Crossman v Sheahan

[2016] NSWCA 200

Court of Appeal

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Crossman v Sheahan [2016] NSWCA 200
Hearing dates:	27 and 28 April 2016
Decision date:	23 August 2016
Before:	Basten JA at [1]; Ward JA at [37]; Payne JA at [390]
Decision:	(1)   Appeal allowed with costs. (2)   Set aside the orders of Rein J made on 2 July 2013 and in lieu thereof order that: (a)   The plaintiffs’ Further Amended Commercial List Summons filed on 28 April 2014 be dismissed. (b)   The first and second plaintiffs pay the costs of the third, fourth, fifth and ninth defendants.
Catchwords:	EQUITY – trusts – where payment made by trustees to third party out of trust assets to settle separate proceedings against trustees personally for misapplication of trust assets – whether beneficiary consented to breach of trust – knowing receipt – whether appellant who received trust property had knowledge of breach of trust so as to be liable under first limb of Barnes v Addy – where releases contained in two separate deeds – whether a knowing recipient of trust property can rely on release clauses excluding liability of trustees for breach of trust – whether rescission of both deeds a precondition to relief – whether entire agreement clauses in each deed precluded release in one deed operating in relation to claim for breach in respect of the other – whether substantial restitution possible – whether defences of laches, acquiescence, delay should have been upheld   APPEAL – apprehended bias – whether primary judge should have recused himself for having heard earlier application for appointment of new trustees
Legislation Cited:	Corporations Act 2001 (Cth), s 471B Trustee Act 1925 (NSW), s 63 Uniform Civil Procedure Rules 2005 (NSW), r 51.53
Cases Cited:	Agricultural Land Management Ltd v Jackson (No 2) [2014] WASC 102 AH McDonald & Co Pty Ltd v Wells [1931] HCA 24; (1931) 45 CLR 506 Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216 Amcor Packaging (Australia) Pty Ltd v Baulderstone Pty Ltd [2013] FCA 253 Armitage v Nurse [1998] Ch 241 Australian National Industries Ltd v Spedley Securities Ltd (In liq) (1992) 26 NSWLR 411 Australian Securities and Investments Commission v Hellicar [2012] HCA 17; (2012) 247 CLR 345 Barnes v Addy (1874) LR 9 Ch App 244 Bathurst City Council v PWC Properties Pty Ltd [1998] HCA 59; (1998) 195 CLR 566 Beach Petroleum NL v Johnson (1993) 43 FCR 1 Bilta (UK) Ltd (in liq) v Nazir (No 2) [2015] UKSC 23; 2 WLR 1168 Blackmagic Design Pty Ltd v Overliese [2011] FCAFC 24; (2011) 191 FCR 1 Brisbane South Regional Health Authority v Taylor [1996] HCA 25; (1996) 186 CLR 541 British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283; [2011] HCA 2 Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; (2006) 229 CLR 577 Crossman v PILT Nominees Pty Ltd [2008] NSWSC 557 Crossman v PILT Nominees [2009] NSWSC 393 Daly v Sydney Stock Exchange Ltd [1986] HCA 25; (1986) 160 CLR 371 Duke Group Ltd (in liq) v Alamain Investments Ltd [2003] SASC 415 Duke Group (in liq) v Pilmer [1999] SASC 97; (1999) 73 SASR 64 Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 Gerard Cassegrain & Co Pty Ltd (in liq) v Cassegrain [2013] NSWCA 455; (2013) 305 ALR 687 Goodwin v Commissioner of Police [2012] NSWCA 379 Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112 Greater Pacific Investments Pty Ltd (in liq) v Australian National Industries Ltd (1996) 39 NSWLR 143 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296 Hancock Family Memorial Foundation Ltd v Porteous [2000] WASCA 29; (2000) 22 WAR 198 House v The King [1936] HCA 40; (1936) 55 CLR 499 Incitec Ltd v Alkimos Shipping Corporation [2004] FCA 698; (2004) 138 FCR 496 Inntrepreneur Pub Co v East Crown Ltd [2000] 2 Lloyd’s Rep 611 Isbester v Knox City Council (2015) 255 CLR 135; [2015] HCA 20 Jackamarra v Krakouer [1998] HCA 27; (1998) 195 CLR 516 Johnson v Johnson (2000) 201 CLR 488; [2000] HCA 48 Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 Laws v Australian Broadcasting Tribunal [1990] HCA 31; (1990) 170 CLR 70 Leerac Pty Ltd v Garrick E Fay [2008] NSWSC 1082 Lightsource Technologies Australia Pty Ltd v Pointsec Mobile Technologies AB [2011] ACTSC 59 Livesey v NSW Bar Association (1983) 151 CLR 288 Londish v Sheahan – In re Valofo Pty Ltd [2010] NSWSC 337 Londish v Sheahan [2009] NSWSC 1175 Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633 Michael Wilson & Partners Ltd v Nicholls [2011] HCA 48; (2011) 244 CLR 427 Minister for Immigration and Multicultural Affairs v Jia Legeng [2001] HCA 17; (2001) 205 CLR 507 Najjar v Haines (1991) 25 NSWLR 224 Nicholls v Michael Wilson & Partners Ltd [2010] NSWCA 222; (2010) 243 FLR 177 O’Donnell v Reichard [1975] VR 916 O’Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 Payne v Parker [1976] 1 NSWLR 191 PILT Nominees Pty Ltd v Baltarna Pty Ltd [2009] NSWSC 656 R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256 R v Watson; Ex parte Armstrong 91976) 136 CLR 248; Re Dawson (dec’d) [1966] 2 NSWLR 211 Re JRL; Ex parte CJL (1986) 161 CLR 342 Re Lusink; Ex parte Shaw (1980) 55 ALJR 12; 32 ALR 47 RHG Mortgage Ltd v Rosario Ianni [2015] NSWCA 56 Rinehart v Welker [2012] NSWCA 95 Robins v Incentive Dynamics Pty Ltd (in liq) [2003] NSWCA 71; (2003) 175 FLR 286 RPS v The Queen [2000] HCA 3; (2000) 199 CLR 620 Segelov v Ernst & Young Services Pty Ltd [2015] NSWCA 156; (2015) 89 NSWLR 431 Sheahan v Londish [2010] NSWCA 270; (2010) 244 FLR 64 Sheahan v Thompson [2015] NSWSC 535 Sheahan v Thompson (No 2) [2015] NSWSC 871 Spellson v George (1992) 26 NSWLR 666 Streeter v Western Areas Exploration Pty Ltd (No 2) [2011] WASCA 17 Vakauta v Kelly [1989] HCA 44; (1989) 167 CLR 568 Valofo Pty Ltd (Administrators Appointed) v PILT Nominees Pty Ltd [2011] NSWSC 134 Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544 Webb v The Queen (1994) 181 CLR 41 Young v Murphy [1996] 1 VR 279 Youyang Pty Ltd v Minter Ellison Morris Fletcher [2003] HCA 15; (2003) 212 CLR 484
Texts Cited:	I Spry, Equitable Remedies (6th ed, 2001, LBC) JD Heydon, Cross on Evidence (10th ed, 2014, LexisNexis) JD Heydon and MJ Leeming, Jacobs’ Law of Trusts (7th ed, 2006, LexisNexis) JD Heydon, MJ Leeming and PG Turner, Meagher, Gummow & Lehane’s Equity Doctrines and Remedies (5th ed, 2015, LexisNexis) JW Carter, The Construction of Commercial Contracts (2013, Hart Publishing) ML Ascher, A Wakeman Scott, WF Fratcher, Scott and Ascher on Trusts (5th ed, 2008, Aspen Publishers) RP Meagher, JD Heydon and MJ Leeming, Meagher, Gummow & Lehane’s Equity Doctrines & Remedies (4th ed, 2002, LexisNexis)
Category:	Principal judgment
Parties:	Phillip Crossman (First Appellant) Seniors Provident Pty Ltd (Second Appellant) Metro Finance Pty Ltd (Third Appellant) Metro Finance (NZ) Pty Ltd (Fourth Appellant) John Sheahan (First Respondent) Ian Lock (Second Respondent) Valofo Pty Ltd (in liq) (Third Respondent) Ross Seller (Fifth Respondent) Peter Londish (Sixth Respondent)
Representation:	Counsel: Dr AS Bell SC with DFC Thomas (Appellants) JE Marshall SC with DR Sulan (First and Second Respondents)   Solicitors: Corrs Chambers Westgarth (Appellants) Clayton Utz (First, Second and Third Respondents)
File Number(s):	2015/221882
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity – Commercial List Citation: [2015] NSWSC 535; [2015] NSWSC 871 Date of Decision: 06 May 2015 Before: Rein J File Number(s): 2013/127413

HEADNOTE

[This Headnote is not to be read as part of the judgment]

These proceedings arise out of a dispute in relation to a tax-driven securitised investment scheme which involved the establishment of a number of trusts, the primary trust being the PILT Trust. The investor in the scheme was Valofo Pty Ltd. Mr Crossman, who had been one of the architects of the scheme, was a contingent beneficiary under one of the sub-trusts established under the scheme (the Baltarna Class Trust). On the vesting of that sub-trust he would have been contingently entitled to a distribution of trust assets, that being the way in which his “sweat equity” was to be remunerated.

In March 2008, steps were taken by another architect of the scheme, Mr Ross Seller, to remove Mr Crossman as a contingent beneficiary under the Baltarna Class Trust Deed. Mr Crossman commenced proceedings against Mr Seller and others, including the then trustee of the PILT Trust, alleging breach of trust in relation to the disbursement of trust assets and seeking, among other relief, his reinstatement as a contingent beneficiary and orders for the vesting of the respective trusts. In the course of those proceedings he brought an application seeking that the trustee of the PILT Trust as well as Mr Seller and Mr Peter Londish be punished for contempt of court, following the entry by the trustee into a bill facility secured over the trust assets in alleged breach of court orders preventing the trustee from borrowing using the assets of the trust.

The proceedings brought by Mr Crossman, including the contempt motion, were settled in 2009. Two separate settlement deeds were entered into, both containing entire agreement clauses and mutual releases/covenants not to sue. Under the contempt settlement deed, payments totalling around $2.2 million were paid in two tranches to Mr Crossman’s companies (at his direction) in consideration for which Mr Crossman agreed to discontinue the contempt motion. Under the main settlement deed, the parties settled the balance of the proceedings brought by Mr Crossman for the sum of $1.

In 2011, Valofo’s liquidators were appointed as trustees of the PILT Trust. Over two years later (and some time after the final of the two settlement payments under the contempt settlement deed had been made) they commenced proceedings against Mr Crossman and the Crossman companies (the appellants) seeking the payment of equitable compensation in the amount of the settlement sum paid under the contempt settlement deed. They were successful at first instance, on the basis that the appellants were liable as knowing recipients of moneys paid in breach of trust by the former trustees of the PILT Trust.

The appellants appealed from that decision on a number of grounds, including that the primary judge should have acceded to an application made by them at the commencement of the hearing that he disqualify himself for apprehended bias on the basis of his determination of the earlier application made in 2011 for the appointment of the new trustees.

Held, allowing the appeal, setting aside the orders made by the primary judge and in lieu thereof dismissing the new trustees’ proceedings:

as to the claim of apprehended bias:

(1)   by Ward JA at [141], [174]-[175]; Payne JA agreeing at [390], the primary judge did not err in refusing the appellants’ application that he recuse himself on the ground of apprehended bias.

(2)   by Basten JA (dissenting on this ground) at [33] the ground of reasonable apprehension of bias should have been upheld by the primary judge but that the final orders proposed by Ward JA should be made.

as to the remaining grounds of appeal:

(3)   by Ward JA (at [141], [191], [195]) (Basten JA (at [6]) and Payne JA (at [390]) agreeing), that where: the respondents did not plead a breach of trust in relation to the entry by the former trustee into the main settlement deed; the case was not conducted on the basis that there was any such breach of trust; and no application was made for the main settlement deed to be set aside, reliance could be placed by the appellants on the release clause in the main settlement deed to resist the claims made by the respondents and the new trustees’ proceedings should have been determined in favour of the appellants on that basis.

(4)   by Ward JA (at [150]-[152], [237]-[239], [246]) (Basten JA (at [6]) and Payne JA (at [390]) agreeing), the release clause in the main settlement deed on its proper construction operated to release Mr Crossman and the Crossman companies (as “related entities”) from the claims made by the respondents.

(5)   by Ward JA (at [156]; [367]) (Basten JA (at [7]) and Payne JA (at [390]) agreeing), the fully informed consent of the only beneficiary of the PILT Trust (Baltarna Pty Ltd) should have been determinative in the appellants’ favour of any claim that the former trustees were in breach of trust in entering into the main settlement deed; Payne JA (at [406]) (Ward JA agreeing at [367]) the primary judge was correct to reject the new trustees’ submission that the knowledge of Mr Seller could not be attributed to Baltarna, there having been no pleading of fraud.

(6)      by Ward JA (at [143]-[144], [292], [303], [337]) (obiter) (Payne JA at [390]) agreeing), entry into the contempt settlement deed, viewed in isolation, was a breach of trust by the former trustees and was not authorised by the provisions of the PILT Trust Deed due to the obvious conflict of interest on the part of the former trustees in so doing and the appellants’ reliance on the exoneration clauses in the PILT Trust Deed did not alter that conclusion.

(7)   by Ward JA (at [154], [263], [269]; [388]) (obiter), (Payne JA at [390] agreeing), were it necessary to determine, the exercise of the primary judge’s discretion in relation to the relief granted miscarried in circumstances where equitable compensation was ordered without any adjustment to take into account the value Mr Crossman had given up by entering into the respective settlement deeds and where substantial restitution was not possible; had substantial restitution been practical, the defence of laches, acquiescence and delay would not have been made out.

(8)   by Basten JA (at [8]), in the circumstances it is not necessary to consider whether relief should have been refused on the basis that it was at the date of trial no longer possible in practical terms to put Mr Crossman back into the position he had been in prior to the settlement.

Judgment

INDEX

BASTEN JA			[1]
Reasonable apprehension of bias			[10]
(a) recusal application		[10]
(b) challenge on appeal		[18]
(c) relevant legal principles		[21]
(d) application of principles		[28]
(e) consequence of conclusion as to bias		[34]
WARD JA			[37]
Background			[44]
PILT Trust		[52]
Baltarna Trust		[59]
Baltarna Class Trust		[66]
Position as at March 2008		[68]
Subsequent events		[70]
Commencement of Crossman proceedings		[81]
Settlement of the Crossman proceedings		[94]
The Settlement Deeds		[96]
Main Settlement Deed		[99]
Contempt Settlement Deed		[102]
First payment under Contempt Settlement Deed		[108]
Valofo administration		[109]
October 2009 Deed of Amendment		[114]
Reappointment of administrators to Valofo/notification of proposed Second Payment to Crossman		[115]
Valofo Liquidation		[120]
Second payment under Contempt Settlement Deed		[121]
Discontinuance of Crossman proceedings		[124]
Consent to vesting of Baltarna Class Trust		[125]
Outcome of challenges to the administrators’ appointment		[126]
Application for removal of PILT Nominees and Baltarna as trustees		[127]
Commencement of subject proceedings by the New Trustees/recusal application		[131]
Subject proceedings			[136]
Appeal proceedings			[138]
Summary			[140]
Appeal ground 1 – apprehended bias			[158]
Determination		[167]
Notice of contention grounds 1 and 2 – capacity in which PILT Nominess entered the settlement deeds			[177]
Appeal ground 2 – denial of procedural fairness			[182]
Submissions		[186]
Determination		[190]
Appeal grounds 3, 4 and 5 – release clauses			[197]
Primary judgment		[206]
New Trustees’ general submissions		[213]
Submissions as to construction of the releases
Sub-clauses 3.2(a)(i) and (ii) of the Main Settlement Deed/4.2(a)(i) and (ii) of the Contempt Settlement Deed	[218]
Sub-clause 3(b) of the Main Settlement Deed	[223]
Extension of releases to the Crossman corporations		[230]
Determination		[234]
Appeal grounds 6-7 – complaint as to issues relating to rescission			[249]
Primary judgment		[250]
Submissions		[254]
Determination		[258]
Appeal grounds 8-12 – breach of trust			[270]
Challenge to findings of breach of trust		[286]
Submissions		[287]
Authorisation – ground 8		[288]
Clause 23.19 – ground 9		[293]
Did the exoneration clauses apply? – grounds 9-10		[304]
Were the exoneration clauses engaged?	[313]
Did the fraud/wilful default/negligence exceptions apply?	[317]
Jones v Dunkel – ground 11		[339]
The “New” Baltarna consent ground – ground 12		[345]
Determination	[354]
Appeal grounds 13-14 – laches, acquiescence and delay			[369]
Primary judgment		[370]
Submissions		[374]
Determination		[385]
Conclusion			[389]
PAYNE JA			[390]
Consent by the only unitholder of the PILT Trust - Baltarna			[392]

1. BASTEN JA: In 1995 the first appellant, Phillip Crossman, a financial consultant, conceived a tax-effective trust structure involving the acquisition of a number of service stations by the primary trust. Mr Crossman was a contingent beneficiary under a sub-trust and expected a financial reward for his conception, to be realised on a final sale of the assets.

2. In March 2008, before the assets were realised, the corporate trustee of the primary trust removed the mechanism by which Mr Crossman could obtain any financial reward. Mr Crossman commenced proceedings in 2008 against the trustee of the primary trust. In the course of those proceedings, he obtained an interlocutory injunction prohibiting the trustee from disposing of or encumbering the trust assets. In apparent defiance of the court order, the trustee mortgaged the assets for a bank loan of $11.3 million and paid out most of the proceeds to third parties. Mr Crossman then commenced separate proceedings for contempt of court.

3. In July 2009, Mr Crossman settled his claims against the trustee and those responsible for the alleged contempt, on payment to him by the trustee of a sum of $2.2 million.

4. The trustee was subsequently replaced by the present respondents. They commenced proceedings against Mr Crossman (and companies to which parts of the $2.2 million had been paid) to recover the $2.2 million which they alleged had been paid out in breach of trust. They were successful before the primary judge, Rein J. [1]

   1. John Sheahan v Martin Thompson [2015] NSWSC 871.

5. Mr Crossman (and the companies) appealed against orders that they repay the amount obtained pursuant to the settlement of the proceedings against the former trustee. I agree with the orders proposed by Ward JA, which would allow the appeal and set aside the orders made by the primary judge.

6. The settlement of the proceedings brought by Mr Crossman took effect under two deeds, known as the “main settlement deed” and the “contempt settlement deed”. The payment by the trustee to Mr Crossman was made under the contempt settlement deed. Before the primary judge, the new trustees successfully claimed that the contempt settlement deed was made in breach of trust and should be set aside. However, they did not attack the validity of the main settlement deed. The main settlement deed contained mutual releases in broad terms. As Ward JA explains, the release in the main settlement deed in favour of Mr Crossman precluded the proceedings brought by the new trustees against him and his companies. I agree with Ward JA that his defence should have been upheld on that basis, in circumstances where the new trustees did not allege that the main settlement deed was invalid because it involved a breach of trust. The judgment below should be set aside on that basis.

1. To the extent that there may have been grounds available to the new trustees to seek rescission of the main settlement deed, I agree with Ward JA that the consent of the only extant beneficiary under the trust (Baltarna Pty Ltd) provided a full answer to any claim that the trustee was in breach of trust in entering into the main settlement deed.

2. In these circumstances it is not necessary to consider whether the new trustees should have been refused relief on the basis that it was, at the date of trial, no longer possible in practical terms to put Mr Crossman back in the position he had been prior to the settlement. First, as Ward JA explains, the difficulty in that regard did not result from laches, acquiescence or delay on the part of the new trustees. Secondly, it was not established that the chose in action which Mr Crossman was entitled to pursue, prior to the settlement, became less valuable if the settlement deeds were to be set aside, except by reason of the fact that he no longer had access to the trust funds which, on this hypothesis, had been wrongly paid out to him, in breach of trust.

3. The other primary ground dealt with by Ward JA is that of apprehended bias. In my view, that ground should be upheld on the basis of two matters which will be identified below. It will then be necessary to consider the consequences for the relief sought in the appeal.

Reasonable apprehension of bias

(a)   recusal application

10. A recusal application was made by the appellants on the first day of the trial, 4 May 2015; the trial judge dismissed the application immediately, but reserved his reasons. Those reasons were contained in a separate judgment and were delivered on 6 May 2015. [2] That decision was not then appealed and the trial proceeded.

    2. John Sheahan v Martin Thompson [2015] NSWSC 535 (“recusal judgment”).

11. The appellant challenged the statement by the trial judge of the legal principle to be applied. After setting out the background circumstances giving rise to the application, the judge noted that senior counsel for the applicant had drawn his attention to a number of decisions setting out the principles to be applied. [3] He then noted the submission made by the applicant, namely “that a lay observer might conclude that I had accepted that the transaction entered into by Crossman and the Old Trustees was in fact a breach of trust, and had passed judgment on the very transaction in question in this case.”[4]

    3. Recusal judgment at [11].

    4. Recusal judgment at [12].

12. The phrase “the Old Trustees” was used by the trial judge to refer to both the former trustee of the primary trust (PILT Nominees Pty Ltd) and the trustee of the sub-trust, being the beneficiary of the primary trust (Baltarna Pty Ltd). The judge then immediately stated his approach to the matter in the following terms:[5]

“I approach the matter as required to do by Wilson [6] – could a fair minded lay observer reasonably apprehend that I might not bring an impartial and unprejudiced mind to the resolution of the questions which I am called on to decide in this matter?”

5. Recusal judgment at [13].

6. Referring to Michael Wilson & Partners Ltd v Nicholls (2011) 244 CLR 427; [2011] HCA 48 at [31]-[33].

13. The judge noted that the question that he had had to determine in the earlier proceeding had been whether it was “in the best interests of the trusts that the persons against whom allegations of inappropriate conduct had been made … should be removed in circumstances where they had accepted that they should retire”. [7] The judge observed that he had determined that the old trustees had no entitlement to be heard on the identity of their replacements, but continued, stating that he “made no findings of fact concerning the transactions nor was I required to do so”. [8]

    7.    Recusal judgment at [14(2)(a)].

    8.    Recusal judgment at [14(2)(b) and (3)].

14. It was the liquidators of the beneficiary of the Baltarna Trust, Valofo Pty Ltd, who had sought appointment as the new trustees. They had alleged that there were substantial claims to be made against the retiring trustees and other persons. The judge then stated in the appointment proceedings:[9]

“There is an exceedingly obvious conflict of interest between the interest of the retiring trustees and that of the beneficiary, in a context where the Valofo liquidators have outlined a series of concerns about the management of the trusts and quite specifically enumerated those concerns, and where, as I understood it, the essential factual matters asserted are not disputed, but only the conclusions to be drawn from them. This is precisely the reason why resignation was sought from the retiring trustees and was surprisingly resisted, but finally, as I have noted, was proffered. It is in the interests of Mr Raphael's clients that there be no investigation of the claims or potential claims, and that there be no proceedings brought against them. This interest does not, in my view, provide the retiring trustees with a legitimate basis to be heard, and as I have noted, Mr Raphael did not in the end assert that they did, and I saw no reason to hear from them through their counsel.”

9. Valofo Pty Ltd (Administrators Appointed) v PILT Nominees Pty Ltd [2011] NSWSC 134 at [10].

15. On the recusal application, the judge characterised that passage as one in which he was merely noting the claims made against the old trustees as sufficient to demonstrate the “exceedingly obvious conflict of interest” and that he had then understood that “the essential factual matters asserted are not disputed”. That did not mean, the reasoning continued, that he had made a finding as to the facts, nor that he had heard evidence concerning the facts. Nevertheless, he was clearly satisfied that the conflict, which ultimately formed the basis of the breach of trust allegations, was “exceedingly obvious”.

16. The trial judge placed weight on the fact that he had made no findings of fact in relation to the impugned transactions and had not been required to do so. [10] Nevertheless, he also noted that “the allegations made by the New Trustees in the [appointment] proceedings were, at least in relation to the circumstances leading up to the settlement, very similar to the allegations made by the Crossman defendants [sic] in the Crossman proceedings”. [11] He concluded that, because he had made no finding of fact and there had been no determination of the credibility of any party, the case should be distinguished from Australian National Industries Ltd v Spedley Securities Ltd (In liq) [12] relied on by counsel for Mr Crossman. [13]

    10. Recusal judgment at [14(3)] and [16].

    11.    Recusal judgment at [14](5)].

    12. (1992) 26 NSWLR 411.

    13.    Recusal judgment at [14(3) and (6)].

17. After determining what he had in fact decided in the earlier proceeding, which formed the basis of the application, the judge then concluded:[14]

“I do not accept that by reason of my conclusion in the Valofo proceedings it could be thought that in determining the dispute between the New Trustees and the Crossman defendants I would in some way be inhibited or impeded in determining on the evidence to be put before me in these proceedings the issues both factual and legal to be identified, and would not approach the matter with an entirely unbiased mind free of any preconceptions about any of the matters in issue.”

14. Recusal judgment at [17].

(b)   challenge on appeal

18. The appellant submitted that the trial judge had misstated the legal test for addressing a reasonable apprehension of bias (pre-judgment). The bar against recusal was thus significantly raised.

19. In the first reference (set out at [12] above) the judge correctly stated one limb of the test (“that I might not bring an impartial … mind…”), but the other limb was not correctly stated because it imported the language of probabilities (“could a fair-minded lay observer reasonably apprehend…”). In the conclusion (at [17] above) both limbs were misstated, using the language of probability rather than possibility, thus denying that “it could be thought that… I would in some way be inhibited… and would not approach the matter with an entirely unbiased mind”.

20. The appellants also challenged the manner in which the judge identified the logical connection between the opinion he had earlier expressed and the matters to be determined in the present proceedings.

(c)   relevant legal principles

21. The test for disqualification on the basis of a reasonable apprehension of bias is not entirely easy to apply. It contains three discrete elements, which are interrelated. Thus, in Ebner v Official Trustee in Bankruptcy,[15] the joint judgment of Gleeson CJ, McHugh, Gummow and Hayne JJ stated:

“6.   … a judge is disqualified if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the resolution of the question the judge is required to decide[16] . That principle gives effect to the requirement that justice should both be done and be seen to be done[17] , a requirement which reflects the fundamental importance of the principle that the tribunal be independent and impartial. It is convenient to refer to it as the apprehension of bias principle.

…

8.   The apprehension of bias principle admits of the possibility of human frailty.… Its application requires two steps. First, it requires the identification of what it is said might lead a judge (or juror) to decide a case other than on its legal and factual merits. The second step is no less important. There must be an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits. … Only then can the reasonableness of the asserted apprehension of bias be assessed.”

15. (2000) 205 CLR 337; [2000] HCA 63.

16. R v Watson; Ex parte Armstrong (1976) 136 CLR 248; Re Lusink; Ex parte Shaw (1980) 55 ALJR 12; 32 ALR 47; Livesey v New South Wales Bar Association (1983) 151 CLR 288; Re JRL; Ex parte CJL (1986) 161 CLR 342; Vakauta v Kelly (1989) 167 CLR 568; Webb v The Queen (1994) 181 CLR 41; Johnson v Johnson (2000) 201 CLR 488; [2000] HCA 48; (2000).

17. R v Sussex Justices; Ex parte McCarthy [1924] 1 KB 256 at 259, per Lord Hewart CJ.

22. The three elements are (a) what the fair-minded observer might apprehend, (b) whether the judge might not be impartial and (c) the reasonableness of the apprehension. The third element, dealing with the reasonableness of the apprehension, requires a “logical connection” between the matter relied on as an indicator of pre-judgment and the feared deviation from impartial determination of the case before the court. It imposes a constraint on what might otherwise be a low (in the sense of undemanding) standard for disqualification. On one view, the third element requires a degree of clear thinking on the part of the hypothetical “fair minded lay observer”; on another view, the logical connection must be established to the satisfaction of the reviewing court, or the judge dealing with a recusal application. That is, on the latter view the test involves an objective assessment of the reasonableness of the apprehension, rather than determining whether the fair-minded lay observer “might” perceive a logical connection.

23. It is the latter approach which the High Court undertook in Michael Wilson. [18] Thus, in this case, the court must be satisfied as to the logical connection between the earlier expression of opinion in the appointment proceeding and the feared deviation from impartiality in the claim brought by the new trustees.

    18. Michael Wilson at [69]-[73]; Isbester v Knox City Council (2015) 255 CLR 135; [2015] HCA 20 at [21] (Kiefel, Bell, Keane and Nettle JJ); cf at [68] (Gageler J).

24. Further, in Michael Wilson, the High Court noted the need to avoid identifying in the final judgment actual prejudgment when the allegation was limited to a reasonable apprehension that the judge might not bring an impartial and unprejudiced mind to the resolution of the questions the judge was required to decide. As the joint reasons stated:[19]

“Because the test is objective it is important to keep an inquiry about apprehension of bias distinct from any inquiry about actual bias. An inquiry about actual bias in the form of prejudgment would require assessment of the state of mind of the judge in question. No doubt that would have to be done, at least for the most part, on the basis of what the judge had said and done. But to allow an inquiry about whether the judge had in fact prejudged some issue to enter into a debate about what a fair-minded lay observer might apprehend is to introduce considerations that are irrelevant to the issue that is to be decided when a party submits that there is or was a reasonable apprehension of bias.”

19. Michael Wilson at [33].

25. In order to consider whether there is a logical connection between the opinion said to give rise to prejudgment and the proceedings to be determined, it is necessary to identify the issues in the proceedings. That exercise is not necessarily straightforward. Where the question is raised before the commencement of the proceedings, it would usually be appropriate to have regard to the pleadings in a civil matter. However, the issues in dispute may be refined (or even expanded) in the course of proceedings. It would be inappropriate to take a narrow or over-refined view of the issues as pleaded.

26. Finally, it is necessary to reiterate the proposition accepted in Michael Wilson that the making of an interlocutory order will not of itself give rise to a reasonable apprehension of bias, in part because such an order will not usually require a judge to determine any matter on a final basis. [20] That is because such matters will usually not involve assessing the credibility of witnesses and making findings on the balance of probabilities. However, different principles may apply with respect to findings in separate proceedings. [21]

    20. Michael Wilson at [68].

    21. See, eg, Livesey v NSW Bar Association (1983) 151 CLR 288; British American Tobacco Australia Services Ltd v Laurie (2011) 242 CLR 283; [2011] HCA 2 at [126] and [140] (Heydon, Kiefel and Bell JJ).

27. In the present case, the statements were not made in the course of an interlocutory application in the same proceedings, but in separate, albeit related, proceedings. Nevertheless, a statement in other proceedings need not necessarily give rise to a reasonable apprehension of prejudgment. Although decided in days before the undemanding standard now applied had been firmly articulated, the caution expressed by Mason J in Re JRL; Ex parte CJL [22] remains apposite:

“There may be many situations in which previous decisions of a judicial officer on issues of fact and law may generate an expectation that he is likely to decide issues in a particular case adversely to one of the parties. But this does not mean either that he will approach the issues in that case otherwise than with an impartial and unprejudiced mind in the sense in which that expression is used in the authorities or that his previous decisions provide an acceptable basis for inferring that there is a reasonable apprehension that he will approach the issues in this way.”

22. (1986) 161 CLR 342 at 352.

(d)   application of principles

28. The appellants’ submission that the trial judge misstated the test to be applied must be accepted. This conclusion requires that this Court reassess the question of bias for itself, according to the correct test. That requires both the application of the first two elements of the test, and determining the proper scope of the third element. It is convenient to address the latter issue first.

29. Undertaking that task, it is clear that the primary judge, in approving the appointment of new trustees, did not make a finding as to whether any of the conduct of the former trustees had involved a breach of trust. However, the observer might think that no order would have been made, even in circumstances where the former trustees had agreed to retire, unless such an order were justified. Further, hearing the judge opine that there was an exceedingly obvious conflict of interest, on the part of the trustees of each trust, the observer might think that the judge had formed a firm conclusion on an issue of which he needed to be satisfied, incompatible with a real willingness to reassess later the correctness of that view. It is relevant in that regard that the statement relied on was not an observation in the course of argument, but appeared in a published judgment.

30. The judge’s observations in the judgment in the appointment proceedings were potentially relevant to the questions whether:

1. the former trustee entering into the main settlement deed constituted a breach of trust;

2. the former trustee entering into the contempt settlement deed constituted a breach of trust;

3. the former trustee making payments under the contempt settlement deed constituted a breach of trust, and

4. the trustee of the Baltarna Trust gave informed consent to the settlement.

31. The proceedings as pleaded by the new trustees relied on an allegation that the old trustees had a conflict of interest in resolving the contempt motion, [23] which conflict resulted in a breach of trust in entering into the contempt settlement deed. [24] Mr Crossman did not admit the alleged conflict, [25] nor the alleged breach of trust. [26] Mr Crossman further pleaded the release in the main settlement deed. [27] Thus, on the pleaded cases, the observations in the judgment in the appointment proceedings related to the same basis of the breach of trust alleged against the old trustees in the proceedings brought by the new trustees. The allegations were not admitted.

    23.    Further Amended Commercial List Statement, par 166.

    24.    Ibid par 167.

    25.    Response, par 74.

    26.    Response, par 75.

    27.    Response, par 83(d).

32. Senior counsel for the respondents did not oppose the recusal application [28] and acknowledged that the judge’s reference in the appointment proceedings to “a series of concerns” included “part of what we’re going to say in this case.” [29]

    28.    Tcpt, 04/05/15, p 3(15)-(20).

    29.    Tcpt, p 15-16.

33. To say that the later proceedings were only concerned with the consequences of an admitted conflict was to understate the effect of the pleadings. To dismiss the expression of opinion as (a) not based on a finding as to disputed facts and (b) not necessary for the determination of the appointment proceedings, would be to introduce a degree of sophistication into the assessment of the logical connection which seriously undermines the first limb of the test as to what the fair minded lay observer might possibly fear as a deviation from impartial determination of the later proceedings. Whilst acknowledging the tension between the two parts of the test established by the High Court, I do not think that the second part was intended to be quite so dramatic a diminution of the double “might” test. It follows that the ground of reasonable apprehension of bias should have been upheld.

(e)   consequence of conclusion as to bias

34. The next question is what follows from that conclusion. As considered in Goodwin v Commissioner of Police, [30] how grounds addressed to issues in dispute and grounds addressing an unsuccessful recusal application should be addressed is not without its difficulties. [31]

    30. [2012] NSWCA 379.

    31.    Goodwin at [15]-[17].

“[16]   [I]n Concrete Pty Ltd v Parramatta Design & Developments Pty Ltd [2006] HCA 55; 229 CLR 577, at [117] Kirby and Crennan JJ stated:

‘An intermediate appellate court dealing with allegations of apprehended bias, coupled with other discrete grounds of appeal must deal with the issue of bias first. It must do this because, logically, it comes first. Actual or apprehended bias strike at the validity and acceptability of the trial and its outcome. It is for that reason that such questions should be dealt with before other, substantive, issues are decided.’

[17]   These comments should be understood in the context in which they arose. The High Court was dealing with an appeal from a judgment of the Full Court of the Federal Court. The substantive issues involved a dispute between the parties as to copyright in architectural plans. As explained by Gummow ACJ at [2]:

‘If the bias submissions were to succeed, the remedy would be a retrial. If the copyright submissions were to succeed, the Full Court would itself provide the orders which should have been made and there would be no occasion to order a retrial.’”

35. The logic of the position that bias should generally be dealt with first must be accepted; even if bias is upheld, however, the practical realities in a particular case may not preclude the appeal court disposing of the substantive issues. In circumstances where an appellant is entitled to a final judgment in its favour from the appeal court, it could constitute a substantial injustice to force the successful party to relitigate the whole claim before a single judge, possibly in circumstances where there will be no realistic likelihood of recovering the additional costs. That, in effect, might be to give the unsuccessful respondent a benefit from successfully opposing the recusal application at trial, but on a false basis. (That consideration was not engaged in the present case, the respondents not having opposed the recusal application.)

36. In my view, the appellants should succeed on their challenge to the refusal of the trial judge to recuse himself, but the final orders proposed by Ward JA should nevertheless be made.

37. WARD JA: In proceedings heard last year in the Equity Division of the Supreme Court, the first appellant (Mr Phillip Crossman) and certain entities controlled by him (Seniors Provident Pty Ltd, Metro Finance Pty Ltd (Metro Finance) and Metro Finance (NZ) Pty Ltd (Metro Finance (NZ)) – collectively, the Crossman corporations) were found liable to pay equitable compensation to the first and second respondents (the New Trustees) in their capacity as trustees of the Prime Indexed Lease Trust (the PILT Trust) (Sheahan v Thompson (No 2) [2015] NSWSC 871). They were held so liable on the basis that they had knowingly received moneys (paid in settlement of claims made by Mr Crossman in earlier proceedings) in circumstances amounting to a breach of trust by the former trustee of the PILT Trust, PILT Nominees Pty Ltd (PILT Nominees); in other words as knowing recipients under the first limb of the rule in Barnes v Addy (1874) LR 9 Ch App 244.

38. In the earlier proceedings (the Crossman proceedings), which were commenced in 2008, Mr Crossman had alleged that PILT Nominees had misappropriated trust moneys and that his interest in another trust (the Baltarna Trust) had been wrongly defeased. As will be explained shortly, Mr Crossman’s “interest” in the Baltarna Trust was in fact limited to his interest in its proper administration, arising out of his position (until the events in question) as a discretionary beneficiary under a third trust (the Baltarna Class Trust), by which he was entitled, if certain events transpired, to a distribution out of the assets of the Baltarna Trust.

39. In the course of the Crossman proceedings, Mr Crossman filed a notice of motion (the contempt motion) alleging contempt of court by PILT Nominees and others by reason of their alleged breach of interlocutory injunctions that had been granted by the court to restrain, in effect, borrowings by PILT Nominees as trustee and the use of trust assets to secure any further borrowings. The sum of $2.2 million ordered by way of equitable compensation in the commercial list proceedings the subject of this appeal (the subject proceedings) represents the sum that Mr Crossman, or one or more of the Crossman corporations at his direction, received in consideration of the discontinuance of the contempt motion in the Crossman proceedings. As will be seen, that discontinuance occurred in the context of the settlement of the Crossman proceedings as a whole, albeit a settlement effected by two separate deeds.

40. In the present proceedings, the appellants raise at the outset a complaint as to the refusal of the primary judge to recuse himself from hearing the matter on the ground of apprehended bias (Sheahan v Thompson [2015] NSWSC 535). They next challenge the primary judge’s findings in relation to various of the substantive issues determined in the subject proceedings (Sheahan v Thompson (No 2) [2015] NSWSC 871). They seek orders setting aside the orders made by the primary judge and, in lieu thereof, dismissing the further amended commercial list summons filed in the proceedings below. The New Trustees have filed a notice of contention in which they contend that the decision below should be affirmed on other grounds.

41. Named in the notice of appeal as the third respondent to the proceedings is Valofo Pty Ltd (in liq) (Valofo), the ultimate beneficiary of the PILT Trust, as will be explained shortly. As Valofo is in liquidation, the appellants filed a notice of motion seeking leave pursuant to s 471B of the Corporations Act 2001 (Cth) to proceed against it. The New Trustees (in their capacity as liquidators of Valofo) did not oppose leave being granted but contended that any leave should be subject to a condition that no costs orders or judgment obtained by the appellants be enforced against Valofo without further leave of the Court. The appellants were prepared to consent to a condition in those terms. It being appropriate in the circumstances to do so, at the outset of the hearing of the appeal such leave was granted nunc pro tunc.

42. The fourth named respondent (PILT Nominees) was de-registered some time prior to the hearing of the appeal and had already been removed as a party to the proceedings, by order of the registrar, by the time the appeal came to be heard.

43. The remaining respondents, Mr Ross Seller and Mr Peter Londish, were directors at relevant times of PILT Nominees. They played no part in the appeal proceedings. The role they played in the relevant events will be explained further below.

Background

44. The background to the present proceedings is not uncomplicated. It involves a corporate and trust structure conceived by Mr Crossman, a financial adviser, and implemented by Mr Seller, a solicitor, to put in place a securitised investment scheme involving the acquisition of various service station properties. There has been a protracted history of litigation between those involved in the investment scheme, including various members of the family of the property developer, Mr Sid Londish. Reference to some of that litigious history will be made in these reasons, as necessary.

45. The underlying tax benefit sought to be obtained through the investment scheme (described at [16] of the primary judge’s reasons) was for tax losses of the investor company to be offset against income. Valofo was the investor in the scheme. The sole shareholder of Valofo was Londish Nominees Queensland Pty Ltd, which the parties in the subject proceedings accepted held its interest in Valofo as trustee of trusts the underlying beneficiaries of which were Mr Sid Londish, Mr David Bowman (his son-in-law) and Mr Peter Londish (his son) (see [37] of the primary judge’s reasons).

46. The structure of the underlying commercial transaction involved the establishment in 1995 of three separate trusts: the PILT Trust, of which PILT Nominees was the trustee at the relevant time; the Baltarna Trust (sometimes referred to as the Baltarna Unit Trust), of which Baltarna Pty Ltd (Baltarna) was the trustee at the relevant time; and the Baltarna Class Trust, of which first Baltarna and then later Sanabu Pty Ltd (Sanabu) was the trustee. Both Baltarna and Sanabu were companies controlled by Mr Seller. Neither was a party to the subject proceedings.

47. Baltarna was the sole unitholder of the PILT Trust (in its capacity as trustee of the Baltarna Trust). Valofo was the sole unitholder of the Baltarna Trust. The “Baltarna Class Trust” was nominated as a general beneficiary of the Baltarna Trust. Until March 2008, the class A general beneficiaries of the Baltarna Class Trust (as to one-third of the trust fund) were Mr Seller and persons or entities associated with him and the class B general beneficiaries of the Baltarna Class Trust (as to two-thirds of the trust fund) were Mr Crossman and persons or entities associated with him. A diagram (provided by the New Trustees with their submissions) setting out the structure of the trusts in a simplified form is annexed to these reasons.

48. In around 1996, PILT Nominees (as trustee of the PILT Trust) acquired a number of service station properties, which were or were to be the subject of a lease (initially for a 12 year period) to a major oil company. The borrowings to finance the acquisition of those properties were refinanced though the issue of bonds.

49. Mr Crossman’s return for his “sweat equity” was, according to his closing submissions to the primary judge (see [16] of his Honour’s reasons) to be the receipt of one-third of the distributed net proceeds from the ultimate sale of the service station properties (described as a “free-carried promoter’s equity”) with the balance to be divided equally between Valofo and Mr Seller.

50. Nevertheless, as has been emphasised by the New Trustees in the present litigation, Mr Crossman was not himself a beneficiary of the PILT Trust. Rather, until March 2008, he was a discretionary beneficiary of the Baltarna Class Trust. The structure of the scheme was such that, even as a beneficiary of the Baltarna Class Trust, Mr Crossman had no entitlement to any payment out of the trust funds. Under the scheme, the only way that Mr Crossman would receive funds was through a distribution to him as a class B general beneficiary, under the terms of the Baltarna Class Trust Deed, on the vesting of the Baltarna Class Trust. Moreover, under that deed the class A and B general beneficiaries would be entitled to payment of a distribution out of trust funds only if Valofo had first been paid a specified amount (agreed, in the events which transpired, to be a minimum of $7.5 million) and the trustee of the Baltarna Trust had then exercised a discretion to pay residual funds to the general beneficiaries (pursuant to what was described by Senior Counsel for the New Trustees as the “cascading waterfall” under cl 4.2 of the relevant trust deed – see T56.50 28/4/16).

51. The establishment of the various trusts and relevant provisions of the respective trust deeds are described in more detail below.

PILT Trust

52. The PILT Trust was established by deed dated 5 December 1995. The initial trustee of the trust was Australian Securitisation Corporation Holdings Ltd (ASCH), a company incorporated in the Australian Capital Territory. The initial manager of the trust was Australian Gilt Securities Ltd (AGS), a company incorporated in New South Wales, whose name was later changed to RMB Australia Ltd (RMB) (see Supplemental Deed dated 17 December 1996). Mr Crossman was employed, at the time the investment scheme was put in place, as a senior executive of RMB (see [16] of the primary judge’s reasons).

53. Recital C of the PILT Trust Deed recorded the intention that the trustee would progressively acquire a portfolio of “Designated Properties” (defined as including land the subject of a lease or agreement to lease to a company whose business included the sale of petroleum products; in effect, the service stations) and would fund those acquisitions by borrowings that were to be refinanced by the issue of bonds, if so directed by the manager following the acquisition of the portfolio.

54. Pursuant to cl 9.1 of the PILT Trust Deed, read with the definitions in cl 1.1, the only authorised investments of the trust were the Designated Properties, cash and “Short-Term Authorised Investments”. The primary investment policy of the trust (cl 9.2) was to acquire, and hold for the “Consent Period” (defined as the period from the date of the deed until the manager issued a notice of intended trust termination), the Designated Properties.

55. The beneficial ownership of the PILT Trust was, pursuant to cl 3, divided into units of two classes (consent units and ordinary units). Clause 4 made provision for the issue of bonds and for the principal and interest entitlements of bondholders.

56. As at December 1996 (according to the Supplemental Deed dated 17 December 1996), the only bondholder was the AMP and there were two unitholders (Baltarna and AGS; the latter being the only “consent unitholder”) (Recital E). It was accepted in the present proceedings that the sole unitholder of the PILT Trust as at the relevant time was Baltarna (in its capacity as trustee of the Baltarna Trust) (see [20] of the primary judge’s reasons).

57. Under the PILT Trust Deed, the trustee had, in addition to the general power in respect of trust assets conferred by cl 13.1, certain specific powers conferred by cl 13.2. Those included the power to execute instruments (cl 13.2(n)), the power to settle and compromise legal proceedings (cl 13.2(o)), and the power to do all things incidental thereto or necessary or convenient to be done for or in connection with the trust or the trustee’s functions under the PILT Trust Deed (cl 13.2(v)).

58. Clause 23 of the PILT Trust Deed contained the following relevant provisions, the first three of which I will refer to as the exoneration clauses:

23.9   Powers, Authorities and Discretions

Except insofar as herein otherwise expressly provided and in the absence of fraud, negligence or wilful default, the Trustee and the Manager shall not be in any way responsible for any loss (whether consequential or otherwise), costs, damages or inconvenience that may result from the exercise or non-exercise of any powers, authorities and discretion vested in it.

…

23.13   No Liability except for Negligence etc.

In the absence of fraud, negligence or wilful default, the Trustee and the Manager shall not be liable personally in the event of failure to pay moneys on the due date for payment to any Bondholder, any Unitholder, the Manager (in the case of the Trustee), the Trustee (in the case of the Manager) or any other person or for any loss howsoever caused in respect of the Trust or to any Bondholder, any Unitholder, the Manager (in the case of the Trustee), the Trustee (in the case of the Manager) or other person.

23.14   Further Limitations on Trustee’s Liability

Subject to clause 23.3, the Trustee shall not be liable:

(a)   (For Loss on its Discretions): for any losses, costs, liabilities or expenses arising out of the exercise or non-exercise of its discretion or for any other act or omission on its part under this Deed, any other Transaction Document or any other document except where the exercise or non-exercise of any discretion, or any act or omission, by the Trustee, or any of its officers, employees, agents or delegates, constitutes fraud, negligence or wilful default;

…

Nothing in this clause 23.14 alone (but without limiting the operation of any other clause of this Deed) shall imply a duty upon the Trustee to supervise the Manager in the performance of the Manager’s functions and duties, and the exercise by the Manager of its discretions, hereunder.

…

23.19   Conflicts

Nothing in this Deed shall prevent the Trustee, the Manager or any Related Body Corporate or Associate of either of them or the directors or other officers thereof or any other person (all being included unless the context otherwise requires in the expression the “Trustee and the Manager” where hereafter used in this clause) from subscribing for purchasing, holding, dealing in or disposing of any Units or Bonds or from otherwise at any time contracting or acting in any capacity as representative or agent or otherwise or entering into any financial, banking, development, insurance, agency, broking or other transaction with, or providing any advice or services for the Trust or from being interested in any such contract or transaction or otherwise and the Trustee and the Manager shall not be in any way liable to account to any Unitholder or Bondholder or any other person or any of them for any profits or benefits (including but without limiting the generality thereof any profit, bank charges, commission, exchange, brokerage and fees) made or derived thereby or in connection therewith and the Trustee and the Manager shall not by reason of any fiduciary relationship be in any way precluded from making any contracts or entering into any transactions with any such person in the ordinary course of the business or from undertaking any banking, financial, development, agency or other services and without prejudice to the generality of these provisions it is expressly declared that such contract and transactions may include any contract or transaction in relation to the placing of or dealing with any investment and the acceptance of any office of profit or any contract of loan or deposits or other contract or transaction which any person or company not being a party to this Deed could or might have lawfully entered into if not a party to this Deed and the Trustee and the Manager shall not be accountable to Unitholders, Bondholders or any other person for any profits arising from any such contracts, transactions or offices.

Baltarna Trust

59. The Baltarna Trust was established by deed dated (it would seem erroneously) 5 December 1996. The year “1996” is a typographical error for 1995 (see minutes dated 5 December 1995 of the meeting of directors of Baltarna at which the appointment of that company as trustee of the Baltarna Trust was noted; see also the Unit Certificate dated 28 November 1996 subsequently issued in favour of Valofo).

60. The Baltarna Trust Deed contemplated the issue of units to registered holders (see cl 6). The sole unitholder (or registered holder of ordinary units) was Valofo. It applied for the issue of 10 units in the trust on 5 December 1995. The resolution to issue 10 units to Valofo was passed at a meeting of directors of Baltarna on the same day. A Unit Certificate was issued in relation to Valofo’s registered holding of $344,651 units in the Trust Fund of the Baltarna Trust subject to and with the benefit of the deed.

61. Clause 20.1 of the Baltarna Trust Deed made provision for the trustee, with the consent in writing of the appointor, at any time before the Vesting Day, to nominate one or more individuals, corporations, trusts or entities having separate legal identity to be a member or members of the class of General Beneficiaries. That term was defined in cl 1.1 to mean persons who from time to time until the Vesting Day are named in or come within those categories as defined in Items 2 and 4 respectively of the schedule to the deed. Item 4 was there stated to be “Nil”. Item 2, on the other hand, headed General Beneficiaries, referred to such individuals, corporations, trusts or other entities having separate legal identity (exclusive of certain named persons or entities) as may be nominated pursuant to cl 20 of the deed. The appointor was identified in Item 5 as “[a]s nominated by the Trustee”.

62. Clause 20.4 of the Baltarna Trust Deed made provision for the trustee (with the consent of the appointor) also to declare any individual or entity to be removed as a beneficiary, whether by resolution, deed or deed poll.

63. At a meeting of the directors of Baltarna on 31 July 1996, it was noted that, in its position as trustee of the trust and pursuant to cl 17(d) of the Baltarna Trust Deed, Baltarna was the appointor of the trust. The minutes then recorded Baltarna’s resignation as appointor of the trust and its notification that its successor was to be Mr Seller. The minutes also recorded that, pursuant to the power under cl 20 of the Baltarna Trust Deed, the trustee (with the written consent of Mr Seller) nominated the Baltarna Class Trust as a member of the General Beneficiaries of the Baltarna Trust. A resolution was passed to that effect as and from 31 July 1996. Mr Seller signed a letter dated 31 July 1996 confirming the said appointment. (Presumably the nomination should be understood as being a nomination of the trustee of the Baltarna Class Trust, as the “trust” is not a legal entity.)

59. Clause 4.2 (the “cascading waterfall”) of the Baltarna Trust Deed made provision for the order of application of the trust fund on the Vesting Day (that being the date specified in Item 3 of the schedule – the 79th anniversary of the date of the deed – or such earlier date as the trustee might, with the consent of the appointor, appoint). Relevantly, after the payment of taxes, trustees’ fees and expenses, amounts due to lenders in relation to any borrowings, and undistributed income including unitholders’ income pursuant to cll 2.3 or 3, the fund was to be distributed in the following order:

(e)   A repayment of Unit Holders capital paid on the Ordinary Units to the greater of:

(i)   $7,500,000; or

(ii)   55% of the total Capital paid up (whether as bonus Ordinary Units or otherwise) on all Ordinary Units ever issued, less any amounts already paid pursuant to Clause 8 as a Redemption of such Units. No premium is payable on these Units.

(f)   An amount determined by the Trustee pursuant to his discretion and or power of appointment as contained in this deed, to be paid or payable pursuant [sic] to any General Beneficiary out of the Trust Fund, provided that such amount is not to exceed the sum of the amounts determined under 4.2(e) plus any amount paid or payable to the Ordinary Unitholders upon redemption pursuant to Clause 8.

(g)   The balance of the capital on the Ordinary Units in existence at the vesting date without any premium payable.

(h)   Any remaining balance of the Trust Fund in trust for those of any remaining Unitholders, General Beneficiaries for those interests and in those proportions and for one to the exclusion of the other as the Trustee may in its absolute discretion appoint on or before the Vesting Day revocable at any time earlier than the Vesting Day unless expressed to be otherwise.

65. Clause 4.3 provided that, in default of the Trust Fund or any part of it vesting absolutely pursuant to cll 4.1 and 4.2, the trustee was to stand possessed of it (or part thereof) for the Unitholders and General Beneficiaries jointly living or in existence on the Vesting Day in equal shares absolutely.

Baltarna Class Trust

66. The Baltarna Class Trust was established by deed dated 5 December 1995, with Baltarna as its trustee. This Trust Deed made provision for two classes of general beneficiaries (Class A General Beneficiaries and Class B General Beneficiaries) as well as Remainder Beneficiaries.

67. Pursuant to cl 2 of the Baltarna Class Trust Deed, the trustee held one-third of the trust fund and income of the fund in trust for the Class A General Beneficiaries (cl 2.2) and the remaining two-thirds for the Class B General Beneficiaries (cl 2.3). Clause 4 dealt with the application of the said funds as from the Vesting Day for the respective classes of general beneficiaries. As already noted, in effect, the Class A General Beneficiaries identified in Item 2 of the schedule, relevantly, were Mr Seller and persons or entities related to or associated with him; the Class B General Beneficiaries identified in Item 3 were Mr Crossman and persons or entities related to or associated with him.

Position as at March 2008

68. To recap, the position in relation to the respective trusts prior to the events in 2008 which led to the Crossman proceedings was, in summary, that: Baltarna was the sole beneficiary under the PILT Trust; it held its interest under the PILT Trust as trustee of the Baltarna Trust, the sole unitholder of which was Valofo and the nominated general beneficiary of which was the Baltarna Class Trust; and Baltarna was also the trustee of the Baltarna Class Trust, the two classes of general beneficiaries of which were, in effect, Mr Seller (as to one-third of the trust fund) and Mr Crossman (as to two-thirds of the trust fund). The Baltarna Class Trust (or more precisely Baltarna, as trustee of that trust) had a prospective entitlement, on the future vesting of the Baltarna Trust, to an amount (which the parties accept was not to exceed $7.5 million) assuming the prior repayment of $7.5 million to Valofo and a favourable exercise of Baltarna’s discretion.

69. Relevantly, Mr Seller, the appointor under the Baltarna Trust Deed, had the power under that Trust Deed at his discretion to remove any general beneficiary appointed for the purposes of the Baltarna Trust. Therefore, leaving aside the question whether in so doing he was acting properly in the exercise of his discretion as appointor, in practical terms Mr Seller was able to remove the Baltarna Class Trust as general beneficiary of the Baltarna Trust, thus severing the nexus between the Baltarna Class Trust and the Baltarna Trust, which is precisely what he subsequently did and about which Mr Crossman complained in the Crossman proceedings.

Subsequent events

70. As foreshadowed above, in March 2008, Mr Seller exercised his power as appointor as defined in the Baltarna Trust Deed to remove the Baltarna Class Trust as a general beneficiary of the Baltarna Trust. The effect of this was to remove the potential for the class A and, more relevantly, the class B general beneficiaries of the Baltarna Class Trust to obtain a distribution of capital or income out of the Baltarna Class Trust on the future vesting of the Baltarna Trust.

71. The timing of the removal of the Baltarna Class Trust as a general beneficiary of the Baltarna Trust coincided with the then imminent cessation of the securitisation arrangement. The AMP loan, which was secured over the service station properties, was due to come to an end on or about 15 March 2008 (see letter dated 3 March 2008 written by the solicitors acting for Mr Crossman to Mr Seller).

72. At around this time, Mr Crossman had unsuccessfully sought confirmation from Mr Seller that the service station properties would be sold and that the Baltarna Trust would vest at the expiration of the initial 12 year lease period; a state of affairs that he contended had been contemplated when the investment scheme was initially put in place. Mr Seller’s response to the queries which had been raised on 3 March 2008 by Mr Crossman’s solicitors in this regard, was to deny that Mr Crossman had any interest in, or was a beneficiary of, the PILT Trust or the Baltarna Trust; to state that Mr Crossman “may have an interest in the proper administration of the BC Trust [Baltarna Class Trust] only”; and to state that the Baltarna Class Trust had no assets or liabilities and that there had been no resolution by the trustee to terminate the Baltarna Trust.

73. It was the following day that Mr Seller, in his capacity as a director of Baltarna and as the appointor under the Baltarna Trust Deed, signed the document headed “[r]esolution of directors of Baltarna Pty Limited as trustee of the Baltarna Unit Trust 6 March 2008”, recording the resolution that the Baltarna Class Trust be removed as a beneficiary of the “Baltarna Unit Trust” effective immediately; and containing an irrevocable declaration that Mr Crossman was “expressly excluded from ever being entitled to benefit under the Baltarna Unit Trust or any trust created under its deed”.

74. The formal resolution so recorded was preceded by reference in the document to a discussion between Mr Peter Londish (as director of Valofo, the sole unit holder in the Baltarna Class Trust) and Mr Seller (as sole director of Baltarna) as to the formation of the Baltarna Class Trust and as to a perceived conflict of interest on the part of Mr Crossman at that time (as to him ‘taking on’ “a position of profit under the BC Trust” when he was in the employ of RMB, the manager of the PILT Trust). The document also included reference to “a more significant problem with the terms of Part 4 A of the NSW Crimes Act regarding payment of commissions, including the offence of aiding and abetting”. The document stated the conclusion that the Baltarna Class Trust should be removed as a beneficiary of the Baltarna Unit Trust effective immediately.

75. Also at that time, Baltarna was replaced as trustee of the Baltarna Class Trust, and as appointor of that trust, by Sanabu (see resolutions dated 6 March 2008).

76. By letter dated 12 March 2008 to Mr Seller, Mr Crossman’s solicitors (who at that stage had not been made aware of the resolution passed to remove the Baltarna Class Trust as general beneficiary of the Baltarna Trust nor of the replacement of Baltarna as the trustee and appointor of that trust) asserted Mr Crossman’s interest in the proper administration of the Baltarna Trust. The letter stated that using the assets of the Baltarna Trust to “fund” a “payout” to Valofo was not permitted under the Baltarna Trust Deed and could prejudice the interests of both the Baltarna Class Trust and Mr Crossman. The commencement of proceedings was foreshadowed.

77. On 18 March 2008, Mr Seller, as beneficiary, signed a document repudiating any interest in the Baltarna Class Trust “so that none of the beneficiaries mentioned as a part of the Part A Beneficiaries of the Baltarna Class Trust may benefit under that trust ever”.

78. Still unaware of what had occurred on 6 March 2008 (see [73]-[74] above), by letter dated 4 April 2008, Mr Crossman’s solicitors wrote to Mr Seller raising Mr Crossman’s concern (based on information said to have been received from Mr Peter Londish) that Mr Seller was then in the process of arranging with the trustee of the PILT Trust to retire and had mandated BankWest to raise approximately $11.5 million using the land the subject of the PILT Trust as security, such finance to be repayable over a 10 year period (and $7.5 million of which was to be used to pay a distribution to Valofo).

79. At least part of that concern seems to have been well-founded. By Deed of Retirement and Appointment of Trustee and Manager dated 17 April 2008, the then trustee and manager of the PILT Trust (ASCH and RMB, respectively) retired from their positions. PILT Nominees and PILT Managers Pty Ltd were appointed as the new trustee and manager, respectively, with effect from the date of the deed, subject to compliance by the new trustee with cl 6 of the deed (relating to final payments of the retiring manager’s fee, legal fees and an obligation to pay default interest on any amount not paid when due).

80. By “at least” May 2008, the service station properties were unencumbered (see the parties’ joint chronology in the present proceedings,).

Commencement of Crossman proceedings

81. The Crossman proceedings were commenced by Mr Crossman by way of summons filed on 20 May 2008. Mr Crossman sought urgent interlocutory relief to restrain PILT Nominees, Baltarna and Mr Seller in effect from borrowing money (other than to finance the acquisition or holding of a designated property as defined in the PILT Trust Deed) or from taking any step in furtherance or for the purpose of any transaction in which the designated property was used as security for borrowings other than borrowings to finance the acquisition or holding of a designated property.

82. Mr Crossman’s application was heard by Hamilton J on 27 May 2008. His Honour concluded (Crossman v PILT Nominees Pty Ltd [2008] NSWSC 557) that there were serious questions to be tried and that if Mr Crossman’s rights were as he claimed them to be they could be seriously compromised by the raising at that stage of the proposed loan of $11.5 million ([6]; [8]). His Honour appeared to accept that Mr Crossman had an arguable case and that he had standing to maintain the claim for relief sought in the principal (i.e., Crossman) proceedings ([6]-[7]). His Honour concluded that it was appropriate to grant interlocutory relief, indicating that leave would be granted to the defendants to apply to the court to discharge or vary the injunction in relation to a proposal for borrowing different from the proposal for an $11.5 million borrowing “that is the proposal in the evidence before me”.

83. The orders that were then made, on the usual undertaking as to damages proffered by Mr Crossman through his legal representatives, included that:

1.   Each of the first defendant [PILT Nominees], the second defendant [Mr Seller] and third defendant [Mr Peter Londish] whether by itself or himself, his or its officers, employees, agents or otherwise be restrained until further order from:

(a)   entering into any agreement pursuant to which any money is borrowed by the first defendant otherwise than to finance the acquisition or holding of a Designated Property (as defined in the Prime Indexed Lease Trust deed); and

(b)   entering into any transaction whereby any or all of the Designated Property (as defined in the Prime Indexed Lease Trust Deed) is used as security for any borrowings other than by the trust of the Prime Indexed Lease Trust to finance the acquisition or holding of a Designated Property

84. Notwithstanding these orders, and within days of their making, the directors of PILT Nominees (Mr Seller and Mr Peter Londish) resolved (subject, among other things, to receipt of legal advice) to accept what was described in the company’s minutes as “an offer of funding” from the ANZ Bank. That offer was, in terms, an offer of an interchangeable facility with a facility limit of $11.3 million, comprising a variable rate commercial bill acceptance and discount facility and a fixed rate commercial bill facility. The letter of offer stated that the facility was to be made available in three separate tranches (though only two tranches were identified in the body of the letter) with the combined balance not to exceed the total facility limit. The facility was to be advanced against specified security properties (the five service station properties). The loan to value ratio over the term of the facility was not to exceed 71%, from which the appellants argue it can be inferred that, as at the relevant date (presumably either the date of acceptance of the bill facility or at least by the time of drawing down of the second tranche), the service stations must have been valued (or ANZ must have accepted valuations) at a figure in excess of $11.3 million.

85. The 3 June 2008 PILT Nominees’ minutes noted that legal advice had been sought “about the ability of the company to accept the offer in view of the recent litigation caused by Mr Phillip Crossman”. That advice must have been given promptly because the signed acceptance of the facility offer appears to be dated that same day. However, there may have been some delay in communication of the acceptance of the facility since, in a position paper prepared for PILT Nominees, Mr Seller and Mr Peter Londish for a mediation in May 2009, reference is made to an opinion dated 6 June 2008 from counsel to the effect that a bill acceptance facility agreement was not a loan and would not infringe the injunction ([78]) and it is asserted that entry into the facility was on 9 July 2008 after receipt of legal advices ([83]). Nothing turns on this discrepancy.

86. On 4 June 2008, in apparent ignorance of what had occurred the day before, Mr Crossman filed his statement of claim in the Crossman proceedings. As part of the relief claimed, Mr Crossman sought a declaration that both the purported removal and exclusion of the Baltarna Class Trust as a beneficiary of the Baltarna Trust and his exclusion from being a beneficiary of the trust, by the resolution of 6 March 2008, were void and of no effect. Mr Crossman also sought the removal of the existing trustees and the appointment of new trustees to each of the PILT Trust, Baltarna Trust, and Baltarna Class Trust. Vesting orders were sought in respect of each of those trusts, consequential upon the appointment of new trustees. (Had the Baltarna Trust vested, the cascading effect of the distribution provisions in cl 4.2 of the Baltarna Trust Deed would then have come into play.)

87. On 16 June 2008, solicitors then acting for PILT Nominees (Johnson Winter & Slattery) wrote to Mr Crossman’s solicitors (Allens Arthur Robinson) advising them that PILT Nominees was “proposing” to “raise funds” through a bill discount facility (without disclosing that the offer of such a facility had already been accepted by PILT Nominees) and that PILT Nominees proposed to use the funds to pay debts incurred in the administration of the PILT Trust. They sought confirmation that there was no objection to the proposed financing arrangements and, in particular (though this could not on any view have been determinative of the question), that the “proposed financing arrangements” did not breach the orders made by Hamilton J on 27 May 2008. In the alternative, they sought confirmation that Mr Crossman would not object to such an order being obtained from the court (and that he would accept that it was purely a matter for the court). No such confirmation was provided by Mr Crossman or his solicitors. Instead, information was sought by Mr Crossman’s solicitors from PILT Nominees’ solicitors as to various matters relating to the “proposed” bill discount facility and its proposed use.

88. From June 2008, PILT Nominees proceeded to draw down from the ANZ bill facility for which the service station properties were security (see joint chronology; see also affidavit sworn by Mr Seller on 29 April 2009 in the Crossman proceedings).

89. On 9 April 2009, Mr Crossman filed two notices of motion in the Crossman proceedings. The first sought, among other things, orders that Mr Seller and Mr Peter Londish file and serve affidavits identifying the date, amount and recipient of any payment from the ANZ facility; that a receiver and manager be appointed to the property owned by PILT Nominees as trustee for the PILT Trust; and freezing orders in relation to each of PILT Nominees and Baltarna.

90. The second (the contempt motion) sought declarations that each of Mr Seller, PILT Nominees and Mr Peter Londish had committed contempt of court, for alleged breach of the orders made by Hamilton J. Mr Crossman sought orders that each be punished for such contempt.

91. On 21 and 23 April 2009, White J heard the first of those applications. His Honour accepted undertakings given by each of PILT Nominees, Baltarna and Mr Seller that, until further order, each would not, except with the consent in writing of Mr Crossman, dispose of, deal with, or diminish the value of any of the assets of PILT Nominees or Baltarna and would not cause any assets of those companies to be removed from Australia. His Honour also made an order restraining Mr Seller from taking any step to transfer or otherwise deal with all or any part of the money transferred from PILT Nominees to Baltarna, or so transferred to Baltarna and then to another entity, except with the consent in writing of Mr Crossman. Orders were made for the filing of affidavits in respect of various matters. Mr Crossman’s application for the appointment of a receiver (which his Honour considered the balance of convenience heavily favoured) was stood over so that the necessary arrangements by reference to the ANZ bank charge could be completed (see Crossman v PILT Nominees [2009] NSWSC 393;).

92. On 29 and 30 April 2009, respectively, affidavits were filed by each of Mr Seller and Mr Peter Londish in the Crossman proceedings (as had been ordered by White J). Those affidavits disclosed the amounts that had been paid out of the funds raised by the ANZ bill facility, including amounts totalling approximately $3.9 million to Radio Nominees Pty Ltd (Radio Nominees), an entity associated with Mr Seller; and amounts totalling approximately $5.5 million to Davlon Management Pty Ltd (Davlon), an entity associated with Mr Peter Londish (joint chronology). (Presumably, Valofo’s administrators were not privy at that stage to those affidavits, not being party to the Crossman proceedings.)

93. The matter came back before White J in June 2009 on which occasion PILT Nominees sought judicial advice pursuant to s 63 of the Trustee Act 1925 (NSW) as to whether it was a proper exercise of its powers as trustee to defend the proceedings instituted by Mr Crossman and as to whether it was entitled to use the assets of the trust to recoup its expenses in so doing. His Honour accepted that the trustee would be acting properly in defending the proceedings brought by Mr Crossman and considered that, prima facie, the trustee was entitled to be recouped its expenses incurred when acting bona fide in the execution of the trusts in defending the proceedings. His Honour gave judicial advice substantially as sought (PILT Nominees Pty Ltd v Baltarna Pty Ltd [2009] NSWSC 656).

370. The primary judge was not persuaded that any prejudice had been established by reason of the delay from February 2011 to May 2013 in the commencement of the proceedings by the New Trustees ([168]); nor was he persuaded that there would be any inequity or unreasonableness in permitting the New Trustees now to propound their claims ([170]). Further, his Honour did not accept that the failure to take action to prevent the second payment to or at Mr Crossman’s direction could be equated to acquiescence in the payment, referring in particular to the letter sent by Valofo’s solicitors in July 2009 reserving its rights in relation to the payments to Mr Crossman.

371. Having referred (at [172]) to the different uses of the term “acquiescence” described in Orr v Ford [1989] HCA 4; (1989) 167 CLR 316 (at 337-338 by Deane J, with whom Mason CJ concurred) the primary judge said (at [173]) that: there was no acceptance of the past acts; no representation that might have led PILT Nominees to believe that its past action in entering into the deeds or its present intention to pay the second payment was accepted; and no scope for inferral of consent. His Honour noted that Mr Crossman had given no evidence of having done something or abstained from doing something because of the failure of the New Trustees to take action against him earlier.

Submissions

374. The appellants maintain that the relevant question was whether the New Trustees had, by their inaction and by standing by and taking no action to enjoin the making of the second payment, placed the appellants in a situation in which it would be inequitable and unreasonable to place them if the remedy were afterwards to be asserted. They submit that both aspects of the doctrine of laches are applicable in the present case: i.e., delay implying acquiescence and assent; and delay involving prejudicial change of circumstances. The appellants again emphasise that cases where relief by way of rescission is sought are recognised as cases requiring special promptitude (citing Streeter v Western Areas Exploration Pty Ltd (No 2) at [640]).

375. The appellants contend that the prejudice they suffered from the New Trustees’ delay was self-evident in that, by the New Trustees’ inaction, Mr Crossman was permitted to discontinue the Crossman proceedings, give up the benefit of accrued costs orders, lose the opportunity to have misappropriated trust funds recovered, consent to the vesting of the Baltarna Class Trust and “generally organise his affairs on the basis that the Settlement Deeds were valid and binding” (submissions at [87]).

376. They emphasise that the circumstances in which laches, acquiescence and delay arise include where a situation has been permitted to arise which it would be unjust to disturb (Meagher, Gummow & Lehane’s Equity Doctrines and Remedies at [38-005]).

377. In response, the New Trustees argue that the context in which the claim of delay and acquiescence was made must be viewed in the context of the finding by his Honour (at [115(p)]) that Mr Crossman was fully aware of the fact that what the settlement deeds entailed “was a complete departure from the requirements of the trust deeds”; a finding not challenged by the appellants.

378. Although the New Trustees also point in this context to what his Honour said at [176] as a finding that Mr Crossman “had knowledge of all matters relevant to [the] breach of trust including the source of the $2.2 million”, it is apparent that his Honour was there referring to a contention that the New Trustees had made to that effect. What his Honour then said was that he was “unable to accept that Crossman was ‘entirely innocent’” as the appellants had asserted. There was not a finding (as such) of knowledge of all matters relevant to the breach of trust.

379. Similarly, although the New Trustees also refer to the primary judge’s conclusion (at [115(p)]) that it was obvious (notwithstanding Mr Crossman’s denial of this in cross-examination) that the “threat of sanctions for contempt of Court and the requirement that Nominees, Londish and Seller might have to refund all the money removed from the trust was an effective ‘lever’” on them (which his Honour inferred played a very significant part in their decision to have PILT Nominees and Baltarna enter into the deeds) it is not clear whether, in stating that this was obvious, the primary judge was there accepting the submission put by the New Trustees (and recorded at [56(14)]) to the effect that Mr Crossman appreciated that the contempt motion gave him a lever against Mr Seller and Mr Londish or was simply stating that it was obvious that it was such a lever. I would read the reasons as amounting to the latter.

380. The New Trustees submit that Mr Crossman could not establish that he had altered his position in reasonable reliance on the New Trustee’s acceptance of the status quo (as articulated in Meagher, Gummow & Lehane’s Equity Doctrines and Remedies at [38-005]). They argue that they never accepted the status quo and that the matters pleaded by Mr Crossman (at [88(b)(ii)] of the appellants’ commercial list response to the further amended commercial list statement) all took place prior to their appointment in February 2011 and hence cannot have been done in reliance on anything done or not done by them (in their capacity as trustees of the PILT Trust).

381. The matters to which reference is made at [88(b)(ii)] of the commercial list response were the entry into the respective settlement deeds (in July 2009), the deed of amendment (in October 2009), the payments made under those deeds (in July 2009 and April 2010), and the discontinuance of the proceedings (which occurred in March 2010). The New Trustees note that there is no reference at [88(b)(ii)] to the loss of an opportunity of the kind referred to in the appellants’ submissions nor to the general organisation of Mr Crossman’s affairs.

382. The New Trustees point out that the commercial list response did not assert that Mr Crossman did any of the things itemised at [88(b)(ii)] in reliance on anything the New Trustees did or did not do; and that Mr Crossman gave no evidence that he did those things in reliance on anything the New Trustees did or did not do.

383. They point out that Mr Crossman was on notice, before receipt of the second payment, of the contention that it would be an improper application of trust property and chose nevertheless to proceed without approaching the Court for declarations or suggesting that PILT Nominees obtain judicial advice in respect to the payments in question. Hence the New Trustees submit that when Mr Crossman dealt with the first payment and pressed for the second payment he took the risk that the Court would later order that he restore the trust. The New Trustees further submit that it is irrelevant that Valofo did not take court action to enjoin the payments to the appellants because the claim against the appellants is a claim properly brought by the New Trustees.

384. The appellants submit that it was not necessary for Mr Crossman to give evidence as to the specific prejudice suffered by him as a result of the New Trustee’s delay in commencing proceedings against him, since the prejudicial nature of delays in the commencement of legal proceedings are well-established and treated as self-evident (reference there being made to Brisbane South Regional Health Authority v Taylor [1996] HCA 25; (1996) 186 CLR 541 at 552-553; Jackamarra v Krakouer [1998] HCA 27; (1998) 195 CLR 516 at [526]).

Determination

385. The authors of Meagher, Gummow & Lehane’s Equity Doctrine and Remedies explain at [38-005] that:

Laches is an equitable defences to an equitable claim. It is no answer to a claim at law. In its primary sense, laches requires a defendant to establish that a plaintiff has so delayed the institution or prosecution of an equitable claim that the defendant has altered his position in reasonable reliance upon the plaintiff's acceptance of the status quo, or otherwise permitted a situation to arise which it would be unjust to disturb. Mere delay, of itself, is not sufficient to establish the defence.

In Orr v Ford (at 341) Deane J expressed the principle as being whether the plaintiff has, by his inaction and standing by, placed the defendant or a third party in a situation in which it would be inequitable and unreasonable “to place him if the remedy were afterwards to be asserted”. See also I Spry, Equitable Remedies (6th ed, 2001, LBC) at 435.

386. To establish a laches defence the defendant must demonstrate both unreasonable delay and prejudice to the defendant. As Doyle CJ observed in Duke Group Ltd (in liq) v Alamain Investments Ltd [2003] SASC 415 at [156]:

In connection with the defence of laches, two main issues arise. Has there been unreasonable delay by the plaintiff? Or putting it more broadly, what explanation is there for the time that has elapsed since the occurrence of the events giving rise to the claim, and since the liquidator was aware of the circumstances giving rise to the claim? Second, the impact of the passage of time on the defendants.

387. In the present case, there was a long delay and there was no explanation for that delay. However, the evidence does not establish any acquiescence on the part of the New Trustees in the breach of trust of which they later complained. The real question is whether there was error in the finding of lack of prejudice to the appellants. True it is that entry into the settlement deeds (though not performance of all the obligations thereunder) had been completed by the time of the New Trustees’ appointment and cannot be said to have been done in reliance on any action or inaction by them. Payment of the final instalment under the Contempt Settlement Deed, which occurred after the New Trustees’ appointment, was made in the knowledge of the New Trustees’ reservation of rights and similarly cannot be seen as having been done with their acquiescence.

388. However, I have difficulty in accepting that the New Trustees’ delay in bringing the proceedings did not leave the appellants in a position in which it was unjust or unreasonable to leave them. It was accepted by the primary judge that by the time the New Trustees did bring their claim for equitable compensation the chose in action that had been given up by Mr Crossman was no longer of any practical worth. Had substantial restitution been practicable, then I would have concluded that the defence of laches was not made out, since I agree that there was no acquiescence on the part of the New Trustees and there would then not have been a situation in which it was unjust or unreasonable to leave the appellants. As it is, I have difficulty with the conclusion the primary judge reached. That said, it is not necessary to determine the appeal on these grounds given the conclusion reached on grounds 2 and 12.

Conclusion

389. For the above reasons I would uphold the appeal and make the following orders:

1. Appeal allowed with costs.

2. Set aside the orders of Rein J made on 2 July 2013 and in lieu thereof order that:

1. The plaintiffs’ Further Amended Commercial List Summons filed on 28 April 2014 be dismissed.

2. The first and second plaintiffs pay the costs of the third, fourth, fifth and ninth defendants.

390. PAYNE JA: I have had the benefit of reading the judgment of Ward JA in draft. I agree with her Honour’s reasons and the orders that her Honour proposes.

391. I wish to make some brief additional observations about the Baltarna consent issue that her Honour deals with at paragraphs [354]-[368].

Consent by the only unitholder of the PILT Trust - Baltarna

392. At all relevant times Baltarna was the sole unitholder of the PILT Trust. ASIC records show that Mr Seller was the sole director and shareholder of Baltarna. It was also the New Trustees’ case that Mr Seller controlled Baltarna at all relevant times: Baltarna was the alter ego of Mr Seller. His mind was its mind: Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89 at [128].

393. As Ward JA demonstrates, Baltarna’s consent, as a defence to the claims pleaded against them, was pleaded by the appellants.

394. The primary judge found that, even if pleaded, the Baltarna consent issue should not be permitted to be raised. I disagree. There are cases where unfairness arises because a point which has been pleaded is only specifically raised by a party late in the proceedings. The present was not such a case.

395. The issue was specifically raised by the appellants when addressing the New Trustees’ submission that Mr Crossman could not succeed in establishing consent as he did not have an interest in the Baltarna Trust and consent “would need to happen at the Baltarna Trust level as well”. The determinative significance of Baltarna’s consent was an issue clearly raised by the appellants at the trial. Following complaint by the New Trustees, both parties were given leave to address the issue in writing: Senior Counsel who appeared for the New Trustees very properly did not suggest that the New Trustees would have conducted their case any differently if the point had been raised earlier.

396. The question of substance that the parties addressed was whether Mr Seller’s knowledge could be attributed to Baltarna as the sole beneficiary of the PILT Trust.

397. On the issue of substance, the New Trustees submitted that Mr Seller’s knowledge could not be imputed to Baltarna Pty Ltd because Mr Seller was acting improperly. It was further submitted that as a matter of principle, conduct of a director acting improperly vis a vis the relevant corporation is not to be imputed as against that corporation. It was submitted this was demonstrated by demonstrated by the following cases:

In Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 46, von Doussa J held at 46:

As a matter of law Beach had no knowledge of the fraud, because, being the victim, it was not imputed with the knowledge of those acting on its behalf. Notice of the true position, if it were to be effective notice, would have to be given to someone other than the parties to the fraud. As the only directors of Beach in June 1989 were Messrs Fuller, Cummings and Main, notice could not be given effectively to a director ... The only organ of the company to whom effective notice could be given would be the shareholders. Had the shareholders been told the true position, it is beyond doubt that the transactions would not have occurred.

See also Duke Group Ltd v Pilmer (1992) 31 ACSR 213 at [634].

398. It was submitted that the Court should not infer consent of Baltarna in circumstances where Mr Seller was hopelessly conflicted in giving such consent on behalf of Baltarna and that it was “not possible to impute to Baltarna as trustee an improper act through the knowledge of Seller”.

399. The primary judge addressed the issue at [184]-[185] as follows:

Against the possibility that to exclude argument on this point is not permissible I shall however deal with the substantive point. The submissions seemed to focus on the question of whether the knowledge of Seller concerning the Contempt Deed and Main Deed was to be attributed to Baltarna a question of a type considered in detail in Beach Petroleum NL v Johnson (1993) 43 FCR 1 and Duke Group Ltd (inliq) vPilmer (1999) 73 SASR 64 [607]- [649].

I am inclined to the view that because Seller was not seeking to defraud or take advantage of Baltarna: see Duke[629] and [630], his knowledge is to be attributed to Baltarna. However if the knowledge of Seller can be attributed to Baltarna, as Mr Thomas contended, Baltarna was, as trustee, in breach of its fiduciary duty owed to the beneficiaries of the Baltarna Trust by permitting assets to be dissipated from the PILT Trust and without ensuring that the assets were available for distribution to the Baltarna Trust unitholder (namely Valofo). That was a clear breach of trust by both Nominees and Baltarna. In the case of Nominees, Seller and Londish were the human agents of the trustee and in the case of Baltarna (and if it be relevant as it might of Sanabu as well) Seller was the human agent. The conduct of Baltarna and Nominees through Seller (and Londish) was conduct which constituted a breach of trust and establishing that Baltarna knew that Nominees was acting in breach of trust is not a defence available to Crossman and the Crossman corporations as against the New Trustees.

400. Accordingly, at least on the contingent basis he was addressing the question, the primary judge rejected the New Trustees’ submission that the knowledge of Mr Seller could not be attributed to Baltarna. The primary judge was correct to do so.

401. The authorities to which the New Trustees referred did not warrant a contrary conclusion. The passage from Beach Petroleum NL v Johnson (1993) 43 FCR 1 at 46 referred to was concerned with the attribution of knowledge of a fraud.

402. No allegations of fraud were made in the present case against Baltarna or Mr Seller. As von Doussa J explained earlier in Beach Petroleum (at 31-32), knowledge of fraud has particular consequences under the law of attribution but, even then, the director must be acting totally in fraud of the company, that is, where all the director’s activities are directed against the interests of the company, and not partly for the benefit of the company.

403. Duke Group Ltd v Pilmer takes the matter no further. The issue in that case was a contingent finding at [634] that, had it been necessary to do so, the Court would have reasoned as von Doussa J had in Beach to find that a company could sue to recover the proceeds of a fraud upon it, despite knowledge and participation by its directors in the fraud.

404. In circumstances where no allegation of fraud had been made by the New Trustees, the primary judge was correct to decline to depart from the ordinary rule that Mr Seller as the sole shareholder and director of Baltarna was an embodiment of the company and his mind was the mind of the company.

405. The basis of the primary judge’s finding against the appellants on this issue was that there was a “clear breach of trust” by Baltarna.

406. Baltarna was not a party to the proceedings. The New Trustees did not submit that Baltarna acted in breach of trust, either before the primary judge or in this Court. No pleading was advanced by the New Trustees about this issue. No application to amend an existing pleading or file a new pleading was made by the New Trustees about this issue. In those circumstances, the finding that Baltarna acted in breach of trust was not open to the primary judge.

407. Baltarna, the only beneficiary of the PILT Trust, was a party to the Main Settlement Deed. As the primary judge found, Mr Seller’s knowledge was properly imputed to Baltarna. In those circumstances it should be concluded that Baltarna knew all that there was to know about the entry into the Contempt Settlement Deed and the two payments to Mr Crossman, being the only matters alleged to be a breach of trust.

408. Baltarna’s fully informed consent to the Main Settlement Deed, the Contempt Deed and the two payments under that Deed may readily be inferred where it had full knowledge of the entry into the Contempt Settlement Deed and the two impugned payments and in circumstances where it was a party to and took the benefit of the releases in its favour contained in the Main Settlement Deed which were contingent upon the two relevant payments being made pursuant to the Contempt Settlement Deed.

409. Thus, on this basis and the basis addressed by Ward JA at [367], the fully informed consent of Baltarna was a further ground upon which the appellants were entitled to succeed.

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Endnotes

Decision last updated: 23 August 2016