Garslev Holdings Pty Ltd v Overdean Developments Pty Ltd
[2023] NSWCA 259
•30 October 2023
|
New South Wales |
Case Name: | Garslev Holdings Pty Ltd v Overdean Developments Pty Ltd |
Medium Neutral Citation: | [2023] NSWCA 259 |
Hearing Date(s): | 9 June 2023 |
Date of Orders: | 30 October 2023 |
Decision Date: | 30 October 2023 |
Before: | Meagher JA at [1]; |
Decision: | (1) The amended notice of appeal dated 1 December 2022 be dismissed. |
Catchwords: | EQUITY – fiduciary duties – whether fiduciary relationship overlay contractual relationship between the principal and attorneys – duty of attorneys not to act in conflict with interests of their principal not inconsistent with contractual terms |
Legislation Cited: | Corporations Act 2001 (Cth) ss 126, 128, 129 |
Cases Cited: | Barnes v Addy (1874) 9 Ch App 244 |
Texts Cited: | JD Heydon, The Hon. Justice Leeming, Dr P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (5th ed, 2015, LexisNexis Butterworths) |
Category: | Principal judgment |
Parties: | Garslev Holdings Pty Ltd (ACN 003 312 383) (first appellant) |
Representation: | Counsel: |
File Number(s): | 2021/349602 |
Publication Restriction: | Nil |
Decision under appeal: | |
Court or Tribunal: | Supreme Court of NSW |
Jurisdiction: | Equity Division |
Citation: | [2021] NSWSC 1482; [2022] NSWSC 24 |
Date of Decision: | 17 November 2021 |
Before: | Williams J |
File Number(s): | 2018/384191 |
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
HEADNOTE
[This headnote is not to be read as part of the judgment]
The appeal relates to orders made by the primary judge in the Equity Division of the Supreme Court arising from the following two principal matters:
(a) A Power of Attorney executed in 2016 by BAD Nominees (NSW) Pty Ltd and Messrs L Smits and P Mahommed for a period of three years with the purpose of the attorneys exercising BAD Nominees’ rights and powers under or ancillary to loans made by it to Beechworth Land Estates Pty Ltd (BLE) and Griffith Estates Pty Ltd. BAD Nominees was then the trustee of the Dean Super Fund.
(b) The subsequent conduct of the attorneys and Mr Mahommed’s company, Vestecorp Financial Services Pty Ltd, acting in purported compliance with the Power of Attorney and/or two other documents executed by BAD Nominees on 9 May 2016, being a Consultancy Agreement and a document entitled “Irrevocable Authorisation Direction” (IAD). Collectively, these three documents are referred to as the 9 May 2016 agreements.
On 2 August 2017, the administrators of BLE, the attorneys of BAD Nominees, and a third party agreed that nine lots of land owned by BLE in Beechworth would be transferred from BLE to BAD Nominees in consideration for a reduction of $1,000,000 in the amount claimed by BAD Nominees in the administration of BLE. Using the Power of Attorney, Messrs L Smits and Mahommed then transferred the nine lots to Garslev Holdings Pty Ltd (Mr J Smits, who is the brother of Mr L Smits, was the sole director and shareholder of Garslev) in consideration for fees which were purportedly owed to the attorneys or Vestecorp. Mr Mahommed, acting as attorney for BAD Nominees, executed a deed of assignment with Garslev in which BAD Nominees’ rights to the nine lots and other rights in relation to BLE’s administration were assigned in consideration for $850,000.
On Garslev becoming the registered proprietor, on 5 November 2018, Mr Mahommed used the Power of Attorney to enter into two further deeds with Garslev, assigning to it rights in respect of alleged present and future debts and setting off those unspecified debts assigned to it against the $850,000 payable to BAD Nominees under the first deed. In effect, the nine lots were transferred to Garslev without it having made any monetary payment to BAD Nominees. Garslev then sold the nine lots for $1,126,000. Further steps were taken by Mr Mahommed to enable Mr L Smits to act as BAD Nominees’ solicitor in litigation concerning its remaining rights against BLE. Despite BAD Nominees’ rights being assigned to Garslev, the costs associated with this litigation were charged to BAD Nominees.
The primary judge found that Messrs L Smits and Mahommed owed, and breached, their fiduciary obligations to BAD Nominees. Garslev was also found to be liable for those breaches, the primary judge finding them to be part of a dishonest and fraudulent design in which Garslev knowingly assisted. The primary judge rejected a knowing assistance claim brought against Mr J Smits personally, finding that his involvement was confined to the actions taken by him as director of Garslev in causing that company to enter into the relevant deeds.
The primary judge ordered that the three deeds executed by Mr Mahommed (on behalf of BAD Nominees) and Garslev be rescinded ab initio. Garslev was ordered to account to Overdean Developments Pty Ltd (which had replaced BAD Nominees as trustee of the Dean Super Fund) for the net proceeds of sale of the nine lots of land. These monies were impressed with a constructive trust for the benefit of Overdean (as trustee). Messrs L Smits and Mahommed were also ordered to pay equitable compensation to Overdean (as trustee) in the amount of $1,058,579 plus interest.
On appeal, the issues for determination were whether the primary judge erred in finding that:
(i) Messrs L Smits and Mahommed owed fiduciary duties to BAD Nominees upon execution of the 9 May 2016 agreements;
(ii) there is an implied term in the Power of Attorney that Messrs L Smits and Mahommed would not act in circumstances of a conflict between their interests and those of BAD Nominees and further finding that a reference in the IAD to “25% of recoveries” was to be read as a reference to monies recovered by the attorneys and consultants;
(iii) Messrs L Smits and Mahommed breached their fiduciary duties;
(iv) the breaches of Messrs L Smits and Mahommed were part of a dishonest and fraudulent design;
(v) Garslev and Mr J Smits had requisite knowledge of the dishonest and fraudulent design;
(vi) alternatively, Messrs L Smits and Mahommed acted on a fraud on the power in that they were obliged to seek approval of their fees from Mr Dean, and they would inevitably render excessive fee invoices after 20 May 2018 in relation to unauthorised work; and
(vii) the relief ordered was appropriate in the circumstances.
An appeal against costs arose only if the issues were determined in the appellants’ favour. The finding that Mr J Smits was not personally liable under the second limb of Barnes v Addy was challenged in the cross-appeal.
The Court held (Griffiths AJA, Meagher and Kirk JJA agreeing), dismissing both the appeal and cross-appeal:
Appeal
As to issue (i):
Messrs L Smits and Mahommed and BAD Nominees were in a fiduciary relationship which overlay the relevant contractual obligations and rights. The contractual provisions and fiduciary duties coexisted: [125], [136]. There remained vulnerability in the parties’ relationship, which was reinforced by the explicit terms of the 9 May 2016 agreements. Messrs L Smits and Mahommed’s powers were to be exercised within the confines of their duty not to act in conflict with BAD Nominees’ interests: [138]-[149].
Cordiant Communications (Australia) Pty Ltd v The Communications Group Holdings Pty Ltd [2005] NSWSC 1005; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64, considered.
As to issue (ii):
The implied term concerning no conflict of interest was not inconsistent with the terms of the Power of Attorney: [155]-[156]. Moreover, there was no impermissible rewriting of the 9 May 2016 agreements by her Honour’s construction of cl 1 of the IAD. Rather, it was clarified by this interpretation: [159].
As to issue (iii):
The primary judge’s findings did not traverse a wider range of matters than those raised in the plaintiffs’ pleaded case below: [173]. The primary judge’s findings were based on matters which were raised in the case below: [176], [181]. There was no identifiable error in the primary judge’s findings: [186].
As to issue (iv):
BAD Nominees was left at the mercy of its attorneys and Garslev: [194]. How much of the $850,000 was to be paid to BAD Nominees was at the absolute discretion of Garslev, in an arrangement which was wholly uncommercial for BAD Nominees: [194], [195].
As to issue (v):
Mr J Smits, and through him Garslev, were put on sufficient notice of the claims of there being a dishonest and fraudulent design: [202]. Mr J Smits’ forensic choice not to give evidence was not because he did not have a case to answer: [203]. There was, otherwise, no appellable error in the primary judge’s finding that Mr J Smits had read one of the relevant deeds dated 5 November 2018 and had actual knowledge of its features, as established by Mr L Smits’ evidence: [205].
As to issue (vi):
For completeness, there was no error in the primary judge’s alternative findings based on the doctrine of fraud on the power: [213], [214].
As to issue (vii):
No appellable error was established in the primary judge’s order that Messrs L Smits and Mahommed pay equitable compensation to Overdean in circumstances where Garslev being ordered to account to Overdean was of itself insufficient compensation (especially noting that Garslev is the subject of a winding up order made by Hammerschlag CJ in Eq on 8 June 2023): [222]. The appellants failed to discharge their onus of establishing that the primary judge made accounting errors: [228]-[229].
Cross-appeal
The cross-appellants, save for pointing to Mr J Smits’ “moral obliquity”, provided no evidence of him having acted personally (as opposed to in his capacity as director and sole shareholder of Garslev) such that he should be made personally liable under the second limb of Barnes v Addy: [244].
Hasler v Singtel Optus Pty Ltd; Curtis v Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266; Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 244; Re-Engine Pty Ltd (in liq) v Fergusson (2007) 209 FLR 1; [2007] VSC 57, considered.
HEADNOTE_Toc149314992
JUDGMENT_Toc149314993
Background facts summarised_Toc149314994
A. the proceedings below_Toc149314995
(a) Other proceedings summarised_Toc149314996
(b) Some procedural matters_Toc149314997
(c) The relief sought by the plaintiffs_Toc149314998
Defence and cross-claim_Toc149314999
Primary judge’s findings and reasons summarised_Toc149315000
(a) Preliminary matters – rejecting much of the defendants’ defence_Toc149315001
(b) Breaches of fiduciary duty by executing the 9 May 2016 agreements_Toc149315002
(c) Creation of fiduciary duty after execution of the 9 May 2016 agreements_Toc149315003
(d) Breach of fiduciary duty by Messrs L Smits and Mahommed in entering into the 20 March 2018 deed_Toc149315004
(e) Breach of fiduciary duty by Messrs L Smits and Mahommed in entering into the Garslev deeds_Toc149315005
(f) Fraud on the power_Toc149315006
(g) Various claims against Garslev_Toc149315007
Inducement or procurement of breaches of fiduciary duty_Toc149315008
Second limb of Barnes v Addy_Toc149315009
First limb of Barnes v Addy_Toc149315010
(h) Claims for equitable compensation or restitution against Mr J Smits_Toc149315011
(i) Relief_Toc149315012
The costs judgment_Toc149315013
B. THE APPEAL_Toc149315014
Vacation of original appeal hearing dates and related matters_Toc149315015
Amended notice of appeal_Toc149315016
C. Consideration and determination_Toc149315017
Ground 1 (no fiduciary duties owed)_Toc149315018
Ground 2 (implied terms)_Toc149315019
Ground 3 (no breach of 9 May 2016 agreements or fiduciary duties)_Toc149315020
(a) 20 March 2018 deed of assignment_Toc149315021
(b) Garslev deeds (dated 5 November 2018)_Toc149315022
(c) 20 March 2018 deed of assignment and the 5 November 2018 deeds, and the knowing involvement of Mr J Smits and Garslev in the procurement and performance of those deeds_Toc149315023
Ground 4a (whether any breaches of fiduciary duties bore the quality of a “dishonest or fraudulent” design)_Toc149315024
Ground 4b (whether Garslev and Mr J Smits had the requisite knowledge of the “dishonest or fraudulent” design)_Toc149315025
Ground 5 (fraud on the power)_Toc149315026
Ground 6 (costs)_Toc149315027
Ground 7 (the appropriateness of the relief)_Toc149315028
D. Cross-appeal_Toc149315029
E. Notice of contention_Toc149315030
F. Conclusion_Toc149315031
JUDGMENT
MEAGHER JA: I agree with Griffiths AJA.
KIRK JA: I agree with Griffiths AJA.
GRIFFITHS AJA: This appeal arises from two judgments and orders dated 17 November 2021 and 20 January 2022 in the Equity Division of the Supreme Court: Overdean Developments Pty Ltd v Garslev Holdings Pty Ltd (No 3) [2021] NSWSC 1482 (primary judgment or PJ) and Overdean Developments Pty Ltd v Garslev Holdings Pty Ltd (No 4) [2022] NSWSC 24 (costs judgment or CJ) respectively. There is also a cross-appeal and a notice of contention.
By way of broad overview, the appeal concerns findings made by the primary judge (Williams J) arising from the following two principal matters:
(a)A Power of Attorney executed by BAD Nominees (NSW) Pty Ltd appointing Mr Leonardus Gerardus Smits (Mr L Smits) and Mr Peter Shah Mahommed (Mr Mahommed) as its attorneys for a period of three years to exercise BAD Nominees’ rights and powers under or ancillary to certain loans made by it to Beechworth Land Estates Pty Ltd (BLE) and Griffith Estates Pty Ltd.
(b)The subsequent conduct of Messrs L Smits and Mahommed and Mr Mahommed’s company Vestecorp Financial Services Pty Ltd acting or purporting to act in accordance with the Power of Attorney and/or Consultancy Agreement and/or a document entitled “Irrevocable Authorisation Direction” (IAD). These documents were all executed by BAD Nominees on 9 May 2016. I will refer to them collectively as the 9 May 2016 agreements.
In brief, the following findings of the primary judge are challenged on appeal:
(a)Under the 9 May 2016 agreements, Messrs L Smits and Mahommed were subject to fiduciary duties or obligations to BAD Nominees. The appellants contend that the primary judge ought to have held that Messrs L Smits and Mahommed were only subject to contractual obligations and rights under those agreements.
(b)Two of the 9 May 2016 agreements were subject to the following implied terms or interpretations:
(i)an implied term of the Power of Attorney that Messrs L Smits and Mahommed would not act in circumstances of a conflict between their own interests and those of BAD Nominees; and
(ii)in cl 1 of the IAD the reference therein to “25% of recoveries” was to be read as a reference to monies recovered by the efforts of the attorneys and consultants.
Additional grounds of appeal (some of which are expressed to be in the alternative) claim that the primary judge erred in finding that:
(a)Messrs L Smits and Mahommed breached the 9 May 2016 agreements and the fiduciary duties they owed to BAD Nominees;
(b)the fiduciary breaches bore the quality of a dishonest and fraudulent design;
(c)Garslev and Mr J Smits (Mr L Smits’ brother) had the requisite knowledge of the dishonest and fraudulent design; and
(d)Messrs L Smits and Mahommed committed a fraud on their powers under the 9 May 2016 agreements.
The appellants also challenge the relief granted by the primary judge.
I will defer summarising the cross-appeal and notice of contention.
Background facts summarised
Mr Brian Dean (second plaintiff below) established the Dean Super Fund in December 2012. Mr Dean was and remains the sole beneficiary of the Dean Super Fund. BAD Nominees was the trustee of the Dean Super Fund from its establishment until 5 September 2018. Mr Dean was the sole shareholder and director of BAD Nominees at all times. Overdean Developments Pty Ltd (first plaintiff below) became the trustee of the Dean Super Fund after BAD Nominees was removed from that role. Mr Dean left school when he was in Year 8 and aged 14 and he worked as a train driver with NSW Railways for 38 years until 2003, after which time he worked as a farmer.
In February 2013, BAD Nominees (in its capacity as trustee of the Dean Super Fund) made a loan (February 2013 loan) of $2 million to BLE to fund the acquisition of 39 lots of land (Beechworth land) by assignment from the existing mortgagee, Suncorp Metway Ltd. The mortgagor of the Beechworth land, Redhill Developments Pty Ltd, had defaulted under the mortgage and, instead of exercising its power of sale, Suncorp agreed to assign its interest as mortgagee to BLE. The February 2013 loan was secured on the terms of a general security agreement (February 2013 security) (see at PJ[41] for a summary of the specific terms of the February 2013 security). The February 2013 security was registered on the Personal Property Securities Register on 13 May 2013.
BAD Nominees also provided a loan to Griffith Estates prior to July 2014. That loan does not feature prominently in the present dispute.
On 14 July 2014, administrators were appointed to both BLE and Griffith Estates. There were then 28 lots of the Beechworth land unsold. Reports issued by the administrators of BLE recorded that BAD Nominees’ security interest ranked first in priority amongst secured creditors. BAD Nominees lodged a proof of debt with the administrators for an amount of $807,903.04 claimed to be owing under the February 2013 loan.
The administration of BLE proved to be long and complex. It gave rise to several proceedings, including In the matter of Beechworth Land Estates Pty Ltd (Admin Apt) and Griffith Estates Pty Ltd (Admin Appt) No 2 [2015] NSWSC 336.
In early May 2016, Messrs L Smits and Mahommed (third and fourth defendants below respectively) became aware that BAD Nominees was still awaiting payment out of the administration of BLE and lacked legal representation in proceedings then on foot relating to the administration. The plaintiffs alleged that, at this point, Messrs L Smits and Mahommed concocted what was described below as the Attorney conspiracy. This conspiracy was said to involve Messrs L Smits and Mahommed planning and procuring an agreement under which they could overcharge for legal services provided to BAD Nominees, which payments would be assured by a power of attorney that would also prevent Mr Dean from complaining by preventing him from acting in the name of BAD Nominees (see in more detail at PJ[54]. At PJ[614], the primary judge found that it was not necessary to determine the Attorney conspiracy as the plaintiffs had made no reference to it in their written or oral submissions).
Mr L Smits (who has practised as a solicitor at various times over many years) did not have a practising certificate at this time. On 19 January 2016, he had become a bankrupt. At that time, he had not held a practising certificate for some years. He again obtained a practising certificate on 7 February 2017 (which was subject to conditions, such as not being allowed to operate a trust account or be a trustee of any trust – see PJ[419]).
Following a series of discussions and meetings between Mr Dean and Messrs L Smits and Mahommed, as noted above, the 9 May 2016 agreements were executed. Some key features of these agreements may be summarised as follows:
Pursuant to the Power of Attorney, BAD Nominees appointed Messrs L Smits and Mahommed as its attorneys for a period of three years “to act and to exercise all powers, rights and privileges of or imputable to or exercisable by [BAD Nominees] in relation to and in respect of” specified matters relating to BLE and Griffith Estates, and the administration and foreshadowed liquidation of those companies (see in more detail at PJ[71]–[77]).
The Consultancy Agreement set out terms on which BAD Nominees engaged Vestecorp (fifth defendant below) (of which the sole controlling mind was Mr Mahommed) and Mr L Smits as consultants to provide “services, functions and powers” and “matters referred to” in the Power of Attorney (see in more detail at PJ[80]–[84]).
The IAD was addressed to Messrs L Smits and Mahommed and Vestecorp. It was expressed as being given in consideration for their undertaking to execute the other two agreements executed on 9 May 2016. It provided at p 6 for an authority and direction to Messrs L Smits and Mahommed and the administrators of Griffith Estates and BLE to pay to Messrs L Smits and Mahommed and Vestecorp 25% “of all moneys, damages interest and costs due, owing or payable to [BAD Nominees] in respect of any Griffith Lots referred to in current Legal Proceeding as directed in writing by you and for your absolute benefit and the balance of 75% thereof shall be paid to [BAD Nominees]” (see in more detail at PJ[78]–[79]).
After the execution of these agreements, Messrs L Smits and Mahommed notified the administrators of the existence of the Power of Attorney and took various related steps thereupon (see in more detail at PJ[119]–[133]).
On 10 August 2016, BAD Nominees entered into a deed with Maitland Finance and Acquisition Pty Ltd (MAFA) pursuant to which it assigned, or purported to assign, to MAFA the debt owed to it by BLE (MAFA Deed) (see in more detail at PJ[147]–[152]).
On 2 August 2017, it was agreed between the administrators of BLE, BAD Nominees and MAFA that nine lots of the Beechworth land would be transferred from BLE to BAD Nominees in consideration for a reduction of $1,000,000 in the amount claimed by BAD Nominees in the administration of BLE (2 August 2017 contract) (see in more detail at PJ[176]–[177]). This followed the making of an offer to that effect by the administrators of BLE to BAD Nominees in June 2017. The plaintiffs pleaded that, upon the making of that offer, Messrs L Smits and Mahommed agreed to what was described below as the Vestecorp conspiracy, pursuant to which they would resurrect and perform the Attorney conspiracy and use the Power of Attorney to procure the transfer of two lots of the Beechworth land to Vestecorp and themselves under the pretence of BAD Nominees’ indebtedness to them (see in more detail at PJ[164]).
On 18 January 2018, Mr Cohen, a solicitor retained on behalf of BAD Nominees by Mr Dean, engaged another solicitor, Mr Bennett, to act on the transfer to BAD Nominees of the nine Beechworth lots as mortgagee in possession. Mr Bennett received a market-based appraisal of the value of the nine lots at an aggregate value of $923,000.
On 21 February 2018, BLE went into liquidation.
On 23 February 2018, Brereton J held, in related proceedings, that the Power of Attorney was irrevocable for three years under s 15 of the Powers of Attorney Act 2003 (NSW): see In the matter of Beechworth Land Estates Pty Ltd [2018] NSWSC 1630 (in relation to which, see further at PJ[199]–[216]). The plaintiffs alleged below that, upon his Honour making those orders, Messrs L Smits, Mahommed, J Smits (the sixth defendant below who was the sole director and shareholder of Garslev Holdings Pty Ltd at all material times), Vestecorp and Garslev (first defendant below) agreed to what was described as the Garslev conspiracy. The elements of the Garslev conspiracy were said to be as follows (see PJ[217], noting that the primary judge ultimately rejected the Garslev conspiracy allegations at PJ[677]):
(1)Messrs L Smits and Mahommed would use the Power of Attorney to transfer the nine lots to Garslev.
(2)Garslev would immediately sell the nine lots.
(3)Garslev would use the proceeds of sale of those lots to fund a property development that Garslev was undertaking in Yeppoon, Qld (Yeppoon development).
(4)Messrs L Smits and Mahommed would continue to manage the Yeppoon development for Garslev.
(5)Messrs L Smits and Mahommed would receive the profit made by Garslev from the Yeppoon development, with the profit to be calculated on the basis that the money raised by Garslev from the sale of the nine lots was to be treated as a capital investment by them in the Yeppoon development.
(6)Messrs L Smits and Mahommed would claim that they were owed over $850,000 in fees by BAD Nominees, and would claim that the nine lots were worth $850,000 rather than the $1,000,000 value attributed to them in the 2 August 2017 contract. These claims would be made in order to justify the assignment of the nine lots to Garslev for $850,000, notwithstanding that Messrs L Smits and Mahommed expected that the nine lots would sell for an aggregate price of greater than $1,000,000.
(7)BAD Nominees would receive no benefit from the transfer of the nine lots because the defendants would “take all that they could and leave BAD Nominees with nothing”.
(8)The result for BAD Nominees would be that it paid for the recovery of the nine lots but would receive no benefit from that recovery, and that benefit would be received solely by Messrs L Smits and Mahommed.
(9)They would not tell Mr Dean about any of the above, because if Mr Dean knew he would prevent the agreement being put into effect.
On 20 March 2018, Mr Mahommed (on behalf of BAD Nominees) entered into a deed with Garslev. The 20 March 2018 deed assigned to Garslev BAD Nominees’ right to the transfer of the nine lots under the 2 August 2017 contract and BAD Nominees’ other rights in relation to BLE, in consideration for $850,000. It also permitted Garslev to “pay” that $850,000 sum by deducting fees allegedly owed, or to become owing in the future, by BAD Nominees to Messrs L Smits and Mahommed and Vestecorp determined by Garslev in its absolute discretion to be the debts of BAD Nominees (see in more detail at PJ[231]–[241]).
Garslev became the registered proprietor of the nine lots of Beechworth land on 5 November 2018. On or about the same date, Mr Mahommed (on behalf of BAD Nominees) entered into two further deeds with Garslev (collectively with the 20 March 2018 deed, the Garslev deeds). By the first deed, Messrs L Smits and Mahommed and Vestecorp assigned to Garslev their rights in respect of those alleged present and future debts in consideration for Garslev’s promise to pay to them the equivalent amounts out of the proceeds of the Yeppoon development (5 November 2018 deed of assignment) (see in more detail at PJ[322]–[335]). By the 5 November 2018 deed of settlement, Garslev set off unspecified amounts of the alleged debts assigned to it against the $850,000 payable to BAD Nominees under the 20 March 2018 deed and BAD Nominees acknowledged that Garslev had thereby satisfied all of its obligations under that deed (see in more detail at PJ[336]–[348]). Effectively, the nine lots were transferred to Garslev without it having made any actual monetary payment to BAD Nominees.
Garslev promptly sold the nine lots for an aggregate sale price of $1,126,000. The majority of the sale proceeds were paid into Court pursuant to orders made on 1 February 2019 in the proceeding below. Garslev subsequently purported to allocate $50,000 of that amount as security for costs in related proceedings.
Using the Power of Attorney, in the latter half of 2018 Mr Mahommed retained Mr L Smits to act as BAD Nominees’ solicitor in litigation concerning its remaining rights against BLE (noting that this was not the only time Mr Mahommed retained Mr L Smits’ legal services over the relevant period). Despite BAD Nominees’ rights against BLE having been assigned to Garslev under the 20 March 2018 deed, the costs associated with that litigation were charged to BAD Nominees.
Given the complexity of these arrangements, it may be helpful to illustrate some of them diagrammatically.
A. THE PROCEEDINGS BELOW
Before summarising the primary judgment and the costs judgment, it is desirable to outline the multiple other proceedings in which these parties have been involved arising from BAD Nominees’ relationship with BLE, and to say something further about the procedural history of the proceeding which gives rise to the present appeal.
(a) Other proceedings summarised
The other proceedings relating to BLE following the involvement of Messrs L Smits and Mahommed from May 2016 are:
(1)In the matter of Beechworth Land Estates Pty Ltd (administrators appointed) [2017] NSWSC 1447: Gleeson JA published reasons for orders made on 23 October 2017, including the joinder of Mr Dean and Messrs L Smits and Mahommed as parties in the proceedings.
(2)In the matter ofBeechworth Land Estates Pty Ltd (in liq) and Griffith Estates Pty Ltd (in liq) (No 5) [2018] NSWSC 959: Robb J published reasons for judgment relating to remuneration of voluntary administrators.
(3)In the matter ofBeechworth Land Estates Pty Ltd [2018] NSWSC 1630: Brereton J published reasons for judgment as to why he granted declaratory relief to the effect that the Power of Attorney was irrevocable.
(4)In the matter ofBeechworth Land Estates Pty Ltd (in liquidation) and Griffith Estates Pty Ltd (in liquidation) [2018] NSWSC 1703: Black J published reasons for judgment as part of disputes between various parties who asserted claims to the assets of BLE.
(5)In the matter ofBeechworth Land Estates Pty Ltd (admins apptd) and Griffith Estates Pty Ltd (admins apptd); Cussen and of Beechworth Land Estates Pty Ltd v Douglas Estate Holdings Pty Ltd [2019] NSWSC 1129: Parker J published reasons for judgment concerning disputes about priority between BLE’s various creditors. The dispute included an issue as to whether a debt owing under the February 2013 security had priority over the administrators’ remuneration and disbursements.
(6)In the present appeal proceedings, there were also several interlocutory disputes which resulted in the primary judge publishing separate reasons for judgment regarding the setting aside of various notices to produce and the provision of security for an undertaking as to damages: see respectively Overdean Developments Pty Ltd v Garslev Holdings Pty Ltd [2020] NSWSC 670 and Overdean Developments Pty Ltd v Garslev Holdings Pty Ltd (No 2) [2020] NSWSC 745.
(7)Finally, shortly before the appeal was heard, Hammerschlag CJ in Eq gave reasons for judgment for winding up Garslev and appointing a liquidator: In the matter ofGarslev Holdings Pty Ltd [2023] NSWSC 609.
(b) Some procedural matters
It is desirable to say something more about the difficulties which confronted the primary judge in the substantive proceedings below. The proceedings were commenced in December 2018 and were listed for an expedited final hearing in May 2019. That final hearing was vacated on two occasions. The trial was conducted over 11 days commencing on 22 June 2020. As the primary judge noted at PJ[33], the conduct of the parties had added to the complexity of the litigation. This included the fact that the defendants had read no less than 14 affidavits by Mr Mahommed rather than providing a comprehensive affidavit addressing all of the issues. The Court Book covered six volumes and the defendants tendered several folders of documents some of which were duplicates of those in the Court Book.
The primary judge also noted at PJ[35] that the defendants provided 340 pages of written submissions prior to the commencement of the hearing. Mr L Smits (who appeared below both for himself and the other defendants) subsequently provided more succinct written closing submissions (comprising 41 pages of single spaced submissions) but then declined the opportunity to supplement them with any oral submissions.
In these circumstances, it is understandable that the primary judge reserved her judgment for some time. The primary judgment exceeds 250 pages and the costs judgment is approximately 20 pages.
The smooth and orderly conduct of the proceedings below was also made more difficult by various other events. Several of the plaintiffs’ claims were expressly abandoned or were taken to be abandoned. What remained were claims for breach of fiduciary duty; liability under the first or second limbs of Barnes v Addy (1874) 9 Ch App 244 (knowing receipt or knowing assistance respectively); and fraud on the power.
(c) The relief sought by the plaintiffs
The plaintiffs ultimately sought a declaration that each of the 9 May 2016 agreements was rescinded in equity as void ab initio for breach of fiduciary duty: PJ[455]. The plaintiffs also sought either a declaration that the Garslev deeds have been rescinded or an order that they be rescinded. This relief was sought on the following three alternative bases (PJ[457]):
(1)If the Power of Attorney was rescinded as sought, then the three deeds entered into by Mr Mahommed on behalf of BAD Nominees purporting to exercise his authority under the Power of Attorney must also be rescinded.
(2)Messrs L Smits and Mahommed acted in breach of their fiduciary duties by acting in circumstances where their interests conflicted with those of BAD Nominees.
(3)The nomination of Garslev as the transferee of the nine lots and the execution of the three deeds was a fraud on the Power of Attorney, irrespective of whether Messrs L Smits and Mahommed owed and breached fiduciary duties to BAD Nominees.
The plaintiffs claimed that rescission was also available as against Garslev because (PJ[458]):
(1)Garslev became chargeable with the nine lots and the other rights assigned to it under the 20 March 2018 deed because it had knowledge that the property was being assigned to it in breach of fiduciary duties owed by Messrs L Smits and Mahommed to BAD Nominees (relying on the first limb of Barnes v Addy);
(2)Garslev procured the three deeds, which it knew were entered into in breach of fiduciary duties owed by Messrs L Smits and Mahommed to BAD Nominees or were a fraud on the power; and/or
(3)Garslev and Mr J Smits were co-conspirators in the Garslev conspiracy, and knowingly assisted in breaches of fiduciary duty that were a dishonest and fraudulent design (relying on the second limb of Barnes v Addy).
The plaintiffs contended that, if orders for rescission were made, they were entitled to relief in the form of a declaration that the sum of $1,126,000 received by Garslev from the sale of the nine lots was held on trust for BAD Nominees (PJ[459(1)]) or to restitution or equitable compensation in that sum (PJ[459(2)]). The plaintiffs contended that, if orders for rescission were not made, they were entitled to relief in the form of equitable compensation for the alleged breaches of fiduciary duty and fraud on the power (PJ[460(1)]) and a declaration that Garslev held the sum of $1,126,000 on constructive trust for BAD Nominees on the basis that Garslev had knowledge of the alleged breaches of fiduciary duty or fraud on the power and received those sale proceeds as a volunteer (PJ[460(2)]). The plaintiffs made submissions on how orders for restitution or equitable compensation should be made if they were found to be entitled to such relief (PJ[461]).
The plaintiffs also claimed compounding interest on the basis that Messrs L Smits and Mahommed were defaulting fiduciaries, costs and interest on costs (PJ[472]).
Defence and cross-claim
The defendants denied liability in respect of the plaintiffs’ claims. They raised claims in defence that the plaintiffs lacked standing; that the doctrines of res judicata, issue estoppel or Anshun estoppel applied; that various other estoppel claims were available; and that the proceedings were an abuse of process.
The defendants cross-claimed for damages in the sum of $769,397.20 (plus interest). This sum was said to comprise the outstanding fees due to Mr L Smits and Vestecorp under either the 9 May 2016 agreements or to Mr L Smits personally in respect of legal services performed by him, under the various retainers entered into by Mr Mahommed on behalf of BAD Nominees, less the $850,000 sum specified as consideration for the assignment of the nine lots in the 20 March 2018 deed (PJ[473]).
The defendants also cross-claimed against Mr Dean for allegedly having procured or induced breaches by BAD Nominees of the Consultancy Agreement and the three deeds entered into with Garslev (see in more detail at PJ[474]–[476]).
The defendants claimed pre-judgment interest and costs (PJ[478]).
Primary judge’s findings and reasons summarised
(a) Preliminary matters – rejecting much of the defendants’ defence
The primary judge rejected the defendants’ claim that the plaintiffs lacked standing to maintain the proceedings (PJ[479]–[485]).
The primary judge also rejected many (but not all) of the defendants’ claims that the doctrines of res judicata, issue estoppel or Anshun estoppel applied (PJ[486]–[535]). This is because, while various issues related to the parties’ agreements had been litigated earlier, those earlier proceedings had not necessarily resolved any ultimate issue of fact or law put in issue in these proceedings.
This conclusion was subject to two exceptions. First, as noted at PJ[504], the plaintiffs were issue estopped from raising the following matters, which had been determined by Brereton J:
(1)whether the Power of Attorney was coupled with an interest of the attorneys in earning 25% of recoveries referred to in cl 1 of the IAD; and
(2)whether the IAD entitled Messrs L Smits and Mahommed and Vestecorp to receive 25% of monies payable to BAD Nominees in respect of the Griffith Estates’ lots only.
Secondly, the plaintiffs were Anshun estopped from maintaining the following claims (see PJ[514]–[522] and [524]):
(1)The 9 May 2016 agreements were void, voidable or should be rescinded by reason of alleged breaches by Messrs L Smits and Mahommed of fiduciary duties owed to BAD Nominees and Mr Dean at the time those documents were negotiated and executed.
(2)The retainer of Mr L Smits in 2017 to act as solicitor for BAD Nominees involved a breach of fiduciary duty by Messrs L Smits and Mahommed and a breach of the terms of the Power of Attorney.
(3)The claim that Messrs L Smits and Mahommed and Vestecorp owed fiduciary obligations to Mr Dean and BAD Nominees during the May 2016 negotiations; the claim that they breached those obligations (or, in the case of Mr Mahommed and Vestecorp that they procured and participated in a breach by Mr L Smits of those obligations) by entering into inter alia the 9 May 2016 agreements; the claim that, by reason of those matters, the agreements were “void, voidable and rescinded”; and the claim that by reason of those matters any document entered into by Messrs L Smits and Mahommed on behalf of BAD Nominees using the Power of Attorney should also be rescinded.
(4)The claim that the retainer of Mr L Smits in 2017 to act as solicitor for BAD Nominees involved a breach of fiduciary duty by Messrs L Smits and Mahommed and a breach of the terms of the Power of Attorney, and that the 2017 retainer was therefore void, voidable or rescinded or cannot be enforced by Mr L Smits on the basis that he cannot take advantage of his own wrong.
The primary judge dismissed various other estoppel claims by the defendants at PJ[536]–[558]. Her Honour also rejected the defendants’ claims of abuse of process, including their claim that the plaintiffs had invoked the Court’s procedures for an illegitimate purpose, describing the claim as “nothing more than a complaint about what they say will be the effect on them if the plaintiffs’ claims are upheld”: PJ[565].
(b) Breaches of fiduciary duty by executing the 9 May 2016 agreements
The plaintiffs pleaded below that the execution of the 9 May 2016 agreements per se involved breaches of fiduciary duties by Messrs L Smits and Mahommed and, accordingly, each of those agreements was “void, voidable and rescinded”. In light of her Honour’s findings as to Anshun estoppel (see at [45] above), the primary judge held that this claim for relief could not succeed (PJ[570]).
(c) Creation of fiduciary duty after execution of the 9 May 2016 agreements
The plaintiffs alleged that after the execution of the 9 May 2016 agreements Messrs L Smits and Mahommed were the fiduciaries of BAD Nominees. In particular, they pointed to the following matters as underpinning the fiduciary relationship:
(a)the characterisation of the 9 May 2016 agreements as a “pledge” by Messrs L Smits and Mahommed to act in the best interests of BAD Nominees;
(b)the fiduciary character of the obligations owed to BAD Nominees were confirmed by cll 6(c)-(e) of the Power of Attorney;
(c)the overriding purpose of the 9 May 2016 agreements was to allow Messrs L Smits and Mahommed to act as legal representatives and agents of BAD Nominees;
(d)in implementing the 9 May 2016 agreements, Messrs L Smits and Mahommed would make decisions that would bind and affect BAD Nominees; and
(e)the relationship was one in which BAD Nominees, to the knowledge of Messrs L Smits and Mahommed, reposed trust and confidence in Messrs L Smits and Mahommed and the company was therefore vulnerable to any misuse of the powers and authority conferred upon Messrs L Smits and Mahommed (PJ[115]-[116]).
Messrs L Smits and Mahommed denied the existence of any fiduciary relationship. In particular, they made the following claims (PJ[117]-[118]):
(a)they made no pledge to BAD Nominees which overrode the express terms of the 9 May 2016 agreements;
(b)cll 6(c)-(e) of the Power of Attorney did not support the characterisation of any duty owed to BAD Nominees as fiduciary, nor did those clauses override the express terms of the Power of Attorney;
(c)properly construed, the 9 May 2016 agreements did not have the overriding purpose of allowing Messrs L Smits and Mahommed to act as authorised representatives and agents of BAD Nominees;
(d)it is not unusual for an attorney to make a decision which binds or affects, or even adversely affects, the principal;
(e)the relationship did not involve BAD Nominees reposing trust and confidence in them as attorneys, rather the relationship was one in which all parties had an implied contractual duty of co-operation in the performance of the 9 May 2016 agreements and under which the interests of Messrs L Smits and Mahommed (as well as Vestecorp) were capable of being protected at law and in equity by virtue of the Power of Attorney;
(f)the claim of vulnerability on the part of Mr Dean and BAD Nominees was misplaced, because the powers and authority of Messrs L Smits and Mahommed arose not from any trust and confidence reposed in them by BAD Nominees, but rather by reason of the express terms of cl 2 of the Power of Attorney;
(g)any duty to avoid a conflict in interest was “proscriptive and of limited or qualified application” because of the terms of cl 2 of the Power of Attorney; and
(h)reliance was also placed on ss 126, 128 and 129 of the Corporations Act 2001 (Cth) (the primary judge’s rejection of these particular claims at PJ[612] has not been appealed).
After noting that the Power of Attorney was a “prescribed power of attorney” within the meaning of s 8 of the Powers of Attorney Act, her Honour acknowledged that, in determining the powers and obligations imposed on Messrs L Smits and Mahommed by that instrument, together with a question of whether the Power of Attorney included the implied terms as claimed by the plaintiffs, regard had to be had to “the circumstances in which it was entered into” (including the execution of the Consultancy Agreement and the IAD at the same time) and the provisions of Pt 2 of the Powers of Attorney Act governing prescribed powers of attorney (PJ[571]).
After noting the terms of cl 2 of the Power of Attorney, the primary judge found that the Power of Attorney was signed in circumstances where BAD Nominees had made loans to BLE and Griffith Estates in its capacity as trustee of the Dean Super Fund. Those loans remained unpaid after the companies went into administration approximately two years earlier and no valid security was held in relation to the loan to Griffith Estates. Her Honour further noted that the administration proceedings were on foot and BAD Nominees lacked legal representation. Her Honour found that the object of the 9 May 2016 agreements, including the Power of Attorney, was recorded in cl 3 of the IAD, which contained the following acknowledgment by BAD Nominees to Messrs L Smits and Mahommed and Vestecorp:
Without your input and assistance, BAD would be unable to marshal or engage the requisite expertise and resources to deal with the enforcement of its alleged loan securities and associated rights or to make or resist any legal challenges against or from the Administrators of or any Liquidators or Receivers or Trustees (if appointed) to BLE, GEP, and associated wrongdoers and that, BAD carries the risk of payment of all related legal costs, for which BAD undertakes that you will be fully indemnified by BAD.
The primary judge reasoned that reading cl 2 of the Power of Attorney as a whole and in the context of the “factual matrix” described by her Honour, cl 2 and p 5 of the Power of Attorney delineated the scope of the things which the attorneys were authorised to do on behalf of BAD Nominees (PJ[577]).
Her Honour then noted that the Power of Attorney did not contain any provision which authorised the attorneys to confer a benefit on themselves or a third party (PJ[581]).
The primary judge rejected the defendants’ submission that cl 6(c) (i.e., the attorney must not benefit from being an attorney, unless expressly authorised by the principal) was subject to and qualified by cl 2. Her Honour held that cl 2 said nothing which qualified the requirements of cl 6(c). The primary judge also made clear at PJ[585] that this did not mean that Messrs L Smits and Mahommed were not entitled to work towards earning the 25% of recoveries referred to in cl 1 of the IAD.
The primary judge explained at PJ[589] why she rejected the defendants’ submission that Messrs L Smits and Mahommed did not owe fiduciary duties to BAD Nominees (and/or Mr Dean) because the Power of Attorney was irrevocable both under s 15 of the Powers of Attorney Act and at common law. The defendants claimed that, at common law, an attorney appointed under an irrevocable power of attorney did not owe any fiduciary duties to the principal and could act contrary to the principal’s interests subject to the express terms of the instrument appointing the attorney. Those submissions were rejected by the primary judge for reasons which may be summarised as follows:
(a)Contrary to the defendants’ claim, Brereton J (in the decision cited at [29(3)] above) did not determine that the Power of Attorney was irrevocable at common law, rather the finding of irrevocability was based solely on s 15 of the Powers of Attorney Act.
(b)As Brereton J pointed out, s 16 of the Powers of Attorney Act provided for the consequences of irrevocability. It did not expressly provide that a power of attorney which is irrevocable by reason of s 15 precluded fiduciary duties being owed to the principal.
The principal’s inability to revoke the Power of Attorney did not preclude by necessary implication any fiduciary duties that would otherwise be owed. Her Honour explained that this was “because the rationale for common law’s treatment of a power coupled with a grant of an interest as irrevocable and not subject to fiduciary duties owed by the attorney lies in the nature of the interest granted to the attorney and the purpose of the power”, citing this Court’s decision in Despot v Registrar-General of NSW [2013] NSWCA 313 at [49]-[52].
The primary judge found that the purpose of the Power of Attorney was to protect and advance the rights and interests of BAD Nominees (as trustee of the Dean Super Fund) as a secured creditor of BLE and a creditor of Griffith Estates (PJ[594]). Her Honour also found that the attorneys’ interest in earning 25% of any recoveries for themselves and Vestecorp as provided in cl 1 of the IAD was an interest which was “wholly aligned” with the interest of BAD Nominees in achieving such recoveries.
Accordingly, at PJ[596] the primary judge concluded that the Power of Attorney was not irrevocable at common law and that any fiduciary duties of the attorneys were not excluded on that basis. Her Honour concluded at PJ[598] that the question whether equity imposed fiduciary duties on Messrs L Smits and Mahommed as attorneys, and the extent of any such duties, depended on the terms of the Power of Attorney and the purpose for which it was granted (citing Despot at [48]).
Importantly, the primary judge made clear at PJ[600] that she accepted the defendants’ submission that any fiduciary duty had to accommodate itself to the relationship created by the 9 May 2016 agreements and any such duty could not alter the intended operation of the contract, citing Taheri v Vitek (2014) 87 NSWLR 403; [2014] NSWCA 209 at [115] per Leeming JA, with whom Bathurst CJ agreed.
The primary judge then turned her attention to the issue of whether the Power of Attorney here was qualified or conditioned by any implied or express terms. Her Honour made the following findings:
(1)It was an implied term that Messrs L Smits and Mahommed would not act in circumstances of a conflict between their interests and those of BAD Nominees.
(2)It was an express term that the attorneys must act in BAD Nominees’ best interests.
(3)Subject to the qualification that, properly construed, the reference to 25% of recoveries in cl 1 of the IAD is a reference to monies actually recovered by the efforts of the attorneys and consultants, the 9 May 2016 agreements did not include an implied term that Mr L Smits and Vestecorp would only be paid if and when they were the cause of BAD Nominees recovering money from BLE.
(4)The 9 May 2016 agreements did not include an implied term that the Power of Attorney was only to be used for the purpose of providing the services pursuant to the Consultancy Services Agreement.
(5)The 9 May 2016 agreements did not include an implied term that all fees charged, including under the Consultancy Agreement, would be fair, reasonable and proportionate and could be substantiated and ascertained to be fair, reasonable and proportionate from invoices.
(6)There were no implied terms that would incorporate by reference the provisions of s 172 of the Legal Profession Uniform Law2014 (NSW) to fees charged by each of Mr L Smits and Vestecorp to the extent that they engaged in legal practice.
Ultimately, the primary judge accepted the plaintiffs’ submission that the execution of the Power of Attorney created a fiduciary relationship between BAD Nominees as principal and Messrs L Smits and Mahommed as attorneys (PJ[604]). This fiduciary relationship was of the kind as between an agent and principal, which attracted the proscriptive duties of not placing oneself in a position of conflict and not obtaining an unauthorised benefit from the fiduciary relationship (PJ[605]–[607]).
It is well to set out PJ[605] (emphasis added and footnote omitted):
The relationship between agent and principal is a recognised category of fiduciary relationship. In any event, this particular relationship had all the hallmarks of a fiduciary relationship for the reasons I have summarised immediately above even if it had not been expressly described as an agency and even if there was no express obligation to act in the best interests of BAD Nominees: John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19 at [86]-[92] (French CJ, Gummow, Hayne, Heydon and Kiefel JJ). As the plaintiffs submitted, that is particularly so in circumstances where the judgments and discretions to be exercised by the attorneys required legal expertise that Mr Dean lacked and that Mr Smits offered by putting himself forward as either a practising or retired lawyer who was capable of assisting BAD Nominees in its efforts to recover monies in the administration of BLE and GEP, and by entering into the 9 May 2016 documents authorising him to represent BAD Nominees in the existing proceedings.
The primary judge rejected the defendants’ claim that these proscriptive fiduciary duties were inconsistent with the express terms of the 9 May 2016 agreements. Her Honour added at PJ[607] that the fiduciary duties were “entirely consistent” with cll 2 and 6 of the Power of Attorney.
After explaining at some length at PJ[608] her reasons for rejecting the defendants’ submissions as to why the proscriptive fiduciary duties were not owed, her Honour acknowledged, however, that those duties “must accommodate themselves to the particulars of the underlying relationship that gave rise to the duty so that the scope of the duties conform to the scope and limits of that relationship” (citing Howard v Commissioner of Taxation (2014) 253 CLR 93; [2014] HCA 21 at [34]-[35] per French CJ and Keane J and at [60] per Hayne and Crennan JJ).
(d) Breach of fiduciary duty by Messrs L Smits and Mahommed in entering into the 20 March 2018 deed
The primary judge found at PJ[662]:
The absence of any evidence of any serious attempt to identify a buyer for the nine lots other than Garslev, the absence of any detailed analysis undertaken to ascertain a fair price for the nine lots and the fact that the $850,000 sum was not even reached through negotiation with Garslev but was unilaterally “set” by Mr Mahommed and reflected a $73,000 discount on the market appraisal for the nine lots alone [of $923,000] are strong indications that the $850,000 sum was less than the fair value for the rights in respect [of] the nine lots and the other rights assigned to Garslev under the 20 March 2018 deed.
Her Honour stated that, even if the $850,000 sum did represent fair value, it was plainly contrary to the interests of BAD Nominees to enter into the 20 March 2018 deed permitting “payment” of the $850,000 in the manner it did, because its effect was to empower Garslev to determine whether and in what amounts fees allegedly payable to Messrs L Smits and Mahommed and Vestecorp would be paid out of the $850,000 without investigating their entitlement to the fees claimed and without consultation with BAD Nominees: PJ[663].
Considering all of the circumstances, the primary judge determined that the 20 March 2018 deed was contrary to the interests of BAD Nominees and conferred unauthorised benefits on Messrs L Smits, Vestecorp and Garslev (PJ[670]–[672]). Her Honour further found that there were a number of apparent conflicts of interest at the time the 20 March 2018 deed was entered into (PJ[674]).
The primary judge found that, by having drafted and/or executed the 20 March 2018 deed, Messrs L Smits and Mahommed breached their fiduciary duties to BAD Nominees because it conferred unauthorised benefits on Mr L Smits and Vestecorp and Garslev and because they acted in circumstances of conflict (PJ[673], [675]).
The primary judge also found that the established breaches of fiduciary duty involved and constituted a dishonest and fraudulent design (PJ[703] and see further at [80]ff below).
However, the primary judge at PJ[676] rejected the plaintiffs’ contention that the 20 March 2018 deed was entered into in breach of fiduciary duties owed by Messrs L Smits and Mahommed to BAD Nominees on the grounds that they were acting as agents of Garslev in entering into the deed and the deed was entered into in furtherance of the alleged Garslev conspiracy. This was because there was insufficient evidence to establish the alleged Garslev conspiracy and, consequently, the alleged agency relationship between Messrs L Smits and Mahommed and Garslev (see in more detail at PJ[677]–[685]). As will emerge below at [164]ff, the appellants submit under appeal ground 3 that some of the primary judge’s findings of breach of fiduciary duties were outside the pleadings.
(e) Breach of fiduciary duty by Messrs L Smits and Mahommed in entering into the Garslev deeds
The primary judge found that “[t]he obvious effect of the terms of the [three] Garslev deeds was to ensure that no part of the $850,000 payable to BAD Nominees under the 20 March 2018 deed would pass to BAD Nominees” (PJ[692]). Her Honour rejected Mr L Smits’ evidence that BAD Nominees was contractually obliged to pay his fees as solicitor and that the 5 November 2018 deed of assignment was in BAD Nominees’ interest because it provided a means for it to comply with those obligations. This was primarily because the deed purported inter alia to approve the payment of invoices which either had not been reviewed by Mr Mahommed prior to executing the deed or were yet to be issued by Mr L Smits in amounts unknown, and to waive BAD Nominees’ statutory right to have the legal costs assessed or taxed (PJ[694]).
The primary judge concluded that by drafting and/or executing the three Garslev deeds, Messrs L Smits and Mahommed breached their fiduciary duties owed to BAD Nominees by conferring unauthorised benefits on Mr L Smits, Vestecorp and Garslev and by acting in circumstances where there was a conflict between the interests of BAD Nominees and their own interests (PJ[700], [702]). The primary judge set out at PJ[701] a list of conflicts of interest which existed when the Garslev deeds were entered into.
The primary judge rejected, however, the plaintiffs’ allegations that the Garslev deeds were entered into in furtherance of the alleged Garslev conspiracy (PJ[704]).
(f) Fraud on the power
Having regard to her Honour’s earlier finding that the purpose of the power conferred on Messrs L Smits and Mahommed by the Power of Attorney was to protect and enforce the rights and interests of BAD Nominees (as trustee of the Dean Super Fund) as a creditor of both BLE and Griffith Estates, the primary judge found that the execution of the 20 March 2018 deed was a fraud on the power because “Messrs Smits and Mahommed did exercise the power for that extraneous purpose” and the “execution of that deed … was not an exercise of the power in good faith and for a proper purpose” (PJ[708]).
The primary judge found at PJ[709] that the Garslev deeds were a fraud on the power:
… in that they conferred on Messrs Smits, Mahommed and Vestecorp blanket approval of all of their invoices issued, or to be issued in the future, to BAD Nominees, provided for payment of those invoices without assessment or review by deduction from the $850,000 payable to BAD Nominees under the 20 March 2018 deed, assigned those alleged present and future debts to Garslev and offset them against the $850,000, thereby ensuring that no part of the $850,000 payable to BAD Nominees under the 20 March 2018 deed would pass to BAD Nominees.
However, the primary judge expressly rejected the plaintiffs’ contention that the execution of these deeds was a fraud on the power because they were entered into in furtherance of the alleged Garslev conspiracy, for the same reasons as given earlier (see at [70] above) (PJ[710]).
(g) Various claims against Garslev
The primary judgment addressed three claims made against Garslev as identified at [35] above (in short, liability under both the first and second limbs of Barnes v Addy, and liability for having induced or procured breaches of fiduciary duty by Messrs L Smits and Mahommed).
The primary judge noted the plaintiffs’ submission that considering the case on those three alternative bases may add unnecessary complexity because, in the particular circumstances, it was sufficient for the plaintiffs’ claims for relief if Garslev was found to have induced or procured the breaches of fiduciary duty (at PJ[712]). Accordingly, her Honour addressed this claim first.
Inducement or procurement of breaches of fiduciary duty
After considering the authorities relating to liability under this cause of action, the primary judge concluded at PJ[716]:
The matters relied on by the plaintiffs as establishing that Garslev induced or procured the breaches of fiduciary duty by Messrs Mahommed and Smits are the alleged Garslev conspiracy and the contention that Messrs Smits and Mahommed acted as Garslev’s agents in procuring the 20 March 2018 deed and the Garslev deeds. For the reasons explained at [677]-[685] above, the plaintiffs have failed to establish the alleged Garslev conspiracy and the alleged agency. The plaintiffs’ allegation that Garslev induced or procured the breaches of fiduciary duties is therefore rejected.
Second limb of Barnes v Addy
The primary judge turned next to the claim under the second limb of Barnes v Addy. After considering some authorities relating to establishing liability under this cause of action, the primary judge rejected the plaintiffs’ allegations that the 20 March 2018 deed and the Garslev deeds were a dishonest and fraudulent design because the Power of Attorney was being used in furtherance of the Garslev conspiracy (this finding resting on the fact that the plaintiffs had failed to prove the Garslev conspiracy, as referred to above) (PJ[721]).
Nevertheless, the primary judge accepted that, for the following reasons, the breaches of fiduciary duty by Messrs L Smits and Mahommed in relation to the Garslev deeds were a dishonest and fraudulent design for other reasons advanced by the plaintiffs (PJ[722]-[735]).
First, as to the 20 March 2018 deed, the Power of Attorney was used to assign to Garslev the right to receive a transfer of the nine Beechworth lots and other rights in consideration for a mere promise by Garslev to pay the $850,000 at some unspecified time in the future by paying to third parties unspecified amounts they claimed were owing to them or would become owing to them in the future, with Garslev having no obligation to inquire whether those amounts were in fact owing by BAD Nominees (PJ[723]). These features “alone transgressed ordinary standards of honest behaviour by enabling Garslev to take the benefit of the nine lots as soon as the transfers could be facilitated whilst leaving BAD Nominees at the mercy of its alleged creditors and Garslev as to whether or to what extent it received any benefit from the assignment of its rights to Garslev” (PJ[724]). Indeed, the primary judge found that all of these features of the transaction were apparent from the terms of the 20 March 2018 deed, and it was plain that the attorneys stood to benefit (PJ[725]).
The primary judge found that Mr J Smits had read the 20 March 2018 deed before resolving that Garslev would execute the deed. Thus, Garslev, through its sole director, had actual knowledge of the features identified above and that BAD Nominees was being signed up to the transaction by its attorney, Mr Mahommed, who stood to benefit from the deed. Her Honour continued at PJ[727] (emphasis added; citations removed):
In my opinion, a reasonable and honest person in the position of Mr J Smits would have made inquiries on behalf of Garslev about whether the Power of Attorney permitted Mr Mahommed to cause BAD Nominees to enter into a transaction with those features. It would have been a simple matter for such inquiries to be made – the Power of Attorney had been registered by this time and the registration details were cited in the execution clause of the 20 March 2018 deed. The terms of the Power of Attorney would have alerted Garslev to the provisions of clause 6 and to the lack of any clause expressly authorising the attorneys to deal with property of BAD Nominees in order to recover fees that the attorneys claimed were owing to themselves or to pay any other alleged creditors of BAD Nominees, or to confer benefits on third parties (such as Garslev). To the extent that this did not make it clear to Garslev that the Power of Attorney could not be used to cause BAD Nominees to enter into the 20 March 2018 deed, an honest and reasonable person in that position would have sought independent legal advice. There is no reason why such advice would not have been readily available to Garslev had it been sought. As Mr Smits said, Mr J Smits was: “the CEO of a large enterprise, very large, which he's been the CEO of for more than 50 years, and he has his own retinue of advisers. ... He, he has a number of lawyers in his family who are very experienced people and he consults freely with them”. Having regard to the ease with which Garslev could have taken any of these steps and the benefit that it stood to gain by entering into the 20 March 2018 deed, I attribute Garslev’s failure to make the inquiries to it wilfully shutting its eyes to the obvious or wilfully and recklessly failing to make such inquiries as an honest an reasonable person in its position would make before entering into the 20 March 2018 deed.
For these reasons, the primary judge concluded that the breaches of fiduciary duty by Messrs L Smits and Mahommed in relation to the 20 March 2018 deed were a dishonest and fraudulent design and that Garslev knowingly assisted Messrs L Smits and Mahommed in those breaches (PJ[730]–[731]).
As to the other deeds, the primary judge repeated her finding that the effect of their terms was to ensure that no part of the $850,000 payable to BAD Nominees under the 20 March 2018 would pass to BAD Nominees. Her Honour found that Garslev knew the effect of the Garslev deeds at the time that it entered into them. Her Honour concluded that the breaches of fiduciary duty by Messrs L Smits and Mahommed in relation to the Garslev deeds were a dishonest and fraudulent design and Garslev “either had actual knowledge of their effect or wilfully shut its eyes to their effect” (PJ[734]–[735]).
First limb of Barnes v Addy
Having found Garslev liable under the second limb of Barnes v Addy, the primary judge considered that it was unnecessary to address the plaintiffs’ claim under the first limb. Nevertheless, her Honour added at PJ[737]:
Had it been necessary to do so, and subject to one qualification, I would have upheld the plaintiffs’ claim under the first limb of Barnes v Addy on the basis that, for the same reasons that I have explained at [726]-[734] above, Garslev received the assignment of the rights assigned to it under the 20 March 2018 deed, received the title to the nine lots as contemplated by that deed, and received the benefit of the Garslev deeds with the requisite knowledge that Mr Mahommed (in the case of the 20 March 2018 deed and the transfers) and Messrs Smits and Mahommed (in the case of the Garslev deeds) were engaging in conduct that amounted to a breach of fiduciary duties owed to BAD Nominees (whether or not Garslev was aware of that legal characterisation of the conduct): Farah v Say-Dee at [111]-[112]; Grimaldi at [268]-[270] (referred to with approval in Hasler at [191]).
The stated qualification was that it would have been necessary to determine whether the first limb of Barnes v Addy applied in circumstances where the property was transferred to Garslev by the attorneys who were fiduciaries, but not trustees. Her Honour noted “some continuing uncertainty about that question” as divergent views have been expressed by intermediate appellate courts (compare Pittmore Pty Ltd v Chan (2020) 104 NSWLR 62; [2020] NSWCA 344 at [155]–[156] with Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; [2012] FCAFC 6 at [254]). The primary judge considered that it was not appropriate to express a view given it was not necessary to do so in the circumstances (PJ[740]).
(h) Claims for equitable compensation or restitution against Mr J Smits
The primary judge noted that the plaintiffs put their claims for equitable compensation or restitution against Mr J Smits on two alternative bases (PJ[741]), namely:
(1)He was liable for procuring or inducing the breaches of fiduciary duty committed by Messrs L Smits and Mahommed in entering into the Garslev deeds because he was a party to the alleged Garslev conspiracy.
(2)He knowingly assisted in those breaches of fiduciary duty, which were a dishonest and fraudulent design, because he failed to make inquiries that an honest and reasonable person in his position would have made.
The claim on the first basis was rejected because the plaintiffs had failed to prove the alleged Garslev conspiracy (PJ[742]).
The claim on the second basis was rejected because Mr J Smits was not a party to the relevant deeds and his involvement extended only to causing Garslev to enter into those deeds with the knowledge he had in his capacity as the sole director of Garslev. The primary judge considered that the plaintiffs had failed to articulate any reason why Mr J Smits personally should be held to have knowingly assisted in the breaches of fiduciary duty committed by Messrs L Smits and Mahommed, or why Mr J Smits should be personally liable for those breaches in which Garslev knowingly assisted (PJ[743]). These findings are challenged in the cross-appeal.
(i) Relief
The relief granted by the primary judge may be summarised as follows.
First, the following deeds were rescinded ab initio:
(1)Deed of Assignment dated 20 March 2018 between BAD Nominees (as assignor) and Garslev (as assignee).
(2)Deed of Assignment dated 5 November 2018 between BAD Nominees, Garslev, Peter Mahommed and Leonardus Smits.
(3)Deed of Settlement dated 5 November 2018 between BAD Nominees, Garslev, Peter Mahommed, Vestecorp and Leonardus Smits.
Secondly, Garslev was ordered to account to Overdean (as trustee of the Dean Super Fund) for the net proceeds of sale of the nine lots of Beechworth land that were the subject of the declaration made on 23 October 2017 in proceeding 2017/279755.
Thirdly, a declaration was made that monies paid into Court during the period since February 2019 representing the net proceeds of sale of the nine lots of Beechworth land referred to immediately above less the sum of $50,000 were impressed with a constructive trust for the benefit of Overdean (as trustee of the Dean Super Fund).
Fourthly, those monies held in Court were impressed with a constructive trust referred to immediately above and were ordered to be paid to Overdean (as trustee of the Dean Super Fund).
Fifthly, Messrs L Smits and Mahommed were ordered to pay equitable compensation to Overdean (as trustee of the Dean Super Fund) in the amount of $1,058,579 plus interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW) for the period from 30 April 2019 until the date of the orders.
Sixthly, the third further amended statement of claim was otherwise dismissed.
Seventhly, the defendants’ further amended cross-claim was dismissed.
Finally, the parties were given an opportunity to make submissions on costs.
The costs judgment
It is unnecessary to summarise the primary judge’s reasons in the costs judgment as they do not feature heavily in the appeal. After describing which of the plaintiffs’ and defendants’ claims succeeded or failed (and making some critical comments about the conduct of both the plaintiffs’ and defendants’ cases), and addressing an accidental omission in Order 6 identified at PJ[856], the primary judge made the following orders at CJ[82]:
(1) Order that the plaintiffs are to pay the defendants’ costs thrown away by reason of the adjournment of the final hearing in May 2019, being the costs that were reserved by order 3 made on 24 May 2019.
(2) Order that the first, third, fourth and fifth defendants and the first, third, fourth and fifth cross-claimants are to pay the plaintiffs’ and cross-defendants’ costs of these proceedings on the ordinary basis in an amount to be agreed or assessed (including any reserved costs but excluding any costs that are the subject of a previous costs order that provides otherwise, including order (1) above).
(3) Order that any costs within the meaning of s 3 of the Civil Procedure Act 2005 (NSW) incurred by the sixth defendant in defending the plaintiffs’ claims against him (but excluding any costs incurred by him as the sixth cross-claimant in relation to the cross-claim) are to be paid by the plaintiffs on the ordinary basis in such amount as may be agreed or assessed.
(4) Pursuant to r 36.17 of the Uniform Civil Procedure Rules 2005 (NSW), order 6 made on 17 November 2021 is corrected to read as follows:
“Order that the monies held in court that are impressed with the trust in order 5 above, together with any interest accrued thereon whilst those monies have been held in court, be paid to Overdean (as trustee of the Dean Super Fund).”
(5) Dismiss the defendants/cross-claimants’ informal application made in their submissions filed on 1 December 2021 and 8 December 2021 for a stay of execution of these orders and the judgment and orders made on 17 November 2021.
B. THE APPEAL
Vacation of original appeal hearing dates and related matters
The appeal was initially set down for hearing on 23 and 24 November 2022. On the morning of 23 November 2022, the Court (comprised of the same bench) heard an application to vacate those hearing dates on account of Mr L Smits having COVID-19 and being unable to instruct the appellants’ senior counsel (Mr GS Clarke KC) during the hearing. The Court made orders vacating those hearing dates.
At the same time, the Court made orders striking out the appellants’ original 44-page notice of appeal and requiring the appellants to file and serve by 5pm on 28 November 2022 an amended notice of appeal “in proper form containing grounds limited to those in paragraphs (2)(a) to (g) of their supplementary submissions filed on 20 October 2022”. The Court also granted leave to the respondents to file and serve a proposed notice of contention and notice of cross-appeal annexed to a notice of motion filed on their behalf in these proceedings on 17 November 2022.
The Court ordered that the parties’ submissions on the substantive appeal that had been filed to date were to stand as their submissions in support of, or in response to, the amended notice of appeal. The parties were otherwise directed to file and serve brief submissions in support of, or in response to, the respondents/cross-appellants’ notice of contention and notice of cross-appeal. The Court reserved judgment on the costs associated with the vacation of the original hearing dates.
The matter was then relisted for hearing on 20 March 2023. On 16 March 2023, the appellants requested that the hearing be vacated again on account of the ill health of their solicitor, Mr L Smits. The respondents consented. The Court ordered that the hearing listed for 20 March 2023 be vacated, that the costs thrown away by the making of the order to vacate be reserved and that the matter be stood over for a new hearing date to be fixed.
The appeal was listed for hearing on 9 June 2023.
The day before the hearing of the appeal, Hammerschlag CJ in Eq delivered judgment in In the matter of Garslev Holdings Pty Ltd [2023] NSWSC 609. His Honour ordered that Garslev be wound up but that order was then stayed until 12 June 2023 to avoid any adverse consequences of the winding up on the conduct of the appeal. At the commencement of the appeal, the Court gave leave for the respondents to press their cross-appeal against Garslev.
Amended notice of appeal
On 1 December 2022, the appellants filed an amended notice of appeal containing the following grounds of appeal:
1 The LTJ [Learned Trial Judge] erred in holding or finding at J [606], [607] that Messrs Smits and Mahommed, as attorneys, under the 9 May 2016 contracts were subject to proscriptive fiduciary duties or obligations to the principal, BAD Nominees, and ought to have held that they were only subject to contractual obligations and rights under those contracts.
2 The LTJ erred in holding or finding at J [601] (1), (3), [602] that the contracts were subject to implied terms, and ought to have held that the contracts were not subject to the implied terms as found.
3 Alternatively to Grounds 1 and 2, the LTJ erred in holding or finding at J [675], [619]–[674] that the attorneys breached the fiduciary duties owed to the principal, and ought to have held that the attorneys did not breach the fiduciary duties.
4 Alternatively to Ground 3, the LTJ erred in holding or finding at J [703], [727]–[745] that the fiduciary duties breaches bore the quality of a dishonest or fraudulent design of which Garslev had the requisite knowledge, and ought to have held that they did not bear that quality and that Garslev did not have the requisite knowledge.
5 The LTJ erred in holding or finding at J [708], [709] that Messrs Smits and Mahommed committed a fraud on their powers under the 9 May 2016 contracts, and ought to have held that they did not do so.
6 The LTJ erred in ordering the relief against the Appellants at J [856] (1)–(7), and as to costs in the Costs Judgment, and ought not to have ordered any such relief.
7 Dependent upon the decision of the Court of Appeal as to Grounds 1 to 6:
(a) the LTJ erred in holding or finding that Messrs Smits and Mahommed ought pay equitable compensation at J [856] (7);
(b) the LTJ erred in holding or finding at J [856] (4), (5), (6) that the net proceeds of the sale of the Lots was $1,058,579, and ought to have held that the net proceeds of sale instead were $846,732.78.
(c) the Court of Appeal should make such orders and directions concerning the net proceeds of the sale of the Lots, in the events that have occurred concerning those proceeds, as the Court shall deem fit.
Ground 4b (whether Garslev and Mr J Smits had the requisite knowledge of the “dishonest or fraudulent” design)
The appellants raised yet another pleading objection in relation to the primary judge’s finding that Mr J Smits had sufficient knowledge of the dishonest and fraudulent design, which knowledge was attributed to Garslev.
Having regard to [181] and [182(d)] of the third further amended statement of claim, the appellants submitted that the plaintiffs raised four allegations concerning Mr J Smits and Garslev, namely that they:
(a)would have known of a dishonest and fraudulent breach of fiduciary duty;
(b)would have been alive to the possibility of a breach constituting a dishonest and fraudulent design;
(c)would have known of some other form of dishonesty perpetrated by Messrs L Smits and Mahommed; and
(d)would have been alive to the possibility of some other form of dishonesty perpetrated by Messrs L Smits and Mahommed.
The appellants contended that these allegations lacked clarity and were not adequately expressed so as squarely to indicate to Mr J Smits how the plaintiffs put their case against him and Garslev. They emphasised that Mr J Smits was entitled to rely upon a fair reading of the pleadings in deciding whether or not he should give evidence. The appellants also criticised the plaintiffs for having pleaded alternative states of mind. These matters were developed in the appellants’ written submissions filed on 20 October 2022 at [63] to [71]. They contended that neither Mr J Smits nor Garslev knew with the requisite particularity and clarity what the plaintiffs’ case was and that it was significant that the plaintiffs did not call Mr J Smits as a witness.
As to Mr J Smits’ understanding of the 20 March 2018 deed, the appellants submitted that it was not an easy read, even for a lawyer. Merely because there was evidence that Mr J Smits had read the deed did not mean that he understood it, contrary to the primary judge’s finding at PJ[726]. The appellants emphasised that there was no evidence as to what legal advice Mr J Smits received in respect of the deed. For these reasons, the appellants submitted that there was no basis for the primary judge to find that Mr J Smits had actual knowledge of the features of the transaction.
The appellants also challenged the primary judge’s finding at PJ[727] that Mr J Smits did not act reasonably and honestly because he failed to make inquiries about the Power of Attorney. The appellants submitted that these findings cannot stand because:
(a)it is “mere speculation” as to whether or not Garslev did or did not seek, or take, or heed any, and if so, what, legal advice; and
(b)the primary judge’s finding, based upon Mr L Smits’ evidence, that Mr J Smits had received legal advice was made in the absence of knowing what the terms of that advice were.
For the following reasons, this pleading objection is also rejected. First, the appellants have incorrectly summarised the plaintiffs’ allegation relating to this subject. They omitted to mention [171] to [180] of the third further amended statement of claim which also contains additional relevant pleadings on this subject which were not limited to the unsuccessful claims of a Garslev conspiracy. For example, it was pleaded that Mr L Smits knew of the terms of the 20 March 2018 deed and that his co-attorney Mr Mahommed was executing the deed pursuant to the Power of Attorney; that he knew from the terms of the deed that the Power of Attorney was not being used in the interests of BAD Nominees and instead in the interests of Messrs L Smits and Mahommed; and he failed to make any inquiries as to Mr Dean’s knowledge and approval of the deed.
These pleadings were sufficient to put Garslev and Mr J Smits on notice of the claim that they had knowledge of the dishonest and fraudulent design.
Secondly, I see no substance in the appellants’ complaint that Mr J Smits and Garslev had inadequate notice of the claims against them because alternative states of mind were pleaded (referring to the terms of [181] and [182(d)] of the pleading). The plaintiffs were entitled to plead the case in the alternative. The appellants’ complaint is not strengthened by the fact that Mr J Smits elected not to give evidence. That was his forensic choice which he presumably took on advice. There is no basis to conclude that this decision was made because he did not have a case to answer having regard to the pleadings outlined above.
The written opening confirmed that the plaintiffs’ case was that Garslev and Mr J Smits had knowledge of the dishonest and fraudulent design. The plaintiffs’ counsel contended at [275] of the opening submissions that equitable compensation and a constructive trust should be ordered against Garslev because it had either constructive or actual knowledge that BAD Nominees’ property was being taken in breach of fiduciary duty. Furthermore, it was explicitly stated at [278] that constructive notice was sufficient and that, as agent of Garslev, Mr J Smits’ actions ought to be treated as those of Garslev. In [281(b)] of the opening submissions, it was contended that one of the bases of Mr J Smits’ liability was that “he was knowingly involved in a fraudulent and dishonest design”.
Thirdly, the appellants have failed to establish any appellable error in the primary judge’s finding at PJ[726] that Mr J Smits had in fact read the 20 March 2018 deed and had actual knowledge of its features. Although Mr J Smits elected not to give evidence, his brother gave evidence that he had been told by Mr J Smits immediately before the deed was signed on 20 March 2018 that he understood it and had discussed it with a third party, who Mr L Smits assumed was one of his brother’s “retinue of advisers”.
Fourthly, the appellants’ challenge to the primary judge’s finding at PJ[727] to the effect that an honest and reasonable person in Mr J Smits’ position would have made inquiries about whether the Power of Attorney permitted Mr Mahommed to cause BAD Nominees to enter into the 20 March 2018 deed is also baseless. Her Honour was well entitled to rely upon Mr L Smits’ evidence that not only did Mr J Smits have his own “retinue of advisers”, but that he also had a number of lawyers in his family with whom he freely consulted.
Ground 5 (fraud on the power)
As noted above, the plaintiffs relied on the doctrine of fraud on the power as an alternative basis for rescinding the Garslev deeds to cover the contingency that the primary judge did not find that Messrs L Smits and Mahommed breached their fiduciary duties to BAD Nominees. Accordingly, although it was strictly unnecessary for the primary judge to determine the fraud on the power case, her Honour proceeded to do so. The appellants challenged these findings because they claimed that the findings were premised on the following two incorrect bases:
(a)The attorneys were obliged to seek direction from Mr Dean for approval of their fees even though the Power of Attorney was irrevocable, because the 9 May 2016 agreements stated the circumstances in which fees were payable, at specified rates and where the services were to be provided.
(b)The attorneys would inevitably render excessive fee invoices after 20 May 2018 in relation to unauthorised work.
In their written submissions in reply, the appellants contended that different relief would be available depending upon whether liability was based upon breaches of fiduciary duty as opposed to fraud on the power. They emphasised that because the attorneys were not parties to the 20 March 2018 deed, any breach of fiduciary duty by them could not found an order against Garslev which involved rescinding the Garslev deeds. Any such relief would depend upon some finding of procurement or knowing receipt or knowing assistance. Accordingly, the appellants claimed that if they fail in their challenge to the fraud on the power point, orders based on the primary judge’s judgment could not stand.
The appellants said that these matters did not involve mere “procedural points”. They claimed that the primary judge’s orders were based on the findings against the attorneys of breach of fiduciary duties by them and were not based upon any finding that Garslev assisted or participated in any fraud on the power (citing PJ[744]-[745]). They added that the orders made against Garslev rescinding the Garslev deeds were based on the primary judge’s findings that Garslev knowingly assisted those breaches, and not upon any finding that Garslev assisted or participated in any fraud on the power by the attorneys. They submitted that it was important to understand the way in which the plaintiffs pleaded the fraud on the power case against the attorneys.
With respect to the 20 March 2018 deed, the plaintiffs pleaded that the use of the Power of Attorney was a fraud on the power because it was not used bona fide for a proper purpose and instead it was used for improper purposes as particularised at [169] of the pleading. The primary judge found at PJ[708] that the purpose of enabling the attorneys to determine the fees to be paid to them without determining the knowledge or approval of BAD Nominees was extraneous to the purpose for which the power was conferred. The appellants challenged this finding as being inconsistent with the terms of the 9 May 2016 agreements, as well as the terms of the consequent retainer agreements because it was under those agreements that fees payable to the attorneys were determined. The attorneys were not at large to determine what fees were payable to them.
As to the 5 November 2018 deeds, the appellants pointed to the plaintiffs’ pleading at [273] of the third further amended statement of claim and to the primary judge’s findings at PJ[709]. The appellants contended that the primary judge’s findings there went beyond the pleaded matters, particularly bearing in mind the seriousness of the findings.
The appellants contended, moreover, that the primary judge’s findings were not sustainable on the facts because the $850,000 was payable by Garslev in all events and the primary judge erred in ascribing improper purposes to them.
Having regard to the appellants’ failure to make good its grounds of appeal relating to fiduciary duties, it is strictly unnecessary to resolve this part of the appeal. For completeness, however, I would also reject this part. Contrary to the appellants’ contention, the primary judge did not find at PJ[708] that the attorneys were obliged to seek directions from Mr Dean for approval of their fees. Rather, her Honour was making the point that because the purpose of the power conferred on the attorneys by the Power of Attorney was to protect BAD Nominees’ rights and interests, it was extraneous to that purpose for the attorneys to have BAD Nominees enter into the 20 March 2018 deed which had the effect of having Garslev step into the shoes of BAD Nominees in approving these fees.
As to the other matter raised by the appellants, although the primary judge did not make an explicit finding that it was inevitable that the attorneys would render excessive fee invoices after 20 May 2018 in relation to unauthorised work, her Honour referred several times to the fact that the obvious effect of the various deeds was to ensure that no part of the $850,000 would pass to BAD Nominees. To the extent that that conclusion was based upon an expectation that this amount would be exhausted by fees rendered by Messrs L Smits and Mahommed and Vestecorp, there was a sufficient evidentiary basis for that conclusion (see at [195](c)] above).
Ground 6 (costs)
The appellants did not contend that the primary judge had erred in making the costs orders below. Rather, this ground of appeal simply turns on whether or not any of the other grounds of appeal succeed. For this reason, it is unnecessary to elaborate on it any further.
Ground 7 (the appropriateness of the relief)
Putting all the other grounds of appeal to one side, the appellants contended that the primary judge erred in ordering the relief which her Honour did.
First, the appellants submitted that no equitable compensation order should have been made against Messrs L Smits and Mahommed because they did not receive any pecuniary benefit from the matters the subject of the proceeding and Overdean should not be over-compensated for its actual proven loss. Alternatively, any such order ought to have been in the amount of $846,732.78 and not $1,058,579 as referred to in Order 7, as made below.
Secondly (and related to the first matter), the appellants claimed at [94] of their written submissions filed on 20 October 2022 that the primary judge erred and made an accounting error in ordering Messrs L Smits and Mahommed to pay equitable compensation to Overdean in the amount of $1,058,579 (plus interest). They claimed that the true figure should have been $846,732.78. This is because they say that the net proceeds of sale of the nine Beechworth lots were lower than as calculated by the primary judge and should have been arrived at by subtracting from the gross sale proceeds of $1,126,000 the correct expenses being $102,226 for GST, $59,621 for Settlement Costs and $117,421.02 for re-sale costs.
In their written submissions in reply, the appellants reiterated their claim that the primary judge had made insufficient deductions in calculating a “net” sale proceeds figure. In support of this claim, cross-references were made to the following material (noting that the figure for GST in paragraph (c) differs from the figure set out at [218] above):
(a) Table 11 submissions of 24 APR 2020; Black Book Vol 1, 298;
(b) the Affidavit affirmed by Mr Mahommed on 6 May 2019; at [15.5] Table A: Blue Book V1, 407-408;
(c) GST of $90,090 and other statutory adjustments for land tax and council rates that were included in the transfer consideration of $1,000,000 for the 9 Lots that was provided by Garslev to BLE In liq., as acknowledged in the Points of Claim and Submissions of Overdean and Mr Dean filed in December 2018 before Parker J in BLE 2014 Administration Proceedings.
In their written submissions in reply, the appellants also claimed (evidently for the first time) that the primary judge had made insufficient deductions against the figure of $850,000. The following cross-references were given in support of that claim:
(a) …Table 6, in the Defendants’ submissions of 24 APR 2020; Black Book Vol 1, 298 and the evidence annotated there;
(b) …Schedule “B” to the Amended Defence in Red Book V1, 453-454, Statement of Further Amended First Cross-Claim, Red Book V2, 465-466 and Notice of Appeal in Red Book V2, 872-874, respectively; and
(c) further at Defendants’ Submissions of 20 May 2019, Black Book V1, 145-154 and Defendants’ Submissions of 29 August 2019, Black Book V1, 206-207;
Thirdly (and apparently in support of the first claim), the appellants submitted that, if the constructive trust in relation to the monies paid into Court (and later paid to Overdean) which founded the order against Garslev to account survives, this is sufficient compensation in favour of Overdean. This is because the object is to compensate Overdean as the new trustee for its actual and proven loss. The appellants submitted that neither Messrs L Smits nor Mahommed received any pecuniary benefit from the matters raised against them in the proceeding. In these circumstances, the appellants contended that it was sufficient to make orders in relation to the constructive trust monies for the respondents to receive adequate equitable compensation.
As to the first of those matters, no appellable error has been established in relation to her Honour’s conclusion that Messrs L Smits and Mahommed should be ordered to pay equitable compensation to Overdean. Contrary to the appellants’ submission, the order that Garslev account to Overdean for the net proceeds of sale does not provide sufficient compensation for Overdean. That is particularly so as matters stand at present, given that, as noted at [106] above, there is now an order that Garslev be wound up and no evidence has been adduced to the Court to indicate that the taking of accounts will fully compensate Overdean.
Moreover, as the primary judge noted at PJ[764], Messrs L Smits and Mahommed have an equity to prevent Overdean from enforcing against them the order for equitable compensation (including interest) to the extent that it would recover more than it had lost.
As to the appellants’ complaint that the amount of that equitable compensation should be varied, it is necessary for them to establish that there was an accounting error in her Honour’s calculation of the net proceeds of the sale of the nine Beechworth lots. Her Honour explained at PJ[749] that the gross sale proceeds amounted to $1,126,000. Her Honour then deducted from that figure stamp duty and registration fees of $57,800 and legal costs and disbursements of $9,621, relying on the figures set out in Mr Mahommed’s affidavit affirmed on 8 March 2019.
In oral address on the appeal, Mr Clarke KC frankly and properly conceded that there was no evidence to support the figures listed in Table 11 of the defendants’ submissions dated 24 April 2020. That table simply asserted amounts of $59,621 in respect of “associated settlement costs” and $117,421.02 for “re-sale costs paid by Garslev”. Moreover, as noted at [219(c)] above, in their written submissions in reply, the appellants advanced a different figure in relation to the amount of GST (together with “other statutory adjustments for land tax and council rates”) which was paid for by Garslev. The appellants left entirely unclear, however, which of these two figures was correct.
In the absence of any evidence on these matters, and having regard to the confusion in the appellants’ own submissions, the appellants’ claim that there was an accounting error is rejected.
As to the appellants’ claim (which was raised for the first time on the appeal in their written submissions in reply filed on 14 November 2022) that the primary judge made insufficient deductions against the $850,000, this matter was not developed at all in either the appellants’ written submissions in reply or in oral address. The appellants were content simply to make a series of cross-references to multiple other documents, including submissions and pleadings, as set out at [220] above. It would be tedious to reproduce the material the subject of those cross-references. Some of the cross-references are to material of some length, including for example, the cross-reference referred to at [220(c)] above to ten pages of the defendants’ submissions dated 20 May 2019. These submissions were said to itemise invoices issued by Mr L Smits and Vestecorp to BAD Nominees, as well as an invoice dated 12 November 2018 issued by Law Albury Wodonga.
The Court was given no assistance at all in seeking to understand how that vast material made good the appellants’ claim that the primary judge had made insufficient deductions against the figure of $850,000. The same may be said in relation to the other material which was the subject of cross-references as set out at [220] above.
In my view, the appellants have fallen far short of discharging their onus of establishing the alleged error. This aspect of ground 7 is also rejected.
As to the third matter raised by the appellants under ground 7 (see at [221] above), I have explained why I reject the appellants’ submission that no order for equitable compensation should be made against Messrs L Smits or Mahommed. I do not accept that Overdean will be adequately compensated merely by orders in relation to the constructive trust monies.
Finally, having regard to the time which has passed since the primary judge made orders in the proceeding below, it is necessary that Order 7 dated 17 November 2021 be varied so as to take account of that passage of time.
D. CROSS-APPEAL
The cross-appeal challenges the primary judge’s finding at PJ[743] that Mr J Smits was not liable personally, as opposed to Garslev, under the second limb of Barnes v Addy. Her Honour gave two reasons there for that finding:
(a)the plaintiffs’ submissions did not explain why Mr J Smits personally (as opposed to Garslev) should be held to have knowingly assisted in the breaches of fiduciary duty by Messrs L Smits and Mahommed or why Mr J Smits should be personally liable for those breaches in which Garslev knowingly assisted (referring to Pittmore at [167]-]170] per Leeming JA, with whom Bell P and Brereton JA agreed); and
(b)Mr J Smits was not a party to any of the Garslev deeds and, although he caused Garslev to enter into those deeds (with the knowledge that he had as at 20 March 2018 and 5 November 2018 respectively in his capacity as the sole director of Garslev), he had no involvement in the transactions in any other capacity.
The cross-appellants challenged both those reasons. As to the first, they submitted that the relevant matters were in fact addressed at [281]-[286] of their written submissions below dated 16 June 2020. It was submitted there (at [284]) that Mr J Smits’ “moral obliquity is shown by the fact that he had Garslev enter the three Deeds, the terms and circumstances of which would have made it evident to an honest person that Smits and Mahommed were acting in conflict in order to profit at the expense of Nominees”. The plaintiffs also submitted below that Mr J Smits would have known from the terms of the various deeds that the purpose was to take BAD Nominees’ property and that this involved a breach of fiduciary duty. Reliance was placed on what Leeming JA said in Hasler v Singtel Optus Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266 at [139] (Gleeson JA agreeing):
However, where the third party knows the essential facts constituting what is prima facie a dishonest breach of duty, in which he or she is participating, then without more the third party will be liable on conventional principles. It will be seen that the formulation of the categories of knowledge in Baden reflects as much. "Wilfully shutting one's eyes to the obvious" and "wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make" includes studiously avoiding ascertaining whether consent has been given which is fully informed.
As to the second alleged error, the cross-appellants contended that her Honour erroneously considered Pittmore to be inconsistent with their claim that Mr J Smits was personally liable, contending instead that Pittmore at [169] supports their case.
The cross-appellants’ essential argument seems to be that a company director does not escape personal liability when he or she knows the essential facts giving rise to a dishonest breach of fiduciary duty in which the director is participating merely because the company of which the person is a director entered into a contractual relationship.
The cross-appellants seek an order against Mr J Smits personally in similar terms to those which the primary judge made vis-à-vis Garslev.
In response, in their written submissions on appeal, the cross-respondents were content to rely on relevant parts of their supplementary submissions dated 20 October 2022 relating to grounds 3 to 4b of the appeal and on their written reply submissions relating to ground 5 of the appeal (fraud on the power).
In oral address on the appeal, when pressed by the Court to respond to the cross-appellants’ challenge to the primary judge’s reasoning at PJ[743], Mr Clarke KC submitted that the issue did not arise if he was successful in his argument that Garslev was not liable under the second limb in Barnes v Addy. When further pressed on the contingency that that part of the appeal failed, Mr Clarke KC submitted that a distinction should be drawn between corporate and personal liability. He submitted that Garslev’s liability stemmed from Mr J Smits having signed the documents in his capacity as sole director and that he did not participate in any other way in the attorneys’ alleged breach of fiduciary duties.
Assuming in the cross-appellants’ favour that they did in fact make submissions below in support of their contention that Mr J Smits should be personally liable (see, in particular, at [284] of their written submissions dated 16 June 2020), for the following reasons I consider that her Honour was correct to reject the contention.
Pittmore does not support the cross-appellants’ case. At [162]-[170] of Pittmore, Leeming JA addressed the proposition whether a sole director acting merely as a director of a company is liable in equity for procuring or inducing a breach of trust or fiduciary duty by the company of which he is a director. His Honour’s reasons for doubting that proposition may be summarised as follows:
(a)The proposition sits uncomfortably with the position in contract where a director would not be liable at law for inducing a breach of contract by his company and there is a need to ensure coherence of the law (citing, e.g., O’Brien v Dawson (1942) 66 CLR 18; [1942] HCA 8 and Tsaprazis v Goldcrest Properties Pty Ltd [2000] NSWSC 206 at [11] per Hodgson CJ in Eq).
(b)The position may be different if a director procures or induces a breach of trust or fiduciary duty by the company of which he is a director acting other than in their capacity as one of the organs of the company. Leeming JA added, however, at [166] that he understood it not to have been put that the director in Pittmore acted other than in his capacity as a director of the company.
(c)Although Leeming JA favoured the view that there is the same rationale underlying liability for procuring or inducing a breach of trust or fiduciary duty and liability at common law for procuring a breach of contract, his Honour noted at [169] that it was conceivable that the character of a fiduciary relationship might result in a broader approach to ancillary liability than would be the case at common law, but it was unnecessary to take that matter any further in the circumstances of Pittmore.
His Honour’s view was only a provisional one (see at [170]); it was not necessary to reach a final view on the issue in that case. Here, the cross-appellant assumed the correctness of the discussion by Leeming JA but sought to distinguish it on the basis that the actions taken by Mr J Smits were not taken merely in his capacity as a director. It suffices here to assume the correctness of his Honour’s provisional view without deciding the point.
I consider that the cross-appellants have not pointed to any step taken by Mr J Smits other than in his capacity as a director of Garslev.
Contrary to the cross-appellants’ contention, the passage cited at [233] above from Hasler takes the matter no further. The correctness of the passage may not be doubted, but it says nothing about the relevant issue here, namely whether the second limb of Barnes v Addy is said to apply not only to a company, but also to a director who acts in no other capacity than as a director.
Apart from emphasising Mr J Smits’ “moral obliquity”, the cross-appellants pointed to nothing done by Mr J Smits personally (apart from signing the relevant agreements in his capacity as sole director of Garslev) which would support a finding that his actions were taken other than in his capacity as director. There was no evidence, for example, that Mr J Smits acted as he did because there were other dealings in his own personal interest which were advanced by Garslev’s participation. The challenge of establishing any such dealings was not assisted, of course, by the fact that Mr J Smits elected not to give evidence in the proceeding. Although Mr J Smits had the requisite knowledge (as imputed to Garslev) of the dishonest and fraudulent design, he did not render any assistance in his personal capacity as opposed to as a director of Garslev. It is Garslev that facilitated and/or furthered the breach of fiduciary duties by Messrs L Smits and Mahommed (see the discussion of Dodds-Streeton J in Re-Engine Pty Ltd (in liq) v Fergusson (2007) 209 FLR 1; [2007] VSC 57 at [117]-[124]).
For these reasons, the cross-appeal should be dismissed.
E. NOTICE OF CONTENTION
The notice of contention raised the following two grounds:
(a)the orders against Garslev ought also to have been based on acceptance of the appellants’ claims regarding fraud on the power; and
(b)the orders against Garslev ought also to have been based on a finding that Garslev was liable under the first limb of Barnes v Addy.
Having regard to the appellants’ failure to establish any of its grounds of appeal, it is unnecessary to determine the notice of contention.
F. CONCLUSION
For these reasons I propose the following orders be made:
(a)The amended notice of appeal dated 1 December 2022 be dismissed.
(b)The cross-appeal be dismissed.
My tentative view is that the appellants should pay the respondents’ costs of the appeal, including reserved costs, and the cross-appellants should pay the cross-respondents’ costs of the cross-appeal.
If any party disagrees with these proposed orders, it should file and serve within 14 days hereof brief written submissions not exceeding 5 pages as to why different orders should be made. Any response should be provided within a further 7 days thereof, with the same page limit. Final orders will then be made on the papers without a further oral hearing.
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