F & F Holdings Pty Ltd v Ridge Lane Pty Ltd
[1998] VSCA 72
•14 October 1998
SUPREME COURT OF VICTORIA
COURT OF APPEAL Not Restricted No. 7906 of 1996 No. 7550 of 1996
F. & F. HOLDINGS PTY. LTD. (A.C.N. 004 555 239) Appellant v RIDGE LANE PTY. LTD. (ACN 005 626 960) First Respondent - and - ASPENDALE GARDENS SHOPPING CENTRE PTY. LTD. Second Respondent (A.C.N. 069 321 928) (RECEIVER AND MANAGER
APPOINTED)
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JUDGES: ORMISTON, PHILLIPS and KENNY, JJ.A. WHERE HELD: MELBOURNE DATE OF HEARING: 19, 20 and 24 August 1998 DATE OF JUDGMENT: 14 October 1998 CASE MAY BE CITED AS: F. & F. Holdings Pty. Ltd. v. Ridge Lane Pty. Ltd. MEDIA NEUTRAL CITATION: [1998] VSCA 72
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PROPERTY LAW - Torrens system - Priorities - Whether first mortgagee entitled to priority over holder of charge pursuant to consultancy agreements between vendor of land and mortgagor - Land purportedly charged by purchaser in favour of vendor - Vendor induced to forego rights under first agreement in return for second agreement - Share security under second agreement made worthless by purchaser's subsequent acts - Whether mortgagee party to fraudulent scheme - Caveat lodged by vendor after registration of mortgage - Whether priority of first registered mortgage lost by reason of fraud - Transfer of Land Act 1958, ss.42, 43 and 44.
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APPEARANCES: Counsel Solicitors For the Appellant Dr C.L. Pannam Q.C. and Jack Cohen, Serry & Co. Mr S.M. Anderson For the Respondents Mr D.R. Meagher Q.C. and Tasiopoulos, Lambros & Co. Mr N. Pane
ORMISTON, J. A.:
I have had the benefit of reading the judgment of Kenny, J.A. in draft form and, for the reasons she expresses, I agree that this appeal should be allowed.
PHILLIPS, J. A.:
I agree in the judgment of Kenny, J.A.
| KENNY, J. A.: |
On 6 October 1995 a company called Ridge Lane Pty. Ltd. ("Ridge Lane") brought an action against Daleford Glen Pty. Ltd. ("Daleford Glen") and Aspendale Gardens Shopping Centre Pty. Ltd. ("Aspendale Gardens"), claiming moneys due under two consultancy agreements with Daleford Glen dated 23 November 1994 and 5 April 1995 and declarations that land registered in the name of Aspendale Gardens (“the Aspendale land”) was charged with the payment of those moneys. On 21 June 1996 Hansen, J. by judgment ordered, amongst other things, that Daleford Glen pay Ridge Lane the sum of $480,885.92. His Honour also declared that Ridge Lane held a charge over the Aspendale land pursuant to the consultancy agreements and that Aspendale Gardens held its interest in the land subject to that charge. After judgment had been given, a priority dispute arose between Ridge Lane as chargee and F. & F. Holdings Pty. Ltd. ("F&F") as registered first mortgagee and it is that dispute which is now before us. (On 15 October 1996 Ridge Lane issued a summons against Daleford Glen and Aspendale Gardens seeking sale by public auction and payment of the proceeds into Court pending further orders. The hearing of that summons has been adjourned pending the determination of these appeals.)
The proceedings the subject of appeal were commenced by originating motions: on 23 October 1996 F&F by originating motion instituted proceeding numbered 7550 of 1996 seeking, amongst other things, a declaration that its interest in the land as first registered mortgagee had priority over the interest of Ridge Lane as chargee; and on 22 November 1996 Ridge Lane by originating motion instituted proceeding numbered 7906 of 1996 seeking, amongst other things, declarations that its interest as chargee had priority over F&F's mortgage, alternatively, that the moneys secured by the mortgage were no more than the principal sum of $1,721,000, plus interest at the agreed rate under the mortgage.
These two proceedings were heard together. The trial occupied ten sitting days between 7 and 25 March 1997. The trial judge delivered reasons for judgment on 4 June 1997, holding that the priority which F&F's mortgage would ordinarily take had been displaced by the fraud of F&F. By judgment entered on 19 June 1997 in favour of Ridge Lane, the learned trial judge declared that Ridge Lane's interest in the Aspendale land as chargee had priority over F&F's interest as mortgagee and reserved for further consideration the question of the amount secured by the charge pending the determination of these appeals. His Honour’s order that there be a sale by public auction was also stayed pending the determination of these appeals.
F&F, the appellant in both appeals, challenges the finding of fraud made against it and the principal findings upon which that finding is based. Ridge Lane and Aspendale Gardens are the respondents, although Aspendale Gardens has taken no active part below or in these appeals, having notified the Court that it would abide by the Court’s judgment.
Sale and settlement of the Aspendale land
In order to understand what was in issue at trial, it is first necessary to say something of the history of the negotiations which culminated in the settlement on 4 April 1995 of a contract for the sale of land between Ridge Lane as vendor and Daleford Glen as purchaser, F&F providing the finance in return for a first registered mortgage. The Aspendale land had earlier been purchased by Ridge Lane for development as a shopping centre, Ridge Lane becoming the registered proprietor of the land on 6 April 1994. The directors of Ridge Lane were Nick and Alkiviadis Konstandellos. Nick Konstandellos ("Konstandellos") discussed the development with George Kallis, a builder and developer with whom he had already had numerous business dealings. Kallis was the principal director of Daleford Glen and Aspendale Gardens. In August 1994 Kallis proposed to Konstandellos that he (Kallis) become involved in the development of what he hoped would become the "Aspendale Gardens Shopping Centre". On or about 10 November 1994, it was agreed between Konstandellos and Kallis that Kallis would purchase the land from Konstandellos for $1.35 million, and that Kallis would pay a further $450,000 for the purchase of know-how and assistance pursuant to a consultancy agreement.
The contract of sale and consultancy agreement (“the first consultancy agreement”) were executed on 23 November 1994 by Ridge Lane and Daleford Glen as Kallis's nominee. The purchaser's obligations were guaranteed by Kallis and his son Jim. The contract of sale provided for $1.35 million to be paid by a deposit of $100,000 upon execution and the balance on 30 March 1995. Neither the contract of sale nor the s.32 statement prepared by the solicitor for Ridge Lane, Vasilios Tasiopoulos of Vadarlis Tasiopoulos, referred to the consultancy agreement or to any charge purportedly created by it.
The parties to the first consultancy agreement were Ridge Lane and Daleford Glen, the latter’s guarantors being George and Jim Kallis. The agreement provided, in clause 5, for the sum of $450,000 to be paid, as to $150,000, on 21 December 1994 (or within seven days of the issue of a building permit, whichever was the earlier), as to $150,000, on 21 January 1995 (or within seven days of the construction of the walls, panels and roof structure of the development, whichever was the earlier), and as to $150,000, on 28 February 1995 (or within seven days of the issue of certificate of occupancy, whichever was the earlier). There was provision, in clause 7.1(ii) and (iii), that, at the discretion of Ridge Lane, the agreement would be "immediately terminated" "if Daleford Glen committ[ed] a breach or is in default of any of the terms and conditions of the Contract [of sale] or of this agreement and [did] not within seven (7) days [scil. days’] request in writing to do so by Ridge Lane remedy any such breach or default ...[or] if the payment in clause 5 ... is in arrears and unpaid for ... seven (7) days ...". Unpaid moneys under the consultancy agreement were to become due and payable upon termination of the agreement "for the reason ... specified in Clause 7". The first consultancy agreement further provided, in clause 9, that -
"Until such time as Daleford Glen make [sic] all payments as required by clause 5 ..., Daleford Glen charges its interest in the property ... in favour of Ridge Lane provided that Ridge Lane undertakes and agrees that the charge will not be registered unless Daleford Glen defaults in any payment as required by clause 5."
(The italicised proviso was inserted in handwriting just before the agreement was executed on 23 November 1994.) There was also an undertaking, in clause 11, to keep the agreement confidential.
Had the first consultancy agreement been performed and payments made according to its terms, all payments due to Ridge Lane would have been made by Daleford Glen before 30 March 1995, when settlement of the contract of sale was due. What effect clause 9 might then have had in charging, or purporting to charge, the purchaser’s “interest in the property”, being the Aspendale land, we need not inquire. But none of the moneys under the first consultancy agreement was paid by Daleford Glen on the agreed dates and, in consequence, notices of rescission were served on three separate occasions. Each rescission notice called for payment in full of the sum of $450,000, together with interest and costs. Following the first rescission notice dated 29 December 1994 Daleford Glen paid the sum of $10,710 on 11 January 1995, by means of two bank cheques supplied by F&F. After the second notice dated 14 February 1995, Daleford Glen, by its solicitors Kalus Kenny, paid the sum of $13,707 by funds provided by F&F. After the third notice dated 2 March 1995 Daleford Glen paid the sum of $11,850, again by Kalus Kenny and by funds from F&F. The three payments made by Daleford Glen represented no more than default costs and penalty interest.
The principal director of F&F was Mark Freeman ("Freeman"). F&F, on Freeman’s instructions, provided the funds to Daleford Glen to meet the rescission notices through the trust account of F&F’s solicitor, Ronald Serry ("Serry") of Jack Cohen Serry & Co. Arrangements of this kind were not new. Prior to the Aspendale Gardens Shopping Centre project, F&F had acted as financier for other property development companies run by Kallis, and Serry had acted for Freeman in those matters. F&F had apparently agreed to advance funds, to be secured by a first registered mortgage, to enable Daleford Glen to purchase the Aspendale land.
In the second half of March 1995 Tasiopoulos, as the solicitor for Ridge Lane, set about arranging for settlement of the contract of sale and the first consultancy agreement. In accordance with Konstandellos's instructions, Tasiopoulos advised Daleford Glen's solicitor, Henry Kalus (“Kalus”) of Kalus Kenny, of the moneys falling due under the contract of sale and the first consultancy agreement and fixed settlement for 3 p.m. on 30 March 1995.
On 29 March 1995 Serry received a facsimile from Kalus notifying him of the cheques required from F&F in order for Daleford Glen to complete the purchase. Serry set about preparing mortgage documents providing for an advance of $1,721,000. He sent the mortgagee’s requisitions to Kalus Kenny. They included requisition 3, seeking details of any encumbrances or "any rights inherent in any person other than the Mortgagor affecting the property and not disclosed by the usual searches". By letter dated 29 March 1995 (and faxed that day), Serry also wrote to Kalus, relevantly stating:
"The consideration is $1,721,000.00 made up as follows:-
1. $1,271,749.23 on the purchase of the property (in accordance with your facsimile today).
2. $364,000.00 being the amount already advanced.
3. Stamp duty on the Transfer - $74,250.00.
4. Registration fee on Transfer - $1,320.00.
5. Legal Costs estimated at $2,500.00.
6. Registration fee on the Discharge of Mortgage - $59.00.
7. Registration fee on Withdrawal of Caveat - $31.00.
8. Balance being estimated stamp duty on Mortgage plus Titles Office."
On the same day, 29 March, Tasiopoulos faxed a letter to Kalus, as solicitor for Daleford Glen, which included a demand for payment of the consultancy fee of $450,000 (plus interest and default costs after allowing for such payments as had been made). By reason of the letter of 29 March 1995, Kalus would have known then that the funds coming from F&F, whilst sufficient to settle the contract of sale, did not include funds to cover the moneys due from Daleford Glen under the first consultancy agreement. Further, on about 29 March (or possibly a few days later), Kalus received a telephone call from Kallis, during which Kalus recorded Kallis as saying: “Serry knows that there is other agreement but don’t give him copy”. (The “other agreement” was, presumably, the first consultancy agreement.)
On 30 March, after Freeman had delivered the cheques for settlement to Serry, Serry learned, from a final title search of the Aspendale land, that a caveat had unexpectedly been lodged by Leo Dimos & Associates. Around lunchtime on 30 March, Kalus faxed a letter to Serry complaining about the mortgage documents supplied by Serry the day before, alleging that they did not "reflect the agreement" between Daleford Glen and F&F that F&F would "provide a construction facility of $4.25 million for 9 months". At 2.15 p.m. that day, Konstandellos and Tasiopoulos (for Ridge Lane) met with George and Jim Kallis and a Jonathan Kenny of Kalus Kenny (for Daleford Glen) at the offices of Vadarlis Tasiopoulos, in order to discuss the first consultancy agreement. After discussing the basis on which that agreement had been made, Kenny proposed that there be a new agreement (substantially to the effect of what was later to become the second consultancy agreement). Kenny’s proposal (which involved postponing the payment due under the first consultancy agreement) was rejected outright by Konstandellos at that meeting and, as was to be expected, settlement was not effected that day.
The next day, 31 March, the caveat earlier lodged by Leo Dimos & Associates was withdrawn and Tasiopoulos suggested to Kalus that settlement be re-fixed for 3 April 1995. Also on the afternoon of 31 March, Serry telephoned Kalus to ask him to explain why settlement had failed the day before and, in particular, whether the vendor, Ridge Lane, was in dispute with the purchaser, Daleford Glen. (Kalus did not provide a formal reply until 4 April.)
On 3 April at 2.30 p.m., there was a meeting between Tasiopoulos, Konstandellos, Kalus and George and Jim Kallis. At that meeting, (George) Kallis said that he was unable then to pay all the moneys due under the consultancy agreement and he proposed that, in addition to the $450,000 agreed under the first consultancy agreement, Daleford Glen pay an additional sum of $60,000, but that the payment of the total amount of $510,000 be further deferred. Kallis also said that Daleford Glen was also willing to provide Ridge Lane with extra security, namely, share certificates in Daleford Glen and signed transfers to be held, in escrow, in the event of default. Konstandellos accepted this solution. Konstandellos and Kallis agreed that there would be a new consultancy agreement to reflect that arrangement. In an affidavit sworn 21 November 1996, Konstandellos deposed:
"At this meeting I told George Kallis that I required copies of the mortgage documents between Daleford Glen and his financier to confirm the amount which he had borrowed to date and also to confirm the amount which he was to borrow for the construction of the shopping centre. George Kallis agreed to provide Vasilios Tasiopoulos with the information I requested and informed me that the total borrowings in relation to the shopping centre including the purchase of the land was not to exceed 4.2 million dollars."
In an affidavit also sworn 21 November 1996, Tasiopoulos stated that, subsequent to that meeting, he received instructions from Konstandellos to obtain copies of the relevant mortgage documents and that he had subsequently telephoned Kalus, requesting that those copy documents be made available prior to settlement.
At a further meeting on 3 April, at 3.10 p.m., this time attended by Kalus and Kallis, Serry and Freeman, Serry again requested an explanation, in letter form, for the events of 30 March 1995. Some time after 3.10 p.m. on 3 April, Tasiopoulos and Konstandellos, Kalus and George and Jim Kallis met at the offices of Vadarlis Tasiopoulos, as Tasiopoulos put it, "to finalise the matters outstanding concerning the Contract of Sale and the Consultancy Agreement".
Settlement failed on 3 April 1995, because the cheques for settlement were not produced. Serry said in evidence that by the time he had been informed of the proposed time, "it would have been too late in the day to obtain [the] cheques" to be supplied by F&F. Settlement was re-scheduled for the afternoon of 4 April.
At some time on 4 April, Kalus received a telephone call from Serry. Kalus’s file note of the conversation reads as follows:
"need to know shareholding in Daleford Glen.
authority to amend mtge to reflect advances
needs cheque. I said haven't got all certificates ..."
At trial, Kalus was to characterise Serry’s request as an inquiry about "the certificates that a mortgagee normally looks for".
Also on the morning of 4 April, Serry forwarded a letter to Kalus Kenny confirming settlement was fixed for at 2.30 p.m. and requiring Kalus to provide:
"(a) Statement of Adjustments, (b) Answers to Requisitions, (c) Property Enquiry Certificates, (d) Statement outlining the arrangements between the Vendor and Purchaser, [emphasis added] (e) Executed Mortgage documentation. There will be need to be
one amendment to the principal sum to reflect the increase in the
cheques required for settlement."
(When settlement was not effected on 30 March, there were in consequence additional moneys owing to Ridge Lane by way of reimbursement for the costs and interest it was liable to pay its own mortgagee and chargee. The reference in the letter to “the increase in the cheques required for settlement” was a reference to those additional moneys.)
The letter of 4 April continued:
"We confirm that at the meeting yesterday it was agreed that our client would fund the construction of the site to a maximum of $2,940,000.00 on the following terms:-
(a)
Your client and its Directors will enter into a Debenture Deed over the assets of your client company and when the Mortgagee deems fit, there will be a variation of the Mortgage to reflect the further sums to be advanced.
(b)
The terms of the Debenture Deed will be substantially similar to those deeds entered into previously by the Companies within the Kallis family with the additional requirements that the Mortgagee will not be obliged to advance the funds for construction until such time as either a key tenant for the supermarket executes an Agreement for Lease to the satisfaction of the Mortgagee or alternatively sufficient Agreements for Lease of specialty shops are entered into again to the satisfaction of the Mortgagee that will provide a net return of $400,000.00 per annum ...
(c) ... (d)
The documentation will also reflect the items in the letter from Mr. George Kallis to our client on the 7th March, 1995 in relation to the time frame, the initial advance of $364,000.00, profit share, penalty for moneys required to complete the project being in excess of the agreed advance.
(e) ..."
Paragraph (d) referred to a letter from Kallis of 7 March 1995 which read in part:
"I now refer to the Aspendale project ... . Having provided you with
detailed costings and feasibilities which summarize as follows:
Total development cost and statutory duties inclusive of architect fares
[sic], engineers and all and sundry consultants is $2,940,000 The purchase price of site is $1,350,000 Total development costs is $4,290,000 ... I again confirm my offer to you in relation to the first $364,000 advance and a share of profit of $120,000 plus interest at 11.5 per cent is payable.
On funding of the balance, $500,000 share of profit plus interest at 11.5
per cent.
...
I now emplore [sic] you to come to the party and provide me with the
assistance I now require to keep the project and our investment on
foot.
... ."
At some time on 4 April, Kalus discussed the mortgage documents with Kallis. The mortgage, providing for an advance of $1,721,000, was to be an “all moneys” mortgage, being security for “principal moneys secured and each and all sums of money in which the Mortgagor may now or hereafter be indebted or liable or contingently indebted or liable to the Mortgagee in any manner or on any account whatever ....”. A file note prepared by Kalus and dated 4 April recorded that:
"I [Kalus] advised George [Kallis] that the mortgage as it was for construction purposes was completely inadequate and that he could not rely on it. He indicated that he had to sign the document as it was but wanted us to attached [sic] a letter which set out the terms in which he was executing the document. I said that this could not be relied upon necessarily. He said he had no choice but to pursue this."
The letter to which that note referred was written under the letterhead of Kalus Kenny, addressed to Jack Cohen Serry & Co., and dated 4 April 1995. It was expressed to accompany the executed mortgage documents and relevantly read:
"The [mortgage documents] are submitted strictly on the basis that:
1. The terms of the mortgage include those matters set out in your letter earlier today;
2. The term of the mortgage is to be nine (9) months to enable construction to be completed;
3. The amount of the advance is to be varied to reflect the amount advanced to date;
4. The further amount to be advanced to be calculated as follows (with all figures being approximates):
(i) Total funds available $4,290,000.00
(ii)
Funds advanced for acquisition of land and costs (in accordance with the annexed schedule) $1,605,000.00
(iii) The balance available $2,685,000.00 (Available for construction of which $116,000.00 has been
advanced);
(iv) The balance is to be advanced in accordance with the Itemised costings dated 4 April, 1995 and annexed hereto. ..."
In the morning of 4 April, after Kallis had executed the mortgage documentation and signed the answers to requisitions (which did not refer to any charge), Kalus and George and Jim Kallis met with Tasiopoulos and Konstandellos to discuss the second consultancy agreement, the drafting of which was being undertaken by Tasiopoulos. It was not until later that day, at 3.45 p.m., that Kalus, Kallis, Tasiopoulos and Konstandellos met again and the parties executed that agreement. The agreement was executed only after Tasiopoulos was given the original share certificates for Daleford Glen, share transfers signed by George and Jim Kallis and Daleford Glen's memorandum and articles of association. Further, according to the affidavit of Tasiopoulos sworn 21 November 1995, at this 3.45 p.m. meeting "Daleford Glen and Henry Kalus undertook to send to me a copy of all the mortgage documents and the letter of undertaking in respect to the building works".
Paragraph C of the second consultancy agreement, dated 5 April 1995 (though executed on 4 April), recited that:
"Daleford Glen shall become legal and equitable owner of the land upon settlement of the Contract which was scheduled for 30 March 1995 but now rescheduled to 4 April 1995."
The agreement provided, in clause 5.1(a), that:
"In consideration of Ridge Lane selling Daleford Glen the know how and agreeing to provide Daleford Glen the assistance Daleford Glen agrees:-
(a) to pay Ridge Lane (or its nominee) the sum of Five Hundred and Ten Thousand Dollars ($510,000.00) ('the consideration') as follows:
(i) $150,000.00 by 9 May 1995; (ii) $190,000.00 by 9 June 1995; (iii) $170,000.00 by 9 July 1995. ..."
The agreement, in clause 7.1, further provided that it "shall at the discretion of Ridge Lane be immediately terminated on the occurrence of" certain specified events, including:
" (ii) if Daleford Glen commits a breach or is in default of any of the terms and conditions of the Contract or of this agreement and does not within seven (7) days request in writing to do so by Ridge Lane remedy any such breach or default. (iii) if the payment in clause 5 of this agreement or any part thereof is in arrears and unpaid for a period of seven (7) days from any of the days on which the same ought to have been paid (whether or not any formal demand shall have been made therefore). ..."
Clause 9 read as follows:
"9. Charge (a) That Ridge Lane undertakes and agrees that the Charge will not be registered unless Daleford Glen defaults in any payment as required by Clause 5 herein provided that Ridge Lane undertakes and agrees that the charge will not be registered unless Daleford Glen defaults in any payment as required by Clause 5. [sic]
(b) Daleford Glen agrees not to encumber, charge or mortgage the land for a sum not exceeding $4,300,000 not unless it first obtains the prior written consent of Ridge Lane."
Though clause 9 refers to the charge as if it were in existence, there are no other words of charge in the second consultancy agreement. The best counsel could do was to say that it had been created by the first consultancy agreement.
Clause 10 read as follows:
"10. Share Security 10.1 Daleford Glen and the Guarantors confirm and warrant that all of the issued shares in Daleford Glen ('the shares') are held by the Guarantors in their own right and are not subject to any charge or encumbrance. 10.2
(a) Daleford Glen and the Guarantors agree to secure payment of the consideration to Ridge Lane by delivering this day to Ridge Lane: (i) their Guarantors respective Share Certificates in relation to the totality of the shares in Daleford Glen; and
(ii) a duly executed and completed Instrument of Transfer from the Guarantors (in registrable form) in relation to the totality of the shares such Instrument of Transfer to contain the name of Ridge Lane as transferee;
(iii) ...
(b) Subject to Clause 10.2(c) the parties agree that the respective Share Certificates and Instrument of Transfer ... will be held in escrow by Ridge Lane until payment of the consideration is made in accordance with Clause 5 herein.
(c) In the event payment of the consideration is not made by the due dates in accordance with Clause 5 herein or should Daleford Glen breach any other terms and conditions of this agreement, Ridge Lane has the right subject to Clause 7 herein to execute the Instrument of Transfer, pay stamp duty and register the shares in the said share register of Daleford Glen. ...
(d) ...
10.3 The parties further agree that this Clause 10 will not in any way derogate the rights of Ridge Lane to recover payment of any monies due under this Agreement from Daleford Glen and the Guarantors and should be read subject to the terms and conditions of the other Clauses to this Agreement."
The second consultancy agreement was, as clause 10.1 indicates, supported by a guarantee given by George and Jim Kallis: cf. clause 14. There was also a confidentiality clause which read:
"This agreement and the terms and conditions herein contained shall be confidential to the parties, and neither party may disclose any information concerning the contents of this agreement other than as necessary for the enforcement of its rights." (clause 12)
Settlement of the sale was effected shortly after the 3.45 p.m. meeting on 4 April. At settlement, F&F advanced $1,279,120.85 to Daleford Glen and Kalus gave Serry a letter, which was in response to Serry’s request for an explanation as to why settlement had failed on 30 March 1995. The letter was in the following terms:
"I refer to your request for information of 31 March, 1995.
As you know at the scheduled settlement of the above property on
Thursday 30 March, 1995 the Vendor was unable to pass good title to
the subject property due to the caveat in favour of Leo Dimos &
Associates. It was also claimed by the Vendor's solicitors that the
Vendor was entitled to additional moneys.
My client argued that no money was owing at this time. A dispute
developed between the Vendor and my client. My client has
contended that on numerous occasions the Vendor confirmed to him
that monies were not required at this time. My client claims to have
evidence to this effect.
At a meeting with the Vendor and his solicitor on Monday 3 April
1995 my client's understanding was confirmed and the Vendor
confirmed that settlement could take place in accordance with the
Contract of Sale of Land."
Events after settlement
The facts upon which the finding of fraud against F&F was made did not, however, end, in point of time, with settlement. Before turning to the case made against F&F it is necessary to consider briefly what happened after 4 April.
As at 5 April 1995, Serry was holding the duplicate certificate of title with respect to the Aspendale land, an executed transfer and executed mortgage documents, but he did not proceed to lodge the documents at the Land Titles Office for registration. Instead, he lodged a caveat to protect F&F's interest as first mortgagee.
About a week after settlement, by letter dated 12 April 1995, Kalus wrote to Serry, requesting an additional $100,000 for Kallis as "a matter of extreme urgency". Serry replied saying that F&F would not be providing additional funds until suitable tenants for the development were found. Serry (who by this stage was, it seems, not only acting for F&F but also for Daleford Glen in its capacity as lessor) spent considerable time with Kallis discussing the matter of tenants and the provision of funds. Serry's file note for 21 April records, in part:
"On the afternoon of 21st April approximately 1 1/2 of my time was tied up with George Kallis in regards to payments that he was demanding be made. The situation got 'nasty'. George said that someone would get killed if payments were not made. ..."
F&F eventually provided the funds sought by Kallis on this occasion.
By the end of the month, Tasiopoulos had still not received a copy of the relevant mortgage documents. By letter dated 28 April, he wrote to Kalus, reminding him of his undertaking to provide them. Kalus replied, by letter of 2 May, that he had "asked [his client] to deal with the undertakings ... For the record the undertakings were provided by my client and not by myself."
The first payment under the second consultancy agreement, being an amount of $150,000, was due to be paid on 9 May. By letter dated 1 May, Kalus wrote to Daleford Glen, warning, amongst other things, that:
"Please be aware that if payments are not made on the due dates the Share Transfers may be registered whereby all the shares in Daleford Glen Pty. Ltd. will become the property of Ridge Lane Pty. Ltd. This will mean that you will no longer have control of the company which owns the development.
Also until the written undertakings provided by you are complied with the Share Register will not be returned and neither will the moneys which are held by Tasiopoulos on trust pending adjustment.
I would urge you to deal with these matters promptly."
No steps were taken by Daleford Glen, however, to effect any payment. As it turned out, Aspendale Gardens was incorporated on 8 May and, on 8 May, Kallis instructed Kalus that (1) Daleford Glen was, in reality, the trustee of the G&V Family Trust, pursuant to a deed of settlement dated 17 November 1994 and stamped by the State Revenue Office on 24 November 1994; (2) Daleford Glen had on that day been removed as the trustee and replaced by Aspendale Gardens, incorporated that day; and (3) by agreement under seal dated 8 May, Daleford Glen had agreed to transfer the assets of the trust to Aspendale Gardens, including its interest as proprietor of the Aspendale land.
Kalus immediately advised Kallis that there were risks associated with the course he was proposing to adopt and it appears he was referring to the matters which he set out in a letter to Kallis dated 9 May 1995, including that “this course of action is likely to result in claims made pursuant to the Consultancy Agreement”. On 10 May, however, Kalus acted on his instructions and forwarded to Serry, as solicitor for the mortgagee, the documents concerning the change of trustee of the G&V Family Trust, including the trust deed, the memorandum and articles of Daleford Glen and Aspendale Gardens and a transfer of land executed by them both.
No payment was made by Daleford Glen on 9 May. On that date, Tasiopoulos wrote to Kalus, noting the absence of payment and saying:
"As you are aware your client this day is required to pay our client the sum of $150,000.00 pursuant to clause 5.1 of the consultancy agreement.
We are none the less instructed by our client that your client has requested an extension for payment of the first instalment of $150,000.00 and our client has agreed to extend the payment of same from 9 May 1995 to 16 May 1995. Please note that our client shall not agree to any further extensions and if the monies are not paid on 16 May 1995 we are instructed to seek penalty interest from 9 May 1995 on the outstanding amount and take the appropriate action under the agreement as if the moneys were not paid on 9 May 1995."
In the days that followed, Ridge Lane did in fact receive most of the moneys then due.
On 6 June 1995 Kallis lodged a caveat over the Aspendale land to protect the interest of Aspendale Gardens as substitute trustee. Under the second consultancy agreement, the sum of $190,000 was to be paid on 9 June, three days later, but it was not paid. On 6 or 7 July 1995, a representative of Jack Cohen Serry & Co. attended at the Land Titles Office to lodge the transfer of land from Ridge Lane to Daleford Glen, as well as F&F’s mortgage from Daleford Glen. On 9 July 1995, the sum of $170,000 fell due for payment under the second consultancy agreement: it too was not paid. According to the agreed statement of facts, on 23 August 1995 a representative of Jack Cohen Serry & Co. attended at the Land Titles Office to lodge the transfer of land from Daleford Glen to Aspendale Gardens.
It was not until 18 August that Tasiopoulos undertook a title search of the Aspendale land and, of course, found that a caveat had been lodged over the land by Aspendale Gardens. Notwithstanding that the first default under the second consultancy agreement occurred on 9 May, it was not until 1 September 1995 that Tasiopoulos lodged a caveat on behalf of Ridge Lane, noting its claimed interest as chargee. According to a later title search which was in evidence (and to which our attention was drawn) the transfer from Daleford Glen to Aspendale Gardens was, as it happened, registered on 1 September, so that the caveat lodged by Tasiopoulos obviously did not impede registration. (I do not overlook the discrepancy between the date on which the transfer was said in evidence to be lodged and the date disclosed by the search as the date of registration, but this discrepancy was not explained to us and nothing seems to turn on it.)
In a letter dated 5 October 1995, from Tasiopoulos to Serry, Tasiopoulos said that he was writing -
"... to inform your client not to make any further advances to the
registered proprietor, without our client's written consent.
We have also asked you to provide details of any advances made and
you were to seek instructions. Please let us have your client's
response as soon as possible. ...
We have also ascertained that on or about 27 August 1995 your firm
lodged a transfer with the Registrar of Titles whereby Aspendale
Gardens Shopping Centre Pty. Ltd. is the transferee pursuant to an
entitlement in equity pursuant to a change of trustee.
Please advise whether at the time of the advance, that is in April of
1995 your client was aware that Daleford Glen Pty. Ltd. acted as the
trustee of the trust. Furthermore, did your client deliver requisitions
for the proposed mortgagor to answer and if so what were those
requisitions and furthermore what were the mortgagor's answers?
This matter has raised considerable doubts in our client's mind about
the propriety of certain matters that have transpired ..."
This was followed by another letter from Tasiopoulos dated 6 October, reiterating that:
"Our client, wishes to be assured that the funds which have been advanced by your client have been used by the mortgagor solely for the purposes of the project and not for any other purpose."
In a further letter, of 27 October 1995, Tasiopoulos again warned Serry that F&F ought not advance any sum over and above $4.3 million "in accordance with the agreement reached" between Daleford Glen and Ridge Lane. As at October 1995 F&F said that it had advanced $4.3 million (and no more) but that the development called for a further $2 million before it could be finished. (By this stage Ridge Lane had issued the proceedings against Daleford Glen and Aspendale Gardens referred to earlier.)
A loan agreement was executed between F&F, Daleford Glen, Aspendale Gardens and another Kallis company on 21 November 1995, together with a debenture charge from Aspendale Gardens in favour of F&F. The debenture deed was lodged with the Australian Securities Commission on 1 December 1995. F&F continued to advance moneys to Aspendale Gardens for the purpose, according to Freeman and Serry, of completing the development and, in consequence, the loan agreement was twice varied in 1996. Moneys under the loan agreement became due and payable on 21 August 1996 and, such moneys being unpaid, F&F entered into possession of the Aspendale land on 25 September 1996, asserting that it was entitled to do so.
Ridge Lane’s Case against F&F
When F&F’s mortgage was registered pursuant to the Transfer of Land Act 1958 (“TLA”) on 7 July 1995, F&F acquired a legal interest in the Aspendale land and an indefeasible title to be defeated only by establishing that, on the balance of probabilities, the registration was relevantly tainted by F&F’s fraud: cf. Bahr v. Nicolay [No.2] (1988) 164 C.L.R. 604, at 615 per Mason C.J. and Dawson J., 633, 638-9 per Wilson and Toohey JJ. and 654 per Brennan J. “Except in the case of fraud”, F&F’s mortgage necessarily takes priority over Ridge Lane’s interest as chargee: see TLA, ss.42, 43 and 44. For the purposes of those provisions, fraud means actual fraud involving some act of dishonesty on the part of the person whose title is sought to be impeached: see Bahr v. Nicolay [No.2] (1988) 164 C.L.R. 604, at 614 per Mason C.J. and Dawson J. and 630 per Wilson and Toohey JJ.; Assets Company, Limited v. Mere Roihi [1905] A.C. 176, at 210; Pyramid Building Society v. Scorpion Hotels Pty. Ltd. [1998] 1 V.R. 188, at 191, 193 per Hayne J.A. (with whom Brooking and Tadgell J.A. concurred). Registration acquired with knowledge of a prior unregistered interest is not by reason of that knowledge alone fraudulently obtained: see TLA, s.43; Bahr v. Nicolay [No.2] (1988) 164 C.L.R. 604, at 613 per Mason C.J. and Dawson J. and 631, 633 per Wilson and Toohey JJ. Ridge Lane had, therefore, to establish actual fraud on F&F’s part involving some act of dishonesty in (or maybe relevantly in relation to) the procuring of its registration as first mortgagee. (For reasons that appear below, there is no need to decide in this case whether the fraud of which ss.42, 43 and 44 speak is limited to fraud in securing registration.)
Ridge Lane’s case at trial, according to the particulars which it provided, was that F&F had participated in a fraudulent scheme pursuant to which the legal entitlements conferred on Ridge Lane by the first consultancy agreement, including its rights as chargee, were rendered valueless. According to Ridge Lane, the participants in the scheme were F&F, Kallis and Daleford Glen. At trial Ridge Lane contended that the scheme by which F&F defrauded it was as follows. The first step was taken by Kallis who successfully set out to persuade Konstandellos not to press for payment of the moneys due under the first consultancy agreement and to agree instead to substitute the second consultancy agreement for the first, upon the basis that Daleford Glen would not permit the Aspendale land to secure more than $4.3 million and that Ridge Lane would hold, in escrow, the share certificates and executed share transfers in Daleford Glen pending completion of the second consultancy agreement. At the same time, Kallis also successfully set out to persuade Konstandellos to permit settlement of the contract of sale, notwithstanding that neither he nor Ridge Lane’s solicitor, Tasiopoulos, had actually seen the mortgage executed by Daleford Glen and F&F. Had they seen the mortgage, they would have seen that it did not limit the amount to be advanced under it to $4.3 million. The second step in the scheme was the transfer by Daleford Glen of its only asset, the Aspendale land, to Aspendale Gardens, Daleford Glen claiming that it all along held the land as trustee for a family trust. The share security held by Ridge Lane was thus rendered worthless. The final step was F&F’s delay in taking steps to register, first, the transfer from Ridge Lane to Daleford Glen and the mortgage granted it by Daleford Glen and, secondly, the transfer from Daleford Glen to Aspendale Gardens, thereby concealing, so it was said, Ridge Lane's loss from Konstandellos and Tasiopoulos. This was, I think (although it is perhaps not clear from the judgment), the scheme found by the trial judge. In his reasons for judgment, the trial judge concluded:
"... on the balance of probabilities, that F& F participated in a scheme which had as its object the destruction of Ridge Lane's unregistered charge, the effect of which was to acquire a registered first Mortgage with a view to taking priority over the known equitable interest dishonestly."
In reaching that conclusion, his Honour found that (1) on or before settlement on 4 April 1995, F&F, through Freeman and Serry, knew of the consultancy agreements between Ridge Lane and Daleford Glen; (2) F&F, through Freeman and Serry, knew of Kallis's purpose to induce Ridge Lane not to exercise its rights "by lodging a caveat or registering its charge" and to accept instead share security in Daleford Glen; (3) Daleford Glen purchased the Aspendale land in its own capacity and not as trustee of the G&V Family Trust; and (4) F&F participated in the scheme "by delaying registration of the relevant title documents and the Mortgage". On these appeals, the appellant challenged each of these findings and, in addition, submitted that, even if they were correct, they were insufficient to support a finding of fraud on F&F's part.
Serry’s and Freeman’s purported knowledge of the consultancy agreements
The finding that F&F was guilty of fraud depended very largely on acceptance of the proposition that on or before settlement on 4 April F&F, through Freeman and Serry, knew of the first and second consultancy agreements. Absent knowledge of the terms of those agreements, there is little to justify the conclusion that F&F was guilty of deliberate dishonesty, whether in delaying registration of the registrable instruments in its possession or otherwise. The appellant’s counsel submitted that the trial judge erred in finding that (1) F&F, through Freeman, became aware of the first consultancy agreement early in 1995; (2) it was to be inferred that F&F, through Serry, became aware of the first and second consultancy agreements by reason of events between 30 March and 4 April 1995; and (3) in consequence, by settlement on 4 April 1995, F&F knew of the consultancy agreements and, in particular, the second consultancy agreement.
The finding of the judge below that F&F, through Freeman, became aware of the first consultancy agreement is based upon the evidence of Konstandellos. In an affidavit tendered at trial, Konstandellos deposed that he had met Freeman by chance at some time between late January and early March 1995 when Freeman was visiting the Aspendale land to see how the development was progressing. Konstandellos's evidence was that he had introduced himself to Freeman as the owner of the land and, when Freeman had demurred "George is the owner", Konstandellos had said:
"George will only be the owner once he pays me the money owed to me under the Consultancy Agreement, which was in default and the money under the Contract of Sale." [sic]
According to Konstandellos, nothing further was said by Freeman on the subject. In an affidavit in reply, Freeman denied the conversation, although he admitted in cross-examination that his memory may have been affected by a head injury suffered by him in a fall three years before. The trial judge accepted Konstandellos's evidence, as he was entitled to do. On appeal, the appellant's counsel submitted that the most that evidence showed was that Freeman may have been aware that there was a consultancy agreement: it did not establish that he knew anything of its critical terms, in particular, clause 9 of the first consultancy agreement purporting to grant a charge over the land in favour of Ridge Lane "registrable" on default by Daleford Glen. I accept this submission.
Counsel for the respondents submitted that the trial judge was entitled to find Freeman's denial of the conversation false and to draw an inference against him in consequence of that denial. This sought, I think, to make too much of Freeman's denial. Freeman made the basis for his denying knowledge of the consultancy agreement plain by saying, in substance, that he had no recollection of the conversation, possibly because his memory had been adversely affected by the injury sustained in the fall and that had he known of the agreement he would have made additional inquiries. Possibly, Freeman’s evidence savoured of self-justification with the benefit of hindsight but there was nothing within it to show that it was given in the knowledge that it was untrue. Further, even if the conversation with Konstandellos put Freeman on notice that there was a consultancy agreement on foot early in 1995, it did not fix him with knowledge of any critical terms. (The point is only the stronger when it is recalled that clause 9 was of doubtful legal import.)
The respondents, by their counsel, submitted that it was to be inferred that Serry saw the notices of rescission given between December 1994 and March 1995 and that, as they specifically mentioned the first consultancy agreement, Serry must be taken to be aware of it. I do not accept this. The trial judge made no finding to this effect and there is nothing in the evidence which points positively to Serry's calling for the notices which, after all, were not given to his client, F&F, but to Daleford Glen.
In submitting that Freeman and Serry must be taken to have known of the first consultancy agreement, the respondents' counsel relied on a file note written by Kalus and dated 31 March 1995, recording a telephone call with one John Lelleton (an associate of Kallis) to the effect that:
"George [Kallis] has sorted it out with Freeman. HK [Henry Kalus]
should call Serry. Vendor in Court today to remove caveat."
The note refers, plainly enough, to the anticipated removal of the caveat which had at the least contributed to the failure of the settlement the day before, but I do not think it carries the respondents’ case much further. There is nothing to show what "had been sorted out with Freeman" and at no stage did Kalus (whom the trial judge regarded as a truthful witness) depose that he and Serry had fallen to discussing the consultancy agreement. Counsel for the respondents also specifically drew attention to another of Kalus’s file notes, written between 29 March and 4 April, in which Kallis is recorded as saying that Serry knew of the (first or second, depending on the date of the note) consultancy agreement, but that Serry was not to be given a copy of it. For the reasons set out below, this note tends, in my opinion, against the respondents, being indicative of the fact that Serry did not in fact know the critical terms of the relevant consultancy agreement.
On this aspect of the case, the appellant submitted, in substance, that the inferences drawn by the trial judge as to Serry’s knowledge were without foundation, whilst the respondents submitted that they were soundly based. The trial judge inferred that Serry became aware of the consultancy agreements by reason of events between 30 March and 4 April 1995. In particular, his Honour relied upon (1) evidence that Serry had telephoned Kalus on 31 March 1995, the day after the settlement failed, asking whether Ridge Lane was in dispute with Daleford Glen; (2) evidence that on 4 April Serry wrote to Kalus requesting "a statement outlining the arrangement between the vendor and the purchaser"; (3) Serry's lack of file notes relating to the relevant transactions; and (4) the existence of an itemised bill of costs later rendered by Serry. Before us, the respondents’ counsel also relied on the terms of Kalus's letter, dated 4 April 1995, formally replying to Serry’s inquiry; the terms of an earlier draft of Kalus’s 4 April letter; and evidence that shortly after Kalus met with Kallis, Konstandellos and Tasiopoulos on 3 April to negotiate the second consultancy agreement, Kalus met with Kallis, Freeman and Serry
In an affidavit tendered at trial, Serry deposed that he did not find out about the consultancy agreements until the week commencing 2 October 1995 when Kallis told him about them. At trial the respondents persuaded the trial judge to reject that evidence. It may be recalled that Serry telephoned Kalus on 31 March, asking for an explanation as to why settlement had failed the day before and whether Ridge Lane was in dispute with Daleford Glen. The respondents' counsel submitted that Serry well knew why settlement had failed on 30 March and that his somewhat ingenuous inquiry betrayed his knowledge of the first consultancy agreement, for that agreement was indeed the subject of dispute between Ridge Lane and Daleford Glen. In support of this submission, the respondents’ counsel referred to Serry’s evidence and, in particular, to his statement, in an affidavit tendered at trial, that "settlement had been aborted for reasons unbeknown to myself or my office". As the respondents’ counsel pointed out, it was plain enough on the evidence that by settlement on 30 March Serry knew of the caveat lodged by Leo Dimos & Associates and his statement that he did not know why the settlement had failed on 30 March called for some explanation. Serry’s explanation at trial was that he had in mind that he did not know anything about the Dimos caveat, an explanation which was rejected by the trial judge.
As counsel for the appellant pointed out, however, the evidence led by the respondents as to what was said at the meeting for settlement on 30 March 1995 was neither clear nor specific. Tasiopoulos deposed in an affidavit tendered at trial that:
"At settlement I advised the parties that we could not settle as there was a Caveat lodged over the property by Leo Dimos & Associates and that I did not have a Withdrawal of Caveat. Furthermore, the Statement of Adjustments which was produced to me at the time by Jonathan Kenny was inaccurate as they had not allowed for the payment of all funds owing. By this I mean the proceeds of the sale of the Contract and the funds from the Consultancy Agreement. Furthermore, that there was a problem in respect to a Consultancy Agreement between Ridge Lane and Daleford Glen. No cheques were tendered by Jonathan Kenny. Accordingly settlement that day was aborted."
In that passage, Tasiopoulos implied that the principal reason which he advanced for the failure of settlement was the unexpected presence of a caveat over the Aspendale land. It was not at all clear from Tasiopoulos’s evidence whether he specifically told the other parties either that there was insufficient money coming from the purchaser or that a problem had arisen between the vendor and the purchaser with respect to the consultancy agreement. Tasiopoulos's account would seem to indicate that the parties would probably have known that a caveat prevented settlement and would possibly have realised that there was some other difficulty so far as the vendor and the purchaser were concerned, perhaps relating to a consultancy agreement. I accept the appellant’s counsel’s submission that his evidence cannot rise much higher than that. In particular, I do not think it can be inferred from Tasiopoulos’s evidence that Serry knew of clauses 9 and 10 of the second consultancy agreement (or, for that matter, of clause 9 of the first consultancy agreement). Further, this gap in the evidence cannot, in this instance, be made good by the trial judge’s finding that Serry's explanation as to what appeared in his affidavit was unsatisfactory.
The respondents submitted that Serry's request, in his letter to Kalus Kenny on 4 April, for a "Statement outlining the arrangements between the Vendor and Purchaser" was to be construed as a request for details of the second consultancy agreement. To my mind, however, there is no basis for adopting this construction. There is nothing in the letter or in the pertinent evidence sufficient to show that the author of the request had in mind an inquiry about the second consultancy agreement, although Kalus might have felt obliged to refer to the agreement had he been responding to Serry's request frankly. Serry's request was indicative of his having a concern that there might be an arrangement between Ridge Lane and Daleford Glen, the details of which had been kept from him although they touched his client, F&F. The request was, it seems to me, indicative of a lack of knowledge about the critical aspects of any arrangement which might have been made between the vendor (Ridge Lane) and the purchaser (Daleford Glen). Further, I do not detect anything untoward in Serry's subsequent request for details of the shareholding of Daleford Glen, the shareholding of which was relevant to the guarantee of Daleford Glen’s obligations as mortgagor. Serry's failure to make a similar request on 30 March or 3 April was readily explicable by the fact that on each of those occasions he was aware that settlement would not be effected, on the first occasion on account of a caveat and, on the second, because there was too little time to gather together the necessary cheques.
In inferring that by reason of events between 30 March and 4 April Serry became aware of the consultancy agreements, the trial judge relied upon what he considered was "a significant absence of file notes documenting events ... relevant to these transactions. Yet, the existence of the itemised bill of costs points strongly to the existence of some documentation which would have had to have been used to prepare such a detailed bill". Whether or not the itemised bill does in truth indicate that there were formerly additional relevant documentary records in Serry's possession, I do not think that a significant gap in the evidence as to Serry's knowledge of the consultancy agreements can be filled by drawing an adverse inference against him based on the insufficiency of his file notes measured against his itemised bill of costs.
The respondents submitted at trial and on appeal that it is to be inferred that Serry knew of the second consultancy agreement from the letter of 4 April 1995 given to him by Kalus at settlement on that day and from the more detailed terms of an earlier draft. The letter of 4 April referred to Ridge Lane's claim for moneys additional to those in hand on 30 March (also, presumably, additional to those provided on 4 April) and to a meeting on the previous day, 3 April, at which Ridge Lane and Daleford Glen had resolved their differences and went on to state that, in the result, the additional "monies were not required at this time" and settlement could proceed. The terms of the 4 April letter, when read alone, do not give rise to the inference that at settlement Serry knew of the crucial terms of the second consultancy agreement, and I did not understand the respondents’ counsel to submit that they did. Rather, the respondents' counsel submitted that it was to be inferred from the surrounding circumstances that Serry had seen an earlier draft of the letter, dated 3 April, and that Serry’s guilty knowledge was to be inferred from that fact and from a comparison between the 3 April draft and the final version which showed that the non-specific terms of the final version had been deliberately chosen and, according to respondents’ counsel, chosen by Serry. Paragraph 3 of the draft of 3 April read as follows:
"My instructions are that the Purchaser/Borrower entered into the Consultancy Agreement in order to provide a fixed profit share to the Vendor subject to completion of the project and otherwise subject to the responsibilities of the Vendor pursuant to that Agreement. My client contends that no payments are required as at this time under the Consultancy Agreement as the events which are conditions of payment referred to in Clause 5.1(a) of that Agreement had not yet occurred. A dispute exists between the Vendor and my client as to the conditions upon which payment is subject. My client argues that dates for payment referred to in that Clause were inserted without his knowledge. The Agreement was signed without the knowledge of this office, and on my client's understanding that the dates were not included."
Had Serry seen this draft, he would, of course, have known of the first consultancy agreement. That he had seen it was, according to the respondents' counsel, to be inferred from the fact that he had had an opportunity to see it at his meeting with Kalus, Kallis, and Freeman on 3 April and from the nature of the changes made to the draft which resulted in the final form of the letter. The respondents’ hypothesis was that at his meeting with Serry and Freemen on 3 April, Kalus told them that he had just left a meeting with Kallis, Konstandellos and Tasiopoulos at which Kallis and Konstandellos had agreed upon a second consultancy agreement; that Kalus had shown Serry the 3 April draft; and that Serry had sought the changes to it which led to the 4 April letter given him at settlement. For my own part, I have not found anything in the evidence to support the hypothesis that Serry received that information from Kalus, that he saw the draft, or that it was he who sought the changes to it. It is pure speculation.
In an affidavit tendered at trial, Serry deposed that "[a]t no time during [the] meeting [on 3 April] did Kallis or Henry Kalus advise me about the Consultancy Agreements or the fact that re-negotiation of the Consultancy Agreements was occurring prior to settlement". Further, the evidence of Kalus, the author of the letter in draft and final form, did not support the respondents’ hypothesis. Kalus could not recall what had led him, as he put it, to "tone down" the 3 April draft and to delete express reference to the consultancy agreement, but he did give evidence that it would have been his practice to seek instructions from his client before parting with a letter such as that given to Serry on 4 April. That evidence indicates that it was Kallis, not Serry, who, having perused the 3 April draft, requested that it be amended. Kalus (whose evidence was accepted by the judge below) would, I am inclined to think, have remembered any direction from Serry to modify the draft.
Indeed, there was evidence that Kallis was anxious that Kalus not disclose the details of the arrangements made in the consultancy agreements between Ridge Lane and Daleford Glen to other parties, that those details be kept from Serry and Freeman and, therefore, from F&F. There was, for example, Kalus's file note that Kallis had told him not to give Serry the first consultancy agreement and there was also the fact that each consultancy agreement included a confidentiality clause.
At trial, Serry denied that the inquiry he made on 31 March was directed to the first consultancy agreement. There was no evidence to show that that denial was false. Having regard to the matters discussed above, there was no reason to doubt that Serry genuinely sought an explanation for the failure of the settlement on 30 March, because he did not believe that he knew the whole story and was sufficiently concerned that his client might be at risk to make the inquiry and seek the assurance (by seeking an explanation in letter form) that he did.
On the hearing of this appeal, respondents' counsel also referred to a note dated 31 March 1995, set out on a fax cover sheet of Kalus Kenny, solicitors for Daleford Glen, and addressed to Vadarlis Tasiopoulos, solicitors for Ridge Lane, which referred to a meeting at the office of Vadarlis Tasiopoulos at about "3 p.m. yesterday" and to discussion of the consultancy agreement. It may be recalled that the time fixed for settlement on that day had been 3 p.m. and, of course, the parties had met at that time. There had also been an earlier meeting at 2.15 p.m. that day between Konstandellos, Tasiopoulos, George and Jim Kallis and Kenny from Kalus Kenny at the office of Vadarlis Tasiopoulos. The reference to the meeting at about “3 p.m.” was probably a mistaken reference to that earlier meeting. It was probably not a reference to discussions at settlement, because the offices appointed for settlement were not those of Vadarlis Tasiopoulos: the offices of Mahoney Galvin were appointed, they being the offices of the solicitors for the first mortgagee of Ridge Lane which was to be paid out at settlement. There is therefore nothing in the note to which we were referred to raise as a real possibility that Serry or Freeman were in attendance at a meeting at which the consultancy agreement was discussed.
In any event, even if the evidence lent sufficient support to the inference that Serry had become aware of the consultancy agreements (as the trial judge found), the evidence referred to in this connection falls well short of establishing that Serry knew of the terms of the agreements and, in particular, that clause 9 of the first consultancy agreement and clause 9(a) of the second consultancy agreement “provided for” a charge, that clause 9(b) of the second consultancy agreement purported to set a cap upon the amount Daleford Glen could borrow against the security of the land, and that the second consultancy agreement gave additional security in the terms of clause 10.
Ridge Lane induced not to register charge
In finding the case against F&F made out, the trial judge inferred from the evidence before him that F&F, through Freeman and Serry, became aware of Kallis's purpose to induce Ridge Lane not to exercise its rights “by lodging a caveat or registering its charge” (presumably in aid of the “charge” referred to in the first consultancy agreement) and to accept instead transfers of the shares in Daleford Glen as security. In drawing that inference, the trial judge relied on the evidence that (1) on 3 April 1995 Kalus attended a meeting with Kallis, Konstandellos and Tasiopoulos to negotiate the terms of the second consultancy agreement; (2) subsequently, Kalus attended a meeting, on 3 April, with Serry and Freeman; and (3) on 4 April Serry wrote to Kalus requesting "a statement outlining the arrangement between the vendor and the purchaser". On appeal, the respondents’ counsel also relied on evidence that on 4 April Serry telephoned Kalus, asking about the shareholding in Daleford Glen and referring to an authority to amend the mortgage.
The appellant by its counsel submitted that that evidence did not support an inference that F&F, through Freeman and Serry, became aware of Kallis's purposes. I accept that submission. In any event, even if there were evidence from which that inference could be drawn, neither such evidence nor such inference would establish as a corollary that Freeman and Serry were aware of any dishonesty on Kallis’s part. Kallis’s purpose in seeking Konstandellos’s agreement to substitute the second consultancy agreement for the first would have been as apparent to Konstandellos and his advisers as to Kallis. It is only if it were shown that F&F knew that Kallis had it in mind to defraud Ridge Lane by diminishing the value of its security or rendering it worthless that F&F could, in the circumstances, be said to have had knowledge of Kallis’s dishonest purpose.
By way of preliminary observation, I accept that if either or both of the consultancy agreements did create a charge then, as the appellant submitted, the charge was an equitable charge and was not capable of protection by registration either under the TLA or under the Corporations Law: cf. TLA, ss. 74, 88(2) and Corporations Law, s.262(8). On the other hand, if the “charge” created an equitable interest in land, for present purposes it may be supposed that such would be capable of being protected by caveat lodged under s.89 of the TLA. I leave aside, for the moment, the question whether Ridge Lane would in truth have been entitled, whilst it remained the registered proprietor of the Aspendale land, to lodge a caveat over the land to protect its interest as chargee, an interest which could presumably be of significance only after it ceased to be registered as proprietor.
As already indicated, I do not think that the evidence permits the inference that Kalus disclosed the proposal for a second consultancy agreement at his meeting with Kallis, Serry and Freeman on 3 April. A fortiori, I do not accept that the evidence permits the inference that Kalus disclosed the terms of that agreement to Serry and Freeman on 3 April, its terms not being finalised until the next day, 4 April. Kalus could not recall any mention of the second consultancy agreement then and there is no reason to believe that he disclosed either the fact of the agreement or its terms to Serry, contrary to the spirit of his instructions not to supply the agreement to Serry and contrary to the tenor of the agreement which called upon the parties to keep its terms confidential. Moreover, as the appellant's counsel pointed out, it was not put to either Serry or Freeman, in cross-examination, that they were party to a “plot hatched” at the meeting of 3 April 1995.
Further, for the reasons already stated, I am of the view that Serry’s request for a “Statement outlining the arrangements between the Vendor and Purchaser” contained in his letter to Kalus Kenny dated 4 April is not to be construed as a request for details of the second consultancy agreement. That request was indicative of a well-placed concern that there might be an undisclosed arrangement between Ridge Lane and Daleford Glen which might touch his client.
G&V Family Trust
In written submissions, the appellant submitted that the trial judge was wrong in inferring from the evidence that it was likely that Daleford Glen purchased the Aspendale land in its own capacity and not as trustee for the G&V Family Trust. On the hearing of the appeal, counsel for the appellant submitted that, whatever the true position with respect to Daleford Glen’s capacity as purchaser, there was no evidence that the appellant was aware on 4 April that Daleford Glen was purchasing as a trustee. I accept this submission. There was no evidence that Freeman or Serry knew of the existence of the G&V Family Trust prior to 10 May 1995 or, prior to that date, had any reason to believe that paragraph C (set out earlier) to the recital in the second consultancy agreement was false. Kalus said in evidence that Kallis did not tell him that Daleford Glen was purchasing as trustee until 8 May 1995. That evidence is consistent with the tenor of his letter to Kallis dated 9 May as well as with his letter to Jack Cohen Serry & Co. dated 10 May. Further, it was not put to Freeman and Serry in cross-examination that either of them had prior knowledge that Daleford Glen was purchasing as trustee prior to settlement. The evidence only permits the conclusion that, apart from Kallis, prior to 10 May, neither Kalus nor Freeman nor Serry knew of the fact, or alleged fact, that Daleford Glen had purchased as trustee. If Kallis, who alone alleged Daleford Glen held the land as trustee and who instigated the transfer of the land to Aspendale Gardens, intended to render worthless the share security held by Ridge Lane, there is nothing in the evidence to indicate that, prior to 10 May, either Freeman or Serry were privy to that crucial aspect of Kallis's plan.
Nor do I think that it can be inferred from the sending of the documents relating to the change of trustee under cover of the Kalus Kenny letter of 10 May 1995 that a scheme came into existence on or about 10 May which involved Kallis, Serry and Freeman, or that the sending of the letter was evidence of a scheme already in train. F&F had no reason to object to the change of trustee because, upon registration, the advances made by F&F would still be secured by a registered mortgage, Aspendale Gardens simply succeeding as registered proprietor to the obligations of Daleford Glen which as registered proprietor had given the mortgage to F&F. As a practical matter, F&F had no real interest in Kallis's claim that Daleford Glen had purchased as trustee. Given that either F&F did not know of the consequential devaluation of Daleford Glen's shares or, if it did, it was not affected by it, it was natural enough that F&F did not object to the new arrangements.
F&F's participation in the scheme
Finally the appellant by its counsel challenged the finding that F&F knowingly participated in the scheme to render the shares in Daleford Glen worthless (and presumably diminish the value of the charge) by delaying registration of title documents and the mortgage. The finding was supported by the respondents by reference to the evidence that (1) Serry failed to give Konstandellos a copy of the mortgage and (2) Serry delayed in lodging for registration the transfer from Ridge Lane to Daleford Glen, the mortgage from Daleford Glen to F&F and the transfer from Daleford Glen to Aspendale Gardens.
I do not think that the respondents’ case is greatly advanced by the first point. It had been Tasiopoulos's decision to settle on 4 April without sighting the mortgage before hand. A copy of the mortgage was repeatedly sought by Konstandellos or Tasiopoulos from Kalus or Kallis, not Serry. In any event, as the appellant's counsel pointed out, had Tasiopoulos and Konstandellos been provided with a copy of the mortgage and the Kalus Kenny letter of 4 April which Daleford Glen intended should accompany it, they would have seen that F&F had an "all moneys” mortgage in consideration for an advance of $1,721,000 and that further advances of up to $4.29 million were proposed (being within the limit agreed upon in the second consultancy agreement). This would, it seems to me, have done no more than confirm that at least as at 4 April Daleford Glen was acting in conformity with the second consultancy agreement, because the promise, in clause 9 of that agreement, was not "to encumber, charge or mortgage the land" for more than $4,300,000 without first obtaining Ridge Lane's written consent. The promise was broken when the sum secured by way of mortgage, charge or other encumbrance exceeded $4,300,000. The promise was not broken by a mortgage which was merely capable of providing security for advances in excess of $4.3 million, were such advance to be made. After all, the second consultancy agreement contemplated that Ridge Lane might well consent to advances in excess of the proposed $4.3 million.
Further, I do not accept that Serry's delay in obtaining registration of the transfer from Ridge Lane and F&F’s mortgage after settlement on 4 April warrants the inference that F&F participated in a scheme to postpone Ridge Lane’s charge to F&F's mortgage or to render worthless Ridge Lane's share security. In the first place, what was referred to as the charge granted under the second consultancy agreement was granted in contemplation of Daleford Glen becoming the registered proprietor of the land subject to a mortgage to F&F. It was, so far as the second agreement was concerned, always in contemplation that F&F's legal interest as mortgagee would rank ahead of Ridge Lane's equitable interest as chargee. The delay on F&F's part in registering the transfer and mortgage gave rise to a risk so far as F&F was concerned that Ridge Lane would lodge a caveat (assuming, as the parties apparently thought, that Ridge Lane's interest as chargee was capable of being protected by a caveat). Had Ridge Lane been successful, Ridge Lane would have been better placed to argue that Ridge Lane's interest as chargee ranked ahead of F&F's interest as mortgagee. On this basis, the longer F&F delayed registration the greater the risk it was running that there would be a challenge from Ridge Lane.
Let it be assumed that Serry or Freeman knew at settlement on 4 April of the terms of clause 9 of the second consultancy agreement; then Serry by his delay of two months must be taken to have consciously put F&F at risk, because on this assumption Serry knew that moneys were due under the agreement and, in default of payment, Ridge Lane was, under that agreement at least, entitled to move to protect its interest by lodging a caveat. As it turned out, if it was open to Ridge Lane to lodge a caveat in respect of its interest as chargee (notwithstanding that it was the registered proprietor), it might have done so after 9 May. I accept, as the appellant submitted, that it was inherently improbable that F&F would have joined with Daleford Glen to expose itself to such a risk, more particularly as it might have avoided the risk altogether by registering its mortgage immediately after settlement on 4 April 1995. Serry said in evidence that he delayed taking steps to register the transfer from Ridge Lane and F&F’s mortgage in order to delay payment of stamp duty (a pre-requisite to registration). I find this explanation less improbable than the contrary hypothesis advanced by the respondents.
The judge below took the view that it would not have been possible for Ridge Lane to lodge a caveat whilst it was registered as proprietor of the Aspendale land and that while Serry delayed in registering the transfer (and mortgage), Ridge Lane was unable to protect its interest. If that was the concern of Ridge Lane, it should have taken steps to precipitate registration of the transfer. Perhaps it suffices to say that the law is unclear as to whether (and, if so, in what circumstances) it is open to a registered proprietor to lodge a caveat over the land of which he is the proprietor. It has been suggested in some cases that a registered proprietor is not prevented from lodging a caveat merely because he is the registered proprietor: see, e.g., J.& H. Just (Holdings) Pty. Ltd. v. Bank of New South Wales (1971) 125 C.L.R. 546, at 553 per Barwick C.J. (McTiernan and Owen JJ. concurring) and Barry v. Heider (1914) 19 C.L.R. 197. It has been said that a registered proprietor may lodge a caveat over the land of which he is proprietor where there is “some set of circumstances over and above his status as registered proprietor which affirmatively gives rise to a distinct [caveatable] interest in the land”: see Re An Application by Haupiri Courts Ltd (No.2) [1969] N.Z.L.R. 353, at 357. If correct, that principle might cover this case. The point was, however, left open in Swanston Mortgage Pty. Ltd. v. Trepan Investments Pty. Ltd. [1994] 1 V.R. 672, at 682 and I need not decide it in this case. Whilst I am inclined to think that there is much merit in the approach favoured in Haupiri Courts, it is enough that in this case the parties to the consultancy agreements, Ridge Lane and Daleford Glen, were of the view that Ridge Lane's interest as chargee was capable of being protected by a caveat at any time after Daleford Glen made default under the agreements (even default under the first consultancy agreement, which in terms of that agreement may well have occurred long before the contract of sale was settled). If F&F were indeed party to the alleged fraud, it too can be taken to have been of the view that Ridge Lane had an entitlement to lodge a caveat, alternatively, to have been cognisant of the fact that Ridge Lane thought it had such an entitlement and there was a real risk that Ridge Lane would succeed in any attempt to exercise what it believed was its right. Put another way, it seems inherently improbable that, had Serry and Freeman known of the terms of the agreements, they would have delayed registering the mortgage in order to secure for F&F such benefit as might perhaps flow to F&F so long as Ridge Lane failed to lodge a caveat when, in contrast, to register the mortgage as early as possible must surely have secured the greater benefit of obtaining priority for the mortgage over any interest capable of being protected by a caveat.
Further, it cannot be said that anything F&F did (by way either of non- disclosure of the mortgage or of delay in obtaining registration) had the effect of inducing Ridge Lane, through Konstandellos, not to exercise its rights to protect its interest as chargee, either by way of lodging a caveat or by exercising its rights as holder of the executed share transfers. There was nothing to explain why Ridge Lane delayed until 1 September before taking steps to lodge a caveat. It was said that it could not in law have done so whilst it remained registered as proprietor of the Aspendale land: this was supported only by counsel’s argument, not by the evidence. In any event, it did not explain the delay subsequent to 7 July when the transfer had been lodged for registration. Further, nothing F&F did had the effect of rendering valueless the Daleford Glen shares held, in escrow, by Ridge Lane.
On appeal, it was also the contention of the respondents’ counsel that had the terms of the mortgage been known to Tasiopoulos and Konstandellos they would have seen that the consideration for the “all moneys” mortgage was an advance of only $1.7 million and they may have taken the view that this would have worked to their advantage on any takeover of Daleford Glen. Though advantage was claimed in this, it is perhaps difficult to see how money committed to developing the Aspendale land could have been applied to meeting obligations under the consultancy agreement. In any event, as the appellant's counsel pointed out, this was not the way the case was put at trial and the effect of the second consultancy agreement was not to require advances in the sum of $4.3 million: it was to cap the advances to be made at that figure.
The appellant submitted that the judge below failed to take into account that by 1 September, when finally Ridge Lane did lodge its caveat (nearly two months after the lodgment of the transfer and mortgage by F&F), F&F had advanced only $2.69 million, a figure well within the limit agreed under the second consultancy agreement. The delay on F&F's part in registering the title documents was, therefore, clearly not for the purpose of F&F's advancing moneys to Daleford Glen in excess of the capped amount. Indeed, it seems that it was not until 1 December 1995 that Kallis sought to exceed the cap. In the letter of that date purporting to be sent by Aspendale Gardens to F&F, Kallis sought additional funds from Freeman, observing:
"I have kept a tight control on the costings enabling the project to be completed as originally designed at the figure of $4,290,000.00 being the amount agreed between us that you were going to advance".
There was, it seems to me, little to be gained by F&F in participating in the fraud. The respondents’ counsel argued that F&F had more than a financier's interest in the project. Freeman stated in evidence at trial that he stood to gain a fee or profit share of around $600,000 from the Aspendale Gardens project and that by the end of March 1995 he had already advanced a substantial sum to Kallis which was unsecured. But accepting that argument, the gain which counsel was driven to suggest was the motive for the fraud scarcely warranted F&F’s participation in it.
The respondents by their counsel contended that because the evidence given by Serry and Freeman was shown to be untrue in important respects, the trial judge was entitled to treat their evidence as revealing consciousness of guilt. Once again, I think that this submission makes too much of their evidence. Further, it was submitted by the respondents’ counsel that his Honour was entitled to infer from the fact that F&F did not call Kallis that Kallis’s evidence would not have advanced its case and to take that into account against F&F’s interest. The former of these points was conceded by F&F: when Freeman was asked why he had not asked Kallis to give evidence, he stated "I didn't think that he could support me because he is the one who has got me into trouble". It was plain enough why F&F might decide not to call Kallis: F&F was owed some $6.2 million by Kallis’s interests and the one thing that all counsel agreed upon was that, if anyone had been guilty of dishonesty, it was Kallis.
In any event, neither of these considerations was sufficient to overcome the fact that there was simply insufficient evidence to support the findings made by the trial judge that, on the balance of probabilities, on 4 April 1995, F&F knew of the second consultancy agreement and of Kallis's purpose to induce Ridge Lane not to exercise its rights and to accept instead share security in Daleford Glen; and that F&F participated in a scheme to defraud Ridge Lane by delaying registration of the relevant title documents and the mortgage. Further I accept the appellant’s counsel’s submission that these findings, even if correct, would not support the finding of fraud against F&F. The respondents needed to establish that, on the balance of probabilities, as at 4 April 1995, there was an arrangement (unknown to Kalus) between Serry and Freeman on the one hand and Kallis on the other whereby the share security given by Daleford Glen to Ridge Lane was to be rendered worthless and F&F's mortgage was to be accorded a priority over Ridge Lane’s interest as chargee which was contrary to the basis upon which Ridge Lane had accepted the charge. On a careful analysis the evidence never reached so high.
For the reasons stated, I would allow the appeals and by order declare that the charge claimed by Ridge Lane did not have priority over F&F's mortgage.
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