Ashrafinia v Ashrafinia
[2013] NSWSC 1442
•30 September 2013
Supreme Court
New South Wales
- Amendment notes
Medium Neutral Citation: Amir Ashrafinia v Mohammad Reza Ashrafinia; Parvaneh Karami Fakhrabadi v Mohammad Reza Ashrafinia [2013] NSWSC 1442 Hearing dates: 25, 26, 27, 28, 29 June & 2, 3, 4, 5, 6, 9 & 10 July, 8 August 2012, 14 June 2013 Decision date: 30 September 2013 Jurisdiction: Equity Division Before: Slattery J Decision: Plaintiff unsuccessful in the 2008 proceedings in establishing a joint venture for property development. In the 2011 proceedings the plaintiff establishes breaches of trust against Amir, Mohammad and Abbas and the Court will order removal of the Ashrafi Persian Trading Company Pty Ltd as Trustee of the Ashrafinia Family Investment Trust. Orders and directions made for further inquiries, for submissions as to costs, for securing payment to the Court expert, and for the appointment of a suitable new trustee.
Catchwords: TRUSTS - discretionary family trust controlled by a corporate trustee - trust funds generated from a motel business run by the trustee - what are the assets of the trust - whether trust for the benefit of one of the brothers only or of the whole family - whether trust funds misapplied by family members who controlled the corporate trustee - several properties held by two brothers, directors of the trustee, in their own names were purchased and then refinanced through loans taken out by the trust - whether the brothers hold the properties on behalf of the trust - whether a food importing business run by a sister and its profits are held on constructive trust for the trust - funds paid from trust accounts to one brother and to companies controlled by him - whether some of these payments were remuneration for services rendered to the trust, loans from the trust or trust distributions - no contemporaneous trust accounts evidencing remuneration for services, loans or distributions.
TRUSTS - breach of trust - Barnes v Addy knowing receipt or knowing assistance claims against the directors of the corporate trustee and third parties - whether Barnes v Addy knowledge requirements satisfied.
CORPORATIONS - breach of directors' duties by the directors of the corporate -trustee - whether directors acted honestly and reasonably and should be excused from personal liability for breaches of duties under Corporations Act 2001 s 1318.
PROCEDURE - limitation period - whether limitation period in relation to the pleaded breaches of trust expired - when did the relevant limitation period start running - whether limitation period in relation to the claim for constructive trust over the food business expired or whether the doctrine of laches operates.
CONTRACTS - two brothers, directors of the corporate trustee, bought several properties as co-owners - whether the properties purchased with trust funds - whether the properties owned by the brothers beneficially or on behalf of the trust - whether the brothers entered into a joint venture agreement in relation to the properties - whether one of the brothers misapplied proceeds from the joint venture properties to his own benefit and should be required to refund the misapplied amounts.Legislation Cited: Conveyancing Act 1919 s 66G
Corporations Act 2001 (Cth) s 1318, s 1318(1)
Limitation Act 1969 s 48
Uniform Civil Procedure Rules 2005 r 31.37Cases Cited: Barnes v Addy (1874) LR 9 Ch App 244
Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256
Bell Group Ltd v Westpac Banking Corporation (No. 9) [2008] WASC 239
Briginshaw v Briginshaw (1938) 60 CLR 336
Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd (2011) 277 ALR 189 [2011] NSWCA 109
Cain v Cain (2007) 13 BPR 24, 963
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373
Elders Trustee & Executor Co Ltd v Higgins (1963) 113 CLR 426
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 (2007) 230 CLR 89
Federal Commissioner of Taxation v Clark (1927) 40 CLR 246
Gerard Cassegrain & Co Pty Ltd v Cassegrain [2011] NSWSC 1156
Hall v Poolman (2007) 65 ACSR 123; [2007] NSWSC 1330
Investa Properties Ltd v Westpac Property Funds Management Ltd (2001) 187 ALR 462
Johnstone v Johnstone (1902) 2 SR (NSW) Eq 90
Jones v Stores [1999] 1 WLR 1739
Lindsay Petroleum Co v Farewell & Kemp (1874) LR 5 PC 221
McLean v Burns Philp Trustee Pty Ltd (1985) 2 NSWLR 623
Meredith v Davis (1933) SR (NSW) 334
National Trustees Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373
Hourigan v Trustees Executors and Agency Co Ltd (1934) 51 CLR 619
Orr v Ford (1989) 167 CLR 316
Salvation Army (South Australia Property Trust) v Graham Rundle [2008] NSWCA 347
Tempest v Lord Camoys (1882) 21 Ch D 571
Walker v Melham [2007] NSWSC 264
Walters v Scarborough [2011] NSWSC 1380
Warman International Ltd v Dwyer (1995) 182 CLR 544
Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497Texts Cited: Jacobs Law of Trusts in Australia, 7th edition, J.D. Heydon and M.J Leeming, Lexis Nexis, 2006
Scott on Trusts, 4th edition, Little Brown and Company Boston, 1987Category: Principal judgment Parties: First Plaintiff:- Amir Hossain Ashrafinia
First Plaintiff:- Parvaneh Karami Fakhrabadi First Defendant:- Mohammad Reza Ashrafinia
First Defendant:- Mohammad Reza Ashrafinia;
Second Defendant:- Ashrafi Persian Trading Company Pty Limited
Second Defendant:- Amir Hossain Ashrafinia
Third Defendant:- Abbas Ashrafinia
Fourth Defendant:- Ashrafi Persian Trading Company Pty LimitedRepresentation: Counsel:
Mr D. Jenkins (for Mohammad Reza Ashrafinia)
Mr M.Sneddon; T. Fishburn (for Amir Hossain Ashrafinia)
Mr G. McGrath SC (for Parvaneh Karami Fakhrabadi)
Mr D. Currie (for Azadeh Ashrafinia)
Solicitors:
File Number(s): 2008/281524; 2011/166674 Publication restriction: No
Judgment
In these proceedings five members of the one family contest the beneficial ownership of three assets - a residential house in Marsfield, a commercial property in Darlinghurst and a food importing business. Their competing claims to these assets arise out of 20 years of intra-family disputes.
Abbas Ashrafinia ("Abbas") and Parvaneh Karami Fakrabadi ("Karami") were married in Iran in 1969 and were divorced there under Islamic law in 1998. Neither has sought divorce under the Family Law Act 1975 (Cth). They have five children, three of whom are parties to these proceedings - Mohammad Reza Ashrafinia ("Mohammad"), Amir Hossain Ashrafinia ("Amir") and Azadeh Ashrafinia ("Azadeh"). The other two - Leila and Mojtaba (Moji) did not give evidence. For convenience, and I hope with no disrespect to any of the parties, I will call them by their first names in this judgment, as they were described throughout the proceedings.
The Ashrafinia family successfully operated a motel business in leased premises in Roslyn Gardens Elizabeth Bay from the mid-1980s until February 2009. The family motel business was initially operated through Ashrafi Motels Pty Limited ("Motels"), which was controlled until the mid-1990s by both Abbas and Karami. In a March 1995 transaction, which is not in contest in the proceedings, Motels transferred the motel business to Ashrafi Persian Trading Company Pty Limited ("Trading"), a company said at different times to be controlled by Abbas, by Mohammad, or by Amir. The control of Trading and the beneficial ownership of its assets and income are issues in these proceedings. Trading is the trustee of the Ashrafinia Family Investment Trust ("the Trust"), a discretionary trust constituted by deed in August 1995.
There are two sets of proceedings before the Court: one commenced in 2008, ("the 2008 proceedings") and the other in 2011 ("the 2011 proceedings"). In these two proceedings Mr M. Sneddon and Ms T. Fishburn of counsel appear for Amir, Mr G. McGrath SC for Karami, Mr D. Jenkins for Mohammad, and Mr D. Currie for Azadeh.
The 2008 Proceedings
In the 2008 proceedings Amir as plaintiff sues his brother Mohammad and Trading, as trustee of the Trust. Amir alleges in the 2008 proceedings: that Mohammad and Amir made a joint venture agreement in about 1999 assuming they would continue to manage Trading's motel business; that Mohammad and Amir would acquire equally the freehold of the leased property on which the motel business was conducted and that over time they would redevelop this freehold either themselves or through a company they controlled; and, that together, using borrowed funds, they would also acquire other real estate for improvement and sale, to generate further joint venture funds, which in turn would assist in funding their acquisition and development of the freehold of the motel site.
The fundamentals of the property transactions in the 2008 proceedings are not in serious dispute. Two of those properties remained in Mohammad and Amir's hands at the time of trial. One is a residential property in Brunton Place Marsfield ("the Marsfield property"). Amir and Mohammad are the registered proprietors as joint tenants of the Marsfield property in which Karami now lives. The other is a residential and commercial property in Victoria Street Darlinghurst ("the Oporto property") that Amir and Mohammad hold as tenants-in-common. Yet a third alleged joint venture property, an apartment in Roslyn Gardens Elizabeth Bay, known in these proceedings as "Unit 17" was also purchased in Amir and Mohammad's names as joint tenants, but has since been sold.
Amir contends in the 2008 proceedings: that these various items of real estate are property of the joint venture formed through the common intention of himself and Mohammad; that Mohammad breached his fiduciary duty as a joint venturer with Amir by misapplying joint venture funds from the sale of joint venture properties, by encumbering the Marsfield and Oporto properties, and by diverting the sale and mortgage proceeds from dealings with these properties to Mohammad's own individual benefit; and, that Mohammad now holds his legal interests in the Marsfield and Oporto properties on trust for Amir or holds them charged with an obligation to refund the allegedly misapplied joint venture funds.
Mohammad says there was no joint venture agreement between himself and Amir. Moreover, Mohammad says that if there was a joint venture agreement as Amir alleges, that because Amir was also a director of Trading before during and after the alleged joint venture agreement, such a joint venture would have involved a deliberate scheme for Amir to misuse his position as a director of Trading to appropriate the Trust's assets and opportunities. Mohammad says that he and Amir are the legal and beneficial owners of the Marsfield property and of the formerly held Unit 17, and that they both hold the Oporto property on behalf of the Trust.
Karami is not a party to the 2008 proceedings. But her contention is that Amir's allegations in the 2008 proceedings falsely assume that Amir and Mohammad were dealing with their own money in the alleged joint venture. Karami says they were really dealing with property of the Trust, whatever their joint venture activities were. She says that Amir and Mohammad had no demonstrable sources of funds of their own between late 1999 and mid-2001 and their mutual dealings with the Marsfield and Oporto properties and Unit 17 were not on their own account but were dealings with Trust assets. Amir and Mohammad's 1999-2001 alleged use of Trust funds lies beyond the scope of the 2011 proceedings, which deal only with breaches of trust going back until 21 May 2005, six years before their commencement. Thus, Karami does not have a particular interest in the 2008 proceedings beyond contending that they are based on a misconception on Amir's part.
But in the 2008 proceedings there is a curious consensus between Mohammad and Karami about the assets of the Trust. Mother and eldest son are at issue about almost everything in the 2011 proceedings. But in the 2008 proceedings Karami accepts the correctness of Mohammad's position that the Oporto property was held on behalf of the Trust. Because at least one or other of Amir and Mohammad allege in the 2008 proceedings that these three properties are not properties of the Trust, it is necessary in these reasons to determine whether or not they are Trust properties.
After March 2012 Trading was not represented in either the 2008 or the 2011 proceedings. Notice was given to Trading of all the allegations in the 2008 and the 2011 proceedings before its representation ceased. No party sought orders to ensure Trading was represented at the hearing.
The 2011 Proceedings
There are two active contests in the 2011 proceedings. In the first contest, Karami seeks in her Statement of Claim to bring to account, Trading as trustee of the Trust, and Mohammad, Amir and Abbas as persons controlling Trading, for their alleged misapplication of what she claims are funds Trading held as trustee of the Trust. In the second 2011 proceedings contest, Mohammad seeks on his Cross Claim, to show that the food importing business Azadeh now conducts is also Trust property.
As originally conceived, the 2011 proceedings raised allegations of breach of trust, and other allegations apparently made on behalf of Motels, spanning a period of about 20 years from the late 1980s and founding various claims for equitable relief. All but one of these allegations and claims to relief has now been abandoned. Motels is no longer a plaintiff in the 2011 proceedings and was purportedly represented in them by lawyers on the record between August and October 2011. In an earlier judgment in the 2011 proceedings I found that Motels' lawyers had acted in the proceedings without proper authority, but not in circumstances that would warrant their paying other parties' costs of the proceedings: Amir Ashrafinia v Mohammad Reza Ashrafinia [2012] NSWSC 500.
In their original form the 2011 proceedings alleged that Abbas, Amir and Mohammad had appropriated the business of Motels either themselves, or through Trading, and misapplied the revenue generated by the motel business for their own benefit, and without Karami's knowledge. That was undoubtedly a complicated case. Not only did it risk a lengthy hearing but as a suit between husband and wife over what could be their matrimonial property, it risked raising a conflict of jurisdiction with the Family Court of Australia.
As indicated, in the end Karami did not press most of the causes of action and relief that she originally sought in the 2011 proceedings. Her amended pleading assumes that the motel business is an asset of the Trust, a matter which was ultimately not contested. Karami claims that she, Azadeh and the other discretionary objects of the Trust can bring Trading to account for its dealings with Trust assets and that Trading's directors, Amir and Mohammad, should account for their control of Trading in the management of the Trust's affairs, and that Abbas account for his alleged dealings with Trust assets.
Karami's general case in the 2011 proceedings is that between March 1996 and February 2009 Trading, Mohammad, Amir and Abbas used the Trust's cash flows generated by Trading from the motel business for their own purposes and intermingled those Trust funds with their own funds, to acquire properties and to pay for a variety of living expenses both for themselves and for her. And her case is that the motel business cash flow was the only financial resource available for Amir and Mohammad to acquire in their own names the Oporto property, the Marsfield property and the other investment property, Unit 17, and that is what they did by misapplying Trust funds.
Other properties, several apartments in Elizabeth Bay, were also bought and sold in Trading's name during the same period. These are collectively known in these reasons as the "Trading Apartments". Karami seeks an account in the 2011 proceedings of Trading's dealings with these Trading Apartments, whilst Trading was under Amir's and Mohammad's and then Mohammad's control. Mohammad and Amir both deny liability to the Trust in the 2011 proceedings. Karami founds a case on seven sample transactions that are alleged to demonstrate Amir and Mohammad's knowledge and involvement in breaches of trust and to warrant further inquiry against them and Abbas, and to demonstrate the need for Trading to be removed as trustee.
Mohammad defends himself in a number of ways from these allegations. First, he says that the Trust was set up for him as a vehicle to own and manage the motel business and accumulate wealth for his benefit and the benefit of his future family. Mohammad says that apart from paying the expenses of Amir and Azadeh while they were studying, the profits from the motel business were to be used at his discretion. But Mohammad has alternative defences that concede that the Trust was not just for his benefit.
Mohammad says that at all times he acted honestly and reasonably in his role as a director of Trading, and that if any breaches of trust are found, he should be excused from any personal liability. Amir fields a similar defence. Mohammad also notes that Limitation Act 1969 (NSW) bars any action for breach of trust prior to what he says is the applicable date 2 March 2006 - six years before the filing of Karami's Amended Statement of Claim in the 2011 proceedings.
On Mohammad's Cross Claim in the 2011 proceedings, he seeks to show that Azadeh converted Trust property to enable her to conduct a food importing business through her company, Parvaneh Pty Limited ("Parvaneh"). He claims that Azadeh and Parveneh hold the food importing business on constructive trust for the Trust and he seeks an account of its profit against both Azadeh and Parvaneh.
Azadeh answers Mohammad's cross-claim by saying that she established and developed Parveneh's food importing business with the active encouragement and consent of her parents, Abbas and Karami, and without misapplying any Trust property for her own benefit.
Procedural Background
These complex proceedings have had a difficult recent procedural history. In June 2011, the 2008 proceedings were due to be heard before Sackar J. But that trial was vacated when the 2011 proceedings were commenced. On 22 August 2011, Bergin CJ in Eq fixed this matter for trial before me on Monday, 5 March 2012. The hearing was vacated, as not all parties were ready to proceed on the then recently amended pleadings in the 2011 proceedings. Other procedural disputes arising out of the amended pleadings were resolved at this time, including the responsibility for the costs generated by Motels' involvement in the proceedings: Amir Ashrafinia v Mohammad Reza Ashrafinia [2012] NSWSC 500.
Directions were made in April 2012 to appoint a Court Expert, Mr Paul Russell of Forensic Advisory Services Pty Limited, to identify and report upon the cash flows associated with the various transactions in issue between the parties. Mr Russell executed this task and his report was used in evidence. The proceedings were then fixed before me for hearing for two weeks commencing 25 June 2012. Abbas, Karami, Amir, Azadeh and Mohammad were all cross-examined in a hearing that ultimately lasted 15 days, including a day reserved for speaking to the parties' various written submissions on 8 August 2012. The parties appeared again before the Court on 14 June 2013.
These reasons involve a detailed account of the parties' various property transactions. In both the 2008 and 2011 proceedings the parties closely debated the beneficial ownership of various assets. The parties maintain that the Marsfield and Oporto properties are assets of the Trust (as Karami contends), or part of a joint venture agreement (as Amir says), or owned beneficially by their respective registered proprietors (as Mohammad says in respect of the Marsfield property). Either Azadeh (as she says) or the Trust (as Mohammad says) hold a beneficial entitlement to the food importing business.
Any contention that these respective assets are Trust assets must be well established by evidence. To find a trust it must be clear what is trust property: Federal Commissioner of Taxation v Clark (1927) 40 CLR 246. Jacobs Law of Trusts in Australia, 7th edition, J.D. Heydon and M.J. Leeming, Lexis Nexis, 2006 [523]. A trust cannot be created where the subject matter is not definite or definitely ascertainable from facts existing at the time of the creation of the purported trust and until the trust property is ascertained no trust arises: Scott on Trusts, 4th edition, Little Brown and Company Boston, 1987 [76]. The analysis required to establish the beneficial ownership of these various properties is substantial.
Credibility Matters
This case required the Court to assess the credibility of five members of the Ashrafinia family, Abbas, Karami, Mohammad, Amir and Azadeh. That assessment was important to the proceedings, but not easy. In the course of evidence most family members directed adverse comments across the Courtroom against other family members. No one family member's testimony was wholly reliable. The Ashrafinia family has been torn apart by long-standing grievances and personality clashes, which by the time of the proceedings, had developed into entrenched warfare.
Family alliances have shifted over the years. By the time of the hearing Mohammad stood isolated from all other family members. But in past times he had been close to his father.
The bitterness of these disputes distorted the evidence of every family witness and obscured the Court's view of the family's history. It is therefore a useful approach in analysing the evidence in these proceedings to find some anchors of credibility in an unreliable sea of testimony.
This can be done. Family members may generally be ranked in the following order of credibility (from the most reliable down to the least reliable): Karami, Amir, Azadeh, Abbas and Mohammad. At the more dependable end of this spectrum the Court could accept most of Karami's evidence. Despite a bitter separation from Abbas and with some qualifications concerning her evidence about him, her narrative seemed to be consistent, restrained and the family account least infected with invective. Amir too generally gave a good account of events that was supported by the available objective materials. Although he was intensely bitter about Mohammad's past conduct towards him, Amir's account of Mohammad's conduct I have found to be largely correct.
Azadeh stands at a tipping point between reliability and distortion. Of all the witnesses her palpable distaste for Mohammad was the most florid. Parts of her evidence brimmed with amateur psychoanalysis of Mohammad's alleged personality flaws. Other parts expressed her profound repulsion for him. Anything Azadeh said about Mohammad the Court treated with caution. But parts of her evidence proved at times to be surprisingly accurate, especially with respect to the food business she conducted.
The Court had difficulty taking much that Mohammad or Abbas said at face value. Each of them generated a discomforting aura of mistrust. They both evoked the Court's suspicions, not its confidence. In the end the Court reached the view that no part of Mohammad or Abbas' evidence could be accepted unless it was corroborated by reliable objective materials, or by the oral evidence of other witnesses which the Court accepted.
These are only general conclusions. The Court's more detailed findings about these five family members are distributed throughout these reasons.
Ashrafinia Family Business 1996 to 2009 - Trading, the Trust, and disputed assets
But first it is necessary to set out a narrative of the Court's findings on disputed and undisputed questions in the proceedings before analysing the parties' particular contentions. The narrative in this section expresses the Court's findings on relevant disputed questions. With the multiple sub-contests that exist in these proceedings it is not possible within these reasons to decide all the contests of fact or refer to all the competing contentions of fact that the Court has rejected. But the material in this chronological narrative down to the heading "The 2008 proceedings - the alleged joint venture" are all findings and involve a rejection of any competing inconsistent versions of contested events in the evidence, whether mentioned or not.
The Court first considers the setting up of the family trust and the absorption of the family business into it and Amir and Mohammad's business in the acquisition and development of property. Later in these reasons, when dealing with the cross-claim, the Court will separately consider the relationship between Azadeh's food importing business and the Trust.
The Early Years before 1995
Seven years after the 1979 Iranian revolution, the Ashrafinia family emigrated from the Iranian city of Esfahan to Australia. All members of the family now live permanently in Australia other than Abbas, who lives in Iran to conduct business but who visits Australia regularly.
In 1995 Abbas decided to separate from the rest of the family in Australia, and to return to Iran. Since that time Abbas has conducted business in Iran. Abbas's family has little insight into the into his business interests there. Only Mohammad has any appreciation of the extent of Abbas' overseas business interests. And his father treated even Mohammad on a "need-to-know" basis about such matters.
Abbas acquired the motel business in Australia in about 1987. By May 1989 Motels (a company jointly controlled by Abbas and Karami) had a three-year lease (commencing in January 1989) over the motel freehold from its owner CCFM Pty Limited (CCFM). Dr Freyer, who took a role in assisting the family in aspects of their motel business had a substantial interest in CCFM. In October 1992 Motels took another three-year lease from CCFM, which expired in May 1995. Shortly after this lease expired Trading was incorporated and the Trust established for the Ashrafinia family. Trading took the next lease, a six-year lease, from 1 September 1995 to 31 August 2001. CCFM did not offer another lease to Trading after August 2001. Instead Trading held over on the motel freehold from August 2001, in an uncertain month-to-month arrangement, until March 2009, when it was evicted shortly after the 2008 proceedings commenced.
Abbas involved the whole family in running the motel business, which was very successful. At different times different family members took up occupation of the motel premises and assisted in operating the motel business. Amir says, and I accept, that he was working at the hotel from 1988 when he was aged 12 and that by year 10 of high school he was working casually a few nights a week and on weekends in the business. Mohammad worked there from an early age as well.
By 1990 Abbas and Karami's marriage appeared to have broken down. Abbas moved into the motel. In 1991 Amir moved into the motel with Abbas. In August 1992 Abbas loosened his involvement in the motel business and Karami, Azadeh, Leila, and Mojtaba moved into the motel business premises, to facilitate Karami taking over its day-to-day management. Between 1992 and 1995 Abbas made regular visits to Iran but retained involvement with the motel business when he was in Australia.
Karami and Azadeh each took an active role in the motel business whilst they lived there. Karami's management continued until 1995, when Mohammad and Amir took over.
Abbas and Karami attempted reconciliation in 1995 and returned to Iran together. But that was unsuccessful and they were later divorced there in 1998. From 1995 Abbas made Mohammad the managing director of Trading and of the motel business. Abbas really forced Mohammad into this position by threatening to close the business. Abbas instructed Mohammad that he was not to pay any money from the business to Karami, Azadeh or Leila. To his credit Mohammad disobeyed this perverse instruction. Mohammad and Amir were jointly involved in the management of the motel business from this time. Although, they were not each fully involved all the time and they each disputed the quality of the other's management.
As well as working in the motel business, each of the older children involved in these proceedings made their way into higher education in the 1990s. Mohammad completed his Higher School certificate in 1991 and commenced studies at University of New South Wales in 1992. In 1993 Mohammad moved to Tasmania to attend university. Amir commenced a Bachelor of Commerce degree at Macquarie University in the mid 1990's but completed his degree after a break between 2000 and 2003. But I accept that Amir's studies were directed towards better qualifying him to assist in running the family's motel business. Azadeh studied at the Australian National University from the mid-1990s.
Abbas prepared for his permanent change of residence back to Iran in 1995. In August 1995 he executed a general power of attorney in Mohammad's favour so Mohammad could manage his affairs in Australia whilst Abbas was in Iran. Abbas was the moving force behind the establishment of the Trust, giving instructions for it to be set up. Abbas wanted to involve other family members in the motel business through this structure. The family were still quite young at the time he went back to Iran: Mohammad was 24, Azadeh was 22, Amir was 19, Leah was 18 and Mojtaba was only 15. In theory the Trust structure was a sensible one. But in practice the Ashrafinia family were ill educated for the responsibilities of administering this Trust.
The Trust Deed - August 1995
There is consensus in the 2008 and 2011 proceedings about the establishment of the Trust. Trading was incorporated in August 1995 and became trustee of the Trust the same month. From August 1995 Trading held the motel business and its other assets, on the trust so established. Nor is it in dispute that Trading acquired the motel business from Motels at about this time; Motels having conducted the business since the early 1980s. That Trading treated the motel business as an asset of the Trust is well established by objective evidence. Mr Loewy, the Trusts' accountant, lodged tax returns for FY00 to FY04 signed by both Mohammad and Amir recording it as a Trust asset.
The deed establishing the Trust ("the Trust Deed") dated 10 August 1995 was made between Stephen Freeman, a solicitor to whom Dr Freyer had referred the Ashrafinia family for legal assistance about their business affairs. Abbas accepted Dr Freyer's advice to see Mr Freeman and set up the Trust. The Trust Deed was not varied after August 1995.
The Trust Deed contained the common features of a discretionary trust. The "appointor" of the Trust was defined as Mohammad Ali Khojasteh and Mr Hooshang Rahmani "or the survivor of them" (Trust Deed clause 1.1). Mr Khojasteh and Mr Rahmani were business associates of Abbas in 1995.
The Trust Deed identifies a range of "Eligible Beneficiaries" who are defined as "the Primary Beneficiaries "together with any spouse, present or future relative of a Primary Beneficiary, any company of which a Primary Beneficiary or relative of a primary beneficiary is a member or officer, the trustee of any trust in which a Eligible Beneficiary has a vested or contingent interest, or person the trustee nominates before the 80th anniversary of the Trust Deed to be an Eligible Beneficiary": Trust Deed clause 1.1. The "Primary Beneficiaries" are curiously defined to mean only Mohammad. But other Ashrafinia family members may become "Eligible Beneficiaries" as Mohammad's relatives. Thus Karami, Abbas, Amir, Azadeh, and the younger siblings, Leila and Moji, qualify under the Trust Deed as Eligible Beneficiaries.
The Trustee declared in the Trust Deed (cl. 2.1) it will hold the Trust Fund "upon the trust and with and subject to the powers and provisions" contained in the Trust Deed.
The Trustee has an uncontrolled discretion to distribute capital or income of the Trust Fund in such proportions as it choses for the advancement, maintenance, education and benefit of "Eligible Beneficiaries": Trust Deed cl. 3.1.
The default provisions of the Trust Deed favour Mohammad slightly. If the Trustee does not appoint the capital of the Trust Fund (under cl. 3.1) to an Eligible Beneficiary other than the Primary Beneficiaries, Mohammad, the default provision for the Trusts income is that it may be applied or accumulated under cl. 4.2. The default provision for unappointed capital is that it is paid to the Primary Beneficiaries, Mohammad: Trust Deed cl. 4.3.
The Trustee has broad powers of investment, in all "modes [of investment] as the Trustee may in its absolute discretion think fit": Trust Deed cl. 7.1. And it has general power to carry on "any business which the Trustee in its absolute discretion thinks fit: Trust Deed cl. 7.7. The Trustee also has power to do all such things as may seem to the Trustee "in its absolute discretion" to be "incidental or conducive to the furthering of the interest of the Beneficiaries...or any of them": Trust Deed cl. 7.42.
In addition to any powers conferred by statute the Trust Deed confers on the Trustee a number of other powers and duties relevant to the matters in issue in these proceedings. Net Income of the Trust Fund to which a beneficiary is absolutely entitled must be held separately in trust for such beneficiary (cl. 8); property a part of the Trust Fund may be held at the discretion of the Trustee in the name of a nominee (cl. 10); the Trustee shall keep accurate annual accounts of the Net Income (as defined) of the Trust Fund through a public accountant selected by the Trustee (cl. 11); the Trustee is not liable for mistakes or omissions made in good faith (cl. 14); the Trustee may exercise powers and discretions under the Trust Deed notwithstanding any conflict of interest (cl. 17); the Trustee may engage and remunerate professional solicitors and accountants at professional rates (cl. 18); when the Trustee is a corporation, its powers and discretion should be exercised by resolution of the company (cl. 19); and, the appointor for the time being under the Trust Deed has the power to remove a Trustee, or to appoint an additional Trustee (cl. 23).
The Trust Deed cl. 19 provides special background to the 2011 proceedings. Karami submits, and I accept, that each of the seven particular breaches of trust discussed later in these reasons shows that Trading has not complied with cl. 19. There is no evidence of any written resolutions of Trading authorising any of these transactions, and I infer that no meetings of Trading did take place to authorise them. These cl. 19 breaches are more fully detailed below.
The 2011 proceedings include a contest about whether Trading's transfer of certain funds to Iran was in breach of trust. The Trust Deed clause 24 provides a mechanism for the transfer of funds outside the State of New South Wales. These provisions (cl. 24.1, 24.2 and 24.3) codify for the operation of the Trust the circumstances in which funds may be transferred to another country: it must be "desirable to do so" to the satisfaction of the Trustee to "appoint a new Trustee" and transfer to such new Trustee the Trust Fund and Gross Income thereof (cl. 24.1); once appointed, the new Trustee and the Trust Fund are governed by the laws of the place to which the transfer occurred (cl. 24.2); and, the appointor under the Trust Deed has the power by giving notice in writing to appoint a Trustee for any part of the Trust Fund held in such foreign country. Read in context, cl. 24 permits a part or the whole of the Trust Fund to be transferred to another country, provided there is compliance with its formalities.
Whilst the Trust Deed was biased in Mohammad's favour, I do not accept Mohammad's contention that the Trust was set up solely for his and his children's benefit and that it was at Mohammad's absolute discretion that benefits could be provided to other family members. Nor do I accept that is what Mohammad believed or what Abbas told him. But Mohammad acknowledged his father was really in control of Trading from the earliest times as he said and "could do whatever he wanted" with it. I accept Karami's submissions that Mohammad's removal of assets from the Trust, in the circumstances found below to be breaches of trust, are inconsistent with a belief on Mohammad's part that he controlled the Trust to apply for the benefit of himself and his immediate family.
The pattern of Mohammad's conduct identified later in these reasons, is more consistent in my view with a longstanding belief on his part that the Trust was for the benefit of all family members, not just him and his immediate family. But he found it convenient to use its assets for his own benefit. The reasons for this conclusion are explained in relation to each of the seven breaches of trust analysed below. Moreover, Mohammad conceded in his Defence to Karami's Amended Statement of Claim in the 2011 proceedings that the Trust is a "family discretionary trust" with objects other than himself and his immediate family.
The Trust 1995-1999
The eldest son Mohammad and his father Abbas had a complex and at times difficult relationship. In 1997 Abbas persuaded Mohammad to return to Iran to assist Abbas in business there. In consequence, Mohammad employed a full-time live-in manager for the motel business. Amir continued to work as a duty manager to keep an eye on operations.
Karami leaving the motel premises and Mohammad's departure to Iran sharpened the issue of providing accommodation for her and the youngest family members, Leila and Moji. Karami discussed this with Mohammad on many occasions during this period.
But Mohammad did not stay in Iran long. Tensions with Abbas prompted Mohammad's return to Australia in 1998. Abbas dismissed the live-in manager at the motel and from 1998 Mohammad and Amir jointly conducted the motel business through Trading. Amir became an additional director of Trading from 1998.
After 1995 the operations of Trading were run through a number of bank accounts, which will be identified in more detail through the evidence of the court expert Mr Russell.
The Marsfield and Oporto properties and Unit 17 - 1999 to 2001
By December 1999 Amir and Mohammad had decided to branch out from the motel business and to conduct some property developments in their own names. Amir and Mohammad purchased three properties together between December 1999 and May 2001, committing themselves to mortgage obligations to fund their acquisitions:
(a) the Marsfield property, in December 1999;
(b) Unit 17 in a block of apartments in Roslyn Gardens, Elizabeth Bay, in February 2000; and
(c) adjoining commercial and residential strata title properties in Victoria Street, Darlinghurst, the Oporto property, in May 2001.
This group of three assets acquired in the eighteen months between December 1999 and May 2001 provided a platform for Mohammad, Amir and Trading's later dealings in real property. Amir's case is that he and Mohammad agreed to acquire these three properties together and to acquire and develop other properties in a joint property development venture. It is difficult to explain Mohammad and Amir's property acquisitions in their own names without some purchasing consensus between them. But in my view their consensus was unspecific and not the joint venture that Amir now alleges.
At this point the 2008 proceedings intersect with the 2011 proceedings. I accept Karami's case in the 2011 proceedings that the resources Amir and Mohammad used to fund their property purchase activity came from the Trust. For approximately a decade after they commenced their joint property developments in December 1999 Amir and Mohammad, and from 2007 Mohammad, met their obligations to the mortgagees of the Marsfield property, Unit 17 and the Oporto property, and refinanced the Oporto property using Trust assets and Trust revenues. Mr Russell's analysis shows that the Trust was the source of their funds for this activity.
But Mohammad and Amir purchased the Marsfield and Oporto properties in their own names, not in Trading's name. In my view they were well aware they were using Trust property to fund these purchases. And the purchase of the first of them, the Marsfield property, was consistent with Trust purposes: it was for Karami and the younger children to live in rent-free. Mohammad and Karami had been discussing such a purchase on and off between 1996 and 1998. Amir and Mohammad began to talk about the issue in 1999. Karami and Mohammad met in November 1999 at the Marsfield property to discuss its purchase and then contracts were exchanged. The purchase in Amir and Mohammad's names of property to serve Trust purposes can be explained as a defence against Abbas.
And Mohammad and Amir jointly decided to buy Unit 17 in January 2000, which purchase they completed on 15 February 2000. Then in January 2001 they looked at the Oporto property together and finally purchased it in May 2001. The Trust's funding of all these purchases is considered later in these reasons. But the looming expiry of the CCFM lease to Trading in August 2001 caused Amir and Mohammad to contemplate the possible purchase of the motel freehold at Elizabeth Bay (the motel freehold) from CCFM.
That coincided with CCFM offering Mohammad and Amir the opportunity of buying the motel freehold in early 2001. But they and Trading had insufficient capital to achieve that at the time. Dr Freyer, who spoke for CCFM, was prepared to wait. Amir and Mohammad wanted to buy. Dr Freyer did not take a hardheaded approach to his discussions with Amir and Mohammad. He clearly had a soft spot for the Ashrafinia family. He gave evidence and was a most impressive witness, whose evidence I entirely accept.
An agreement to acquire and develop properties to buy the motel freehold made commercial sense and would assist the Trust. Trading was holding over on a month-to-month basis on an expired lease over the motel freehold. Dr Freyer and his freehold co-owners in CCFM could give one month's notice to Trading to vacate the premises. This made for a precarious balance. CCFM declined to sign a long-term lease, wishing to keep open its option of selling the motel freehold with vacant possession, if the right opportunity came along. Trading faced a permanent low-level risk of eviction, should the right commercial opportunity present itself to Dr Freyer and his partners, a risk only modified by the somewhat avuncular relationship between Dr Freyer and the Ashrafinia family. Were it properly conducted, Mohammad and Amir's further property refinancing and development would have been an intelligent response to Trading's potentially unstable monthly tenancy at the motel freehold.
Amir and Mohammad refinancing and acquiring properties - May 2001 to July 2007
Both Mohammad's and Amir's evidence support the idea of a plan for more property development from about May 2001 to July 2007 to assist in acquiring the motel freehold. But within a few years their vague consensus and their competing ambitions drove them apart. Mohammad began to exclude Amir and six years later, in mid-2007, their relationship entirely broke down. Amir left the motel business and was no longer prepared to co-operate with Mohammad. But near the end of these six years between May 2001 and July 2007, Trading purchased a number of other properties, all in January 2007 - Unit 4, Elizabeth Bay Road ("Unit 4") Unit 5 Roslyn Gardens ("Unit 5") and Unit 8, Roslyn Gardens ("Unit 8"), (and referred to collectively in these reasons as "the Trading Apartments"). This section deals with events of this period.
From about 2002 Mohammad began to withdraw from day-to-day operations of the motel. He was suffering serious health problems. I accept Amir's evidence that Mohammad employed a number of managers to replace his services whilst he was absent. One of them during the 2003-2004 period was Ms Christina Sofroniou, with whom Amir effectively ran the day-to-day operations of motel until July 2004. After that Amir was in practical control of daily operations. But he was not in charge of Trading's bank accounts, which were being operated by Mohammad, partly at the behest of Abbas.
Amir began to develop suspicions about Mohammad's approach to their mutual dealings and his administration of the Trust's affairs. As early as 2003 he became concerned that Mohammad was diverting the rental income from the Oporto property to Mohammad's own purposes and not accounting for it to Amir or the Trust. When Amir questioned Mohammad about this rent, Mohammad indicated that he wanted "to take all ownership of" the Oporto property and "walk away from anything to do with the Trust". Although this was not pursued any further at the time between them, it indicates an early consciousness on Mohammad's part of the difference between his own interests and those of the Trust, which in my view he always held.
Mohammad's withdrawal from day-to-day motel operations allowed him to invest in a restaurant/bar, "La Cita", at the King Street Wharf in 2003. Although it is not the subject of specific allegations of breach of trust in these proceedings, I accept Amir's s evidence that the taking of security over, and the use of rent from, the Oporto property in part funded Mohammad's venture into La Cita. This restaurant/bar ran into financial difficulties in 2004.
But internally the relationship between Mohammad and Amir was becoming increasingly dysfunctional. I accept Amir's evidence that Mohammad had a strong sense of entitlement to do whatever he wished with the revenue from the motel business and with any properties that he and Amir jointly owned. Having observed Mohammad in the witness box I conclude: that he has a strongly developed sense of self interest; and that he usually dismissed Amir as an irritant when Amir tried to have a say in the disposition of motel funds. But Mohammad treated the Trust and the properties they owned by this time, 2003-2004, as able to be simply divided up between himself and Amir. I accept Mohammad's evidence that in late 2003 he said to Amir "Amir, I will keep the Oporto shop and you keep the house and the motel business" to which Amir agreed. But in my view they were both conscious at this time that these properties had been funded from Trust earnings. But the proposal was not put into effect, due in part to their poor relationship. This in turn was exacerbated by Mohammad's criticisms of Amir's management of the motel business while Mohammad was away. This reached the point by late 2005 that Mohammad was attempting to refinance their existing investment properties so that he can try to separate their financial affairs. But this objective seemed almost unattainable as the motel business in the Trust was their principle source of revenue.
Despite this the Trust's affairs were conducted with reasonable efficiency between Amir and Mohammad between 2000 and 2004. The Trust filed tax returns for the financial years FY00 to FY 04. But the deteriorating relationship between Amir and Mohammad from 2005 onwards is evidenced by the fact that the Trust's basic civil obligations were not thereafter fulfilled. Trading did not file tax returns for FY 05, FY 06, FY 07, FY 08, FY 09, FY 10 and FY 11. From FY05 Amir had no confidence he had the full picture from Mohammad about the Trust's affairs. By the end of FY07 they were in open conflict.
In 2006 Amir first became suspicious that Mohammad was transferring money out of the Trust's St George Bank Account 649 to Iran. He enquired and obtained from St George Bank the telegraphic transfer authorisations showing that between 9 May 2001 and 17 October 2006 $340,470 had been transferred from the Trust to Iran, much of it to an associate of Abbas, a Mr Noori. Amir's active enquiries in 2006 are entirely consistent with him not knowing anything about these transfers before then.
I accept Amir's evidence that he confronted Mohammad about these Iran transfers and said to him words to the following effect "What's going on here?" I accept that the only assistance that Amir received from Mohammad in response to his enquiry was "We are buying land in Iran. If anybody asks this is to pay for the motel." But I accept Amir's evidence that Mohammad did not give any details about the land, if any that had been or was being purchased in Iran with Trust funds and in whose name the land being purchased. Although I do accept that some of those funds transferred to Iran on account of the purchase of goods for the food business she was operating. I do not accept that Azadeh was sending money to Iran to hide it from the Government Insurance Office who had costs orders against her in legal proceedings.
Mohammad has never given a satisfactory account of what was done in Iran either with these funds or other funds subsequently transferred to that country. In my view Abbas maintained a strong personal influence over Mohammad, who did not resist Abbas's requests for the transfer of these funds. I am unconvinced by the evidence that Mohammad ever knew how the funds were applied once they found their way into the opaque world of Mr Noori or Abbas in Iran.
But despite Amir's growing doubts about the trustworthiness of his brother Mohammad, they both authorised Trading's acquisition of the Trading Apartments in January 2007 - Units 4, 5 8. The financial details of these acquisitions are dealt with later in relation to the breach of trust allegations in the 2011 proceedings. I accept Amir's evidence that he and Mohammad discussed renting out the Trading Apartments to earn income for the Trust. This in my view is one of the reasons why Amir went along with the idea of buying these Trading Apartments in 2007. Despite the ever-present risk that Abbas might still persuade Mohammad to divert more Trust property to Iran, in my view and with some sense of responsibility to the Trust, Amir not unwisely thought that if the Trust's cash were tied up in servicing mortgage obligations on clearly identifiable Australian real estate, it was far less likely to be misapplied in Iran by pressure from Abbas. Amir took what he thought was the best of the bad options on offer to him. Getting legal advice would have been a better one.
Amir and Mohammad were both living at the motel in January 2007. But soon after Trading purchased Units 4, 5 and 8, they decided to live in Units 4 and 5 themselves. Although this appear to defeat the financial logic of the purchase of the Trading Apartments, I accept Mohammad's evidence that Amir's occupation of Unit 5 would free up a room at the motel which would generate more income from the motel. I accept Amir's evidence that there was no discussion between them at this time about either of them paying rent or an occupation fee to the Trust. In March 2007 Mohammad moved into Unit 4 in Elizabeth Bay and Amir moved into Unit 5 in Roslyn Gardens. By mid 2007 Mohammad had moved out of Unit 4, which was then renovated using Trust funds, after which it was leased.
Finally, before January 2007 several restructurings of Amir and Mohammad's borrowings over the three properties in their names took place. One dispute remains from this 2001 to 2007 period: whether or not Amir participated in a refinancing with Bankwest in October 2005 of his and Mohammad's existing obligations to financial institutions over the Marsfield property, Unit 17 and the Oporto property. It is relevant to Amir's culpability for losses to the Trust arising out of this refinancing, which is Transaction 1 of the allegations of breach of trust in the 2011 proceedings.
The October 2005 Bankwest refinancing was the last refinancing before the acquisition of the Trading Apartments in January 2007. The dispute relates to whether the Amir signed certain Bankwest home loan contract and mortgage documents on 4 August 2005. Amir denied that he did, saying that he was in Thailand at the time. And Amir adduced evidence from a handwriting expert, Mr Storey, which showed convincingly in my view, that Amir did not sign his name on the questioned documents. Mr Storey's expert evidence gained considerable force from admissions by Mohammad that he had indeed signed many of the questioned signatures on the early August Bankwest documentation.
Mohammad's explanation for signing these Bankwest documents was an unusual one. He said that he thought that Bankwest already had his power of attorney from Amir and that in those circumstances he was permitted to sign in Amir's name without clearly indicating whether or not he was signing as an attorney. Mohammad gave very inadequate answers to explain why he did not use the initials "PP" or "PA" as Bankwest was expecting when a power of attorney was used, saying that he preferred to sign "his own way" without giving any indication of signing as an attorney.
On this issue I accept Mohammad's explanation for signing the Bankwest documents. I find that because Mohammad thought he was entitled to do so, he signed all the questioned Bankwest documents in Amir's name. Mohammad also adduced evidence from a Mr Richard Hancock that he had witnessed Amir's signature on the documents and that he remembered Amir signing them at a cafe in Kellett Street Kings Cross. But given Mohammad's admissions, although I found Mr Hancock to be generally quite a credible witness, I conclude he was mistaken.
Amir's case based on Mohammad using Amir's signature, was that Mohammad was concealing the Bankwest refinancing from Amir. But in my view Amir was well aware of the Bankwest refinancing. He conceded in cross examination that he had signed Bankwest refinance documents on 19 October 2005, after his return to Australia and, after the date of the mortgage documents the signatures on which he was challenging. I infer that Mohammad had told Amir of the Bankwest refinancing at some time between August and October 2005.
Sources of Amir's and Mohammad's funds - 1999 to 2007
A feature of the whole period 1999 to 2007 is that neither Mohammad nor Amir discussed a specific plan to acquire the motel freehold. Neither of them identified the acquisition and sale of particular properties as being earmarked to generate particular funds to acquire the motel freehold. Their plans remained vague and indefinite for several reasons: there was no formal joint venture between them of the kind Amir pleads; Dr Freyer and CCFM were not applying pressure to vacate the motel freehold; Amir and Mohammad were becoming suspicious of one another especially from 2005 and were content just to coast along.
How did Amir and Mohammad acquire Trust funds to buy the properties in their own names which they then used for further refinancing? Amir submits that the Court should find that the Trust distributed the funds in accordance with the Trust Deed to Amir and Mohammad, and that they used their own funds right from their first acquisition of the Marsfield property.
I do not accept Amir and Mohammad used distributions from the Trust to them as beneficiaries. This explanation does not fit the evidence at many levels. I did not find Amir's defence of this position to be persuasive. And Amir and Mohammad have made various allegation and counter-allegations of misuse of motel revenue and rent from the Oporto property for personal ends. The Court does not have to decide all of these disputes. But they often refer to credit card bills for services from external suppliers and are not obviously a source of funds for the acquisition of funds in their own names.
First, Mohammad's evidence on his receiving distributions was contradictory and unreliable. In his first affidavit Mohammad swore "Amir and I received distributions from the Trust in order to finance the balance of the acquisition of the Properties and to pay the mortgages on the Properties". But in answer to a question from the Court, Mohammad said about this same subject "neither Amir not I received distributions". Despite what Mohammad had said in his affidavit his answer to the Court was a moment of candour from Mohammad. And I accept this is what happened - he and Amir did not receive distributions from the Trust.
Neither Mohammad's nor Amir's case was much assisted by Mohammad's further rationalisations of what had happened. Mohammad attempted to explain away his earlier affidavit evidence by saying at the time he wrote his affidavit "I couldn't remember there were any distributions or not. Amir had told me that there were distributions and so I assumed that there were distributions when I wrote this affidavit. That's what I wrote". This evidence is highly improbable. Mohammad would not ordinarily rely on Amir for such important business information about whether the Trust had made distributions to them both. That is the kind of thing that Mohammad himself wanted to control. Mohammad transferred Trust funds to Iran without Amir's knowledge up until 2006. And Amir ultimately left the motel business because Mohammad unilaterally assumed control.
Secondly, there are no proper trust accounting records, which record any distributions from the Trust to beneficiaries in the 1999-2001 period. In the absence of Mohammad and Amir keeping proper records of Trust distributions, I am not prepared to infer that is what they did. Mohammad say that Trust records went missing from the motel in November 2007 and this is some explanation for the absence of such records. But no real effort seems to have been made to respond to this theft and replace the documents and I am not convinced that any documents went missing in the way that Mohammad says. Mohammad and Amir subsequently used what were undoubtedly Trust funds to refinance obligations over these properties and pay the mortgages for the properties they acquired in their own names. They both applied these Trust funds later for their own purposes, so I see no reason to infer that they were careful to ensure that the original funds were distributed to them as beneficiaries before being applied. Were they to have received the funds as beneficiaries, it could be expected that from that point on they would treat the funds entirely as their own and would raise and discharge mortgages without further assistance from the Trust. But they continually sought the Trust's financial assistance with respect to these properties.
Thirdly, there is no support in Mohammad's or Amir's tax returns for the conclusion they received money beneficially and dealt with it as property to which they were beneficially entitled.
Fourthly, the idea that Mohammad would make distributions to himself and Amir is inconsistent with Mohammad's own evidence: that he regarded himself as the sole object or beneficiary of the Trust; and, that he did not find out until 2011 that he was supposed to administer the Trust for the benefit of all family members. The idea that he would make distributions to Amir to acquire the Marsfield and Oporto properties does not sit well with his position on this. Although in my view, contrary to Mohammad's evidence, he was always aware the Trust was set up to benefit family members other than him.
From July 2007 until commencement of proceedings
Amir remained dissatisfied into early 2007 about Mohammad's lack of compelling explanation for the Iran funds transfers, about how Mohammad had applied the rent from the Oporto property, and other matters relating to the administration of the Trust.
But Mohammad had his own developing suspicions about Amir. In November 2004 I accept that when Amir was attempting to bring up to date the Australian Securities and Investments Commission (ASIC) records for Trading to remove Abbas' name that an administrative mistake was made and that ASIC's records were then incorrectly altered to show that Amir had 60% of the shares of Trading and Mohammad had 40%. Mohammad seemed to think that this was not an error and that Abbas had given control of trading to Amir behind his back.
Mohammad was determined to take control of Trading. So in May 2007 he initiated the steps that ultimately led to a complete rift between himself and Amir in July 2007 and to Amir commencing the 2008 proceedings. On 25 May 2007 Mohammad gave notice of a general meeting of Trading on 19 June 2007 to correct the ASIC records for Trading, to issue shares to give Mohammad control of the company, and to remove Amir as a director of the company. But Amir was overseas at the time and did not receive notice of this meeting.
But delay itself is not sufficient ground on which to deny relief. However, "the conduct of the plaintiff may be such as to make it inequitable to order an account of profits. Thus a plaintiff may not stand by and permit the defendant to make profits and then claim entitlement to those profits": Warman International Ltd v Dwyer (1995) 182 CLR 544 at 559 per Mason CJ, Brennan, Deane, Dawson and Gaudron JJ. Azadeh says that the relief sought by Mohammad is unjust because Mohammad's failure to act, with knowledge of the material facts, constitutes acquiescence to Azadeh's conduct and that it would be unjust to alter the situation in which she has developed the food business. Azadeh says that any order, in particular an order to account for profits, against Azadeh and Parvaneh, is unjust because she and Parvaneh have spent profits and structured their financial affairs in such a way that means that any order, in particular an order to account for profits, is unfair and burdensome. Further, in the time period since the alleged conversion of the food business Azadeh, through Parvaneh, has worked to develop the food business to such an extent that it would be unfair for Mohammad to seek to benefit, at least without an account for Azadeh's work, from Azadeh's work.
Mohammad has long had knowledge of the material facts on which the cross-claim is based. This is not a requirement of knowledge of the legal conclusions to be drawn from the facts, but of the facts from which the right arises: Hourigan v Trustees Executors and Agency Co Ltd (1934) 51 CLR 619 at 651.
Between 1998 and 1999 Mohammad shared an office with Azadeh at the Motel and was in a position to observe first hand the food business activities in which Azadeh was engaged. And Mohammad was a director of Trading. In that capacity, he signed off on Trading's tax returns. If there was any conversion of the food business, the consequent discrepancies must have been evident to him in the Trading's tax returns.
If the food business was property of Trading and the Trust, and Azadeh and Parvaneh converted the food business, the relief sought by the cross-claim should, in any case, be refused.
Statute of Limitations
Azadeh also says that Mohammad is not entitled to any of the relief sought, because the proceedings were not commenced within the twelve-year statute of limitation period. The proceedings were commenced by way of Statement of Cross-Claim filed on 19 June 2012.
In Williams v Minister, Aboriginal Land Rights Act 1983 (1994) 35 NSWLR 497 at 509, Kirby P stated: "The structure of the Limitation Act 1969 (NSW) makes it clear that the ancient principles of Equity have been preserved". Kirby P said that the Limitation Act does not apply, in its own terms, to a cause of action for equitable relief. But equity follows the law. The Limitation Act may apply by analogy: Salvation Army (South Australia Property Trust) v Graham Rundle [2008] NSWCA 347 at [81]-[83] per McColl JA, Basten and Bell JJA agreeing. Because the relief which Mohammad seeks is wholly equitable relief, the Limitation Action has no direct application. It is therefore necessary to consider whether any provisions of the Limitation Act apply by analogy to the claims brought by Mohammad.
Counsel for Azadeh raised Limitations Act, s 16, which provides: An action on a cause of action founded on a deed is not maintainable if brought after the expiration of a limitation period of twelve years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims. And Limitations Act, s 23 provides: Sections 14, 16, 17, 18, 20 and 21 do not apply, except so far as they may be applied by analogy, to a cause of action for specific performance of a contract or for an injunction or for other equitable relief.
Azadeh says that because Trading, as the trustee of the Trust, created by a deed dated 10 August 1995, is moving the Court for orders against Azadeh and Parvaneh, the cross-claim is an action founded on a deed and as such that the limitation period provided by Limitation Act, s 16 is applicable.
But Mohammad says that the limitation defence does not bar the cross claim because the alleged conversion of the food business occurred either: at the time Azadeh relocated the operation and control of the food business from the motel premises in 2000; upon the incorporation of Parvaneh Pty Ltd on 27 May 2002; or, when Parvaneh Pty Ltd commenced operation of the food business on 1 July 2002. Mohammad says that whichever of these events constitutes the point at which Azadeh converted the food business is less than 12 years before the commencement of the proceedings, such that any limitation defence does not bar the cross claim.
Further, before applying the Limitation Act time limit by analogy, it is not simply a matter of finding sufficient similarity between the equitable claim and the claim that it is subject to the statutory time limit; the Court must be satisfied that in all the circumstances it is just to apply the statutory time limit: Salvation Army (South Australia Property Trust) v Graham Rundle [2008] NSWCA 347 at [86] per McColl JA Basten and Bell JJA agreeing.
In this case the application of the limitation period in Limitation Act, s 16 is not appropriate for the cause of action pleaded by Mohammad. In addition, even if Limitation Act, s16 were to be applied, the particular limitation period has not expired.
The defence of laches may arise before any limitation period expires: Walter v Melham [2007] NSWSC 264 per White J and Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256 at [18] per Gleeson CJ, Gummow, Hayne and Crennan JJ; see also Limitation Act, s 9.
The relief sought by Mohammad is not barred by the operation of the Limitation Act, however, since the defence of laches may arise before any statutory time limit potentially applicable by analogy expires, if I am wrong and the food business was property of Trading and the Trust and Azadeh and Parvaneh did convert the food business, the relief sought by the cross-claim is otherwise refused because of the equitable defence of laches.
Relief in the 2008 and 2011 proceedings
The 2008 proceedings
Amir's 2008 proceedings should be dismissed to the extent they deal with Amir's allegations of a property development joint venture. He has failed to make out any joint venture with Mohammad for the acquisition or development of properties as he alleged. Ordinarily costs would follow the event. But one or other party may seek a special costs order in the 2008 proceedings.
But there are some other residual issues in the 2008 proceedings that may or may not still have to be resolved in light of the Court's present findings. Amir sought relief in his Amended Summons to restore his position as a director of Trading and to reverse the effect of resolutions passed at general meetings of Trading in May and June 2007. The Court will replace Trading as the Trustee, so this other relief may no longer be necessary. Nor should Amir be able now to pursue the Conveyancing Act s 66G relief he sought over the Marsfield property: whether and when the Marsfield property is sold will be a matter for the new Trustee, subject to what the Court will order to ensure Mr Russell's fees are paid shortly.
There will have been a substantial overlap between the legal costs incurred in each of the 2008 and 2011 proceedings. And in the 2011 proceedings all the property said to be the subject of the joint venture in the 2008 proceedings has been found to belong to the Trust and some of it has been dealt with by Mohammad in breach of Trust without
Amir's knowledge. In these circumstances it may perhaps only be possible to make a blended costs order in both the 2008 and 2011 proceedings.
The 2011 proceedings
Mohammad's cross claim in the 2011 proceedings against Azadeh and Parveneh should be dismissed. He has failed to make out his contentions that the food business is a Trust asset. Costs would normally follow the event on the cross claim but some special costs order may be sought. If the parties cannot agree on the costs of this cross claim they can file submissions as to costs in accordance with the directions below.
A new trustee of the Trust must be appointed in place of Trading. The affairs of Trading are deadlocked. Mohammed consents to appointing a new trustee. But Azadeh and Karami seek their appointment in Trading's place. The Court concludes that the present trustee, Trading is incapable of carrying out its duties as trustee because of family deadlock. The only question is who should replace it.
The principles governing the appointment of a trustee in circumstances such as the present are clear. As a general rule the Court will not accede to a request to appoint the beneficiary as a trustee: Johnstone v Johnstone (1902) 2 SR (NSW) Eq 90.
Azadeh and Karami are not suitable for appointment as trustees. The Court is not confident that either of them would administer the trust impartially. I doubt they could ever set aside their antipathy towards Mohammad in their administration of the trust. Karami believes Mohammad has betrayed the whole family. Azadeh is convinced that Mohammad was responsible for an assault that she suffered and that he only deserves her condemnation. Her attitude is manifest one of in her descriptions of him as "the crazy cancer in our family which we are trying to get rid of".
In my view the only hope of suitable future administration of this trust is for the appointment of an independent trustee. This is in my view would be a suitable case for the appointment of the NSW Trustee and Guardian. But Karami does not want the NSW Trustee and Guardian appointed. She seeks to put forward evidence of other persons who are willing to take on that role. As the Trust's assets have been much depleted by litigation and by the actions of Abbas, Mohammad and Amir, it is useful briefly to explore whether it is possible to appoint some independent trustee or trustees, who are prepared to serve in that role at a lower costs to the Trust than the NSW Trustee and Guardian. So, I will allow a very short opportunity for that to occur. But it will not be long. The Trust must very soon either pay Mr Russell's fees or arrange for the Marsfield property to be sold. I will allow only 14 days for the parties to find another Trustee and during that same period to propose a mechanism for the payment of Mr Russell's fees.
The Court will declare on the basis of its findings that the Marsfield Property, Unit 17, and the Oporto property, are or were Trust properties. The Court will declare that the Chilli Blue backpackers business is charged in equity with the repayment of the moneys the Trust advanced to it between December 2007 and October 2008, together with any other monies found on inquiry to have been advanced to it. If it is useful to declare whether the Trading Apartments formerly owned by Trading, namely Units 4, 5 and 8 were Trust properties, the Court will declare that they are.
The evidence establishes that in breach of trust Abbas and Mohammad have transferred substantial amounts of Trust property to Iran. They have not yet accounted for these funds. In light of the Court findings, Karami should now identify precisely what relief within the jurisdiction of this Court she seeks. Although Abbas is often overseas and the Trust property he transferred is still in Iran, he is amenable to this Court's in personam jurisdiction. But Karami should identify what orders she now seeks against him to reveal what Trust funds are in Iran.
Karami may seek a wider account or inquiry in relation to the other Trust properties. The properties sold more recently, or still in the hands of the parties, would be the more obvious candidates for such an inquiry. But Mr Russell has already done much very useful work in this direction. The Court will not initiate an inquiry process, which merely duplicates what Mr Russell has already done. But to the extent that Mohammad and Amir wish to prove that they have any remaining beneficial interest in some part of these properties, or are entitled to just allowances for their work in relation to them, such an inquiry may perhaps offer them a limited opportunity to show that. As well such an inquiry may reveal what profits if any they have made with Trust property.
Karami's final submissions raise the possibility of the Court making an order for the general administration of the Trust. Such an order may be made where trustees cannot pull together, where an estate's administration gives rise to recurring difficulties, or doubt is thrown on the bona fides or discretion of one or more of the trustees: McLean v Burns Philp Trustee Pty [1985] 2 NSWLR 623. But the Court will not make such an order where the whole fund will be spent in costs or where there would not be likely to be any benefit to the beneficiaries: Meredith v Davis [1985] 2 NSWLR 623. Nor will the Court move in and distribute or wind up the Trust where the trustee has a discretion - the trustee will be permitted to exercise that discretion and the Court will not do that for the trustee: Tempest v Lord Camoys (1882) 21 Ch D 571. Both of these factors are present here and caution against making a general administration order in this case. But authority does support a general administration order being made where, as here, the affairs of the Trust are in great confusion, or there have been significant breaches of Trust: McLean, at p 636D.
The better and probably cheaper course here is to see if an independent trustee or trustees can be persuaded to act in this Trust. An administration order is likely to be far too expensive and cumbersome for what is left of this Trust estate, unless some of the beneficiaries can augment the estate by funding further action against the trustees, who have been found to be in default.
The Court will hear Karami or any Trustee on any other specific orders that any beneficiary seeks to secure any Trust property in the hands of a person dealing with Trust property in breach of fiduciary duty and who these reasons has found to be or have been in possession of Trust property. Liberty to apply is granted for this purpose.
Mr Russell has been waiting long enough to be paid. Unless a clear funding proposal for payment of his fees emerges within 14 days, the Court will re-list the proceedings to make orders for the sale or further mortgaging of trust property to enable the parties' obligations to him to be met, as soon as possible.
Costs should follow the event and Karami should have her costs of the 2011 proceedings, unless any defendant wishes to argue that a different costs order should be made. Questions of costs of the 2011 proceedings are complicated, as the Court has not found that all defendants were involved in all breaches of trust.
Conclusions and orders
In the result Amir has failed in the 2008 proceedings and orders will need to be made about the costs of those proceedings. In the 2011 proceedings Karami has been successful against Amir, Mohammad and Abbas, although not against all of them in respect of all breaches of trust. On the cross-claim in the 2011 proceedings the cross defendants Azadeh and Parveneh have been successful against Mohammad. Costs should follow the event on this cross claim unless some special costs order is sought. A new Trustee should be appointed to replace Trading as trustee of the Trust. That would be the NSW Trustee and Guardian unless some other Trustee can be found within the next 14 days. All parties must join within the next 14 days in arrangements to pay Mr Russell's fees, otherwise the Court will hear argument on 14 October as to why trustees for sale to the Marsfield property should not be appointed in order to satisfy his fees. The orders of the Court therefore will be:
(1) Dismiss the claims for relief in the 2008 proceedings of a property joint venture between Mohammad and Amir.
(2) Dismiss Mohammad's cross-claim against Azadeh and Parveneh in the 2011 proceedings.
(3) Direct the parties by 4.00pm on 10 October 2013 to bring in short minutes of order (to the extent that they can be agreed) to make any necessary declarations and to otherwise give effect to the Court's findings in both the 2008 and 2011 proceedings.
(4) In addition to direction (3), further direct the parties by 4.00pm on 11 October 2013 to file and serve any short minutes of proposed declarations, orders or directions (to the extent that such orders cannot be made the subject of agreement among the parties), which any party contends are necessary to give effect to the Court's findings in both the 2008 and 2011 proceedings.
(5) Direct the parties to make any application for the appointment of a trustee other than the NSW Trustee and Guardian returnable before the Court on 14 October 2013 at 9.30am.
(6) Direct the parties to exchange submissions as to costs in relation to the 2008 proceedings and the 2011 proceedings and the cross-claim in the 2011 proceedings by 4.00 pm on 10 October 2013.
(7) Any applications for an account from any defendant or for restraining orders against any defendant, arising out of the Court's findings in these reasons, together with any defendant's claim for relevant just allowances, may be made returnable before the Court at 9.30am on 14 October 2013.
(8) Grant liberty to apply on three days notice, to the parties to take action consequential upon these reasons, and to the Court expert Mr Russell in respect of the payment of his fees.
(9) Adjourn the proceedings for further directions to 9.30am on 14 October 2013.
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I certify that this and the preceding pages are a true copy of the reasons for judgment of Justice Slattery delivered on
Associate..................................
Amendments
27 February 2014 - Deletion of the words "He is married to a medical practitioner" and replacing them with the words "His wife has a doctorate".
Amended paragraphs: 240
Decision last updated: 30 September 2013
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