibid.
The applicant relied upon two passages from the judgment of Dixon J which, it was submitted, set out principles that are applicable to the position of Lotteries in relation to the proceeds of sale of the bakery and café business. The first passage relied upon was the following:
An assignment of future debts obtains its efficacy from the doctrines of equity. In Tailby v Official Receiver Lord Macnaghten stated the principles, which he described as well known. ‘It has long been settled,’ he said, ‘that future property, possibilities and expectancies are assignable in equity for value. The mode or form of assignment is absolutely immaterial provided the intention of the parties is clear. To effectuate the intention an assignment for value, in terms present and immediate, has always been regarded in equity as a contract binding on the conscience of the assignor and so binding on the subject matter of the contract when it comes into existence, if it is in such a nature and so described as to be capable of being ascertained and identified.’ He expounds, explains and exemplifies this statement in a way that has made his speech the chief source of guidance upon the subject. In a later passage, he says: ‘Long before Holroyd v Marshall was determined it was well settled that an assignment of future property for value operates in equity by way of agreement, binding the conscience of the assignor, and so binding the property from the moment when the contract becomes capable of being performed, on the principle that equity considers as done that which ought to be done, and in accordance with the maxim which Lord Thurlow said he took to be universal, ‘that whenever persons agree concerning any particular subject that, in a court of equity, as against the party himself, and any claiming under him, voluntary or with notice, raises a trust’: Legard v Hodges.’[31]
[31]Ibid 26 (citations omitted).
Whilst not part of the passage quoted and relied upon by the applicant, Dixon J went on to quote a further passage from Lord Macnaghten. He said:
Again:– ‘The truth is that cases of equitable assignment or specific lien, where the consideration has passed, depend on the real meaning of the agreement between the parties. The difficulty, generally speaking, is to ascertain the true scope and effect of the agreement. When that is ascertained you have only to apply the principle that equity considers that done which ought to be done if that principle is applicable under the circumstances of the case.’[32]
[32]Ibid (citation omitted).
The second passage relied upon by the applicant follows shortly after those I have just quoted. Dixon J said:
As the subject to be made over does not exist, the matter primarily rests in contract. Because value has been given on the one side, the conscience of the other party is bound when the subject comes into existence, that is, when, as is generally the case the legal property vests in him. Because his conscience is bound in respect of a subject property, equity fastens upon the property itself and makes him a trustee of the legal rights or ownership for the assignee. But, although the matter rests primarily in contract, the prospective right in property which the assignee obtains ‘is a higher right than the right to have specific performance of a contract’, and it may survive the assignor’s bankruptcy because it attaches without more eo instanti when the property arises and gives the assignee an equitable interest therein (In Re Lind; Industrials Finance Syndicate Ltd v Lind). In that case Swinfen Eady LJ describes the effect of the decisions thus:–‘It is clear from these authorities that an assignment for value of future property actually binds the property itself directly it is acquired — automatically on the happening of the event, and without any further act on the part of the assignor — and does not merely rest in, and amount to, a right in contract, giving rise to an action. The assignor, having received the consideration, becomes in equity, on the happening of the event, trustee for the assignee of the property devolving upon or acquired by him, and which he had previously sold and been paid for.’[33]
[33]Ibid 27 (citations omitted). This and the preceding reasoning of Dixon J has subsequently been adopted: see, eg, AssociatedAlloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588, 603 [28]; Booth v Federal Commissioner of Taxation (1987) 164 CLR 159, 165–6.
I will briefly interpose how the other judges in Palette Shoes characterised the interests created by the contractual arrangements. Latham CJ held that the money which the manufacturer received from customers was Krohn and Nodrum’s money.[34] He said that the payments made were payments for their goods and that it was ‘evident’ that the monies were required to be kept separate from the monies of the manufacturer.[35] Rich J said that once the ‘discount operation’ took place, the proceeds of the debt discounted became in equity the property of Krohn and Nodrum.[36] McTiernan J found that the provisions of the agreement meant that the manufacturer held the proceeds of sale as trustee on the footing that they were the proceeds of Krohn and Nodrum’s property sold by the manufacturer as their agent.[37]
[34]Ibid 15.
[35]Ibid 14.
[36]Ibid 17–18.
[37]Ibid 35.
Dixon J’s conclusion as to the application of the principles he had set out to the particular case was the following:
Immediately the sale is included in a debit note which the company [the manufacturer] renders to the respondents [the purchasers] and they pay the discounted amount to the company, then they become beneficially entitled to the debt owing by the customer. The company becomes trustee for them of its right to recover the debt and when it receives a payment is bound to pay that specific money to the respondents’ credit at their bank. The act of discounting the book debt operates, in virtue of the executory agreement, to effect a transfer of the beneficial interest in the book debt.[38]
[38]Ibid 32.
Before addressing the other authorities upon which the applicant relied, the principles expounded by Dixon J in Palette Shoes might be summarised for present purposes as follows.
1.An assignment for value of future property, including future proceeds of the sale, will bind the property itself once that property is acquired by the assignor. The assignor will then be a trustee of that property, or those proceeds, for the assignee.
2.The issue of whether such an assignment has taken place is to be determined by reference to the intention of the parties and the real meaning of the contract which they made.
Other authorities relied upon by the applicant were Holroyd v Marshall,[39] Foxgold Pty Ltd v Paterson (No 2),[40] a decision of the District Court of South Australia, Taleb v Director of Public Prosecutions,[41] a decision of the Trial Division of this Court under the Confiscation Act 1997 (Vic), and Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd.[42]
[39][1862] 10 HLC 191; 11 ER 999 (‘Holroyd’).
[40][2005] SADC 68 (‘Foxgold’).
[41][2014] VSC 285 (‘Taleb’).
[42](2000) 202 CLR 588 (‘Associated Alloys’).
It does not seem to me that Holroyd relevantly adds to, or assists in understanding, the principles set out by Dixon J in Palette Shoes. The respondent to the application relied on passages in Holroyd which emphasised that these principles could only be applicable to a contract capable of being specifically performed.[43]
[43][1862] 10 HLC 191, 209, 212; 11 ER 999, 1006–1007.
In each of Taleb and Foxgold there was a finding that a contract had been made between a debtor and a creditor to the effect that the particular debt would be paid from a specified fund when received, and it was held in each case that that had created an equitable interest in the creditor in that fund. In Foxglove, this conclusion was reached by applying the principles set out by Dixon J in Palette Shoes. In each case, the specific finding made as to what had been agreed determined the issue. In Foxgold, the judge found that there had been an intention to assign an interest in the proceeds of sale which were in issue in that case.[44] In Taleb, the judge found that there had been a common intention that when the proceeds in issue were received the claimant ‘would have a beneficial interest’ in those proceeds.[45]
[44][2005] SADC 68, [29].
[45][2014] VSC 285, [71].
Associated Alloys was a case about a retention of title clause. The particular clause was a sophisticated form of such clauses which sought to not only retain a proprietary interest in the unpaid for goods, but also to preserve that interest in the ‘proceeds’ of manufacture in which the goods supplied were used. The passage relied upon by the applicant was one in which the majority explained that it was no objection to the effective creation of a trust that the property to be the subject of that trust was identified as ‘a proportion of the proceeds received by the buyer; a proportion referable to monies from time to time due and owing but unpaid by the buyer to the seller.’[46] The applicant relied upon this passage so as to meet a submission made by the respondent here, and made also in the Associated Alloys case, that there could be no trust because it was not clear what property was the subject of the trust.
[46](2000) 202 CLR 588, 604 [30].
Was there a trust? Relevant proposed grounds of appeal and submissions made
The proposed grounds of appeal concerning the existence of a trust are the following:
1. The learned Trial Judge erred in finding that there was:
(a) no assignment of; or
(b) no charge over,
the net proceeds of sale of the World Trade Centre bakery/café business after payment of expenses (the ‘net proceeds of sale’) because they were subject to unidentified and unqualified liabilities, with the result that there was no specific fund capable of being so charged. ([225], [234–6] of the Judgment).
2.The learned Trial Judge ought to have found that the relevant expenses of sale and/or of operating the business were readily capable of calculation, or the taking of accounts so that there was no uncertainty or frustration of the loan agreement (Judgment [239–244]).
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6.The learned Trial Judge erred in failing to adjudicate the Plaintiff’s claim based upon an equitable assignment or charge in favour of the Plaintiff over the net proceeds of sale as a source of fiduciary duty or duty as trustee ([299] of the Judgment).
In oral submissions, counsel for the applicant indicated that the contention that there was an equitable charge was no longer made and that the basis for the claim that there was a trust is the passages I have previously quoted from Dixon J’s judgment in Palette Shoes, supported by the other authorities to which I have referred.
It was submitted on behalf of the applicant that the Associate Judge had found that an agreement had been made in relation to the proceeds of sale of the business and that that was sufficient to establish the existence of a trust in accordance with the principles in Palette Shoes. It was submitted that the expenses, which were to be deducted so as to identify the ‘net proceeds of sale’ over which the trust existed, were capable of being identified and quantified and that, if necessary, an accounting could have been ordered, and should now be ordered, to identify and quantify what proper expenses might be deducted. It was submitted that Umbrella was the trustee of the net proceeds in accordance with the agreement which had been made between Mr Cohen and Mr Volteas.
The respondent submitted that there was a fatal flaw in the submissions put in support of the existence of the trust. That was that, on the case as put, no trust would exist until there existed ‘net proceeds’. On any view, it was submitted, that had never happened. Indeed, it was submitted, the applicant’s own conduct in suing Umbrella for what was ‘speciously’ alleged to have been a loan repayable on demand had resulted in legal costs being incurred that had meant that at no time had a fund which could properly be described as the ‘net proceeds of sale’ ever existed. In any event, it was submitted, the principles in Palette Shoes did not apply to this case because Umbrella, said to be the trustee, was not a party to the relevant contract and was not even in existence at the time the agreement between Mr Cohen and Mr Volteas was made.
The respondent submitted that what had been relevantly agreed was that, after a sale of the business, the ‘first call’ would be meeting Umbrella’s own obligations, the ‘second call’ would be the repayment of Mr Cohen’s capital, and the ‘third and fourth calls’ would be an equal split of any balance between the joint venturers. There was no agreed assignment of the proceeds of sale or any part of them.
In reply, it was submitted on behalf of the applicant that Mr Volteas in his defence had pleaded that the agreement which he made had been made on behalf of Umbrella and that no contention had previously been advanced to the effect that there could be no trust because Umbrella was not in existence at the time the relevant agreement was made. Clearly, it was submitted, Umbrella had adopted the agreement.
Was there a trust? Analysis and conclusion
The applicant’s contention that Mr Volteas had pleaded that the agreement he had made with Mr Cohen was made on behalf of Umbrella is correct. I accordingly reject the submissions made to the effect that Umbrella was not a party to the relevant agreement.
In my view, the Associate Judge’s analysis of the position is correct. There was no trust created over the net proceeds of sale.
The fundamental basis of the principles explained in Palette Shoes is an agreement to assign future property. In Palette Shoes there was a written contract which expressly constituted that very thing. The contrast with the position here could hardly be more stark. All that can really be said to have been agreed here is that after the business had been established, conducted and sold, and after all the creditors of the business had been paid, the capital of the Cohen interests, being Lotteries, would be returned before the other equity participants, Messrs Volteas and Pezaros, shared in any return. To find an assignment of future property here would be to construct an agreement that the parties simply never made.
This case is entirely different from Palette Shoes, and, on the facts, it is also different from Taleb and Foxgold.
In Associated Alloys there was a detailed written contract, as there was in Palette Shoes. A contract might assign a specified part of the future property, ascertainable by reference to an accounting of some kind. The issue is not whether that could be agreed but whether it was agreed. In Associated Alloys it was. Here it was not.
The uncertainty as to what was meant by expenses is unsurprising, and it fortifies the Associate Judge’s analysis. All of Umbrella’s obligations were to be met before the equity participants received a return. As the Associate Judge said, the issue of whether expenses had been properly incurred and met was to be judged by reference to the duties of Umbrella’s directors.
Further, as explained below, the need to continue making payments even as the proceeds of sale were still being received indicated the very real difficulty in identifying the ‘net proceeds of sale’ said to be the subject of a trust.
The applicant had a sufficient argument to warrant leave to appeal on these grounds (that is, the appeal had a real prospect of success), but the appeal should be dismissed.
Other proposed grounds of appeal
The remaining grounds of appeal predominantly depend upon a finding that there was a trust. The other proposed grounds of appeal are the following:
3.The learned Trial Judge erred in characterising the ‘expenses’ of Umbrella Enterprises extending to the costs of it defending these proceedings [242]. The learned Trial Judge ought to have confined such expenses to:
(a)the operating expenses of the business prior to the date of sale; and
(b)the selling expenses.
4.The learned Trial Judge erred in applying a test for Barnes v Addy liability (second limb) that the conduct of the Second Defendant must be ‘fraudulent and dishonest’ (Judgment [245]).
5.The learned Trial Judge erred in finding that the first defendant’s deliberate failure to pay over to the Appellant (Plaintiff) the net proceeds of sale despite the trust or charge did not amount to a breach of trust on the part of the First Defendant which would then support a finding of accessorial liability (Barnes v Addy) against the second defendant.
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7.The learned Trial Judge erred in finding that the First Defendant was not in breach of trust or fiduciary duty by:
(a)diverting or mixing the net proceeds including those of the Marvel Gem Pty Ltd (‘Marvel Gem’);
(b)using such monies to satisfy hire purchase obligations of related and/or associated entities of the Defendants, such as Degani Pty Ltd, Degani@Docklands Pty Ltd, or Team Degani Pty Ltd.
8.The learned Trial Judge erred in holding that the second defendant did not knowingly assist the First Defendant in its breach of trust, by the conscious and deliberate diversion of the net proceeds of sale to the Marvel Gem account, from which withdrawals were made for purposes unrelated to the Bakery Café business.
9.The learned Trial Judge erred in finding that there was no loss to the trust estate ([255] of the Judgment).
It became clear in the course of submissions that the complaint in relation to the expenses was focused upon the costs of these proceedings. There was also complaint as to an Australian Taxation Office account that was paid and in relation to the costs of the VCAT proceeding against the landlord. The applicant, however, foreshadowed that it would not be seeking any order for a specific sum of money but rather an order for the taking of accounts. Apart from submissions directed at the proposition that no trustee should ever undertake or defend legal proceedings without first obtaining a direction from the Court, no submissions were directed toward establishing what expenses were or were not proper. Considerable attention was devoted to the issue of Mr Volteas’ conduct in diverting the instalments paid by the purchaser. The instalments were diverted by him into the account of Marvel Gem and payments were then made out of that account to meet the obligations of related parties. The Associate Judge accepted Mr Volteas’ explanation and found that Mr Volteas had accounted for the funds diverted in any event.[47] These conclusions were the subject of criticism in the course of submissions on behalf of the applicant.
[47]Reasons [247] and [265]–[266].
It is unnecessary to deal with these matters given my conclusion that there was no trust. But even addressing these contentions on the basis that I am wrong, and that there was a trust, is not straightforward.
The applicant’s case as pleaded was that there was a trust over ‘the proceeds of sale … after payment of expenses of sale’. At the trial, Mr Cohen readily accepted that Umbrella was entitled to use the sale proceeds to meet debts and obligations it had incurred in conducting the business.[48] Proposed ground of appeal 1 complains of a failure to find an assignment of ‘the net proceeds of sale … after payment of expenses’, and proposed ground 3 complains as to the Associate Judge’s characterisation of ‘expenses’ as including the costs of defending this proceeding when those expenses ought to have been confined to operating expenses and selling expenses. Proposed grounds 4, 5, 7, 8 and 9 complain as to the findings concerning
the ambit of ‘net proceeds of sale’, Umbrella’s alleged breach of trust in relation to the ‘net proceeds of sale’, and Mr Volteas’ assistance in that breach.
[48]Ibid [22].
Whilst it is not difficult to articulate complaints as to Mr Volteas’ diversion of the weekly instalments to Marvel Gem, it is very difficult to analyse those complaints in terms of the trust which is contended for. No claim was made by Umbrella (or its liquidator) against Mr Volteas for breach of director’s duty and no claim was made against Mr Volteas himself for breach of any fiduciary duty he allegedly owed to Lotteries or Mr Cohen as a joint venturer or on any other basis. The only claim made is that Umbrella was a trustee and that Mr Volteas knowingly assisted in a breach of that trust. But of what was Umbrella the trustee? It cannot have been the $1,500 instalments because on any view it was only trustee of the ‘net’ proceeds of sale.
This case is not like Associated Alloys where the proprietary interest created by the agreement the parties made subsisted, in different forms, throughout all the relevant transactions. Here, Lotteries’ proprietary interest, if there was one, only arose upon there being ‘net proceeds of sale’.
All of this reveals, in my view, that the applicant’s postulated trust is untenable. It is neither useful, nor possible, to analyse the alleged breaches because any attempt to do so is immediately confronted by the flaws in the case for the trust itself. It follows that I should not be taken to be expressing any opinion regarding the Associate Judge’s conclusions as to the legal principles to be applied to the Barnes v Addy claim or as to Mr Volteas’ explanation for his conduct.
I would grant leave to appeal on the other proposed grounds, as it cannot be said that their prospects were fanciful if a trust had been found, but I would dismiss the appeal.
FERGUSON JA:
I agree with Whelan JA.
McLEISH JA:
I agree, for the reasons given by Whelan JA, that leave to appeal should be granted and the appeal should be dismissed.
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