CFHW Pty Ltd v Burness
[2014] VSC 451
•16 September 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2014 3812
| CFHW PTY LTD (ACN 601 239 196) (as trustee of the Watson Family Trust) | Plaintiff |
| v | |
| PAUL ANDREW BURNESS and MATTHEW JAMES JESS and REGISTRAR OF TITLES | First Defendant Second Defendant Third Defendant |
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JUDGE: | Warren CJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 August 2014 |
DATE OF JUDGMENT: | 16 September 2014 |
CASE MAY BE CITED AS: | CFHW v Burness |
MEDIUM NEUTRAL CITATION: | [2014] VSC 451 |
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REAL PROPERTY – Removal of caveat – Whether caveators established a prima facie case that they have the estate or interest which they claim in the land – Where interest claimed is a constructive trust resulting from loan moneys – No prima facie case – Balance of convenience favourable to the removal of caveat – Transfer of Land Act 1958 s 90(3).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr J F Styring | Robert James Lawyers |
| For the First and Second Defendants | Mr J Kohn | Beck Legal |
| For the Third Defendant | No appearance |
HER HONOUR:
This application is brought by the original plaintiff, Comat Pty Ltd (‘Comat’), to remove a caveat lodged by the first and second defendants, Messrs Paul Burness and Matthew Jess as trustees (‘the trustees’) of the bankrupt estate of Mr Robert Noel Watson. The third defendant, the Registrar of Titles, did not participate in the hearing. As will become apparent, Comat sought to amend their Originating Motion to substitute CFHW Pty Ltd (‘CFHW’) as the plaintiff in this proceeding.[1]
[1]All references to the ‘plaintiff’ refers to CFHW, references to ‘Comat’ are references to Comat Pty Ltd.
The plaintiff, by an Amended Originating Motion, seeks an order removing the caveat pursuant to ss 90(3) and 103(1) of the Transfer of Land Act 1958 (‘the Act’). In addition the plaintiff seeks an order under s 51(2)(b) of the Trustee Act 1958 that the property subject to this proceeding vest in a new entity called CFHW.
Background
Comat was incorporated on 2 July 2002 and is the trustee of the Watson Family Trust (‘the Trust’). The Trust was established as a discretionary trust by deed on 12 July 2002. Mr Watson and Ms Helen Mary Watson are named as the specified beneficiaries and the Watson Group Australia Pty Ltd is listed as an additional member of the class of general beneficiaries. Mr Watson was the sole director of Comat from its incorporation until he was declared bankrupt on 30 April 2013.
On 2 September 2002 Comat was registered as the proprietor of 6/37 Domain Street, South Yarra (‘the property’). It appears the property was originally purchased in Mr Watson’s name and then registered to Comat. The property is subject to a registered mortgage by Westpac.
In light of Mr Watson’s financial difficulties, on 8 April 2013 Comat passed a resolution which provided that:
In the event that the current Director is made bankrupt as a result of the proceedings on foot, then the following people be approached as replacement Director/s of the company:-
·Campbell Watson (son)
·Frazer Watson (son)
·Michelle Watson (Company Finance Controller)
If the first two nominees decline responsibility of the position offered, then the third nominee, being the company’s current Financial Controller, be requested to consider taking Directorship and Secretary of the company.[2]
[2]Exhibit AMW – 1 of the affidavit of Ms Michelle Watson dated 25 July 2014.
Shortly thereafter, on 30 April 2013 Mr Watson was made bankrupt and the trustees were appointed as trustees in bankruptcy of his estate. There is significant conjecture between the parties regarding the directorship of Comat immediately after Mr Watson was declared bankrupt. In short, the trustees argued that Ms Michelle Watson[3] was invalidly appointed as a director of Comat. Further, the trustees argued that there was no valid resolution appointing Ms Watson and the resolution passed on 8 April 2013 did not appoint Ms Watson as it simply suggested that she be approached as opposed to being appointed. In particular, they pointed to an ASIC change of company detail form where Ms Watson was originally registered as a director from 15 January 2014 and a letter from Ms Watson stating that she gave consent to act as a director effective on 15 January 2014.
[3]Ms Watson was the financial controller of Comat and is not related to Mr Watson.
In response, the plaintiff noted that Ms Watson made an error on the ASIC form and sent in a further change of company detail form on 4 June 2014 which sought to backdate her appointment to 15 April 2013. In her first affidavit, Ms Watson set out that she erroneously instructed Comat’s lawyers to enter the date of her appointment as 15 January 2014. In any event, Comat contended that the 8 April 2013 resolution appointing Ms Watson was valid.
Returning to the background of the lodgement of the caveat, on or about 16 January 2014, Comat executed a contract of sale of the property. The signature of Mr Watson originally appeared on the contract of sale, but seems to have been struck out and replaced with the signature of Ms Watson in her capacity as director of Comat. The settlement date was entered as 20 March 2014.
On 4 March 2014 the trustees lodged a caveat on the property. That caveat claimed an interest pursuant to a constructive trust in the fee simple estate of the property. On 20 March 2014 the trustees executed a withdrawal. Subsequently, the settlement of the sale of the property did not proceed. On 21 March 2014 the trustees lodged a second caveat which is the subject of this proceeding.[4] That caveat claimed the same interest as the first, an interest in the estate in fee simple through a constructive trust.
[4]Caveat number AK978555M.
Change of trustee
Before I explain my reasons regarding the caveat issue, there is a preliminary issue regarding substitution of the plaintiff.
Comat sought leave to amend their Originating Motion and Summons to substitute CFHW Pty Ltd (‘CFHW’) as the plaintiff. According to its submissions, after examining the viability of Comat to pursue this litigation, a decision was made by the Trust to replace Comat with CFHW. Comat additionally sought orders under s 51(2)(b) of the Trustee Act 1958 (Vic) that the property vest in CFHW as trustee of the Trust. As the trustees did not object I make an order substituting CFHW as plaintiff in the proceeding and vesting the property in CFHW.
Removal of a caveat
The Act provides for a person with an unregistrable interest in land to lodge a caveat to be placed on the register. Section 89 states:
(1) Any person claiming any estate or interest in land under any unregistered instrument or dealing or by devolution in law or otherwise or his agent may lodge with the Registrar a caveat in an appropriate approved form forbidding the registration of any person as transferee or proprietor of and of any instrument affecting such estate or interest either absolutely or conditionally and may, at any time, by lodging with the Registrar an instrument in an appropriate approved form, withdraw the caveat as to the whole or any part of the land.
The effect of a caveat under this section is to prevent certain dealings set out in the caveat and gives notice to the proprietor that they can either consent to the lodgement preventing those dealings or take action to have the caveat removed.
In this instance, the plaintiff has sought removal of the caveat pursuant to s 90(3) of the Act. That section provides:
Any person who is adversely affected by any such caveat may bring proceedings in a court against the caveator for the removal of the caveat and the court may make such order as the court thinks fit.
It is clear from case law that applications to remove a caveat under the Act should be treated as analogous to an application for interlocutory injunctive relief.[5] In Piroshenko v Grojsman,[6] I set out the applicable test for a court deciding an application under s 90(3):
In so far as their registration is an administrative act, it is when application is made for their removal that the onus falls on the caveator to satisfy the two-stage test used by the court when deciding whether to exercise its discretion to grant interlocutory injunctive relief. This approach has been established law in Australia since the decision of Lord Diplock in Eng Mee Yong v Letchumanan was approved by the Full Court of the Queensland Supreme Court of Appeal in Re Jorss’ Caveat. This two-stage approach requires the caveator to establish that there is a serious question to be tried that they have the estate or interest which they claim in the land in question, and having done so, to establish that the balance of convenience favours the maintenance of the caveat on the Register of Titles until trial. This is still the approach taken by the courts in Victoria when deciding applications under s 90(3) of the Act.[7]
[5]Eng Mee Yong v Letchumanan [1980] AC 331; Schmidt v 28 Myola St Pty Ltd (2006) 14 VR 447; Piroshenko v Grojsman (2010) 27 VR 489 (‘Piroshenko’).
[6](2010) 27 VR 489
[7]Ibid 491 (citations omitted).
In Australian Broadcasting Corporation v O’Neill,[8] the High Court gave guidance as to the applicable test for interlocutory injunctive relief. The High Court distinguished between the tests as set out by Lord Diplock in American Cyanamid Co v Ethicon Ltd[9] and followed in Australia after the decision of his Lordship in Eng Mee Yong v Letchumanan,[10] and the decision of the High Court in Beeecham Group Ltd v Bristol Laboratories Pty Ltd.[11] Gummow and Hayne JJ held that the party seeking relief must make out a ‘prima facie case’ sufficient to justify relief:
[8](2006) 227 CLR 57 (‘ABC v O’Neil’)
[9][1975] AC 396.
[10][1980] AC 331.
[11](1968) 118 CLR 618.
However, a difference between this Court in Beecham and the House of Lords in AmericanCyanamid lies in the apparent statement by Lord Diplock that, provided the court is satisfied that the plaintiff's claim is not frivolous or vexatious, then there will be a serious question to be tried and this will be sufficient. The critical statement by his Lordship is “[t]he court no doubt must be satisfied that the claim is not frivolous or vexatious; in other words, that there is a serious question to be tried.” That was followed by a proposition which appears to reverse matters of onus:
“So unless the material available to the court at the hearing of the application for an interlocutory injunction fails to disclose that the plaintiff has any real prospect of succeeding in his claim for a permanent injunction at the trial, the court should go on to consider whether the balance of convenience lies in favour of granting or refusing the interlocutory relief that is sought.”
(Emphasis added.)
Those statements do not accord with the doctrine in this Court as established by Beecham and should not be followed. They obscure the governing consideration that the requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.[12]
[12]Ibid 82 (citations omitted).
In line with the decision of the High Court in ABC v O’Neill, the first limb of the test thus requires that the caveator establish that there is a prima facie that they have the estate or interest which they claim in the land in question. While this test is often used interchangeably with whether a serious question is to be tried, the prima facie case test is to be preferred.
Prima facie case
In satisfying the first limb of the test, the trustees must meet the same onus of proof as they would be required to discharge if they were seeking interlocutory injunctive relief.[13] In ABC v O’Neill, Gummow and Hayne JJ, with whom Gleeson CJ and Crennan J agreed on this point,[14] described ‘prima facie case’:
By using the phrase “prima facie case”, their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. [15]
[13]Piroshenko (2010) 27 VR 489, 492.
[14]Ibid 68
[15]Ibid 82.
Further, in Piroshenko I expounded the first limb of the test by setting it out in two parts:
Therefore, consistently, in order for a caveator to satisfy the first limb of the test applied by the courts when deciding applications under s 90(3) of the Act, he or she must satisfy the court that:
1. there is a probability on the evidence before the court that he or she will be found to have the asserted equitable rights or interest; and
2. that probability is sufficient to justify the practical effect which the caveat has on the ability of the registered proprietor to deal with the property in question in accordance with their normal proprietary rights.[16]
[16]Piroshenko (2010) 27 VR 489, 493.
While there is some discussion in the authorities after ABC v O’Neill as to the level of probability that must be satisfied, to avoid confusion, the caveator must show that they have a prima facie case with sufficient likelihood of success to justify the maintenance of the caveat.[17]
[17]Ibid 494.
The crux of the issue in this case is the actual interest the trustees claim. The relevant caveat claimed an interest in the fee simple through a constructive trust. The plaintiff strenuously submitted in its written and oral submissions that the trustees had not provided any evidence of the interest they claimed. The trustees written submissions at no point explained the nature of their interest. They simply contend that Ms Watson was not validly appointed and therefore could not direct Comat to bring these proceedings. I find this submission to be lacking, while there is some conjecture as to the validity of the appointment of Ms Watson, I am concerned with the interest the trustees claim. They are the party seeking to prevent the transfer of the property from the trust to a third party, they are under an onus to show they have a prima facie case with sufficient likelihood of success to justify the maintenance of the caveat. During the oral hearing the trustees expounded a more significant proprietary claim to the property based on a constructive trust. Before I set out the basis of that claim I will now turn to the type of interest that satisfies the requirements of s 89 of the Act.
What is the interest claimed?
As already observed, s 89 of the Act provides for the lodging of a caveat. That provision provides that ‘[A]ny person claiming any estate or interest in land under any unregistered instrument … may lodge with the Registrar a caveat.’
The phrase ‘any estate or interest in land’ is not defined in the Act, and the authorities do not provide an exhaustive list of what interests meet the standard set out in s 89. In Martin v Official Trustee in Bankruptcy,[18] Green CJ posited a number of propositions that set out the characteristics of a caveatable interest:
1. ‘It is only a person who has a legal or equitable interest in land, partaking of the character of an estate in it, or equitable claim to it, who can lodge a caveat’, per Griffith CJ in Municipal District of Concord v Coles (1905 CLR 96, at p.107). That case involved a caveat against applications to bring land under the Act but the simple principles apply to a caveat forbidding any dealing with the land…
2.It is not sufficient if the interest claimed is based upon an assertion of a purely personal right: it must be an interest in the land – see Woodberry v Gilbert (1907) 3 Tas LR 7, at p.10;
3.The interest asserted must be in existence at the time of the lodgement of the caveat.[19]
[18][1990] Tas R 65.
[19]Ibid 68-9.
As explained by Green CJ, it is well established that caveats may only be lodged to protect proprietary interests in land.[20] In Victoria this was made clear by Marks J in McMahon v McMahon,[21] who held:
It is, I think, clear that in order to resist successfully the applications for removal of caveats the wife's arguments must be directed towards the assertion of an interest in the subject land in the light of relevant principles of property and equity law, and that there is no power to alter such law.[22]
[20]See for example McMahon v McMahon [1979] VR 239; Swanston Mortgage Pty Ltd v Trepan Investments Pty Ltd [1994] 1 VR 672.
[21][1979] VR 239.
[22]Ibid 243-4.
The authorities set out that a number of different interests that can be caveated including:[23]
·a beneficiary under a trust (including a unitholder of a unit trust); [24]
·interest of an optionee under an option to purchaser;[25]
·rights under an agreement of a mortgage, a charge, a lease, an easement or a profit a prendre;[26]
·interest of a purchaser of a registered interest under a contract of sale;[27] or
·a vendor’s lien.[28]
[23]See Adrian Bradbrook, Susan V MacCallum, Anthony P Moore and Scott Grattan, Australian Real Property Law ( Lawbook, 5th ed, 2011) 289-90.
[24]Costa & Duppe Properties Pty Ltd v Luppe [1986] VR 90; Schmidt v 28 Myola St Pty Ltd (2006) 14 VR 447.
[25]Laybutt v Amoco Australia Pty Ltd (1974) 132 CLR 57.
[26]Re Elliot (1886) 7 LR (NSW) 71; Avco Financial Services v White [1977] VR 561; Antar v Fairchild Development Pty Ltd [2008] NSWSC 638; Deanshaw v Marshall (1978) 20 SASR 146; Permanent Trustee Australia Ltd v Shand (1992) 27 NSWLR 426.
[27]Jessica Holdings Pty Ltd v Anglican Property Trust Diocese of Sydney (1992) 27 NSWLR 140.
[28]Ex parte Lord [1985] 2 Qd R 75.
In Schmidt v 28 Myola Street Pty Ltd,[29] I explained that s 89 of the Act was broad enough to encompass many equitable interests, including those that did not compel a registered proprietor to provide a registrable document:
In my view the words in s 89(1) of the Transfer of Land Act are plain and ought be applied as meaning what the words say. The words are cast so as to encompass a range of circumstances that may arise in the context of commercial transactions concerned with land. The categories are not closed by the imposition of a narrow concept of traditional “caveatability”. In my view such an approach steers away from proper analysis and consideration of the nature of the interest that the caveator seeks to protect. In essence, a caveat is a quasi-injunction to preserve the status quo. The word “otherwise” in s 89(1) is reflective of and consistent with that purpose.
Accordingly, in appropriate circumstances, an equitable interest in land is capable of supporting a caveat even where that interest will not compel the registered proprietor to deliver a registrable instrument.[30]
[29](2006) 14 VR 447
[30]Ibid 453.
Having established that an equitable interest arising under a trust can give rise to a caveatable interest, I now turn to whether the defendant has established such an interest.
The trustees contended that the property is held by the plaintiff effectively on trust for Mr Watson, not as a beneficiary under the Trust, but because of his provision of moneys to buy the property.
The trustees took me to a number of financial statements of Comat. They noted that the 2007 financial statements of the company did not detail the property as an asset of Comat. They also set out there was only a small loan liability to Mr Watson for $15,498.66 which they submitted could not possibly represent the moneys advanced by Mr Watson to the Trust to buy the property. Further they noted that Comat did not claim capital gains tax on any property in its 2007 tax returns.
In addition to this, the trustees submitted that after 2007 the accountants for Comat recognised the asset was not listed and sought to backdate their financial statements to reflect Comat as being the registered proprietor. The trustees relied on an email dated 6 March 2009 between Comat’s accountant Mr Griggs and the financial controller of Comat, Ms Watson. In that email Mr Griggs noted that the property was not listed in the accounts and that they needed to go back and reinstate the purchase in the records. The trustees contended that the financial statements of the company from 2008 to 2010 all included the property as an asset and showed a more substantial amount in the loan liability to Mr Watson. These statements, it was submitted, were all lodged after the 2009 email.
The nub of the trustees’ argument is that Mr Watson purchased the property with his own funds (along with a loan from Westpac) and the registration of Comat as proprietor was simply a charade. They argued that Mr Watson’s moneys were used to purchase the property and the subsequent loan between Comat and Mr Watson did not reflect the actual nature of the transaction. The trustees argued the property is held by the plaintiff on trust for Mr Watson and thus that interest vests to his trustees in bankruptcy.
The plaintiff presented two key arguments in response to the trustees purported constructive trust. First, the plaintiff accepted that the financial documents indicated that a loan of some $60,206.21 was provided by Mr Watson to Comat for the purchase of the property. The plaintiff relied on the financial statements of Comat from 2008 to 2010 which indicated that the loan to Mr Watson was repaid in 2010 and that Mr Watson lent Comat further moneys in 2011 relating to a property in Rosebud.
Secondly, the plaintiff argued that in addition to the funds being a loan, there was no indication that the South Yarra property was to be held on trust by Comat for Mr Watson in his personal capacity, outside his position as beneficiary under the Trust. The plaintiff argued that the loan evidenced an intention to pass legal rights to moneys lent and not to an equitable right in the South Yarra property. The written submissions of the plaintiff noted that the records of Comat relied upon by the trustees refer to the debt being a loan, not to any other equitable interest. The plaintiff rightly contended that the onus is on the trustees to show a prima facie case that Mr Watson has a constructive trust over the property.
I am persuaded to accept the arguments of the plaintiff for two reasons. First, while I accept there are concerns relating to the accurate representation of the South Yarra property and loan on the books of Comat, the loan appeared in a number of entries originating in a MYOB record from 13 July 2007. I accept that this is some time after the purchase of the property, but the adverse finding which the trustees wish me to make is a step too far. There is no evidence to suggest this was some scheme to mask the ownership of the property. Moreover, the general ledger of Comat from 1 July 2010 to 29 April 2014 indicated the loan account between Mr Watson and Comat was regularly used and included funds relating to property. Further, it is clear that an unsecured loan agreement for the purchase of the property does not gives rise to an interest in the South Yarra property without evidence of the contrary intention. There is no evidence to suggest that there was some form of common intention constructive trust between the parties as identified by the New South Wales Court of Appeal in Allen v Snyder.[31]
[31][1977] 2 NSWLR 685; see also Green v Green (1989) NSWLR 343; Maharaj v Chand [1986] AC 898; Kerr v JP & M Kerr (Billabidge) Pty Ltd [2006] NSWC 1044.
Secondly, the trustees did not provide any further explanation as to the nature of the constructive trust. It appears on the basis of the arguments posited for the trustees that they seek to trace funds from Mr Watson into Comat and then into the property.[32] The logical conclusion of such an argument would be that the plaintiff would hold on constructive trust a proportion of the property equal to the contribution provided by Mr Watson. There are two problems with such a proposition. First, the authorities make it clear that in order to rely on equitable tracing and the subsequent constructive trust, the party seeking that remedy must show a breach of fiduciary duty.[33] The trustees have provided no evidence to show a prima facie case of a breach of fiduciary duty or unconscionable conduct by Comat in its dealings with Mr Watson.
[32]See Foskett v McKeown [2001] 1 AC 102 (‘Foskett’).
[33]See Re Diplock [1948] Ch 465, 520-537; Sinclair v Brougham [1914] AC 398.
Secondly, in order to trace funds through to the plaintiff, it is necessary to determine whether the money or property sought to be traced has a continued existence.[34] In this case, it is unclear if the funds stayed in the loan account or were paid back and replaced with more debt in relation to the sale of the Rosebud property. It seems this case is analogous to a number of cases where equitable tracing into overdraft accounts was unsuccessful on the basis that the traced funds did not have a continued existence.[35]
[34]Foskett [2001] 1 AC 102, 130.
[35]See Bishopgate Investment Management Ltd (in liq) v Homan [1994] WLR 1270, 1278-79; Re Rowena Nominees Pty Ltd (2006) 199 FLR 415, 430; Williams v Peters (2009) 232 FLR 98, 108.
In my opinion there is no probability on the evidence that the trustees have an interest in the property arising out of a constructive trust. As noted by Brennan J in Muschinski v Dodds,[36] the remedy of constructive trust ‘is not so formless as to place proprietary rights in the discretionary disposition of a court acting according to vague notions of what is fair.’[37] The trustees provided almost no evidence to justify their claims and therefore do not make out a prima facie case with sufficient likelihood of success that they have an equitable interest in the property arising out of a constructive trust.
[36](1985) 160 CLR 583.
[37]Ibid 608.
Finally, to reiterate, there were other arguments put forward by the trustees. They alleged that Ms Watson was not validly appointed and therefore could not bring these proceedings. They further argued that Mr Watson originally signed the contract of sale and at that time was a bankrupt and could not exercise his rights as a director of Comat. While these arguments would assist in a proceeding to set aside the sale, they are not arguments that assist the trustees in a proceeding regarding caveats. The validity of Ms Watson’s appointment or the nature of the sale of the property does not, in any way, give rise to a proprietary interest by the trustees in the property. I have therefore not taken them into account.
Balance of convenience
As I have found that the trustees have failed in making out a prima facie case, it is unnecessary for me to deal with the balance of convenience test.[38] However if it were necessary to deal with the second limb I would also find in favour of the plaintiff. As the Court of Appeal (Maxwell P and Charles JA) noted in Bradto Pty Ltd v State of Victoria,[39] the court should take the course which ‘appears to carry the lower risk of injustice if it should turn out to have been “wrong”’.[40] In this case the trustees had substantial difficulty in outlining an equitable interest in the land. At best they may have some equitable interest in the property on the basis of the approximately $60,000 initially lent to Comat. On that basis, the interest in the property is not substantial enough to tip the balance into their favour. Further, according to the trustees the available moneys that would be left over after the sale of the property and creditors paid out would be approximately $170,000. Considering the cost of this proceeding and a possible substantive proceeding to prove the interest, if necessary, this factor would weigh against the trustees in the exercise of the discretion.
[38]Magna Alloys and Research Pty Ltd v Coffey [1981] VR 23, 29.
[39](2006) 15 VR 65.
[40]Ibid 73.
Conclusion
For the reasons set out above I would order, pursuant to ss 90(3) and 103(1) of the Act, that the Registrar of Titles remove the caveat from the Certificate of Title. I further order, pursuant to s 51(2)(b) of the Trustee Act 1958 that the property vest in CFHW as trustee of the Trust.
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