Entwisle v Minken Pty Ltd
[2015] VSC 561
•13 October 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2013 1111
| TIMOTHY JOHN ENTWISLE & ORS | Plaintiffs |
| v | |
| MINKEN PTY LTD & ORS | Defendants |
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JUDGE: | ALMOND J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 14 August 2015 | |
DATE OF RULING: | 13 October 2015 | |
CASE MAY BE CITED AS: | Entwisle & ors v Minken Pty Ltd & ors | |
MEDIUM NEUTRAL CITATION: | [2015] VSC 561 | First Revision 20/10/15 |
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CORPORATIONS – Application for leave to proceed with counterclaim against companies in liquidation – s 471B of the Corporations Act 2001 (Cth) – Whether there is a serious question to be tried – Whether there is a sufficient foundation for proposed counterclaim – Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550 – Commissioner for Consumer Protection v Unleash Solar (in liq) Pty Ltd [2001] FCA 348 – Test satisfied – Leave to proceed granted.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | D V Aghion of counsel C R Brown of counsel | Kyard Business Law |
| For the First to Fourth Defendants The Fifth Defendant appeared in person | J D Barber of counsel | Russell Kennedy |
HIS HONOUR:
Introduction
By interlocutory process filed on 24 April 2015 in this proceeding (‘winding up proceeding’), Dr Timothy Entwisle seeks leave to proceed with his counterclaim in proceeding S CI 2013 0330 (‘lease proceeding’) against the First to Fourth Defendants by counterclaim: Control Group Services Pty Ltd, Deer Park Holdings Pty Ltd, Minken Pty Ltd and Henton Pty Ltd.[1] As these companies are in liquidation, Dr Entwisle requires leave to proceed pursuant to s 471B of the Corporations Act 2001 (Cth) (‘Act’).
[1]Referred to individually as ‘Control Group’, ‘Deer Park’, ‘Minken’ and ‘Henton’.
In support of the application, Dr Entwisle relies on two affidavits of his solicitor, Mr Tony Caillard, sworn on 24 April 2015 and 16 June 2015 respectively, and his own affidavit, sworn 3 September 2013.
The liquidators for the First to Fourth Defendants (‘Liquidators’) oppose the application. They rely on an affidavit of their solicitor, Mr Damian Neylon, sworn on 25 June 2015.[2]
[2]Mr Ian McGoldrick, the Fifth Defendant in the winding up proceeding and the Fifth Defendant by Counterclaim in the lease proceeding, also filed an affidavit sworn 6 July 2015. In Court, Mr McGoldrick, who represented himself, stated, correctly in my view, that he thought the application ‘more of an issue between the liquidator and Entwisle’s interests.’ Accordingly, for present purposes I have confined my attention to the materials filed on behalf of Dr Entwisle and the Liquidators.
Background facts
The winding up proceeding arose as a consequence of a failed joint venture conducted, in effect, as a quasi-partnership between Mr McGoldrick and Dr Entwisle through corporate entities.
Due to a breakdown of the relationship between Mr McGoldrick and Dr Entwisle, Dr Entwisle (and his associated companies) sought to have the joint venture companies, being the First to Fourth Defendants by counterclaim in the lease proceeding (‘property development companies’), wound up on the ‘just and equitable ground’. On 19 December 2013, Elliott J ordered that the property development companies be wound up.[3]
[3]Entwisle v Minken Pty Ltd (Receivers and Managers appointed) [2013] VSC 709.
The lease proceeding
The lease proceeding is brought by Control Group and Deer Park against Dr Entwisle. Control Group and Deer Park were registered owners of farm properties in NSW. It is alleged that Dr Entwisle leased part of the farm properties, and in breach of the lease agreement failed to pay rent and outgoings due.
In his defence to this claim, Dr Entwisle alleges that on 29 June 2008 he and Mr McGoldrick entered into an agreement to dissolve their joint venture (‘dissolution agreement’)[4] which provided that Dr Entwisle would cede control of the property development companies to Mr McGoldrick in exchange for a combination of cash and property in the sum of $2,650,000.[5] Dr Entwisle resigned as director of each of the property development companies.[6] The dissolution agreement otherwise remains unperformed.
[4]Further Amended Defence dated 13 August 2015 (‘Further Amended Defence’), [11]; the dissolution agreement is exhibited as APC-1 to the affidavit of Tony Caillard dated 16 June 2015.
[5]Outline of submissions on behalf of Timothy John Entwisle dated 25 June 2015, [9]; Further Amended Defence, [11]-[15].
[6]Further Amended Defence, [15].
Further, Dr Entwisle alleges that:
(a) Mr McGoldrick represented, on his own behalf and on behalf of the property development companies, that any rent due under the farm lease was to be offset against money due to Dr Entwisle under the dissolution agreement; and
(b) this representation gives rise to an estoppel, further or alternatively a collateral contract, that the rent would not be due until such time as Dr Entwisle was paid his entitlements under the dissolution agreement. [7]
[7]Outline of submissions on behalf of Timothy John Entwisle dated 25 June 2015, [10]; Further Amended Defence, [19]-[27].
In his proposed counterclaim,[8] Dr Entwisle alleges relevantly:
[8]Further Amended Counterclaim dated 13 August 2015 (‘proposed counterclaim’).
33.…[On and from 29 June 2008] each of the property development companies held and continue to hold their respective assets of the property development business pursuant to an express trust, alternatively an implied, resulting or constructive trust, for the benefit of Entwisle, pending the distribution of such of those assets as are necessary to be distributed to Entwisle pursuant to the terms of the dissolution agreement (Entwisle dissolution trust).
34.Further McGoldrick, in his capacity as sole director of the property development companies, further or alternatively in his personal capacity, was subject to a duty to at all times act in accordance with the terms of the Entwisle dissolution trust and not in a manner that was inconsistent with it.
34A.Further, McGoldrick was a fiduciary of Entwisle in respect of the assets of the property development business until such time as the dissolution agreement was performed (fiduciary duty).
Particulars
This duty is implied by law having regard to the principle enunciated in Brunninghausen v Glavanics (1999) 46 NSWLR 538 and Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41.
35.In breach of the terms of the dissolution agreement, the Entwisle dissolution trust and the fiduciary duty:
a. none of the property development companies have transferred any asset or paid any sum to Entwisle, whether pursuant to the terms of the dissolution agreement, the Entwisle dissolution trust, or otherwise;
b. McGoldrick has not acted in accordance with the terms of the dissolution agreement or the Entwisle dissolution trust; and
c. McGoldrick has used his sole directorship of the property development companies to pursue activities for his personal financial gain, including activities that are inconsistent with the dissolution agreement, the Entwisle dissolution trust and the fiduciary duty.
…
35A.By reason of the matters set out in paragraph 35, the fiduciary breaches constituted a dishonest and fraudulent design by McGoldrick.
36. At all material times, the property development companies
a. had knowledge of the fiduciary breaches;
b. had knowledge of the dishonest and fraudulent design; and
c. assisted McGoldrick to engage in the fiduciary breaches.
Particulars
The knowledge of the property development companies is inferred by the fact that McGoldrick was a director of each of the property development companies at all material times.
The assistance arises from the fact that, for each of the transactions comprising the fiduciary breaches and set out in the particulars to paragraph 35 above, the property development companies were parties to those transactions, purported to give their consent to those transactions, and thereby permitted their assets to be dealt with in the manner set out in those transactions.
McGoldrick was able to procure the the consent of the property development companies to those transactions because, at all material times from 30 June 2008, he was the sole director of the property development companies.
36A.By reason of the matters set out at paragraphs 33 to 36 above, McGoldrick and the property development companies held and continue to hold the assets of the property development business:
a. on an implied, constructive or resulting trust for Entwisle until such time as the dissolution agreement is performed; and
b. in the event that the dissolution agreement is unenforceable or otherwise incapable of performance, on a resulting trust for Entwisle in such proportion as this Court may declare; or
c. in the alternative, subject to such other equitable property interest and in such proportion as this Court may declare.
Particulars
The trust or equitable proprietary interest, as the case may be, is established according to the principle enunciated in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) WAR 1 at [4750], and Parker v Tucker (2010) 77 ACSR 525 at [78].
37.To the extent that the property the subject of the Entwisle dissolution trust has been transferred, converted or encumbered by the McGoldrick Conduct fiduciary breaches, Entwisle is entitled to trace his interest into other assets or interests resulting from such transfer, conversion or encumbrance.
Dr Entwisle seeks relief including:
(a) declarations that:
·the joint venture was dissolved on 29 June 2008 pursuant to the dissolution agreement;
·Dr Entwisle is the equitable owner of cash and property assets of the property development companies to the total value of $2.65 million;
·The property development companies hold their respective assets, including real assets, on trust for the benefit of Dr Entwisle as equitable owner pursuant to the terms of the dissolution agreement; and
(b) specific performance of the dissolution agreement. [9]
[9]Proposed counterclaim, Prayer for Relief.
Legislation and principles
Section 471B of the Act provides:
471B Stay of proceedings and suspension of enforcement process
While a company is being wound up in insolvency or by the Court, or a provisional liquidator of a company is acting, a person cannot begin or proceed with:(a) a proceeding in a court against the company or in relation to property of the company; or
(b) enforcement process in relation to such property;
except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
There was common ground as to the applicable principles and the requirements for leave to proceed against a company in liquidation:
(a) Leave will only be granted where the applicant has established that there is a serious question to be tried. This does not mean that a prima facie case in the technical sense of that expression must be established, but rather that there is a solid foundation for the claim;[10]
[10]Commissioner for Consumer Protection v Unleash Solar (in liq) Pty Ltd [2001] FCA 348 [13]; Vagrand Pty Ltd (in liq) v Fielding (1993) FCR 550 at 556 (‘Vagrand’).
(b) the ordinary procedure is for a creditor to lodge a proof of debt. Some good reason must be shown to depart from the ordinary procedure;[11]
[11]Ingot Capital Investments Ltd v Macquarie Equity Capital Market Ltd (2003) 45 ACSR 224, [32]-[35] (Einstein J).
(c) it is usual to grant leave where the company is a necessary party to the action, for example, where there is a dispute as to who is the beneficial owner of shares owned by the company;[12]
[12]Phisci Pty Ltd v Green Frog Nominees Pty Ltd (No 2) [2008] FCA 1492 (Finkelstein J).
(d) leave should be granted where the claim is proprietary and stands outside the province of the proof of debt system;[13]
(e) it is relevant to know whether the proposed counterclaim will interfere with the orderly winding up of the companies; and
(f) whilst it is not possible to exhaustively list the factors a court may take into account, the amount and seriousness of the issues involved, the degree of complexity and the legal and factual issues involved, and the stage of the proceedings, are all relevant factors in determining whether leave ought be granted.[14]
[13]QBE Insurance (International) Ltd v Cycand Pty Ltd [2009] NSWSC 177; Ong v Lottwo Pty Ltd (in liq) [2013] 116 SASR 280, [61].
[14]Re Gordon Grant & Grant Pty Ltd [1983] 2 Qd R 314, 317 (McPherson J, Campbell CJ & Sheahan J agreeing). Refshauge J helpfully summarised the considerations a court may take in to account in such applications in Commonwealth v Davis Samuel Pty Ltd (No 5) (2008) 68 ACSR 336 at [30]. In Commissioner for Consumer Protection v Unleash Solar Pty Ltd (in liq) [2015] FCA 348 at [22] and [23], McKerracher J listed a number of factors courts have considered relevant to the exercise of discretion under s 471B.
Serious question to be tried
The Liquidators assert there is no serious question to be tried, as there is no real basis for Dr Entwisle to claim proprietary relief against the property development companies and therefore the application should be dismissed.
In particular, the Liquidators submit that Dr Entwisle is unable to point to any direct proprietary interest he had in the assets of the property development companies prior to the execution of the dissolution agreement. Counsel for the Liquidators noted that:
· Minken, as trustee of the Kew Property Trust, was the owner of land at 17-27 Cotham Road, Kew. The Kew Property was a principal asset of the Kew Property Trust. Dr Entwisle was not a unit-holder of the Kew Property Trust;[15]
[15]Affidavit of Damian Thomas Neylon dated 25 June 2015, [5]-[8].
· Deer Park, as trustee of the Deer Park Holdings Agribusiness Unit Trust, was the owner of farming land at Deniliquin, New South Wales (known as the ‘Smythesdale’ property). Smythesdale was the principal asset of the Deer Park Holdings Agribusiness Unit Trust. Dr Entwisle was not a unit-holder of the Deer Park Holdings Agribusiness Unit Trust;[16]
· Control Group was the beneficial owner, in its own right, of farming land adjoining Smythesdale at Deniliquin and known as ‘Brassi East’. Dr Entwisle was not a shareholder of Control Group at the relevant time;[17] and
· The principal asset of Henton is development land at Bacchus Marsh. The Bacchus Marsh property has been subdivided and lots are being progressively sold by first mortgagee. There is an ongoing dispute regarding the true ownership of 75% of the shares in Henton, the remaining 25% being owned by Minken.[18]
[16]Ibid, [9]-[11].
[17]Ibid, [12]-[14]. It appears from a company extract from ASIC records that Mr Entwisle was a former shareholder of Control Group: Exhibit DTN-3 to the affidavit of Damian Thomas Neylon dated 25 June 2015.
[18]Affidavit of Damian Thomas Neylon dated 25 June 2015, [15]-[17].
Further, the Liquidators submit that the proposed counterclaim does not identify the property in which it is alleged Dr Entwisle acquired an interest after the execution of the dissolution agreement.
For the purposes of the application, but without making any concession as to its enforceability, counsel for the Liquidators took the dissolution agreement at face value and focused upon two scenarios which relate to the possible final outcome of the dissolution of the joint venture:
(a) ’Cash settlement component, Best case – Scenario 1’, which provides that Dr Entwisle would get $1.26 million in ‘land’, $1 million in cash and a $390,000 interest in ‘Martha’.[19] The reference to Martha is to a property at Martha Cove which is not relevant to this application; and
(b) ‘Cash settlement component, Worst case – Scenario 2’, which provides that Dr Entwisle would get $1.575 million in ‘land’, $685,000 million in cash and a $390,000 interest in Martha.[20]
[19]Application Book filed 12 August 2015, 78 (‘Application Book’); APC-1.
[20]Application Book, 79; APC-1.
The dissolution agreement further provided (in summary) that the assets of three out of the four property development companies (being Control Group, Deer Park and Minken) companies were to be transferred to the McGoldrick interests and not to the Entwisle interests. In the circumstances, the Liquidators submit that Dr Entwisle has no proprietary interest in the assets of these three companies pursuant to the dissolution agreement.
The position is somewhat different with Henton. Henton owns undeveloped parcels of land at Bacchus Marsh. In relation to Henton, the dissolution agreement again envisages two scenarios; ‘Scenario 1’ contemplates that the estimated equity for Dr Entwisle corresponds to 12 blocks of unencumbered land at $105,000 each (amounting to $1.260 million in value). ‘Scenario 2’ contemplates that the estimated equity of Dr Entwisle corresponds to 15 blocks of unencumbered land at $105,000 each (amounting to $1.575 million in value). In another column in the dissolution agreement (relating to Henton) there is the following reference:
- 12 Blocks Unencumber land Entwisle @$105,000 p/bl
- 15 Blocks Unencumber land Entwisle @$105,000 p/bl[21]
[21]Application Book, 83; APC-1.
Notwithstanding this reference, the Liquidators submit (correctly) that none of the individual blocks of land are identified in the dissolution agreement. The Liquidators submit that this lack of identification is fatal to Dr Entwisle’s claim, as the properties need to be identified in order for someone to have a proprietary interest in any of them. Counsel directed the court to a number of authorities to illustrate this proposition.
In Watson v Issel (1890) 16 VLR 607, in a contract for the sale of land, the land was described as being ‘all that piece of land, being part of Crown allotment 4, sec 3, of the Parish of Frankston, County of Mornington, being allotment [ ] on the plan of subdivision.’ It was held by this Court that this was an insufficient description of the property, thus voiding the contract.
In Pirie v Saunders (1961) 104 CLR 149, the respondent had brought an action against the appellants for breach of an alleged agreement to grant a lease of certain shop premises. At issue was a note or memorandum which listed, in abridged form, some of the terms of the proposed lease and set out the names of the parties. The notes were not signed by the parties. It was contended by the respondent that the notes were a sufficient note or memorandum for the purposes of the Conveyancing Act 1919 (NSW). In rejecting this contention, the High Court held:[22]
Finally, even if these objections are not properly founded, it will be seen upon examination that there are several reasons why the document could not be regarded as a sufficient note or memorandum. In the first place it does not specify the property which is to be leased beyond describing it as “part of Lot B, Princes Highway, Sylvania Heights”. This alone is, we should think, a fatal objection…
[22]Pirie v Saunders (1961) 104 CLR 149, 155.
In re Goldcorp Exchange Ltd: Liggett v Kensington[23], customers purchased gold bullion from Goldcorp Exchange Ltd (‘the company’), which then unlawfully misappropriated the bullion by mixing it with its own bullion, removing bullion from the mixed stock and adding more bullion to the stock without intending to replace the claimants’ bullion. The company became insolvent, and the customers sought to assert, in the liquidation of the company, claims of a proprietary nature over the remaining stock of bullion. It was common ground that the purchase contracts for the bullion were for unspecified goods.
[23][1995] 1 AC 74.
Relevantly, the Judicial Committee of the Privy Council made the following observations (at page 90):
…[C]ommon sense dictates that the buyer cannot acquire title until it is known to what goods the title relates.
…
As Lord Blackburn wrote in his treatise on The Effect of the Contract of Sale (1845), pp. 122-123, a principal inspiration of the Sale of Goods Act 1893:
“The first of [the rules] that the parties must be agreed as to the specific goods on which the contract is to attach before there can be a bargain and sale, is one that is founded on the very nature of things…[I]t is clear there can be no intention to transfer the property in any particular lot of goods more than another, till it is ascertained which are the very goods sold.
And later at pages 98-99:
There never was a separate and sufficient stock of bullion in which a proprietary interest could be created. What the non-allocated claimants are really trying to achieve is to attach the proprietary interest, which they maintain should have been created on the non-existent stock, to wholly different assets. It is understandable that the claimants, having been badly let down in a transaction concerning bullion should believe that they must have rights over whatever bullion the company still happens to possess. Whilst sympathising with this notion their Lordships must reject it, for the remaining stock, having never been separated, is just another asset of the company, like its vehicles and office furniture. If the argument applies to the bullion it must apply to the latter as well, an obviously unsustainable idea.
…
As previously remarked the claimants’ argument really comes to this, that because the company broke its contract in a way which had to do with bullion the court should call into existence a proprietary interest in whatever bullion happened to be in the possession and ownership of the company at the time when the competition between the non-allocated claimants and the other secured and unsecured creditors first arose. The company’s stock of bullion had no connection with the claimants’ purchases, and to enable the claimants to reach out and not only abstract it from the assets available to the body of creditors as a whole, but also to afford a priority over a secured creditor, would give them an adventitious benefit devoid of the foundation in logic and justice which underlies this important new branch of the law.
The Liquidators rely on these cases to show that Dr Entwisle improperly claims a proprietary interest in all of the assets of the property development companies, without being able to point to any particular interest or piece of property that he has any direct or indirect interest in, whether before or after the dissolution agreement.
I am satisfied, prima facie, based on the material before me, that Dr Entwisle had no direct proprietary interest in the property development companies immediately before entering into the dissolution agreement. He does not allege otherwise in the proposed counterclaim. I am also satisfied on the basis of the authorities, to which I have been referred, that the dissolution agreement did not create in Dr Entwisle a proprietary interest in any of the land owned by the property development companies, not least for want of identification of the relevant property. The mere reference to blocks of ‘unencumber land’ at Bacchus Marsh in the dissolution agreement is not sufficient to give rise to, or identify, a proprietary interest in particular land.
In written submissions, counsel for Dr Entwisle conceded that, on ‘a strict reading’, the dissolution agreement does not confer any proprietary interest upon Dr Entwisle.[24] In oral submissions, counsel accepted that Dr Entwisle was unable (by reference to title, particulars or otherwise) to identify a specific piece of property to which the claim attaches except in a very abstract sense in relation to the 12 (or 15) lots out of the Henton land.[25]
[24]Outline of submissions on behalf of Timothy John Entwisle dated 25 June 2015, [25].
[25]Transcript 50.1-11.
Critically, counsel for Dr Entwisle submitted that this did not matter. He put the proposed case differently.
He likened the unperformed agreement to settle the joint venture business dealings embodied in the dissolution agreement to an uncompleted contract for the sale of land and contended that, in the notional point between the entry into the contract and its performance, a proprietary interest arises,[26] as described in paragraph 36A of the proposed counterclaim. Paragraph 36A of the proposed counterclaim states:
[26]Transcript 10.22-28.
36A. By reason of the matters set out at paragraphs 33 to 36 above, McGoldrick and the property development companies held and continue to hold the assets of the property development business:
(a) on an implied, constructive or resulting trust for Entwisle until such time as the dissolution agreement is performed; and
(b) in the event that the dissolution agreement is unenforceable or otherwise incapable of performance, on a resulting trust for Entwisle in such proportions as this Court may declare; or
(c) in the alternative, subject to such other equitable proprietary interest and is such proportion as this Court may declare.
Particulars
The trust or equitable proprietary interest, as the case may be, is established according to the principle enunciated in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1 at [4750] & [4776], and Parker v Tucker (2010) 77 ACSR 525 at [78].
In support of the proposition that property of the property development companies could be trust property, Dr Entwisle relies on Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9)[27] and Parker v Tucker.[28] Among the numerous issues considered in Bell Group, Owen J considered whether or not certain company property was trust property in the context of a knowing receipt of trust property claim under the first limb of Barnes v Addy. His Honour said:[29]
The next question that I wish to address is the meaning of “trust property” in these circumstances. By “these circumstances” I mean where a director of a company deals with assets of the company in a way that constitutes a breach of a fiduciary duty that the director owes to the company. It is in this section that the discussion of the somewhat peculiar nature of the trust property is developed…
[27](2008) 70 ACSR 1 (‘Bell Group’).
[28](2010) 77 ACSR 525.
[29]Bell Group (2008) 70 ACSR 1 [4750].
In Bell Group, the banks contended that the plaintiffs’ attempt to characterise company property as trust property was a fatal flaw in the plaintiffs’ case. They submitted that trust property is unique because it involves the recognition of two separate proprietary interests, not present in the case of property owned absolutely. In the case of trust property, there is a beneficial interest and a legal interest residing in, respectively, the beneficiary and trustee. The banks submitted that, according to this line of reasoning, a company director has no interest, either legal or beneficial, in the property of a company. A company has its own legal personality (unlike a trust) and is the absolute owner of its property. Accordingly, a recipient of trust property who knows he or she is dealing with a trustee is immediately on notice that the property is not owned absolutely by the trustee. On the other hand, a recipient of company property knows that the company is the absolute owner of the property. Hence, the banks submitted, the concept that the same principle could govern knowing receipt of trust property and bargains negotiated at arm’s length between corporations is specious.[30]
[30]This formulation of the banks’ argument is derived substantially from Bell Group (2008) 70 ACSR 1 [4751]-[4753].
In relation to this submission, Owen J observed:[31]
As a matter of basic principle, there is a certain attraction in that line of reasoning. But, in my view, the weight of authority suggests that the phrase “trust property” in modern Barnes jurisprudence has a broader meaning than “trust property” in the strict sense.
[31]Bell Group (2008) 70 ACSR 1 [4754].
After reviewing a number of authorities on this point, Owen J held:[32]
In my view first limb Barnes jurisprudence can extend beyond trust property in the strict sense and may include property to which a fiduciary duty attaches…
…The focus of attention is on the disposal, or act of transfer, of property to which the fiduciary obligation attaches. This does not necessarily involve the characterisation of the asset (before the disposal or transfer) as trust property. So far as directors are concerned company property is property to which a fiduciary duty attaches. If they dispose of, or transfer, that property to a third party in breach of those obligations it may be “trust property” within the extended understanding of that phrase.
[32]Ibid [4776]-[4778].
This proposition was referred to by Gordon J in Parker v Tucker,[33] where her Honour noted that on the facts in that case, ‘the reference to “trust property” would include “where a director of a company deals with assets of the company that constitutes a breach of a fiduciary duty that the director owes to the company”: Bell at [4750] and [4776] and following.’
[33](2010) 77 ACSR 525 [78].
Based on these authorities, counsel for Dr Entwisle sought to demonstrate that trust property should be understood in an extended sense, and may include property to which a fiduciary duty attaches, such as company property that has been disposed of or transferred by a director in breach of that duty.
Counsel for Dr Entwisle then submitted that the relevant fiduciary duty that has been breached in this case is one owed by Mr McGoldrick directly to Dr Entwisle. He acknowledged that, as a general proposition, it is understood that directors are in a fiduciary position vis-à-vis the company, but not vis-à-vis shareholders, except where such an obligation arises on the facts. As noted by Handley JA in Brunninghausen v Glavanics,[34] where a director’s fiduciary duties are owed to the company, this prevents the recognition of concurrent and identical duties to its shareholders covering the same subject matter.[35] However, this does not necessarily preclude the recognition of a fiduciary duty to shareholders where this would not compete with any duty owed to the company.[36]
[34]Brunninghausen v Glavanics (1999) 45 NSWLR 538 (‘Brunninghausen v Glavanics’).
[35]Ibid [58].
[36]Ibid.
It is clear that, in some circumstances, directors may owe certain fiduciary duties to shareholders, for example, when directors exercise a power to call up unpaid capital on issued shares, or in relation to the power of directors to issue new shares.[37]
[37]Ibid [61], [62].
In Brunninghausen v Glavanics, a sole effective director (and majority shareholder) in a quasi-partnership company took advantage of the other shareholder’s lack of knowledge and control to acquire the minor shareholding for himself at an undervalue, before selling the shares at a large profit. The director (and majority shareholder) and the minority shareholder were brothers-in-law whose relations had become strained. Their mother-in-law, concerned by the continuing differences between her sons-in-law, made it known that they should resolve their differences and restore family harmony. The question in issue in the case was whether the director was in a fiduciary position to the minor shareholder. Handley JA (with whom Priestley and Stein JJA agreed) answered the question in the affirmative, finding that ‘the family relationship, and the initiative taken by [the mother-in-law], created a situation in which the plaintiff was “entitled to expect” that he would not be cheated by non-disclosure of negotiations’ with prospective buyers of the company.[38] Further, Handley JA said that the fiduciary duty owed required the director to ‘loyally promote the joint interests of all shareholders. A conflict could only arise if the director sought to prefer their personal interests to the joint interest.’[39] The director was found to have breached the duty and was liable to provide equitable compensation.
[38]Ibid [104].
[39]Ibid [106].
Dr Entwisle submits that the position of Mr McGoldrick after the making of the dissolution agreement is not dissimilar to the position of the director and majority shareholder in Brunninghausen v Glavanics.[40] It is alleged that pursuant to the dissolution agreement, and in performance of it, Dr Entwisle resigned as director of the property development companies leaving Mr McGoldrick as sole director and solely able to deal with the assets pursuant to the dissolution agreement or otherwise. Dr Entwisle submits that, in this situation, Mr McGoldrick was required, as a fiduciary to Dr Entwisle, to loyally promote the joint interest of both of them, and not to prefer his own personal interests; that to do so, Mr McGoldrick was required to deploy the resources of the property development companies (those resources being their common enterprise), in part or total satisfaction for Dr Entwisle’s share of the company enterprise in the manner recorded in the dissolution agreement.
[40]Outline of submissions on behalf of Timothy John Entwisle dated 25 June 2015, [22]; Proposed counterclaim [34A].
The proposed counterclaim contains allegations to the effect that after entering into the dissolution agreement, Mr McGoldrick took steps to improve his financial position vis-à-vis Dr Entwisle. It alleges that the intention and effect of these actions was to deplete the assets that would have been otherwise available for distribution to Dr Entwisle pursuant to the terms of the dissolution agreement, in disregard of Dr Entwisle’s entitlement to those assets.[41]
[41]Proposed counterclaim, [35] (including particulars).
In summary, counsel for Dr Entwisle frankly submits that he is ‘super-adding’[42] the case law as propounded in Brunninghausen v Glavanics to the principle enunciated in Bell Group to submit that:
[42]Transcript 20.29-31.
(a) in certain limited circumstances, fiduciary duties are owed by directors directly to shareholders;
(b) a breach of that fiduciary duty creates trust property;
(c) that in this case the parties intended to, and did, pierce the corporate veil and deal directly with each other in settling their respective interests under the joint venture;[43]
[43]Counsel for Dr Entwisle submits therefore that it does not matter that Dr Entwisle is not a shareholder in respect of three of the joint venture companies (though one of his related entities, Baraman Holdings Pty Ltd is a shareholder).
(d) (accordingly on the facts applicable here) Mr McGoldrick owed a Brunninghausen v Glavanics-style fiduciary duty directly to Dr Entwisle;
(e) Mr McGoldrick subsequently dealt with the joint venture company property in a way that amounted to a breach of that fiduciary duty; and
(f) the breach of fiduciary duty gives rise to trust property in which Dr Entwisle now has an interest; and
(g) the cause of action rightly lies with Dr Entwisle.[44]
[44]Counsel for Dr Entwisle noted that, if in fact a ‘strict’ view were to be taken, and the fiduciary duty was only owed to shareholders (i.e. Baraman Holdings Pty Ltd), this could be formally rectified through a simple joinder application.
For present purposes, I do not need to be satisfied that the counterclaim will be successful. It may not be. Nevertheless, I consider that the counterclaim should be allowed to be argued with all relevant facts before the Court, particularly those relevant to the nature and the effect of the dissolution agreement. These facts will inform issues such as the claimed existence of a fiduciary duty, and the content of such a duty and (if necessary) the appropriate equitable remedy. In my view, Dr Entwisle has demonstrated that there is a serious question to be tried or, as characterised in Vagrand, that the claim as outlined has a solid foundation and gives rise to a serious dispute.[45]
[45]Vagrand (1993) 41 FCR 550, 556; Commonwealth v Davis Samuel Pty Ltd (No 5) [2008] ACTSC 124 [26]-[28].
Indeed, the Liquidators might be thought to have a real interest in the outcome of the proposed counterclaim; the assets under the Liquidator’s control are received subject to any mortgage or other charge or any trust to which they are already subject.[46] On Dr Entwisle’s case, the purported trusts, equitable charge or equitable lien over the assets of the property development companies would pre-date the date of winding up by several years.
[46]Commonwealth v Davis Samuel Pty Ltd (No 5) (2008) 68 ACSR 336 [18]; Vagrand Pty Ltd (in liq) v Fielding 41 FCR 550, 552.
In this case, I note that the property development companies were wound up on the just and equitable ground and not by reason of insolvency. In the circumstances, any additional delay caused by the continued prosecution of the proposed counterclaim is unlikely to affect external creditors. There was no evidence in the Liquidators’ affidavit material of specific prejudice to any creditor. Any order granting leave can be fashioned to ensure that Dr Entwisle does not use the proceedings to unfairly obtain a priority or advantage. To this end, counsel for Dr Entwisle has proffered a proposed form of order which provides that Dr Entwisle must not take any step to enforce any judgment for the payment of money obtained against any of the property development companies in the lease proceeding without the leave of the Court.
At the heart of this dispute are two individuals fighting over the spoils of a joint venture. Given the nature of the dispute, there is no suggestion that if leave to proceed with the proposed counterclaim is granted there will be an avalanche of litigation.
In any event, it seems to me that the parties to the proposed counterclaim are necessary parties to the proceeding. They are already caught up in allegations made against them in the defence, including allegations that Mr McGoldrick acted as agent for the property development companies; and that the terms of the dissolution agreement required the property development companies to pay or transfer to Dr Entwisle properties and cash and failed to do so giving rise to a right of set-off by Dr Entwisle against the plaintiff’s claim[47] and estoppel by the representation.[48]
[47]Further Amended Defence, [12], [13], [15], [16], [17] and [18].
[48]Further Amended Defence, [19].
The Liquidators submit that the proposed counterclaim ought not to go forward because the liquidators should not be put to the trouble of defending a counterclaim that will require a strike out application and substantial requests for particulars and would require additional time and expense on the part of the First to Fourth Defendants and delay the progress of the Liquidators’ claim against Dr Entwisle for unpaid rent.
A number of deficiencies with the proposed counterclaim were put forward by counsel for the Liquidators.[49] It is not necessary to go to each of these complaints. A number of them relate to Dr Entwisle’s failure to identify the relevant property in which he claims he has an interest.
[49]Amended Outline Submission of the First to Fourth Defendants dated 10 August 2015, [19].
In my view, there are some deficiencies with the form of the proposed counterclaim but the deficiencies are not so significant that I ought to decline to exercise my discretion under s 471B of the Act. Inconvenience and expense can be minimised by cooperation between counsel and instructing solicitors in dealing with these complaints. The proceeding is in a judge managed list which will ensure that delays are minimised.
Conclusion
I am satisfied that there is a serious question to be tried and leave should be granted to Dr Entwisle to proceed against the First to Fourth Defendants by counterclaim (in the lease proceeding) substantially in the form of the counterclaim filed by the first plaintiff against the property development companies. Leave will be granted on condition that the first plaintiff not take any step to enforce any judgment for the payment of money obtained against any of the property development companies without the leave of the Court.
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