Highwater Nominees Pty Ltd v Mead
[2006] WASC 17
•20 JANUARY 2006
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: HIGHWATER NOMINEES PTY LTD -v- MEAD & ORS [2006] WASC 17
CORAM: HASLUCK J
HEARD: 20 JANUARY 2006
DELIVERED : 20 JANUARY 2006
FILE NO/S: CIV 1048 of 2006
BETWEEN: HIGHWATER NOMINEES PTY LTD (ACN 107 377 131)
Plaintiff
AND
WARREN JOHN MEAD
First DefendantBIGWEST CORPORATION PTY LTD (ACN 106 486 319)
Second DefendantSEASCAPE HOLDINGS PTY LTD (ACN 009 441 498)
Third DefendantLEUKA PTY LTD (ACN 008 892 886)
Fourth Defendant
Catchwords:
Corporations - Trust company - Fiduciary duties - Scope of duties owed by directors - Rights of unit holders - Interim injunction to restrain termination of lease
Legislation:
Nil
Result:
Plaintiff's application for injunction allowed
Category: B
Representation:
Counsel:
Plaintiff: Mr M L Bennett
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : Mr D W John
Fourth Defendant : No appearance
Solicitors:
Plaintiff: Bennett & Co
First Defendant : No appearance
Second Defendant : No appearance
Third Defendant : Freehills
Fourth Defendant : No appearance
Case(s) referred to in judgment(s):
American Cyanamid Co v Ethicon Ltd [1975] AC 396
Blakeley v Cook [2001] WASCA 208
Brunninghausen v Glavanics (1999) 46 NSWLR 538
Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148
Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834
Dempster v Mallina Holdings Ltd (1994) 13 WAR 124
Hamilton v Whitehead (1988) 166 CLR 121
Mills v Mills (1938) 60 CLR 150
Tesco Supermarkets Ltd v Nattrass [1972] AC 153
United States Surgical Corporation v Hospital Products International Pty Ltd (1981) 148 CLR 457
Warman International Ltd v Dwyer (1995) 182 CLR 544
Case(s) also cited:
Nil
HASLUCK J: The plaintiff, Highwater Nominees Pty Ltd ("Highwater"), commenced proceedings by a writ of summons dated 20 January 2006. It is said in the indorsement of claim that the plaintiff's claim arises out of its investment as a unit holder in the Bigwest Corporation Unit Trust, the trustee of which is the second defendant. The claim arises also out of the conduct of the first defendant, Warren John Mead, as a director of the second defendant, Bigwest Corporation Pty Ltd ("Bigwest"), and as the controlling mind and will of the third defendant, Seascape Holdings Pty Ltd ("Seascape"), and the fourth defendant, Leuka Pty Ltd ("Leuka").
It is said further that the claim arises in respect of an alleged breach of fiduciary duties owed by Mr Mead as a director of Bigwest and as the controlling mind of Seascape and Leuka, and the knowing involvement in the alleged breaches of fiduciary duty by Seascape and by Leuka.
More particularly, the alleged breaches of fiduciary duty are said to be referable to the charging of rent under a sublease entered into by Bigwest and the conduct of the first defendant, Mr Mead, in acting and continuing to act in a manner that preferred and continues to prefer his interests to the interests of the plaintiff.
Pursuant to a chamber summons dated 20 January 2006, the plaintiff seeks an order that Seascape be restrained from terminating the sublease and from making a statutory demand until there is an account between the parties or further order. The application for an injunction is supported principally by the affidavit of Luke Timothy Neville sworn 28 July 2005 and the affidavit of Marc Thomas Wilshaw sworn 20 January 2006. Mr Neville is the principal investor in the plaintiff company, Highwater Nominees.
Seascape was represented at the hearing before me by counsel. The other defendants were unrepresented. It seems that due to the late service of the relevant documents it has not been possible to produce responsive affidavits on the defendants' side. However, counsel for Seascape foreshadowed in general terms that the allegations relied upon by the plaintiff will be disputed by his client and possibly by the other defendants.
More importantly for present purposes, counsel for Seascape indicated that the plaintiff's application for an injunction is opposed. It is said that quite apart from contested issues of fact, the restraining order sought should not be granted having regard to the points of law put up by counsel for Seascape which I will come to in a moment.
I note also that I have before me an undertaking as to damages provided by the plaintiff in the usual form.
The principles applicable to the grant of an interlocutory injunction are well known. The applicant must satisfy the Court that the claim is not frivolous or vexatious; in other words, that there is a serious question to be tried: Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148 at 153.
If there is a serious question to be tried the Court must consider whether the balance of convenience is for or against the grant of the injunction. If common law damages would be an adequate remedy and the respondent would be able to pay them an injunction would not normally be granted: American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 408. The proper test is whether in a particular case it is just in all the circumstances to confine the plaintiff to a remedy sounding in damages. Where other factors are evenly balanced it is appropriate to preserve the status quo.
Let me come now to the facts of the matter. Time constraints require that they be presented in a summary form.
It seems that the third defendant, Seascape, operated an oyster bar on the seafront in premises leased from the City of Fremantle.
I understand that Mr Mead, being the principal director in Seascape, became involved in some discussions with Mr Neville which led to the notion that a partnership of sorts should be formed; that is, these two persons would play a part in the formation of Bigwest to act as an agent and operator of the business. Bigwest was to hold the relevant assets in trust for the unit holders being essentially entities controlled by Mr Neville and Mr Mead.
It was against that background that arrangements were made for Bigwest to purchase the subject business as a going concern and to take a sublease of the oyster bar premises.
The relevant agreement for sale appears at page 108 of the Neville affidavit and is dated 13 February 2004. The sublease identifies the City of Fremantle as the head lessor, Seascape as the lessee and Bigwest as the subtenant. The sublease is dated 13 February 2004 also.
I understand from the evidentiary materials and from what has been put to me that Bigwest was constituted as a trustee on 13 February 2004 in the manner contemplated by the preceding discussions. The relevant unit trust deed appears at page 52 of the Neville affidavit and is dated 13 February 2004.
It appears from par 12 of the Neville affidavit that the plaintiff (that is, Highwater, but effectively Mr Neville) paid $260,000 for its units in the trust. Without traversing the full particularity of the affidavit and of the trust deed, such a payment gives rise to a reasonable inference that the recipient of that contribution was meant to be Bigwest in its role as trustee.
Bigwest commenced to operate the business. Various assets and equipment were acquired. There were obviously operational expenses involved in running the business.
I understand that in July of 2005 a notice of default was issued by Seascape whereby it sought to terminate the sublease on the basis that Bigwest was in default in paying the rent due under the sublease. The affidavits indicate that no further action was taken pursuant to the notice of default as the parties commenced to negotiate and evaluate their respective positions. It seems from the affidavits that after 21 July 2005, pursuant to an undertaking not to proceed pursuant to the notice, the matter remained in abeyance.
The parties were unable to reach a consensus. I understand that a further notice of default was then served upon Bigwest on 10 January 2006. The second notice of default reflects a claim by Seascape for unpaid rent against Bigwest as the sublessee of the subject premises.
It seems that there has been some limited grant of an indulgence in respect of the second notice of default but it is common ground before me that on 20 January 2006 the notice will run its course. Thus, unless an injunction of the kind applied for is obtained, it will be open to Seascape to take possession of the premises.
It is against that background that the application for an injunction comes before me whereby Highwater as plaintiff seeks to restrain the proposed entry.
I pause here to note that although it is Bigwest, as sublessee, which is the immediate target of the proposed re-entry, it is Highwater as a unit holder in the Bigwest trust, being a party at one remove, that seeks the injunctive relief.
It is clear from the brief summary of the applicable principles given a moment ago that the plaintiff needs to establish that there is a serious issue to be tried, that is to say, that the plaintiff has reasonable prospects of success in respect of the matters of claim set out in the indorsement of claim attached to the plaintiff's writ. Because of the necessity to establish that there is a serious issue to be tried in respect of those matters, defence counsel on behalf of Seascape asserted that, quite apart from any contest as to the facts, and simply as a matter of law, the plaintiff was clearly not in a position to obtain relief.
Two points in particular are raised in that respect. First, counsel suggested that the plaintiff, Highwater, as a party at one remove from the controversy concerning the proposed re-entry by Seascape, does not have standing to obtain relief of the kind sought. Counsel for Seascape submitted that the plaintiff has no prospects of succeeding in a claim of the kind reflected in the indorsement of claim. Secondly, it is said that the matter in issue is a claim by Seascape for unpaid rent. There are reasons in law (being the reasons I will come to in a moment) as to why the Seascape claim for unpaid rent is clear cut and precludes relief of the kind sought.
Let me deal with each of these matters in turn.
I turn firstly to the somewhat complicated issue of whether the plaintiff as a party at one remove is entitled to assert and rely upon breaches of fiduciary duty of the kind complained of.
Time does not permit me to undertake a full review of the decided cases in this evolving area of the law, but it will be useful to refer to a few broad principles.
The power to control the management of a company, its property and affairs is vested in the board of directors. With this power comes the opportunity for mismanagement and fraud. Thus is it said in Ford's Principles of Corporations Law (11th ed) R8.010 that the law subjects directors to strict statutory and fiduciary duties.
Directors of trust companies owe duties which are imposed by common law and by statute. In addition the directors are in a fiduciary relationship to the company and cannot use the power conferred on them to obtain a private advantage: Mills v Mills (1938) 60 CLR 150.
The duties of the directors include duties to act in good faith, to exercise powers for a proper purpose and to avoid conflicts of interest: United States Surgical Corporation v Hospital Products International Pty Ltd (1981) 148 CLR 457. The general view is that directors owe duties to the corporate entity rather than to members. This view has been recently endorsed as the more appropriate approach by the Full Court in this State in Blakeley v Cook [2001] WASCA 208.
However, the Full Court recognised in the latter case at par 21 that particular circumstances may result in duties of a fiduciary nature being owed by a director to the shareholders. It is said in Ford's Principles of Corporations of Law at R8.110 that issues arise as to whether directors of the company which is a trustee are under a duty to consider the interests of beneficiaries under a trust administered by the company. The learned author acknowledges that if directors pay insufficient attention to the interest of beneficiaries the result may be a claim against the company for breach of trust which could adversely affect the interests of the members and creditors.
The decided cases lend support to the notion that in special circumstances, in which the director of a trust company is in a position of knowledge and influence, the director of a trustee company may owe fiduciary duties to beneficiaries or unit holders in the subject trust, bearing in mind that the categories of fiduciary relationship are not closed: Hospital Products (supra). I refer also to Brunninghausen v Glavanics (1999) 46 NSWLR 538.
The general rule is that once a breach of fiduciary duty is established the claimant is entitled to relief by way of an account and with a view to putting himself in a position in which he would have stood had there been no breach. However, the rule requiring a fiduciary to account for profits must not become a vehicle for the unjust enrichment of the plaintiff: Warman International Ltd v Dwyer (1995) 182 CLR 544.
Rowland J made certain observations in Dempster v Mallina Holdings Ltd (1994) 13 WAR 124 at 172 to 182 to the effect that the remedies for breach of fiduciary duty will usually involve an account, equitable compensation and the implication of a constructive trust attaching to the subject property.
This review of the decided cases is necessarily somewhat cursory due to constraints of time. However, it indicates that a claim of the kind reflected in the indorsement of claim in the present case is theoretically available as a matter of law. Such a claim may be open to the plaintiff if the evidence is sufficient to establish that Mr Mead and the other defendants (as companies arguably subject to Mr Mead's influence) owed certain duties to the plaintiff as a unit holder in Bigwest.
Hence, as to the first of the two matters relied upon by defence counsel, without purporting to make a final ruling upon the matters I have just been dealing with, I do consider that a claim of the kind pleaded is available as a matter of law and can be characterised as a serious issue to be tried if there are sufficient factual matters and related evidence underpinning the allegations reflected in the claim.
This brings me to the second of the two matters of law which were relied upon by defence counsel in an attempt to resist the claim for injunctive relief. This is the question of whether the irregularities complained of are, as a matter of fact, sufficient to give rise to a serious issue to be tried.
The position of defence counsel was to say that the notice of default is essentially a claim for unpaid rent. It is not seriously suggested on the materials before me that as a matter of handing over cheques the rent has actually been paid. Thus, counsel submits, viewed simply as a legal issue, there really can be no basis upon which Seascape should be denied an entitlement to enforce its rights under the lease.
Put against that, however, is the position of the plaintiff, as outlined by counsel, in support of the notion that there has been a breach of fiduciary duties. It is said that if the facts of the matter are examined in detail, it will be revealed that the defendants, and especially Mr Mead as the allegedly controlling influence, have behaved in an unorthodox if not unconscionable way. It is said that the accounts which purport to reflect the way in which the business has been operated by Bigwest are illusory and that the figure representing the so‑called unpaid rent either cannot be substantiated or, even if it be substantiated as a matter of law, there are factors and matters which give rise to an equitable set‑off which will permit the claim for rent to be either extinguished or considerably reduced.
I pause here to say that the matters relied upon by the plaintiff are convoluted and extensive. I will turn to them briefly in a moment. However as I continue to look at the position in overview, I must necessarily come to a matter that occupied some attention in the course of argument.
The sublease dated 13 February 2004 contains a provision in cl 3 that the subtenant, that is, Bigwest, will pay the rent to the sublandlord, that is, Seascape, without deduction or set‑off of any kind on the due dates for payment by equal monthly instalments in advance.
It is said by counsel for Seascape that even if it be thought on the facts that there is a serious issue to be tried, namely that the plaintiff Highwater has a claim of sorts for equitable relief, the fact of the matter is, given the presence of the clause I have just described, that it is not open to the plaintiff to rely upon those circumstances by way of a set‑off as a means of resisting the claim for rent. Both counsel referred to certain authorities bearing upon this point.
The position at law concerning a clause of this kind is best illustrated by the case principally relied upon by defence counsel being Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834. In that case there was a claim for outstanding rent by a landlord and the tenant sought to set off against that claim certain damages arising from an alleged breach of covenant by the landlord. It was held in that case by the Court of Appeal that clear words were needed to exclude a tenant's remedy of an equitable right of set‑off. The word "deduction", however, could not be accurately described as a clear word. It followed that the simple expression "without any deduction" was insufficient by itself in the absence of any context suggesting the contrary to operate by implication as an exclusion of the tenant's equitable right of set‑off.
In other words, on the facts of the Connaught case (supra) the provision in the lease that the rent should be paid without any deduction was insufficiently clear to exclude the tenant's equitable right to set off a claim for damages for a landlord's breach of covenant against the rent due.
Defence counsel sought to distinguish that case from the circumstances of the present case by reliance upon the words "without deduction or set‑off of any kind". His submission was that in the sublease in the present case the parties must be taken to have addressed their minds specifically to the possibility of a set‑off and to have used words which are clear and unambiguous and therefore sufficient to exclude any notion of a set‑off of the kind contended for by counsel for the plaintiff.
Defence counsel relied upon certain observations made by Waite LJ at 108, at 838 of the Connaught case (supra) to the effect that the law was that the lessees were entitled in equity to set off unliquidated claims for damages for breach of covenant against the rent accruing due under the underlease. It was open to the parties to exclude this equitable right of set‑off by express words or by implication from the language of a contract as embodied in the underlease. There is, however, a starting presumption that neither party intends to abandon any remedies for breach arising by operation of law and clear language must be used if this presumption is to be rebutted.
Defence counsel's point, in a nutshell, was to say that in the present case there are clear words which exclude any possibility of a set‑off and there is therefore no real basis in law as to how the claim for rent can be resisted along the lines put up by the plaintiff, namely, that there is an equitable set‑off having regard to the matters of alleged breach of fiduciary duty.
My response to that submission is along the lines I put to counsel for Seascape in the course of argument. The Connaught case (supra) and the other cases cited by him concern circumstances where there was a set‑off in respect of the breach of some other covenant of the lease. Neither the Connaught case (supra), nor the other cases he cited, bore directly upon the more complex situation where, because of a rather intricate relationship between the lessor and the lessee, especially in the context of a trust situation, it might be said that fiduciary duties are owed. One can envisage a case in which it is established that the lessor and those associated with him are acting in a way which is eventually characterised as unconscionable and gives rise to a form of equitable relief which will preclude that party from relying upon an exclusion clause in the subject lease of the kind I mentioned a moment ago.
I note in passing that the decided cases establish that at common law in order to fix primary liability on a company, it is necessary to consider the mental state of the person or persons who constitute the company's directing mind and will. The search is for those people who are charged with such a high degree of responsibility of the management of the company that they can be said to be acting as the corporation rather than for the corporation: Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170; Hamilton v Whitehead (1988) 166 CLR 121.
It emerges, then, that it could be open to the plaintiff in circumstances of the present case to establish that the actions of Mr Mead have been so influential in and about the business of the third defendant, Seascape, that it can be said that Seascape has acted in a manner which amounts to a breach of fiduciary duty, bearing in mind the close relationship between Mead and Seascape.
I remind myself also that Mr Mead is a director of Bigwest and agreed to act in conjunction with Mr Neville. The influence of Mr Mead upon Bigwest as the lessee, when considered with his role as a principal in Seascape, indicates that the facts concerning control of and influence over the companies in question are intricately intertwined.
For all those reasons, I consider that there is a distinction to be drawn between the cases relied upon by defence counsel and the circumstances of the present case. Without purporting in any way to rule decisively on the point, it does seem to me that there is a serious issue to be tried as to whether an equitable set‑off can be asserted of the kind advanced by the plaintiff.
The plaintiff's claims depend largely upon there being sufficient evidence to show that there has been some untoward conduct on the part of the defendants; that is, sufficient to afford to the plaintiff a right of relief in equity by way of set‑off.
It is here that I am conscious that the defendants are at a distinct disadvantage. It is only the third defendant, Seascape, who is represented, and that party has not had a sufficient opportunity to place responsive affidavits before me. I must leave open the question of what might emerge upon a fuller understanding of all the evidence. Nonetheless it will be apparent from my analysis to this point that as a matter of law I do see prospects of the plaintiff obtaining relief. I see no objection in law as a matter of principle as to why the plaintiff cannot assert a claim of the kind reflected in the indorsement claim.
Nonetheless, for present purposes, it is still incumbent upon me, having regard to the principles governing the grant of an injunction, to be satisfied on the evidence before me that there is a serious issue to be tried on the facts of the matter; that is, there is supportive evidence for the allegations of breach of fiduciary duty and misconduct of the kind put up by the plaintiff.
I do not intend to traverse the evidence in that regard at length. Mr Bennett on behalf of the plaintiff has referred to various matters and has suggested that there is a collateral agreement of sorts that would underpin the claim for an equitable set off. The documentation bearing upon that aspect of the matter is scant, but nonetheless, as I perceive it, looking at the rather voluminous affidavits, assertions of misconduct of a quite specific kind have been made over many months and have not been fully and effectively answered by Seascape or by Mr Mead, having regard to what has been presented to me.
Answers may emerge if the defendants are allowed the opportunity to file responsive affidavits or if counsel comes prepared to deal with the factual aspects of the matter. But as matters presently stand, nothing has been drawn to my attention which seems to amount to an effective rebuttal of the assertions of misconduct. Significantly, there does seem to be an acknowledgment by Seascape that the accounts which are said to be defective, must be reconstituted. The defendants themselves seem to recognise there are deficiencies in the accounts without necessarily conceding any wrongdoing.
It is sufficient for present purposes to note that there is evidence before me of various expenses and liabilities being attributed to Bigwest prior to 13 February 2004; that is, prior to Bigwest commencing to operate pursuant to the trust provisions. An attribution of liabilities to Bigwest before Bigwest was operating the business as a trustee suggests that prima facie there is something untoward in the accounts or some matter calling for explanation. I give weight to that aspect of the matter in weighing up whether there is a serious issue to be tried.
I take account also of what was put to me concerning a documentary item which appears at page 264 of the Neville affidavit, being the minutes for directors meeting of Bigwest held on 21 June 2005. I will not traverse the entirety of those minutes, which relate to a meeting attended by Mr Mead and Mr Neville, but there is an assertion in the minutes that Mr Mead responded to a proposition put to him by saying in effect that the capital contribution of over $200,000 made by Mr Neville which, as I said previously, was clearly destined to go to Bigwest as trustee, had gone to him; that is, to Mr Mead.
Again, in the fullness of time there may well be detailed evidence bearing upon this point. However, for the moment, there is at least some evidence to suggest, in combination with the matters of accounting I mentioned earlier, that there has been some misconception as to how the funds in this matter should be handled. If it be established that it is more than a misconception, and that there are questionable circumstances surrounding the dealing with trust funds, then there will undoubtedly be a basis for contending that there had been breaches of fiduciary duties of the kind alleged.
So for present purposes, I do consider there is sufficient evidence before me to be satisfied that there is a serious issue to be tried in that the evidence is sufficient to allow a claim for breach of fiduciary duty to be advanced. It follows from my earlier analysis that as I presently perceive it, there is no reason in strict legal analysis as to why a claim of the kind proposed cannot succeed.
In summary then, I am persuaded for all those reasons that there is a serious issue to be tried. When I turn to the balance of convenience, I am conscious that if the lease of the restaurant business be terminated and Bigwest is evicted, it will be almost impossible to retrieve the situation if the plaintiff is ultimately able to sustain its case. I therefore consider that the balance of convenience requires status quo be preserved, and that an injunction be granted to restrain the termination of the lease and the issue of the statutory demand.
I would not be prepared to make orders in terms reflected in the Chamber summons, namely, that the restraint operate until an account has been taken or further order. It is recognised by Mr Bennett, as counsel of the plaintiff, that such an order is not appropriate in circumstances where there is an ex parte application before me. Certain of the defendants have not been represented, and even as to Seascape, there has not been sufficient time to file responsive affidavits.
Accordingly, I am of the view that the restraining order should be made for a finite time only. I have in mind something in the order of 10 to 14 days. That should probably be accompanied by an order of the kind reflected in par 3 of the summons that parties have liberty to apply upon three clear days' notice to vary or amend the terms in this order. I will hear from counsel as to the exact form of the orders to be made.
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