China v Smith (Also Known as James with) [No 3]
[2014] WASC 29
•7 FEBRUARY 2014
CHINA -v- SMITH (ALSO KNOWN AS JAMES WITH) [No 3] [2014] WASC 29
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2014] WASC 29 | |
| Case No: | CIV:2583/2009 | 5 DECEMBER 2013 | |
| Coram: | KENNETH MARTIN J | 7/02/14 | |
| 23 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | PAUL CHINA BENJAMIN CHINA CHINA BROTHERS PRODUCTION CO PTY LTD JAMES SMITH (ALSO KNOWN AS JAMES WITH) TIRED HORSES FILMS HOLDINGS PTY LTD TRI-US ENTERTAINMENT HOLDINGS PTY LTD TRI-US ENTERTAINMENT PTY LTD |
Catchwords: | Civil law and procedure Equity and trusts Funds advanced as subscription for capital in single purpose company Purpose failed Whether funds subject to Quistclose trust Significance of funds being mixed with other funds of trustee |
Legislation: | Nil |
Case References: | Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 China v Smith (also known as James With) [No 2] [2013] WASC 164 Compass Resources Ltd v Sherman [2010] WASC 41; (2010) 42 WAR 1 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Consolidated by orders dated 17 September 2009
- First Plaintiff
BENJAMIN CHINA
Second Plaintiff
CHINA BROTHERS PRODUCTION CO PTY LTD
Third Plaintiff
AND
JAMES SMITH (ALSO KNOWN AS JAMES WITH)
First Defendant
TIRED HORSES FILMS HOLDINGS PTY LTD
Second Defendant
TRI-US ENTERTAINMENT HOLDINGS PTY LTD
Third Defendant
TRI-US ENTERTAINMENT PTY LTD
Fourth Defendant
Application for an interlocutory injunction
- Plaintiff
AND
JAMES SMITH (ALSO KNOWN AS JAMES WITH)
First Defendant
TIRED HORSES FILMS HOLDINGS PTY LTD
Second Defendant
TRI-US ENTERTAINMENT HOLDINGS PTY LTD
Third Defendant
Catchwords:
Civil law and procedure - Equity and trusts - Funds advanced as subscription for capital in single purpose company - Purpose failed - Whether funds subject to Quistclose trust - Significance of funds being mixed with other funds of trustee
Legislation:
Nil
Result:
Application dismissed
Category: B
Representation:
CIV 2583 of 2009
Consolidated by orders dated 17 September 2009
Counsel:
First Plaintiff : Mr P Durack SC
Second Plaintiff : Mr P Durack SC
Third Plaintiff : Mr P Durack SC
First Defendant : Ms C H Thompson
Second Defendant : Ms C H Thompson
Third Defendant : Ms C H Thompson
Fourth Defendant : Ms C H Thompson
Solicitors:
First Plaintiff : Bennett & Philp Lawyers
Second Plaintiff : Bennett & Philp Lawyers
Third Plaintiff : Bennett & Philp Lawyers
First Defendant : Melvyn Levitan
Second Defendant : Melvyn Levitan
Third Defendant : Melvyn Levitan
Fourth Defendant : Melvyn Levitan
CIV 2376 of 2009
Counsel:
Plaintiff : Mr P Durack SC
First Defendant : Ms C H Thompson
Second Defendant : Ms C H Thompson
Third Defendant : Ms C H Thompson
Solicitors:
Plaintiff : Bennett & Philp Lawyers
First Defendant : Melvyn Levitan
Second Defendant : Melvyn Levitan
Third Defendant : Melvyn Levitan
Case(s) referred to in judgment(s):
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
China v Smith (also known as James With) [No 2] [2013] WASC 164
Compass Resources Ltd v Sherman [2010] WASC 41; (2010) 42 WAR 1
- KENNETH MARTIN J:
Introduction
1 On 5 June 2013 I made orders for the hearing of a separate determination in respect of claims to relief under prayers A6, A7 and A8 of the plaintiffs' second further amended statement of claim: see my reasons China v Smith (also known as James With) [No 2] [2013] WASC 164. In summary, the plaintiffs seek declaratory and other relief to establish that the corporate plaintiff, China Brothers Production Co Pty Ltd ('CB Co'), is the beneficiary as regards funds held by the second and fourth defendants under a 'Quistclose trust': see generally Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.
2 The funds the subject of the plaintiffs' application presently reside in a solicitor's trust account - in the wake of freezing orders I issued between 31 July and 14 August 2009. At the hearing a number of exhibits were uncontroversially tendered, chiefly exhibit 1, being a five volume trial book. I refer to documents within exhibit 1 by volume and tag number respectively. References to page numbers are to pages of the sequentially paginated trial book.
Background and uncontroversial facts found
3 Some time prior to March 2008 the first plaintiff, Paul China, wrote a film script for a motion picture. The script was entitled 'All The Tired Horses'. Paul's brother, Ben, the second plaintiff, then worked as a journalist in the entertainment industry.
4 Through Ben the brothers came to meet the first defendant, James Smith (aka James With). Mr Smith is a resident of Western Australia. During 2008 he was taking part in the Australian promotion of a Hollywood film in which he had played a small part. This was the 2008 movie, 'Rambo' (a fourth instalment in the Sylvester Stallone series of John Rambo movies).
5 Whilst in Sydney, Mr Smith was interviewed by Ben China. Eventually, their conversation got around to Paul's film script. Mr Smith expressed interest in being producer of the film and taking the lead part acting role.
6 Paul and Ben China were young men with minimal experience of the film industry. Unsurprisingly, they placed great reliance upon Mr Smith. Plans for the film now escalated rapidly. Initially, the proposed film's budget was under $1 million. Subsequently, the budget increased to $5.2 million.
7 There were numerous discussions between the brothers and Mr Smith. Mr Smith said he was experienced and knowledgeable in the film industry. He said he had contacts who would be able to assist with the finance.
8 Mr Smith clearly also had access to a number of precedent agreement documents which he worked from and presented to the brothers for signature. These included a writing agreement, a production agreement and a directing agreement: see exhibits 1.1.17, 1.1.18 and 1.1.19.
9 The above three agreements were all entered into between Mr Smith as producer and Paul China either as the nominated director, writer or (in the production agreement) as both. None of these agreements look to be prepared professionally. Rather, they present as crude cut and paste efforts by Mr Smith and then submitted to Paul China and Ben China. The agreements express themselves as being governed by the laws of New South Wales.
10 Next, I will mention two further documents of the same antecedents via Mr Smith concerning the funds needed to make the film. These are called 'private placement memoranda'. The first, exhibit 1.1.14, is of 17 June 2008. A second private placement memorandum, exhibit 1.1.16, is of 24 July 2008. These two documents express themselves, in sloppy language, as essentially fund-raising efforts by the second defendant, Tired Horses Films Holdings Pty Ltd ('THFH').
11 The next document which is of key significance is called an investor's agreement, exhibit 1.1.12. This expresses itself to be an agreement as between Ben China (called 'the investor') and Mr Smith (called 'the producer'). It deals with the raising of A$500,000, which was to be provided by a company associated with Ben and Paul China and their father, Shaun China. That company emerged to be the third plaintiff, CB Co.
12 The face page of the first investment agreement document appears to carry the date, Wednesday, 11 June 2008, although it was probably signed by Ben China after then. CB Co as a corporation was registered on 27 February 2008 in Queensland: see exhibit 1.1.1. CB Co's directors appointed at that time were Ben, Paul and their father, Shaun China.
13 The language of the first investor's agreement, cumbersomely expressed, envisages A$500,000 in investment funds would be outlaid by CB Co. Recital B reads:
The invested funds shall be used by the Producer [Mr Smith] at the sole discretion of the Producer in any way attributed to produce the Film that shall be between 90 and 120 minutes in length.
14 Recital F reads:
A Private Placement Memorandum ('PPM') document for raising the anticipated capital requirement for the Film is referenced as an addendum to this Agreement wherein the INVESTOR'S shareholding in the Company is subject to the INVESTOR remitting the Sum Invested as required in accordance with the Schedule of Payments clause of this Agreement.
15 There was no PPM document as an addendum to the first investor's agreement. The two PPM documents I have mentioned already, exhibits 1.1.14 and 1.1.16, emerged a little later in 2008.
16 By cl 2 of the first investor's agreement it was provided:
2. Investment:
The Sum Invested comprising investment funds shall be paid by the INVESTOR to the PRODUCER and transferred into the Production Account or as required to a nominated current account of the PRODUCER for expenditure on the costs of production of the Film as and when reasonably required by the PRODUCER at the dates listed in clause Schedule of Payments here below and in the amounts agreed by and between the INVESTOR and the PRODUCER.
17 Defined terms used in the first investment agreement such as 'Production Account', 'Production Budget' and 'Sum Invested' are important to this case in the context of Quistclosetrust arguments. 'Production Account' is defined in cl 1.24 as:
that 'relevant film account' set up by the Producer for the purpose of expenditures on the production of the Film.'
18 'Production Budget' is defined in cl 1.25 as:
the budget for the production of the Film to completion and delivery.
19 'Sum Invested' is defined in cl 1.27 as:
the total of all moneys received from Investor for the purposes of producing the film.
20 Concerning the essential Quistclosetrust argument advanced by the plaintiffs, I note the second defendant corporation, THFH, came into existence on 23 May 2008: see exhibit 1.1.4. Mr Smith was appointed its sole director and sole secretary on 23 May 2008.
21 Mr Smith is the holder of 100 ordinary shares in THFH. The third plaintiff, CB Co, is the holder of 1,500,000 A-class shares in THFH. However, these A-class shares carry no voting rights - that is in contradistinction to the ordinary shares, which are all held by Mr Smith: see cl 9 of the Constitution of THFH, exhibit 1.1.11.
22 However, A-class shares in THFH do enjoy paramount dividend and winding up rights over ordinary shares, by its Constitution cl 93(1) and (2). Significantly, as regards any future winding up of THFH, cl 93 provides:
Upon winding up of the Company the said A Class, B Class, C Class and D Class shares shall as regards return of Capital rank in priority to all other shares of the Company to the value of $1.00 each, but shall not carry the right to any further participation in the surplus profits or assets of the Company.
23 Relevantly to this case, there subsist as issued shares in THFH only the 1,500,000 A-class shares held by CB Co and the 100 ordinary shares of Mr Smith.
24 Returning to the first investor agreement, cl 3, 4, 5, 6, 7 and 8 provide:
3. Purpose of the agreement:
3.1 This Investor's Agreement sets the terms under which the INVESTOR undertakes to the PRODUCER to contribute investment funds with regards to the Film. The terms of the contract are already pre-approved by and between the PRODUCER and the INVESTOR and are as follows:
…
4 Picture title: 'All The Tired Horses'
5. Individual Producer:
5.1 James R.W. Smith (James With)
6. Executive Producers:
6.1 INVESTOR, China Brothers Productions Pty Ltd, [and other significant investors]
7. Director:
7.1 Paul China
8. Cast:
8.1 James With (lead) and additional to be attached.
26 Significantly, as regards the ultimate production of a film, cl 18 reads:
18. Production
Producer shall incorporate a new single purpose company to produce the Picture in accordance with the terms hereof, and such new company shall be deemed to be added to this agreement as the 'Producer' for all purposes thereunder, however, Producer shall not be relieved of any liability to Executive Producer by virtue thereof.
27 Ben China signed the first investor agreement on behalf of CB Co. That is apparent from his signature with his attributed agency seen on the last page of the investor agreement (page 73).
28 Mr Smith signed the first investor agreement as producer above a reference to the corporation TRI-US Entertainment Holdings Pty Ltd (the third defendant).
Advances of funds pursuant to the first investor agreement
29 CB Co then proceeded to advance funds in aggregate of half a million dollars in accord with the schedule of payments as is identified under cl 12 (see below) of the first investor agreement.
30 It is the fifth of five payments made by CB Co which is of the greatest significance to this case.
31 Funds were paid by CB Co into an ANZ account of the second defendant, THFH, on 10 July 2008 in the amount of A$402,028.19: see exhibit 1.1.23 (page 249), being ANZ account number 4838-72829.
32 That bank account had been opened in the name of THFH, at the Armadale branch of the ANZ Bank.
33 CB Co had advanced a total of half a million Australian dollars - meeting the terms of cl 11 and cl 12 of the first investor agreement. I set out cl 11:
11. Production Advance:
Upon satisfaction of the following conditions precedent with respect to the Film:
(a) to the extent required, approval by the financiers of the Film of the chain of title for the Screenplay,
(b) the full execution of this Agreement,
(c) engagement of principal lead cast of the Film,
Executive Producer shall advance the sum of $100,000 to fund a portion of the pre-production and production costs of the Film in accordance with an approved producer's advance and a cash flow schedule. All such pre-production and production costs shall be specifically identified in the Budget and at such suitable time shall have been preapproved by the completion guarantor and invoiced by Producer in the form of a receipt of funds or drawdown certificate addressed to Executive Producer. Sums shall be deemed advanced pursuant hereto when received in the production account for the film on [sic in] the PRODUCER nominated current account before a production account has been established.
35 Exhibit 1.1.23 only runs from 3 July 2008. It shows an opening credit balance of $2,990 - before a receipt of the $402,028.19 from CB Co of 10 July 2008. Bank statements for that account run until 10 August 2009 (see page 283). However, the first page of the statement number is missing, with the statements produced commencing from statement number 2.
36 Clause 12 of the first investor agreement contains a schedule of payments by the investor. It provides:
12. Schedule of Payments:
INVESTOR shall remit the Sum Invested in a number of payments to the PRODUCER in accordance with the following schedule:
12.1. Payment 1: A$30,000.00 on 7th April 2008 - Transfer from China Brothers Productions to Producer's nominated account;
12.2. Payment 2: US$10,000.00 on 27th April 2008 - Transfer from China Brothers Productions to Maalouf Law Firm;
12.3 Payment 3: A$25,000.00 on 27th May 2008 - Transfer from China Brothers Productions to Producer's nominated account;
12.4 Payment 4: US$30,000.00 on 13th June 2008 - Transfer from China Brothers Productions to Maalouf Law Firm;
12.5 Payment 5: Balance remaining of the Sum Invested after deducting the total sum of Payment 1, Payment 2, Payment 3, and Payment 4 as referenced hereabove on or before 15th July 2008 – Transfer from China Brothers Productions to the Company Production Account as provided to the INVESTOR by the PRODUCER.
38 Payment 12.3, a $25,000 payment, was also made to Mr Smith on 27 May 2008, this time to his account 1099730, referenced as a 'Producer's Advance': see exhibit 1.1.21.
39 There were also electronic transfers of funds overseas by CB Co to the Maalouf Law Firm to accord with cl 12.2 and cl 12.4, on 28 April 2008 and 13 June 2008: see exhibit 1.1.20, showing payment of $10,633.77 as a 'film retainer', and exhibit 1.1.22, showing two payments of A$16,169.02 transferred electronically by CB Co.
40 The fifth CB Co payment (meeting cl 12.5) was directed differently. This time an electronic transfer of funds from CB Co was remitted to the 'Company Production Account' - not to a personal bank account of Mr Smith. These funds (being A$402,028.19) were received in the ANZ account of THFH (4838-72829) on 10 July 2008.
Second investor's agreement
41 A second investor's agreement, exhibit 1.1.13, displays a date, Thursday, 12 February 2008 on its face page. It is also expressed to be an agreement made between an investor and a producer. The producer is again identified as Mr Smith. The investor party is named as CB Co, represented by Benjamin S China (referred to as 'Executive Producer'). It is apparent Mr Benjamin China signs this agreement at page 81 as 'Investor/Executive Producer, China Brothers Productions Pty Ltd'.
42 This document's provisions are similar to the first investor agreement, save for a distinct schedule of payments clause at cl 12, which provides:
INVESTOR shall remit the Sum Invested in two equal payments to the PRODUCER in accordance with the following schedule:
12.1 Payment 1: A$500,000.00 on or before Saturday, February 28th, 2009 - Transfer from China Brothers Productions' bank account to THFH nominated bank account;
12.2 Payment 2: A$500,000 on or before Tuesday, March 31st, 2009 - Transfer from China Brothers Productions' bank account to THFH nominated bank account;
43 It can be seen at page 81 that Mr Smith signs as 'producer'. But below that, unlike in the first investor's agreement, which referred to the third defendant, this second investor agreement refers to 'Tired Horses Films Holdings Pty Ltd', seen underneath the word 'producer'.
44 The face page of the second investor agreement refers to Mr Smith as a party 'represented by Tired Horses Films Holdings Pty Ltd'. The face page also displays the words:
Dear Ben:
This confirms the terms of your second investment for the production, financing and distribution of the Film between China Brothers Production Co Pty Ltd being the investor ('INVESTOR') and represented by Benjamin S. China ('Executive Producer') on the one hand and Tired Horses Films Holdings Pty Ltd represented by James R.W. Smith ('PRODUCER') on the other hand, with respect to the English language, feature length motion picture currently entitled 'All The Tired Horses' (the Film), based on a screenplay ('the Screenplay') written by Paul China.
45 Producer parties named in the second investor's agreement include the second defendant, THFH.
46 As regards the use of funds provided to THFH by way of this further investment by CB Co of $1,000,000, the recitals in this agreement show:
(b) the invested funds shall be used by the Producer at the sole discretion of the Producer in any way attributed to produce the Film that shall be between 90 and 120 minutes in length;
…
(f) a Private Placement Memorandum ('PPM') document for raising the anticipated capital requirement for the Film has been furnished to the INVESTOR wherein the INVESTOR'S initial shareholding in the Company is referenced. Subject to the INVESTOR remitting to the Company account the Sum Invested as written here above the INVESTOR [shall] receive an additional number of shares in the Company commensurate with the Sum Invested.
47 CB Co, was issued with a first tranche of 500,000 A-class shares in THFH, in August 2008.
48 On 5 March 2009, CB Co electronically transferred $500,000 into the THFH ANZ account. It made a further payment of $500,000 on 7 May 2009: see exhibit 1.1.20 at pages 266 and 272.
49 CB Co received a further allocation of 500,000 A-class shares on 9 March 2009, and another (third) allocation of 500,000 A-class shares on 7 May 2009. That took CB Co's aggregate A-class shareholding in THFH to 1,500,000 shares equating on a $1 per A-class share basis to the aggregate of funds it had advanced to that point under the two investor agreements: see exhibits 1.1.4, 1.1.8, 1.1.9 and 1.1.10 at pages 13, 25, 31 and 34 respectively.
Leakages of funds from the THFH ANZ Account (4838-72829)
50 In late July and August 2009 I dealt with a series of interlocutory applications made both ex parte and inter partes on behalf of the plaintiffs seeking to restrain Mr Smith personally, THFH, and TRI-US Entertainment Holdings Pty Ltd from dealing with the funds in the ANZ account (4388-7289) of THFH. That was in a context of CIV 2376 of 2009, with that action subsequently being consolidated with CIV 2583 of 2009.
51 Exhibit 1.1.23 shows that as at 28 July 2009, there were almost $1 million in funds standing to the credit of THFH in that ANZ account.
52 The first in what turned out to be a series of freezing orders was issued on 31 July 2009, at which time I admitted the action matter to my CMC list.
53 Notwithstanding the freezing orders, between 3 August and 10 August 2009, various transfers of funds out of that ANZ bank account occurred. This saw a movement of funds out of account 4838-7289 in the amount of $475,000 to ANZ account 9020-43819, operated by TRI-US Entertainment Pty Ltd (later joined as fourth defendant).
54 Funds transfers to the account of the fourth defendant (see exhibit 1.1.23 at pages 282 and 283) included an electronic transfer of $100,000 on 4 August, an electronic transfer of $130,000 on 5 August, an electronic transfer of $120,000 on 6 August 2009, and an electronic transfer of $125,000 on 10 August 2009. This represented, in practical terms, a leakage of almost 50% of the funds formerly standing to the credit of the THFH ANZ bank account into the account of TRI-US Entertainment Pty Ltd.
55 On 13 August 2009, I issued further freezing orders - now restraining dealings with funds held in the TRI-US Entertainment account. My order was expressed to be made by consent: see exhibit 1.1.30. That order was revised on 14 August: see exhibit 1.1.31. I issued further consent orders on 13 August 2009 concerning THFH: see exhibit 1.1.32.
56 On 4 February 2010, I ordered that the funds standing to the credit of the account of THFH, as well as the funds standing to the credit of the TRI-US Entertainment account, all be transferred to an 'interest-bearing account that was to be opened in the name of the solicitors of record for the third plaintiff and held on trust pending further order': see exhibit 1.1.33.
57 On 19 December 2012, I made orders requiring the funds to be transferred to a trust account of new lawyers now acting for the plaintiffs.
Arguments
58 In short compass, the plaintiffs strongly contend for the existence of a Quistclose trust in their favour - as regards all funds which are the subject of the court's orders to date. In aggregate, there are funds of just under $1 million (inclusive of interest earned to date).
59 At the outset I will observe that at no point has any application been made to me by the defendants seeking that the interlocutory freezing orders first issued in 2009, as varied subsequently, be discharged. That level of inertia bears upon some matters considered subsequently.
60 The plaintiffs, in advancing a case for declaratory relief regarding a trust favouring CB Co as to the frozen funds and for orders giving effect to that declaration, place a heavy emphasis on the fact that they (more specifically, the third plaintiff, CB Co) were the effective source of the funds received by THFH. Further, they say their funds were clearly advanced to THFH for the mutually intended purpose of the making of a film from the screenplay that was written by Paul China, namely 'All The Tired Horses'.
61 Clearly, such a film has not yet been made. The parties have not spoken to each other for years (other than through their lawyers). They fell out in 2009 in acrimonious circumstances, including over allegations Mr Smith was plundering the production account of THFH for his personal use. That underlying contention was the basis for the freezing orders which issued in mid-2009 and which have remained in place (with some modifications) ever since.
62 The plaintiffs place considerable significance upon the fact CB Co's advances of $402,028.19 and then of $1 million (by two electronic transfers of A$500,000) to THFH were all made into a specific ANZ 'production account' - as is envisaged by and in accord with the two investment agreements. THFH of course is the corporation established with the sole purpose of producing the intended 'Picture': see cl 18 in both investor agreements.
63 Evidence emerged at the trial that Mr Ben China was allowed only limited electronic viewing access to the ANZ account of TFHF. This enabled him only to view the most recent four transactions on the account as well as the account balance. Ben China could not draw funds from or otherwise operate this account. In effect, he held a limited observer status only. Mr Smith had sole capacity to effect transactions upon and from the THFH account held with ANZ.
64 Identification of a specific bank account into which funds are paid and the express recognition, seen in both investment agreements that the single purpose of the second defendant, THFH, was to produce the film ('Picture'), strongly supports the case for a Quistclose trust, according to the plaintiffs' submissions. That argument is made in circumstances where the plaintiffs also contend that the evidence is overwhelming that the film-making purpose for which CB Co's funds were advanced, namely, making a film from the screenplay written by Paul China, in accord with the elaborate contractual arrangements entered with Mr Smith under the various agreements as producer, has wholly failed.
65 The plaintiffs contend that the film-making purpose may be found to have failed as early as mid-2009, but that, in any event, evaluated in December 2013 it is overwhelmingly clear that the as envisaged film will not be made as was intended.
66 The defendants resist all these propositions.
Three Central issues
67 In essence, this separate determination hearing concerning the argued existence of a Quistclose trust over funds and favouring CB Co, distils to a resolution of three essential questions, namely:
(a) Were funds advanced to THFH by CB Co for the primary purpose of making the film 'All The Tired Horses'?
(b) Has the purpose now failed?
(c) Was it the mutual intention of the parties that the funds as advanced by CB Co not become part of the general assets of THFH?
68 In each instance these three issues raise questions of fact to be determined in the unique presenting circumstances now under consideration.
Quistclose Trusts Law
69 Before resolving the fundamental questions it is as well to revisit the state of the law by reference to two leading case authorities. First is the seminal decision of the House of Lords, Barclays Bank Ltd v Quistclose Investments Ltd. There Lord Wilberforce, with whom Lords Reid, Morris, Guest and Pearce agreed, famously observed, at 580:
There is equally, in my opinion, no doubt that the loan was made only so as to enable Rolls Razor Ltd to pay the dividend and for no other purpose. This follows quite clearly … The mutual intention of the respondents and of Rolls Razor Ltd., and the essence of the bargain, was that the sum advanced should not become part of the assets of Rolls Razor Ltd., but should be used exclusively for payment of a particular class of its creditors, namely, those entitled to the dividend. A necessary consequence from this, by process simply of interpretation, must be that if, for any reason, the dividend could not be paid, the money was to be returned to the respondents: the word 'only' or 'exclusively' can have no other meaning or effect. (my emphasis in bold.)
70 Next, I mention Beech J's observations in Compass Resources Ltd v Sherman [2010] WASC 41; (2010) 42 WAR 1. I respectfully refer to and acknowledge his Honour's comprehensive analysis of legal principles in this area, as is seen between [57] and [78] of that decision. The comprehensive character of his Honour's observations relieves me of any need to canvass the law concerning the establishment of a Quistclose trust. However, relevantly to the present determination, I will note, in particular, that his Honour said, at [67]:
In my opinion, the test of the necessary intention is the composite test stated in the cases to which I have referred. Is it intended that the monies not become part of the general assets of the company and be used only for the particular purpose? It is not sufficient, in order to establish a trust, to show that the parties intended that the monies be used only for a particular purpose. Not every contractual obligation to use loan funds for a specified purpose gives rise to a trust of the monies lent. (my emphasis in bold)
71 Quistclose and Compass Resources both concerned advances of loan funds - in circumstances where subsequently intervening events inhibited the intended deployment purpose of the loan funds when received by the borrower. In that situation, it was a failure of the primary purpose which caused an enquiry to be made concerning the parties' mutual intentions (assessed objectively) as to what would happen to the funds in such an event. As to this task, some further observations by Lord Wilberforce in Quistcloseat 581 G - H are pertinent:
There is surely no difficulty in recognising the co-existence in one transaction of legal and equitable rights and remedies: when the money is advanced, the lender acquires an equitable right to see that it is applied for the primary designated purpose (citation of authority omitted): when the purpose has been carried out (ie, the debt paid) the lender has his remedy against the borrower in debt: if the primary purpose cannot be carried out, the question arises if a secondary purpose (ie, repayment to the lender) has been agreed, expressly or by implication: if it has, the remedies of equity may be invoked to give effect to it, if it has not (and the money is intended to fall within the general fund of the debtor's assets) then there is the appropriate remedy for recovery of a loan …. In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it. (my emphasis in bold.)
72 One of the general principles as explained by Beech J in Compass Resources at [69] as regards the objective nature of this Court's enquiries as to mutual purpose, was:
[I]n determining the question of intention the court will have regard to the language employed by the parties, including in the particular clause in question, the nature of the transaction, and the circumstances surrounding the relationship. (citation of authority omitted).
73 Concerning the significance of the funds received being paid into a separate bank account, Beech J then observed [70]:
Whether there is expressed a requirement that the funds be kept separate from other moneys of the borrower is a significant consideration in determining the question of intention: Walker v Corboy (397 - 398) the 'most powerful indicium'; Re Australian Elizabethan Theatre Trust (505 – 506) 'of considerable significance'; Jessup [12]; Salvo [38] 'indicative but not conclusive' [65]; McManus RE Pty Ltd v Ward (2009) 74 NSWLR 662 [25] 'often decisive'.
74 Beech J at [71] referred to the funds being kept separate and 'not mixed with the borrower's general funds' as being 'of considerable significance'.
75 I respectfully adopt in this present context all his Honour said in his Compass Resources reasons.
First question: Were the funds advanced for the purpose of making a film from the screenplay?
76 It is a relatively easy conclusion to draw that the relevant funds advanced by CB Co to THFH were received for the agreed purpose of being used by THFH (after payment into the ANZ production account of THFH) to meet expenses incurred in the making of a film, All The Tired Horses, based upon the screenplay earlier written by Paul China. On the written materials, that assessment is overwhelming: see particularly the terms of the production agreement, writing agreement and directing agreement entered as between Paul China and Mr Smith, the two investment agreements and the two PPMs.
77 Accordingly, the first limb to show a trust, by establishing the mutually intended purpose of the advances by CB Co to THFH was to fund expenditures necessarily associated with parlaying the screenplay written by Paul China into the envisaged film, is satisfied.
Second question: Has the primary purpose of making a film from the screenplay failed?
78 On the evidence before me the second question must also be answered, overwhelmingly, in the affirmative. The evidence is all one way. This is also in circumstances where Mr Smith elected not to give personal viva voce evidence at the hearing of this separate determination.
79 The following factors are of significance. First, at no time since 2008 has there been raised more than a fraction of the film's projected budget by way of finance. The revised 2008 budget for the intended film came in at $5.2 million. The level of funds raised was only A$1.5 million and all of that from CB Co. There is no evidence before me that anyone else was then or is now seriously prepared to advance further money even approaching the required balance up to A$5.2 million, for the making of the proposed film. Without funds to that level the film cannot be made.
80 Secondly, the nominated director for the film was the screenplay writer, Paul China. On the evidence there has been a serious falling out between all of the plaintiffs and Mr Smith in mid-2009. Mr Smith contends, through counsel by way of submission, that he still believes he could make the film at some indeterminate time in the future, since he holds rights to the screenplay (under the writing agreement) and that he can do so by deploying a new director. But this is just assertion. The assertion is far too nebulous and speculative, in my view. Nothing affirmative or reliable by way of evidence is put before me in that regard from Mr Smith.
81 Thirdly, the two PPMs of 2008 envisage a completed film project and a return to investors after approximately 36 months. That was in the documentation circulated to investors in 2008. It is now 2014. There is no film. Nothing much has occurred in terms of filming or the assembly of a cast and crew. The situation of the film as a project presents as one of terminal inertia.
82 Fourthly, my freezing orders as to the residual funds held by THFH issued during late July and throughout August 2009 at the behest of the plaintiffs remain in place. It is not necessary or appropriate upon the present application to descend into the rights or wrongs of underlying grievances the plaintiffs advanced then against Mr Smith concerning his alleged plundering of the THFH account for personal purposes - in circumstances where less than a third of the A$5.2 million in required funding for the film had been raised. Nevertheless, it is a factor of some negative significance that whilst the defendants assert (without evidence) that the purpose of making the film has not failed, there has been no application to rescind, vary, revoke or otherwise challenge those interlocutory freezing orders - which have been in place now in one form or another for almost 4 1/2 years. Correlatively, there is no evidence of any other viable source of funds which Mr Smith might access to produce this film - even deploying another director (retaining himself in the key role).
83 Finally, the diversion of almost half the funds held in the ANZ THFH account ($475,000) to TRI-US Entertainment in a period leading up to 10 August 2009 has not even been attempted to be explained. Putting possible issues of contempt of my orders wholly to one side as inappropriate at this time, nevertheless, the underlying movement of funds at that time is a fact of significance in its own right. No reason can be ascertained consistent with an advancement of a legitimate utilisation by THFH of $475,000 to make the film at that time, that is, for a use for film production purposes in August 2009. No explanation has been forthcoming from the defendants in terms of the events which, effectively, depleted the ANZ production account of almost 50% of its funds at the time. Fortunately, amended freezing orders issued in time to preserve these funds then in the hands of the fourth defendant. But the evidence is overwhelming that $475,000 was knowingly moved out of THFH's production account to what is essentially the account of another corporate entity wholly associated with Mr Smith.
84 I pause to note that the evidence before me incontrovertibly shows the third defendant, TRI-US Entertainment Holdings Pty Ltd, and fourth defendant, TRI-US Entertainment Pty Ltd, as corporations exclusively tied to Mr Smith. He is sole director and shareholder of both. He clearly controls all their decisions and activities.
85 In the end, therefore, the inevitable conclusion is that it is overwhelmingly proved that the purpose of making a film has failed. Towards the proposed film it is appropriate to invoke the words of the classic Python comedy sketch: 'This parrot is dead!'
Third question
86 That assessment, however, still leaves to be determined a critical third issue, namely, whether or not the funds as advanced to THFH's ANZ account by CB Co were to become part of the general assets of THFH. If they were, then this application must fail: see Compass [67]. It is on this last issue, upon my assessment, that the present application must fail.
87 There are a number of factors relevant to this evaluation. First, my assessment is that, crudely drawn as they are, the two investment agreements, objectively assessed and when read together with the accompanying private placement memoranda (PPMs) of 17 June 2008 and 24 July 2008 (exhibits 1.1.14 and 1.1.16), point to the underlying arrangements as being in the nature of a capital raising by THFH - upon the basis of the issue of A-Class shares in THFH in return for money. So, unlike most Quistclose cases, the present is not a case of loan funds being obtained by a borrower to be deployed towards a purpose which subsequently fails. On the present factual scenario there was no loan by CB Co. Instead, capital was being raised by THFH for value given by the issue of its A-class shares at $1 each.
88 Second, CB Co actually received 1,500,000 A-class shares in THFH in return for its subscription of funds totalling $1,500,000. This receipt, on my assessment, points overwhelmingly to a capital raising at $1 per A-class share, in return for which the second plaintiff was to and did receive shares in that proportion in THFH. Thus, it did then receive something of value in return for its money in accord with the contractual agreements entered into.
89 I was not at any point of the hearing shown any annual financial statements for THFH. I rather suspect that they may not even have been prepared. If they had, however, then it would seem that the THFH 2008/2009 accounts should reflect a shareholder's equity for CB Co in the amount of 1,500,000 shares, purchased on the basis of $1 per A-class share in return for CB Co's aggregate subscription of $1.5 million. In other words, the subscription funds once in the hands of THFH would properly be characterised as THFH's own current asset general funds, even in circumstances where THFH is a single purpose company.
90 In reaching this conclusion, I was unswayed by some other factors as raised by the defendants, such as the asserted intermixing of other moneys into the THFH account. It is not beyond the capacity of a court of equity to trace, identify and separate mixed funds in such circumstances. Nor should the conduct of a party ultimately responsible for a mixing of funds unduly inhibit a court of equity taking steps to protect against a wrongdoing if that were ascertained.
91 In the end, however, the question of fact is as to the permitted use of these funds as part of THFH's own assets. The matter can be tested by considering a case in which there were to be general unsecured creditors of THFH advancing debt claims seeking payments, in circumstances where the primary purpose of making the film had failed, and debts had been (wrongly) incurred by THFH for purposes other than making the film. I cannot accept that such creditors would rank below claims of the present plaintiffs to what remained of their subscribed funds from THFH. By my assessment, funds advanced by CB Co to THFH became a part of the general capital of that corporation and, as such, available to all unsecured creditors.
92 Because of that negative conclusion upon the third element, this application for declaratory relief and consequential orders implementing that relief must ultimately fail.
Postscript
93 I observe, however, that during the course of argument I was taken by both counsel to provisions of the Constitution of THFH. I earlier set out cl 93 in the THFH constitution in relation to the expressly stated superior position of the holders of A-class shares on a winding up - they ranking in priority to the claims of all other shares.
94 On that basis, on any winding up of THFH, the 1,500,000 A-class shares held by CB Co must rank in priority to the 100 ordinary issued shares as held by Mr Smith.
95 Given that the purpose of the making of the film for which THFH was exclusively incorporated has now been assessed as having failed, it correlatively follows, I would have thought, there may now be a prima facie basis established for the winding up of THFH, on a just and equitable basis.
96 Counsel have not yet had occasion to address that precise point specifically. By s 461(1)(k) of the Corporations Act 2001 (WA) this court can issue an order for a winding up in circumstances where it is just and equitable to do so.
97 In the present case, the board of THFH is, in effect, Mr Smith. CB Co holds no ordinary shares and hence enjoys no voting rights at a shareholders general meeting, given the characteristics of A-class shares.
98 Accordingly, there may now present a prima facie basis for CB Co to move in this court for orders that THFH be wound up - on the basis that it is just and equitable to do so. The parties were not fully heard upon this further issue at the hearing. Consequently, I will afford an opportunity to address this point after the publication of these reasons.
99 It also seems to follow that there must be an ancillary order to the effect that funds formerly held in the account of TRI-US Entertainment are, in fact, the property of THFH. All the funds should now be assessed as THFH's funds, upon any winding up application of THFH.
100 I will hear the parties as to the implementation of these reasons and other matters after they have had an opportunity of considering them.
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