In the matter of Phoenix Rising Investments Pty Limited (ACN 123 623 754)
[2015] NSWSC 2063
•02 June 2015
Supreme Court
New South Wales
Medium Neutral Citation: In the matter of Phoenix Rising Investments Pty Limited (ACN 123 623 754) [2015] NSWSC 2063 Hearing dates: 2 – 4 June 2015 Date of orders: 02 June 2015 Decision date: 02 June 2015 Jurisdiction: Equity Before: Brereton J Decision: See [5], [11], [21]-[22], [26], [28]-[32].
Catchwords: EQUITY – equitable remedies – accounts and inquiries – surcharges – whether payments treated as dividends – competing inferences.
EQUITY – equitable remedies – accounts and inquiries – objection to payments made out of trust – where payments made after appointment of provisional liquidator – where payments characterised as superannuation entitlements – whether futile to require repayment given defendants’ entitlement to subsequent payment out of superannuation entitlements.
EQUITY – equitable remedies – accounts and inquiries – entitlement to share in property – agreement as to proportionate share and interest – entitlement to rents received and liability for expenses incurred – where third defendant incurred expenses in providing financial support to companies in group – whether third defendant entitled to just allowances for reasonable expenses – where expenses not incurred in transactions in the property.
EQUITY – equitable remedies – accounts and inquiries – falsifications – whether payments actually made – sufficiency of evidence – whether payments properly claimable.Category: Principal judgment Parties: David Alexander Grace (plaintiff)
Deborah Sharon Grace (first defendant)
Julienne Grace (second defendant)
Nevilda Holdings Pty Ltd (third defendant)
Nevilda Investments Pty Ltd (fourth defendant)
Dutchie Pty Ltd (sixth defendant)
Phoenix Rising Investments Pty Ltd (seventh defendant)Representation: Counsel:
Solicitors:
D Williams SC w S Goodman (plaintiff)
D Stewart (first, second, seventh defendant)
James Tuite & Associates (plaintiff)
Clinch Long Letherbarrow Pty Ltd (first, second & seventh defendants/applicant)
File Number(s): 2006/259566
Judgment (ex tempore)
Surcharges for dividend
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HIS HONOUR: These are the defendant’s accounts of the benefits derived by each of them from the one ordinary share held by each of them in the fourth defendant the Nevilda Investments. The defendants have accounted for amounts recorded in the annual financial statements and in their income tax returns as dividends received from or paid by the fourth defendant. The plaintiffs surcharge the defendants for additional amounts which the cheque butts of Nevilda Investments record as payments of dividends – in that the word “dividend” or an abbreviation therefore appears in the description of the payment on the relevant cheque butt.
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Being surcharges, the onus of proving the surcharge lies, on the balance of probabilities, with the plaintiffs. The inference from the financial statements and income tax returns that it is said should be drawn is that however the payments were described on cheque butts when they were made, they were ultimately not treated as dividends in the end of year accounts but presumably treated as payments on loan account or directors fees or in some other such manner.
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As Mr Stewart submitted, that argument would be unassailable if the evidence explained how those payments were actually ultimately dealt with. However, there is no loan account ledger or other evidence that explains how they were ultimately dealt with. Moreover, there are on the defendants’ own affidavits admitted errors in a number of years in the financial statements. That effectively leaves the Court with, on the one hand, the contemporaneous primary record in the form of the bank statement suggesting that the payments were made as dividends, and on the other, an inference to be drawn from the financial statements that however they were initially characterised, they were ultimately not dealt with and treated as dividends when the end of year accounts were prepared.
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Those two positions are, in fact, not inconsistent. It is quite conceivable that payments were recorded when made as dividend – or potentially on account of dividend – at a time when it was not known what the ultimate profits for the year would be out of which a dividend might be declared and paid. There is, I think, much to be said for the view advanced in Mr Stewart’s submissions that ultimately there is a procedure to be followed for the declaration of dividends, and amounts received as dividends ought to be referrable to a declaration of dividend which would be reflected in the annual accounts.
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Ultimately, it seems to me that I cannot be satisfied on balance that the entries made on the cheque butts are to be preferred to the inference to be drawn from the end of year accounts. The surcharges have not been established on the balance of probabilities, and in principle I would disallow those surcharges.
Objection to payments of superannuation entitlements to defendants
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In the accounting by each of the defendants, Ms Deborah Grace, Dr Julienne Grace and Phoenix Rising Investments Pty Ltd in respect of the Nevilda Investments superannuation fund, the plaintiff has taken objection to a number of payments by the fund to Ms Grace or Dr Grace made after a provisional liquidator was appointed to Nevilda Holdings, the trustee of the fund, the majority of which were constituted by the purported "rollover" of the claimed superannuation entitlements of Ms Grace and Dr Grace, and some of which were in the nature of relatively minor sums for disbursements in connection, for example, with a post office box and a seal which was the subject of some discussion in the principal judgment.
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In the principal judgment [Grace v Grace [2012] NSWSC 976], I recorded in paragraphs 213 and 214 the following:
213 Thus, following the appointment to the trustee Nevilda Holdings of a provisional liquidator, Deborah and Julienne, without David's knowledge or concurrence, procured the realisation of the assets of the NISF, and the transfer of a substantial proportion of them (some $284,000) to Julienne personally, or to the PRSF of which they alone were members. The defendants say that when they "rolled-over" their entitlements to the PRSF in this way, they left in the NISF sufficient funds to satisfy David's entitlement. They say that, as at August 2007, David's membership benefit was approximately $39,618, and that the assets then left in the fund (after withdrawal of their entitlements) was in the order of $76,275, so as to more than satisfy his benefit, even if an extra $30,000 were owed to him. However, the accounts of NISF over the period 2004 to 2007 show a substantial increase in assets available to pay benefits (from $214,390 to $351,121), and corresponding increases in the beneficiary accounts of Julienne and Deborah, but none in David's account. Julienne was unable to explain this discrepancy. Some of the explanations initially offered - that she had benefits transferred in - do not upon scrutiny satisfactorily explain the movements in the accounts. However Mr Ashton, who received instructions to rollover Julienne and Deborah's superannuation into the PRSF in 2007, said that the attribution of the whole of the increase in value of the NISF investments in 2004/05 to Julienne and Deborah to the exclusion of David, was a mistake on his part.
214 The state of accounts of the NISF is confusing and unclear. It is not clear whether Julienne was making contributions in late 2006 (as some bank statements suggest). The NISF financial statements for FY2007 are inconsistent as to benefits paid, attributing different amounts in different places. On one version, Julienne is significantly overdrawn. In those circumstances, and as David's entitlement does not appear to have enjoyed the increments that were applied to Deborah's and Julienne's, it is not self-evident that sufficient has been left in the NISF to fund his proper entitlement.
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In paragraph 216, I said:
216 An account of the NISF would involve Deborah and Julienne accounting for their receipts and expenditure as trustees or quasi-trustees of the NISF.
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The defendants have submitted that requiring them to account to the fund for the amounts of their entitlements taken from the funds would simply involve a round robin of transactions, because they would immediately be entitled to have their superannuation entitlements paid to them from the fund.
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The problem with that submission is that one does not know that the amounts that were withdrawn from the fund correctly reflected what should have been the balance of their superannuation accounts. That is because, for the reasons explained in paragraph 213 of the principal judgment and extracted above, Julienne and Deborah's accounts were enhanced by the attribution of the whole of the increase in value of the NISF investments in 2004 and 2005, to the exclusion of David’s, which Mr Ashton conceded was a mistake and which Julienne was unable to explain.
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In those circumstances, even if the lack of utility argument were otherwise a defence, which I doubt, it is not correct in this case as a matter of fact, because there may be a difference between the amounts which were claimed and paid out and the amounts to which Deborah and Julienne are truly entitled.
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Accordingly, it seems to me that these objections are well made and in principle I uphold them.
Etham Avenue
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Order 40 of the Orders made on 9 November 2012 provided for an inquiry as to the extent to which the equity held by Dr Grace in the property known as 41/10 Etham Avenue, Darling Point, and/or all the proceeds of its sale, represented benefits derived by her from the use of 272 Birrell Street, which was used as security for borrowing part of the purchase price for Etham Avenue.
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The parties have agreed that the question posed in that Order should be answered to the effect that 68.9% of the capital gain on the sale of the property, equivalent to $388,814.90, represents those benefits. The parties also have agreed that interest would run, at Supreme Court rates, from the date on which those proceeds were received by the second defendant, namely 20 January 2010.
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Beyond that, a question arises as to the rents received and expenses incurred by Dr Grace in respect of the Etham Avenue property. Prima facie, one would think that the plaintiffs would be entitled to 68.9% of the rents received, but may have to give credit for the whole of the interest paid on the basis that the interest was exclusively attributable to the plaintiffs’ hypothetical contribution. I could easily be wrong about that, and that utterance is made without the benefit of any argument on the issue at this stage. The defendants would presumably also claim other expenses, such as rates and other outgoings, in respect of the property, or at least a proportion thereof.
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The second defendant has prepared an account-like document, which summarises the receipts and expenditure in respect of Etham Avenue, the net effect of which is to assert that, essentially because the property was negatively geared, her expenses exceeded the receipts, so that on balance, there is an amount due to her, which presumably would be set off against the capital sum of $388,000. As it seems to me, the only way in which that can be resolved is by a taking of accounts in respect of the second defendant’s receipts and expenses in respect of Etham Avenue.
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The second defendant has submitted that she should also be entitled to a just allowance on account of support provided by her to other Grace Group companies, which directly or indirectly enured to the plaintiff’s benefit as a holder of equity in Nevilda Investments. I assume for the sake of argument that it can be established that Julienne personally provided loans or financial accommodation to other companies in the Grace Group, and that in some ways that ultimately enured to the benefit of David; but it seems to me that that is outside the scope of what would be a just allowance in respect of the Etham Avenue property. As explained by Neville and Ashe in Equity Proceedings with Precedents (New South Wales) (Butterworths, 1981), just allowances are reasonable expenses appropriate for the accounting party to be paid out of the subject property; for example, a solicitor, mortgagee, executor, partner, receiver or trustee may claim an expense, including remuneration or commission in the transaction comprised in the account; they are not in the nature of a cross-claim.
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It seems to me that, to the extent that Julienne did provide support or accommodation for other companies in the Grace Group, that was not part of the transactions reflected in the Etham Avenue property. Another way of putting it is that generosity in one repect by a person towards another does not entitle that person, in the capacity as trustee, to use the trust property for the trustee’s benefit.
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Accordingly, the account in respect of Etham Avenue should not include allowances for the value of the financial contribution of any loans by Julienne or other financial accommodation provided by her to other companies in the Grace Group.
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It will therefore be appropriate for directions to be made for the taking of an account, in respect of the Etham Avenue property, largely founded on the form of account already prepared by the second defendant.
Birrell Street
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In respect of the Birrell Street account, the matters which require consideration, at least in principle, conveniently fall into four categories, the others having been resolved between the parties.
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The first is those in which the plaintiff falsifies the account on the basis that there is no sufficient evidence that the expense related to Birrell Street. The second is those in which the plaintiff falsifies the accounts on the basis that it is not shown that Dr Grace, as opposed to some other entity, paid for the expense (the so-called “cross-loan issue”). The third and fourth, which in some respects overlap with the second, are Waverley Council rates and land tax.
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As for the first (“insufficient evidence”) issue, the essential question is whether I would accept as sufficient evidence that a payment was made in respect of Birrell Street, a note to that effect recorded on the relevant cheque butt. In the course of the submissions and examination of the evidence, it has emerged that in respect of at least some of the items objected to on that basis, there is a supporting invoice, which fortifies the position.
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But in principle, where the evidence to tie the expense to Birrell Street is only an annotation on the cheque butt – or, for that matter, on a bank statement – and where there is no countervailing evidence on the topic, the position as I see it is that there is some, if less than conclusive, evidence that the expense relates to Birrell Street, and none to the contrary. That is sufficient to tilt the scales, even if ever so slightly, which is all that is required on a matter of this kind, in favour of proof of the item sought to be falsified by the Plaintiff. In other words, where the only evidence is the cheque butt, and there is no contrary evidence, I would disallow the falsification.
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As an example of what does not fall within that category, reference might be made to item 14 in the 2 June 2015 Table: the expense of $1668 to Harvey Norman Electrics. In that case, while there is an annotation on a document that it was for the benefit of Birrell Street, the burden of the document, which identifies Sir Thomas Mitchell Road as the delivery address, is to the contrary. And in that situation, I would not regard the balance as having been tilted in favour of proving that it was a proper expense. But that is the only one in that category that I have so far identified out of those which have been the subject of close examination to this point.
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As to the cross-loan issue, in principle this relates to expenses that are either admittedly, or proved to be, related to Birrell Street, of which Dr Grace was the registered proprietor, and which have admittedly been paid, if not by Dr Grace, then by some other Grace entity. In essence, there is no issue that the expense was incurred; there is no issue that it has been paid; the question is whether it is properly claimable by Dr Grace.
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As it seems to me, Dr Grace was the person, as the registered proprietor, who was ultimately liable for that expense. It is no doubt the case that the evidence does not clearly establish the various means by which loans and cross-loans in this respect were made between the various Grace entities. But it is fairly clear that ultimately Dr Grace was liable for those amounts, and that by one means or another she is entitled to claim them as an expense, because she would be liable to reimburse whoever had paid them on her behalf or at her request. Accordingly, I would disallow the falsifications in the cross-loan category.
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Insofar as the Waverley Council rates are concerned (item 2 in the table), I would find that sufficient evidence has been provided by the second defendant, and I would disallow that falsification. With respect to item 10, I would be satisfied (on the basis of my conclusion on the cross-loan issue) that Dr Grace is entitled to the benefit of that expenditure, and accordingly I would not allow that falsification.
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The land tax is a more complex issue. It follows from my conclusion on the cross-loan issue that the identity of the payer is not a matter which would warrant allowing the falsification. However, in each of the four cases to which objection is taken, it seems likely that the amount that has been claimed as attributable to the Birrell Street property overstates the proper share of the Birrell Street property on a proportionate basis of the total value for land tax purposes of Dr Grace’s land taxable properties. Those objections, being items 34, 43 and 46, should be allowed in part as to the extent to which the amount claimed has been overstated.
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Decision last updated: 11 March 2016
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