Jess v McNiven, in the matter of McNiven (No 2)
[2022] FCA 446
•29 April 2022
FEDERAL COURT OF AUSTRALIA
Jess v McNiven, in the matter of McNiven (No 2) [2022] FCA 446
File number: VID 1571 of 2018 Judgment of: ANASTASSIOU J Date of judgment: 29 April 2022 Catchwords: BANKRUPTCY – where bankrupts owned a matrimonial home and investment property at time of bankruptcy – where properties vested in trustees pursuant to s 58 of the Bankruptcy Act 1966 (Cth) on declaration of bankruptcy – where properties secured by two mortgages – where debts owed under mortgages exceeded value of properties at time of bankruptcy – where trustees investigated validity of second mortgage – where bankrupts discharged from bankruptcy notwithstanding suspicions regarding second mortgage – where bankrupts continued to reside in matrimonial home and receive rental income from investment property – where settlement reached to withdraw second mortgage several years after discharge of bankruptcy – where trustees and bankrupts engaged in without prejudice negotiations following withdrawal of second mortgage – where trustees eventually took transmission of properties and sought vacant possession – whether trustees entitled to a declaration that they are the owners of the properties with powers to dispose of or sell the properties – application granted
ESTOPPEL – whether principles of estoppel apply in the face of a statute – whether decision in O’Brien v Sheahan [2002] FCA 1292 stands for proposition that there can be an estoppel in the context of the administration of bankrupt estates – statutory purpose and policy considerations informing vesting provisions in Bankruptcy Act – relevant duties and obligations of trustee of a bankrupt estate – principles of estoppel inconsistent with scheme for the administration of bankrupt estates – distinguished O’Brien v Sheahan [2002] FCA 1292 – whether alleged representations contained in reports to creditors and by conduct (including silence and inaction) sufficiently clear and unequivocal to found an estoppel – whether bankrupts relied on any representations to their detriment – whether appropriate remedy would be to require transfer of properties – estoppel claim dismissed
UNJUST ENRICHMENT – whether equitable accounting appropriate in circumstances – analytical framework for claim guided by principle of unjust enrichment – whether trustees or bankrupts entitled to benefit of any capital growth of properties – whether bankrupts entitled to a credit for repayment of interest of loans secured against properties – whether bankrupts required to account to trustees for rent received on investment property and notional rent of matrimonial home – whether bankrupts entitled to credit for payments of rates, taxes and outgoing – whether bankrupts entitled to value of capital improvements, maintenance and repairs – no order for restitution
Legislation: Bankruptcy Act 1966 (Cth), ss 19, 19AA, 58, 77A, 116, 127, 129AA 149D, 153, 179, 180
Corporations Act 2011 (Cth), s 596B
Evidence Act 1995 (Cth), s 131(2)(g)
Transfer of Land Act 1958 (Vic), ss 51, 89, 89A
Insolvency Practice Rules (Bankruptcy) 2016 (Cth)
Cases cited: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; 253 CLR 560
Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; 177 CLR 485
Campbell v van der Velde [2019] FCA 1871
Clifton (Liquidator) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5; 379 ALR 593
Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd [1994] HCA 61; 182 CLR 51
Crown Melbourne Ltd v Cosmopolitan Hotel (VIC) Pty Ltd [2016] HCA 26; 260 CLR 1
Daemar v Industrial Commission of New South Wales (No 2) (1990) 22 NSWLR 178
Dixon v Riquero [2004] FMCA 173; 1 ABC(NS) 474
Draper v Official Trustee in Bankruptcy [2006] FCAFC 157; 156 FCR 53
Equuscorp Pty Ltd v Belperio [2006] VSC 14
Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89
Federal Commissioner of Taxation v Wade [1951] HCA 66; 84 CLR 105
Federal Treasury Enterprise (FKP) Sojuzplodoimport v Spirits International B.V. [2021] FCAFC 77; 389 ALR 612
Forgeard v Shanahan (1994) 35 NSWLR 206
Grundt v Great Boulder Pty Gold Mines Ltd [1937] HCA 58; 59 CLR 641
Jess v McNiven, in the matter of McNiven [2021] FCA 53
Jones v Dunkel [1959] HCA 8; 101 CLR 298
Legione v Hateley [1983] HCA 1; 152 CLR 406
Mann v Paterson Constructions Pty Ltd [2019] HCA 32; 267 CLR 560
Maritime Electric Company Ltd v General Dairies Ltd [1937] AC 610
Minister for Health v Nicholl Holdings Pty Ltd [2015] FCAFC 73; 231 FCR 539
O’Brien v Sheahan [2002] FCA 1292
Official Trustee in Bankruptcy v Frederiksen [2007] FMCA 1915; 5 ABC(NS) 67
Rankin v Official Trustee in Bankruptcy [2005] FCA 1084; 220 ALR 723
Re Pavlou (a bankrupt) [1993] 1 WLR 1046
Roxborough v Rothmans of Pall Mall Australia Limited [2001] HCA 68; 208 CLR 516
Sheahan v O'Brien & Anor [2003] HCATrans 308
Sidhu v Van Dyke [2014] HCA 19; 251 CLR 505
Smith v Bone [2015] FCA 319; 104 ACSR 528
United Petroleum Pty Ltd v Pentaco Oil (Aust) Pty Ltd [2016] FCA 118
Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; 164 CLR 387
Yaxley v Gotts [2000] Ch 162
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Number of paragraphs: 315 Dates of last submissions: 14 October 2021 (Applicants)
21 October 2021 (Respondents)
Dates of hearing: 30 November 2020 – 2 December 2020
12 April 2021 – 14 April 2021
27 September 2021 – 30 September 2021
6 October 2021 – 7 October 2021Counsel for the Applicants: Mr P. Fary SC with Mr N. Paterson Solicitor for the Applicants: Lander & Rogers Counsel for the Respondents: Mr M. Gronow QC with Ms A. Carruthers Solicitor for the Respondents: Hopkins Lawyers ORDERS
VID 1571 of 2018 IN THE MATTER OF MATTER OF CAMERON ROBERT MCNIVEN AND HEATHER ANNE MCNIVEN
BETWEEN: MATTHEW JESS AND PAUL BURNESS AS JOINT AND SEVERAL TRUSTEES FOR THE BANKRUPT ESTATE OF CAMERON ROBERT MCNIVEN
First Applicant
JAMES PATRICK DOWNEY AS TRUSTEE FOR THE BANKRUPT ESTATE OF HEATHER ANNE MCNIVEN
Second Applicant
AND: CAMERON ROBERT MCNIVEN
First Respondent
HEATHER ANNE MCNIVEN
Second Respondent
AND BETWEEN: CAMERON ROBERT MCNIVEN (and another named in the Schedule)
First Cross-Claimant
AND: MATTHEW JESS AND PAUL BURNESS AS JOINT AND SEVERAL TRUSTEES FOR THE BANKRUPT ESTATE OF CAMERON ROBERT MCNIVEN (and another named in the Schedule)
First Cross-Respondent
ORDER MADE BY:
ANASTASSIOU J
DATE OF ORDER:
29 APRIL 2022
THE COURT ORDERS THAT:
1.The Court declares that the Applicants are the legal owners of the properties located at 120 Surrey Road, Blackburn North 3130, described as Certificate of Title Volume 08671 Folio 397 (the Blackburn North Property) and 19 Lowan Avenue, Templestowe 3107, described as Certificate of Title Volume 08345 Folio 278 (the Templestowe Property), collectively, the Properties, in their capacity as Joint and Several Trustees for the Bankrupt Estate of Cameron Robert McNiven and Heather Anne McNiven, respectively.
2.Within 14 days of this order:
(a)the First Respondent withdraw the following caveats lodged over the Properties:
(i)caveat with dealing number AR021871E; and
(ii)caveat with dealing number AR021872C;
(b)the Second Respondent withdraw the following caveats lodged over the Properties:
(i)caveat with dealing number AR021873A; and
(ii)caveat with dealing number AR021874X;
(c)the First and Second Respondents withdraw the following caveats lodged over the Properties:
(i)caveat with dealing number AR021875V; and
(ii)caveat with dealing number AR021876T.
3.The First and Second Respondents are restrained from lodging any further caveat over the Properties.
4.In respect of the Templestowe Property:
(a)the First and Second Respondents deliver up vacant possession to the Applicants within 90 days of the date of this order;
(b)the First and Second Respondents deliver up all keys for all buildings and improvements on the property to the Applicants within 90 days of the date of this order;
(c)the First and Second Respondents must remove from the property all vehicles, rubbish and chattels which have not vested in the Applicants (Personal Property) within 90 days of this order;
(d)in the event that the Respondents fail to comply with paragraph 4(c) of these orders, the Applicants are empowered to remove and dispose of the Personal Property on the Templestowe Property as they see fit after 90 days have passed from the date of these orders;
(e)the property be sold subject to the Law Institute of Victoria’s standard form contract and any special conditions reasonably required by the Applicants;
(f)the Applicants have the sole conduct of the sale of the property and be authorised to instruct an agent and/or auctioneer for that purpose;
(g)the Applicants are to decide whether the property is to be sold by public auction or by private sale; and
(h)the Respondents while residing in the property pay all mortgage repayments, rates and taxes, keep the property insured and provide evidence of these payments to the Applicants.
5.In respect of the Blackburn North Property:
(a)the Applicants are entitled, subject to any secured creditors’ rights, to all rental income from the property;
(b)within 14 days, the First Respondent and Second Respondent provide to the Applicants information and documents and a full account of all rental collected in respect of the property, and full details of where and how such funds were disbursed including the details of all bank account/s where rental is, or has been, remitted, including the:
(i)name/s of the financial institution;
(ii)account name/s; and
(iii)branch and account number/s;
(iv)details of the current tenants such as:
A.the names and all contact details for the current tenants;
B.the current rent being charged; and
C.the current lease document;
(c)the Applicants are entitled to sell the property;
(d)the property, if sold, be subject to the Law Institute of Victoria’s standard form contract and any special conditions reasonably required by the Applicants;
(e)the Applicants have the sole conduct of the sale of the property and be authorised to instruct an agent and/or auctioneer for that purpose; and
(f)the Applicants are to decide whether the property is to be sold by public auction or by private sale.
6.The Respondents pay the Applicants’ costs of and incidental to the proceeding, to be agreed and in default of agreement assessed on a standard basis.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
ANASTASSIOU J:
INTRODUCTION
This is a proceeding that arises from the bankruptcies of the Respondents, Mr Cameron Robert McNiven and Mrs Heather Anne McNiven (collectively, the McNivens). Mrs McNiven became bankrupt on 25 November 2010 and was discharged from bankruptcy on 6 March 2014. Mr McNiven became bankrupt on 24 December 2010 and was discharged from bankruptcy on 25 December 2013.
The issue in this proceeding is whether Mr Matthew Jess and Mr Paul Burness (as Joint and Several Trustees of the Bankrupt Estate of Mr McNiven) and Mr James Downey (as Trustee of the Bankrupt Estate of Mrs McNiven) (collectively, the Trustees) are entitled to realise their interests in properties located at:
(1)120 Surrey Road, Blackburn North 3130, described as Certificate of Title Volume 08671 Folio 397 (the Blackburn North Property); and
(2)19 Lowan Avenue, Templestowe 3107, described as Certificate of Title Volume 08345 Folio 278 (the Templestowe Property),
(collectively, the Properties).
By their statement of claim dated 7 February 2019, the Trustees contend that they are entitled to realise their interests in the Properties by reason of the vesting provisions in ss 58 and 116 of the Bankruptcy Act 1966 (Cth). Accordingly, the Trustees seek a declaration to the effect that they are the legal and beneficial owners of the Properties; an order that the McNivens withdraw caveats lodged over the Properties and are restrained from lodging any further caveats over the Properties; and orders for vacant possession and powers of sale in relation to the Properties.
Conversely, by their amended defence and cross-claim dated 15 August 2019, the McNivens contend that the Trustees are estopped from realising the Properties. The McNivens seek a declaration that they are the beneficial owners of the Properties and a consequential order that the Trustees transfer the legal titles in the Properties back to them. In the alternative, the McNivens seek an “equitable accounting” from the Trustees in relation to financial and personal contributions they made in relation to the Properties since their bankruptcies commenced.
As I explain in some detail below, the Trustees initially determined that there was limited (if any) equity in the Properties. However, in March 2016, a secured creditor with a second ranking mortgage over the Properties, Anylock Pty Ltd, agreed to withdraw its claim against the Properties, unlocking substantial equity in the Properties.
Shortly thereafter, the Trustees engaged in without prejudice negotiations with the McNivens’ representatives in an attempt to reach a resolution that would enable the Trustees to annul the bankrupt estates. However, those discussions did not lead to a resolution. Accordingly, the Trustees took steps to seek transmission of the Properties in December 2017 and to issue a notice to vacate to the McNivens in March 2018.
Ultimately, the Trustees commenced this proceeding on 7 December 2018. At the beginning of the trial in November 2020, the estimated equity in the Properties is expected to be $1.45m, less any sale costs and associated expenses.
At a very high level of generality, the parties’ competing contentions may be summarised as follows.
The McNivens’ case is that in all the circumstances, they were entitled to, and ultimately did, form an assumption, based on express and implied representations by the Trustees, that the Trustees had abandoned their interests in the Properties, and it would therefore be unconscionable for the Trustees to resile from the representations, because the McNivens had relied upon them to their detriment. The juridical basis for the McNivens’ cross-claim is an equitable estoppel based on alleged written representations, conduct, silence and inaction by the Trustees since the date of their bankruptcies. The McNivens also say they are beneficiaries of a constructive trust over the Properties, though Senior Counsel for the McNivens accepted that any such claim is effectively coextensive with the equitable estoppel claim.
In response, the Trustees contend that there can be no estoppel against the relevant provisions of the Bankruptcy Act. In this regard, the Trustees rely on longstanding authority that there can be no estoppel in the face of a statute: see, eg, Smith v Bone [2015] FCA 319; 104 ACSR 528; cf. O’Brien v Sheahan [2002] FCA 1292. Further, the Trustees say that they did not make any actionable representations or engage in conduct sufficient to give rise to an equitable estoppel.
In addition, or alternatively, the Trustees submit that to the extent any representations were made by the Trustees to the effect that the administration of the bankrupt estates was being finalised and the Properties would not be realised, such representations were made with an implicit premise or subject to an implied qualification; namely, a factual assumption that there was no equity in the Properties.
The Trustees further contend that the McNivens did not rely on any representations either during or after their discharge from bankruptcy. Rather, they say the McNivens knew, or ought to have known, that the Trustees would sell the Properties if there was equity for them to realise for the benefit of unsecured creditors, consistent with their statutory duties. Moreover, the Trustees contend that the McNivens’ claim of detrimental reliance is unreasonable in the circumstances that followed the McNivens being discharged from bankruptcy. Those circumstances relevantly included public examinations in relation to the Anylock transactions and extensive without prejudice negotiations during which the Trustees put the McNivens on notice of their intention to realise the Properties.
Finally, in relation to the equitable estoppel claim, the Trustees contend that even assuming the pleaded representations are established, and assuming the McNivens relied on those representations, any detriment thereby suffered was minimal. For example, the Trustees highlight that the McNivens have enjoyed the exclusive use and occupation of the Templestowe Property and the receipt of rent from the Blackburn North Property, both during and after their bankruptcies. Accordingly, the Trustees contend it would be disproportionate to require the Trustees to transfer the legal titles in the Properties back to the McNivens.
The McNivens plead in the alternative a claim for “equitable accounting”, which seeks to take into account the capital growth of the Properties and contributions made by the McNivens towards the Properties during and after their bankruptcies. The McNivens’ pursue their alternative claim having regard to the fact that since the commencement of their bankruptcies they have:
(1)made all the loan repayments in relation to the mortgages registered over the Properties, and paid all the rates, taxes and other outgoings in relation to the Properties (the equity payments claim); and
(2)expended significant personal effort and financial resources in undertaking capital improvements, repairs and maintenance in relation to the Properties (the personal efforts claim).
The Trustees contend that in any “equitable accounting”, or like process, they are entitled to the capital growth in the Properties as the legal and beneficial owners. The Trustees submit that the focus of such an enquiry should be whether there has been unjust enrichment to the bankrupt estates, and not alleged detriment to the McNivens. Moreover, the Trustees contend that to the extent credit is given for the equity payments and personal efforts, the McNivens ought to give credit for rent received from the Blackburn North Property and notional rent on the Templestowe Property.
It follows from the above summary that there are three main issues to decide, each of which consists of various sub-issues. First, whether the Trustees are estopped from realising the Properties, including the threshold question of whether there can be an estoppel in the face of the provisions of the Bankruptcy Act (the estoppel claim). Second, whether the McNivens are beneficiaries of a constructive trust over the Properties (the constructive trust claim). Third, if the estoppel and constructive trust claims fail, whether the McNivens are entitled to any interest in, or the proceeds of sale from, the Properties as a result of the equity payments and their personal efforts having regard to the principles of unjust enrichment, including, if answered in the affirmative, whether they ought to give credit to the Trustees for notional rent on the Templestowe Property and the Blackburn North Property. Related also to this issue is whether the Trustees or the McNivens are entitled to the capital growth of the Properties (the unjust enrichment claims).
For the reasons that follow, I have concluded that the equitable estoppel claim is legally, analytically and factually flawed, and must fail. In my view, as a matter of principle, there can be no estoppel against the vesting provisions in the statute. Fundamentally, I dismiss the estoppel claim for three reasons. First, the alleged representations are not rationally capable of founding the assumptions the McNivens claim to have been made. Second, I find that the assumptions the McNivens claim they made consequent on the Trustees’ conduct were a convenient confection. Third, though it may be inferred from the first and second point above, I also expressly find that the McNivens did not alter their position to their detriment in any relevant way.
In sum, as concerns the estoppel claim, I therefore find that the Trustees did not make any representations actionable in estoppel, particularly when the alleged statements, conduct and inaction are understood in context. Further, there was no reasonable reliance by the McNivens to their detriment on any of the pleaded representations. It follows that the Trustees did not act unconscionably, such that equity would not require the transfer of the Properties to the McNivens.
As to the constructive trust claim, I do not accept that the McNivens acquired an equitable interest in the Properties by reason of the equity payments or personal efforts claims. Indeed, no such interest arises by reason of the repayment of the mortgage over the Properties or by reason of the conduct of the parties Trustees.
The unjust enrichment claims raise more complicated questions of fact and law. However, in brief, and for the reasons that I develop below, I have concluded that the McNivens are entitled to a limited credit for interest repayments on their mortgage, as well as a discounted proportion of the rates, taxes and outgoings incurred in relation to the Properties, but are not entitled to any credit for other expenses or personal efforts that did not contribute to an increase in value of the Properties.
However, that entitlement is offset by the requirement that the McNivens give credit to the Trustees for notional rent of the Templestowe Property and rent received from the Blackburn North Property. Accordingly, I have not made an order for restitution because any unjust enrichment to the Trustees is exceeded by the benefit to the McNivens of the exclusive use and occupation of the Properties. Finally, I have concluded that the Trustees, not the McNivens, are entitled to the benefit of any capital growth of the Properties for the reason that appreciation in their value cannot be disaggregated from their ownership of the Properties.
For completeness, I note that during the hearing the McNivens abandoned an allegation that the Trustees disclaimed the Properties. Further, they did not press an allegation of acquiescence, delay or laches, other than to the extent that issue informs the analysis in relation to the above mentioned claims in [16]. Accordingly, I have not considered those issues as discrete claims.
BACKGROUND
Early relationship, investments and purchase of the Properties
The McNivens commenced a serious romantic relationship in 1993 and married on 17 February 2007.
In March 2000, the McNivens purchased the Blackburn North Property as joint proprietors, financed by a loan from Perpetual Trustees. From March 2000 to August 2004, the McNivens resided at the Blackburn North Property.
In March 2004, the McNivens established a family trust called the McNiven Discretionary Trust (the McNiven Family Trust). In August 2004, the McNivens purchased the Templestowe Property on behalf of the McNiven Family Trust. The McNivens did so on the advice of their former accountant, who they did not refer to by name but identified as being employed by “The Accountant Group” in Geelong.
At or around the same time, the McNivens obtained a loan from St George Bank Limited to facilitate the purchase of the Templestowe Property. The McNivens also re-financed the Blackburn North Property with St George.
In August 2004, the McNivens left the Blackburn North Property and moved into the Templestowe Property. From that date onwards, the McNivens lived in the Templestowe Property and rented out the Blackburn North Property as an investment property. The McNivens have also applied contributions of rent from the Blackburn North Property towards the St George mortgage and otherwise maintained both of the Properties.
On 1 May 2005, Mr McNiven completed an application form to invest in a Timbercorp Projects Package with Timbercorp Finance Pty Ltd (now in liquidation). Mr McNiven gave evidence that he made that investment on advice from the McNivens’ former accountant. However, shortly thereafter, the McNivens came to the conclusion that their former accountant was “charging us a lot of money for our accounting services” and they decided to change accountants.
As a result, in or around 2006, the McNivens engaged Mr Peter Holt of Holt Norman & Co Pty Ltd to be their personal and business accountant. The McNivens also retained Mr Holt as a financial planner and reposed full trust in Mr Holt to manage their financial affairs. Indeed, on advice from Mr Holt, the McNivens made further investments in managed investment schemes and margin loans, accruing substantial debts to Timbercorp, BT Financial Group, Macquarie Bank, Agripay Pty Ltd and Rewards Projects Ltd, among others.
The McNivens also transferred the Templestowe Property out of the McNiven Family Trust and into their personal names on 14 March 2007. The McNivens made that decision, on the advice of Mr Holt, to avoid potentially incurring a substantial capital gains tax liability in the future.
In December 2007, the McNivens refinanced the Properties with St George by signing a Portfolio Loan Agreement (the St George Mortgage). That portfolio loan comprised three sub-accounts, which the McNivens have maintained and serviced since that time.
Anylock transactions
In November 2007, Mr Holt recommended a joint venture with Anylock to the McNivens. Anylock was registered as a company with ASIC on 21 June 2007 and Mr John Voitin was the sole director, secretary and shareholder of the company.
The proposed investment with Anylock involved a project to subdivide and develop a property located in Kilmore. More specifically, Mr McNiven gave evidence that the proposal involved subdividing an 11 acre property into 40 lots, with the potential to subdivide a further 40 lots in the future.
On 1 February 2008, Anylock and the McNivens executed a document entitled Property Development Joint Venture Agreement.Under the Joint Venture Agreement, the Joint Venturers (Anylock and the McNivens) would acquire a property from Seatham Developments Pty Ltd, a company associated with Mr Voitin, and would develop the land in accordance with the terms of the Joint Venture Agreement.
Pursuant to the terms of the Joint Venture Agreement, it was anticipated that the McNivens would contribute approximately $600,000 in equity to the development. It was also contemplated that Mr McNiven would be involved in the construction of properties on the development due to his experience as a carpenter builder and to maximise profits from the development. The McNivens understood that Mr Holt would organise the finance for them to invest in the joint venture; however, it appears that Mr Holt had some difficulty obtaining the requisite finance on behalf of the McNivens.
Financial difficulties
The McNivens’ financial difficulties culminated in 2008 and 2009, during which period the McNivens fell into arrears on their loans and investments and received multiple letters of default from creditors.
Mr McNiven gave evidence that around this time Mr Voitin was calling him repeatedly, asserting that the McNivens were in default of the Joint Venture Agreement and demanding money from them. Mrs and Mr McNiven also said that they were receiving margin calls and letters of default from entities such as BT Financial Group and Timbercorp. Mrs McNiven succinctly summarised the McNivens’ financial position at the start of 2009 when she said during her evidence that they were “completely overcommitted”, “into debt up to our eyeballs” and “in serious financial strife”.
In early 2009, Mr Holt introduced the McNivens to Mr Graeme Watters, an accountant with experience dealing with creditors in the insolvency context. Mrs and Mr McNiven each gave evidence that they were told at the time that Mr Watters was a lawyer and it was only “later on down the track” that they became aware that he was not. In my view, nothing turns on this factual issue, other than it is part of the context of relevant events.
Further dealings with Anylock
From around early 2009, Mr Watters was responsible for dealing with the McNivens’ creditors, including, most relevantly for present purposes, liaising with Mr Voitin do something about the McNivens’ rapidly escalating liability to Anylock. During the course of Mr Watters’ negotiations with Mr Voitin in relation to the McNivens’ liability to Anylock, the McNivens were told that they owed Anylock $880,000, mainly as a result of default and interest charges as well as costs allegedly incurred in relation to the joint venture development.
Mr Watters told the McNivens that they could reduce their liability to Anylock to $750,000 if they signed an agreement with Anylock. Mrs and Mr McNiven each gave evidence that they thought this would give them time to pay back the money they owed and, at least temporarily, appease Mr Voitin so that he would leave them alone.
On 1 May 2009, Anylock and the McNivens entered into a Settlement Deed and Loan Agreement. The effect of those agreements was that the McNivens borrowed $750,000 from Anylock with a repayment date of three years at a compounding interest rate of 10 per cent per annum. To secure the amounts owing under the loan agreement, the McNivens gave a mortgage over the Properties to Anylock (the Anylock Mortgage). In accordance with the terms of these agreements, on 2 July 2009, Anylock lodged a caveat with the Registrar of Titles over the Properties pursuant to s 89 of the Transfer of Land Act 1958 (Vic) (the Anylock Caveat).
The McNivens’ financial situation further deteriorated throughout 2009. Mrs McNiven gave evidence that the McNivens were receiving letters of default with increasing frequency as well as calls from creditors demanding the repayment of money, which they generally referred to Mr Watters for advice. Mr Watters assured the McNivens that he was still trying to negotiate with creditors to alleviate their financial pressures. However, those discussions did not lead to a resolution.
In August 2010, Mrs McNiven received a bankruptcy notice from Agripay. Shortly thereafter, Mr McNiven also received a bankruptcy notice from Agripay. Mrs and Mr McNiven each gave evidence that Mr Watters advised them to enter bankruptcy and offered to assist by preparing their statement of affairs. Mrs McNiven said that after discussing the matter with Mr McNiven, she came to the conclusion that: “[w]e didn’t think we had any other options. We had so many creditors. We had no way of paying them. We owed more than what we had. And we were just – we didn’t know what to do.”
On 8 November 2010, prior to petitioning for bankruptcy as debtors, the McNivens paid $103,000 to Anylock. Mrs McNiven said she was not aware of that payment at the time it was made. Mr McNiven explained the circumstances surrounding that payment as follows. He said that the McNivens’ financial situation was dire and Mrs McNiven was experiencing post-natal depression after the birth of their first child. Further, Mr Voitin was threatening legal action to recover the money under the Anylock Loan Agreement. Mr Watters suggested that the McNivens transfer some money to Mr Voitin to cover the ‘interest’ on the loan agreement. Relying on that advice, Mr McNiven arranged a bank cheque of $103,000 in favour of Anylock, being the remaining funds that were available to him at that time.
There is no allegation by the Trustees that the Anylock Mortgage was a sham or not legitimate for some other reason. Indeed, the Trustees expressly said on multiple occasions that they did not seek to characterise the Anylock transactions (being an encapsulated phrase referring to the Anylock Joint Venture Agreement, Settlement Deed, Loan Agreement and Anylock Mortgage) as a “fraud” or “sham”. Of course, the Trustees did not need to go that far. There is an understandable unwisdom to assuming a burden to prove allegations of fraud when it is sufficient to rely on well-established legal rights to succeed in the claim.
Nevertheless, the Trustees said that it should have been apparent to the McNivens that the Anylock transactions were suspicious and were likely to be investigated and challenged by the Trustees, both as a result of enquiries made by the Trustees about the Anylock transactions during the McNivens’ bankruptcies and also by reason of the public examinations conducted by the liquidators of Timbercorp in October to November 2015 (to which I refer below).
Irrespective of whether the Anylock transactions were legitimate or not, it is not contested that the transactions created the appearance that there was no equity in the Properties during the McNivens’ bankruptcies and for several years after their discharge from bankruptcy. In other words, it became a common assumption of fact that due to the Anylock Mortgage, there was no equity in the Properties. That is a critical factual assumption in this matter and one which I shall return to in due course.
As I have already said, it was in the context of public examinations that arose in connection with the Timbercorp liquidation (bearing in mind that the McNivens owed money to Timbercorp) that Mrs McNiven, Mr McNiven and Mr Voitin were publicly examined in October to November 2015. Following those examinations, a settlement agreement was entered into between Timbercorp, Anylock, Mr Voitin and Mrs McNiven’s Trustee in March 2016 concerning the abandonment of Anylock’s interest in the Properties. It is unnecessary to draw any inference, one way or the other, in relation to the sequence of those events, having regard to the matters relied upon by the Trustees in support of their case.
The terms of the settlement were essentially that Anylock would withdraw its claims in relation to the Properties. Less than two weeks after the settlement, and days before the withdrawal of the Anylock Caveat on 1 April 2016, Mr Watters contacted Mr Burness and made an offer to purchase the caveats on the Properties. That led to extensive (albeit ultimately unsuccessful) without prejudice negotiations between the Trustees and the McNivens’ representatives, which I explore below.
Before explaining those events in detail, it is appropriate to first return to the sequence of events which led to the McNivens’ bankruptcies. In considering the factual detail which follows, it is important to bear in mind that the McNivens allege that the Trustees did not take any steps to realise the Properties – and thereby made representations to that effect by conduct, silence and inaction – throughout the whole of the period from the commencement of their bankruptcies in November and December 2010, respectively, until 8 March 2018, when the Trustees wrote to the McNivens requesting that they vacate the Properties.
The McNivens’ bankruptcies
Mrs McNiven
Mrs McNiven signed her statement of affairs on 23 November 2010. In that statement, Mr Holt was recorded as her accountant. Mrs McNiven disclosed her interests in the Properties as well as the existence of the St George Mortgage and Anylock Mortgage. Mrs McNiven proffered the following estimates as to the value of the Properties:
(1)for the Blackburn North Property, resale value of $650,000 and a debt to secured creditors of $1.4m; and
(2)for the Templestowe Property, resale value of $750,000 and a debt to secured creditors of $750,000.
The mathematics of the situation is obvious, even if one is not good at mathematics. As I shall explain, I find that the mathematics was obvious to each of Mrs and Mr McNiven.
On 25 November 2010, Mrs McNiven entered bankruptcy on a debtor’s petition and Mr Andrew Wily was appointed her trustee in bankruptcy. On that same date, Mr Wily sent a letter to Mrs McNiven informing her about the effect of bankruptcy, including the vesting provisions under the Bankruptcy Act.
On 13 December 2010, Mr Wily sent a letter to Anylock, care of its solicitors, Voitin Lawyers, in which Mr Wily stated that he had been appointed as Trustee of Mrs McNiven’s Bankrupt Estate. Mr Wily stated that he had become aware that Anylock had lodged caveats in respect of the Properties supported by a mortgage dated 1 May 2009 and asked for certain documents to assist in his investigations. The documents sought by Mr Wily included:
(1)a copy of the mortgage dated 1 May 2009;
(2)documents which evidence any loan or advance secured by the mortgage;
(3)documents relevant to whether Anylock had received payment of any sums in connection with any loan or advance secured by the mortgage; and
(4)documents which evidence the current amount owing under the mortgage.
On 24 January 2011, Mr Wily received a letter from Voitin Lawyers, on behalf of Anylock, enclosing the Anylock Mortgage and Loan Agreement, both dated 1 May 2009. The letter also said that no payments had been received by Anylock and that the amounting owing under the Anylock Mortgage as at 30 November 2010 was $762,500.
On 30 March 2011, Mr Wily lodged caveats over the Properties with the Registrar of Titles. Shortly thereafter, Mrs McNiven was notified of the caveats by the Land Titles Office.
Throughout 2011 and 2012, Mr Wily made various enquiries aimed at investigating the Anylock Mortgage. On 17 October 2011, he sent a letter to Anylock in which he asked for evidence of the funds advanced to support the Anylock Mortgage. On 16 December 2011, he sent a follow-up letter to Anylock in which he repeated his request for evidence of the funds advanced to support the Anylock Mortgage. On 23 February 2012, he sent yet another letter to Anylock, referring to the “previous correspondence, to which I do not appear to have received a response” and requesting, within 14 days, evidence of the funds advanced to support the Anylock Mortgage.
On 23 February 2012, Mr Wily also sent a letter to Mrs McNiven requesting all documentation in her possession in support of funds advanced to Anylock, including pursuant to the Anylock Loan Agreement. Mr Wily advised Mrs McNiven that if she failed to provide the requested information, he would regard that as grounds for him to object to her discharge from bankruptcy.
Mr Wily sent a further letter to Anylock on 7 August 2012, again referring to his previous correspondence and requesting evidence of “funds advanced to [Anylock to] support the mortgage dated 1 May 2009 in the amount of $750,000.”
On 16 August 2013, Ms Fleur Evans, a Manager working for Mr Wily, recorded in a file note that she had discussions with the Trustee for Mr McNiven, who told her that “no creditors [were] interested in funding [a] claim” to investigate the Anylock transactions and they proposed to finalise Mr McNiven’s bankruptcy. Mr Wily gave evidence that at this time he was still investigating the Anylock transactions in connection with Mrs McNiven’s bankruptcy.
On 3 September 2013, Mr Wily issued a supplementary report to creditors. The supplementary report to creditors relevantly said:
As creditors are aware, Heather McNiven was made bankrupt on 25 November 2010 following acceptance of her Debtors petition with the Official Receiver.
I have conducted further investigations into the affairs of Mrs McNiven and in this regard I have determined that it is necessary to provide a further report on my findings:
[Calculations of estimated equity in Templestowe Property and Blackburn North Property, respectively]
…
If the mortgage of Anylock Pty Ltd is valid, then there will be no equity realisable for the benefit of creditors.
If the mortgage of Anylock Pty Ltd is invalid, and in the event that the caveat is removed then it would appear that the equity available to the Trustee in the bankrupt estate may be in the vicinity of $138,722, less any legal costs and costs and expenses of the Trustee associated with the recovery of the same.
I have requested further details from the caveator in respect of their claim and I am yet to determine the validity and position with respect to their claim over the property.
…
Possible recoveries and funding from creditors
The major areas of possible recovery for the benefit of creditors are those transactions that are void. I am currently without sufficient funds in this estate I would like to obtain legal advice regarding the possible liabilities that the Trustee may incur in issuing a lapsing notice and the effect on the Estate.
I may also elect to have the bankrupt publicly examined on oath as to his conduct, trade dealings, property and affairs. That examination may well be used to seek evidence in relation to a potential recovery or litigation. The trustee (or a creditor) may examine the bankrupt and the transcript of the examination may be used in evidence in proceedings against the bankrupt under this Act.
I am without sufficient funds to enable me to undertake such an examination.
Creditors are requested to advise within ten days of the date of this report if they would be willing to fund the further investigations of the Trustee, in particular providing sufficient funding to commence proceedings to challenge the validity or otherwise of the caveat as lodged over the properties by Anylock Pty Ltd.
Importantly, the supplementary report to creditors dated 3 September 2013 is relied on by the McNivens as one of the bases for their estoppel claim. Suffice to say, for present purposes, that I do not accept that the Trustees represented that they would not be realising their interests in the Properties in this report.
On 2 October 2013, Mr Wily sent a further letter to Mrs McNiven requesting information concerning the Anylock loan for the purpose of investigating whether an amount of $750,000 was advanced and secured by the Anylock Mortgage. Mr Wily again notified Mrs McNiven that failure to provide the requested information was grounds for an objection to her discharge from bankruptcy and could result in an extension of her bankruptcy to a period of eight years.
On 4 November 2013, Mr Wily issued a notice of objection to Mrs McNiven’s discharge from bankruptcy on the basis that she had failed to comply with a written request to provide information about her property, income or expected income: see s 149D(1)(d) of the Bankruptcy Act.
It is alleged that on or 12 February 2014, Mr Wily called Mrs McNiven and told her that he had completed his investigations and decided that the information provided to him was satisfactory. As such, he proposed to withdraw his objection to her discharge from bankruptcy. The alleged oral representations in February 2014 are relied on by the McNivens, together with the written representations in the supplementary report to creditors dated 3 September 2013. These statements are characterised by the McNivens as express representations upon which they were entitled to rely, and did rely, when forming the assumption that the Trustees had abandoned their interests in the Properties.
The McNivens did not produce any direct evidence that might corroborate the alleged oral representations. There was apparently no contemporaneous note made by Mrs McNiven of the telephone conversation on 12 February 2014, nor any file note or other contemporaneous record made by Mr Wily. I found the evidence given by Mrs McNiven on this subject to be highly unsatisfactory. During her evidence in chief, Mrs McNiven claimed that Mr Wily said he was satisfied with the information provided to him and that he would be withdrawing his objection to her discharge from bankruptcy. However, she could not recall what she said in response to Mr Wily. Importantly, Mrs McNiven did not say during her evidence in chief that Mr Wily told her that he would not be realising the Properties during the conversation on 12 February 2014.
Mr Wily gave evidence that he could not recall whether any such conversation took place nor could he recall making any such representations. Mr Wily added, however, that he would not have made representations that the administration of Mrs McNiven’s Bankrupt Estate could be finalised because investigations into the Anylock transactions were ongoing at that time.
On 19 February 2014, Mr Wily received a letter from Mr Watters. The letter referred to a meeting between Mr Wily and Mr Watters on 12 February 2014 and said: “[we] confirm your advice that you have now completed all your investigations and the information that has been provided to you is satisfactory.” The 19 February 2014 letter requested that Mr Wily turn his immediate attention to discharging Mrs McNiven from bankruptcy.
On 6 March 2014, Mr Wily withdrew his objection to Mrs McNiven’s discharge from bankruptcy and Mrs McNiven was discharged from bankruptcy. Despite withdrawing his objection to discharge, Mr Wily gave evidence that at no time did he advise Mrs McNiven that the Properties were no longer vested in him as her trustee in bankruptcy.
On 19 September 2014, Mr Wily instructed his then lawyers, SRM Lawyers, to write to Voitin Lawyers in respect of the Anylock Caveat. In that correspondence, SRM Lawyers said that unless Anylock provided contemporaneous records recording the debt due and owing to Anylock and a valid agreement granting Anylock a proprietary interest in the Properties, SRM Lawyers was of the view that Anylock did not have a sufficient interest in the Properties to maintain the caveat.
The letter enclosed an application under s 89A of the Transfer of Land Act 1958 (Vic) for the removal of the Anylock Caveat. SRM Lawyers had been instructed to issue that application on 30 September 2014 if the caveat was not withdrawn. Mr Wily gave evidence that he recalls providing instructions to SRM Lawyers to write similar letters to Voitin Lawyers with respect to other unrelated bankrupt estates to which he happened to have been appointed as a trustee. He said that by reason of his experience with other bankrupt estates to which he had been appointed, in relation to which caveats had also been lodged by Anylock, there was a lack of evidence to substantiate the debt the subject of the alleged mortgage. I pause to note that this evidence is consistent with Mr Wily’s evidence that investigations into the Anylock transactions were ongoing throughout 2014.
On 30 September 2014, as foreshadowed, Mr Wily instructed his lawyers to issue an application to remove the Anylock Caveat. However, it appears from historical title searches of the Properties that, notwithstanding Mr Wily’s instructions, an application for removal of the caveat under s 89A of the Transfer of Land Act was never in fact issued. This may have been due to Mr Wily being removed and replaced as trustee shortly after those instructions. However, for present purposes, it is not necessary to determine why the application pursuant to s 89A was not issued.
Application to remove Mr Wily as Trustee of the Bankrupt Estate of Mrs McNiven
On 11 November 2014, the liquidators for Timbercorp brought an application in this Court in which they sought to remove Mr Wily as Trustee of the Bankrupt Estate of Mrs McNiven (in addition to other bankrupt estates). The material filed with the Court (and separately provided to Mrs McNiven) explained that Timbercorp proposed to fund an independent trustee to investigate the Anylock Mortgage and, if necessary, commence proceedings to remove the Anylock Caveat. Mr Burness gave evidence that he understood that application was made because the liquidators for Timbercorp were dissatisfied with Mr Wily. While I accept that was Mr Burness’ subjective belief, nothing turns on whether his inference was, or was not, an accurate explanation for the application. In any case, if it matters, that inference clearly emerges from the grounds for, and relief sought in, the application brought by the liquidators of Timbercorp.
On 27 November 2014, Mr Wily sent a letter to the Australian Financial Security Authority (AFSA) stating, among other things, that:
(1)he did not consider there to be any merit in the application to remove him as trustee of various bankrupt estates;
(2)it was nevertheless appropriate for him to cease to be the trustee of the estates because Timbercorp:
(a)was a major creditor in each of those bankrupt estates;
(b)had raised concerns about his administration of the bankrupt estates; and
(c)had made it clear that it was prepared to fund another trustee, but not him, to conduct further investigations in relation to those bankrupt estates; and
(3)accordingly, he would apply to the Court to accept his resignation as trustee of each of the bankrupt estates.
On 28 November 2014, Gordon J made orders:
(1)accepting Mr Wily’s resignation as Mrs McNiven’s trustee in bankruptcy pursuant to s 180 of the Bankruptcy Act; and
(2)appointing Mr Downey as Mrs McNiven’s trustee in bankruptcy pursuant to s 179(1)(b) of the Bankruptcy Act.
On 6 December 2014, Mrs McNiven was served with the court documents filed in relation to the application for the removal and replacement of Mr Wily, including a copy of the Court’s orders.
From the time Mr Downey was appointed to take over the bankrupt estate of Mrs McNiven, no steps were taken to realise the Properties until 2016.
I shall say more about events which transpired in the context of Mrs McNiven’s bankruptcy below in the context of considering the pleaded claims.
Mr McNiven
On 13 December 2010, Mr McNiven signed his statement of affairs. In his statement of affairs, Mr McNiven disclosed his interests in the Properties as well as the existence of the St George Mortgage and Anylock Mortgage, and provided the following estimates:
(1)for the Blackburn North Property, resale value of $650,000 and a debt to secured creditors of $1.4m; and
(2)for the Templestowe Property, resale value of $750,000 and a debt to secured creditors of $1.4m.
I note there is an unexplained discrepancy between what is stated as the amounts owing to secured creditors for Mrs and Mr McNiven in relation to the Templestowe Property. The discrepancy is that Mrs McNiven recorded a debt owing to secured creditors of $750,000 in relation to the Templestowe Property, whereas Mr McNiven recorded a debt owing to secured creditors of $1.4m. However, that discrepancy is not material to the matters I have to determine in this proceeding.
On 24 December 2010, Mr McNiven entered bankruptcy on a debtor’s petition and Mr Jess and Mr Burness were appointed as his trustees in bankruptcy.
On 6 January 2011, Mr Jess and Mr Burness sent a letter to Mr McNiven informing him about his bankruptcy and the vesting provisions under the Bankruptcy Act.
On 10 January 2011, Mr Jess and Mr Burness lodged caveats on the title to the Properties claiming an equitable estate or interest in fee simple as trustees of the estate of the registered proprietor, Mr McNiven.
On 20 January 2011, Mr Jess and Mr Burness sent a report to creditors of Mr McNiven’s Bankrupt Estate. The report contained a summary of Mr McNiven’s financial position, estimating that the equity in the Properties was between nil (on a worst case scenario) and $44,000 (on a best case scenario). Mr Jess and Burness further advised that investigations into the bankrupt’s assets, liabilities, income and pre-bankruptcy activities were ongoing, and said that they would update creditors as to their intentions in respect of the Properties in due course.
Also on 20 January 2011, Mr Matthew Kucianski, an employee of Mr McNiven’s Trustee, sent an email to Mr Watters seeking information and records with respect to the Bankrupt Estate of Mr McNiven.
On 22 March 2011, Mr Voitin sent a letter to Mr Burness enclosing a copy of the Anylock Mortgage and Loan Agreement. Mr Voitin said in the letter that, as at 1 March 2011, there had been no repayments of interest pursuant to the Anylock Mortgage and the payout figure was $787,500.
On 6 April 2011, Mr Burness sent a letter to Anylock seeking information regarding the Anylock Mortgage and Loan Agreement, including:
(1)when the funds which form the security were provided;
(2)how those funds were provided; and
(3)to whom those funds were provided.
On 12 April 2011, Mr Voitin sent a letter to Mr Burness advising that the accountant for Anylock was on leave but that he was currently obtaining instructions in relation to the matters raised in Mr Burness’ letter dated 6 April 2011.
In March or April 2011, Mr Watters told the McNivens that the Trustees had requested formal valuations of the properties to ascertain whether there was any equity in them. Valuations were provided to the McNivens and their Trustees. On 21 April 2011, the Templestowe Property was valued at $750,000. On 3 May 2011, the Blackburn North Property was valued at $700,000.
On 1 August 2011, Mr Burness served a notice on Anylock pursuant to s 77A of the Bankruptcy Act seeking books and records in connection with his investigation of the affairs of Mr McNiven under s 19AA of the Bankruptcy Act.
Over the subsequent years, Mr Jess and Mr Burness investigated the Anylock transactions. However, they did not discover any evidence upon which to challenge the validity of, or set aside, those transactions. It also appears that there was little appetite among creditors to investigate a claim against Anylock, because even if the Anylock Caveat was removed, there was limited equity available in the Properties.
Accordingly, on 25 December 2013, Mr McNiven was discharged from bankruptcy.
On 7 March 2014, being the day after Mrs McNiven was discharged from bankruptcy, Mr Burness and Mr Jess issued an advice to creditors. Mr Burness gave evidence that the document was prepared to advise creditors of the current status of Mr McNiven’s bankruptcy at that time and was not provided to Mr McNiven in his capacity as a bankrupt.
The advice to creditors included the following relevant statements at the start of the document:
Finalisation of Administration
Creditors are advised that Mr McNiven was automatically discharged from his bankruptcy on 25 December 2013. We have now finalised all outstanding matters in the bankrupt estate.
This estate has come to an end and our file is being closed.
…
There will be no further updates on this file.
During the course of the hearing, it was revealed that the advice to creditors appears to have been sent to the McNivens via one of the creditors, Horizon Sunrise Pty Ltd, which was the Trustee for the McNiven Family Trust. Indeed, both Mrs and Mr McNiven gave evidence that they received the advice to creditors dated 7 March 2014 in the mail at their Templestowe Property. They both said in substance that they understood from reading that document that Mr McNiven’s estate was being finalised and the Trustees were not going to sell the Properties.
This advice to creditors is a further document said by the McNivens to contain express representations by the Trustees that they would not seek to realise the Properties given there was little or no equity in them. According to the McNivens, it followed that they were entitled to keep the Properties, and as such, they maintained the Properties, made the St George Mortgage repayments and exerted significant personal efforts in relation to the Properties.
I shall say more about the events which transpired in the context of Mr McNiven’s bankruptcy below in the context of considering the pleaded claims.
Timbercorp public examinations
On 2 September 2015, a summons was issued by this Court pursuant to s 596B of the Corporations Act 2011 (Cth) to Mrs and Mr McNiven in connection with the Timbercorp liquidation. The summons required the attendance of each of Mrs and Mr McNiven for cross-examination and production of various documents relating to the Anylock transactions.
On 7 September 2015, the summons was served on Mrs and Mr McNiven by Mills Oakley, the solicitors acting on behalf of the liquidators of Timbercorp.
The McNivens were publicly examined in October and November 2015. Relevant matters in relation to which the McNivens were cross-examined included:
(1)their introduction to Mr Voitin;
(2)their indebtedness at the time of the introduction to Mr Voitin;
(3)various meetings they had with Mr Voitin;
(4)the joint venture agreement with Anylock;
(5)the Settlement Deed and Loan Agreement with Anylock; and
(6)the amount claimed by Anylock as a debt.
In the course of their public examinations, it was specifically suggested to each of Mrs and Mr McNiven that the objective of the Anylock transactions was to reduce or eliminate any equity in the Properties, in order to obscure value in the Properties that would otherwise be available to unsecured creditors. The Trustees contended that these matters put the McNivens on notice that the Anylock transactions were likely to be challenged by the Trustees.
These matters are central to the Trustees’ contentions that the McNivens were on notice that the Timbercorp liquidators were investigating the Anylock mortgage, and that it was vulnerable to challenge or to being set aside. These suggestions, put to Mrs and Mr McNiven during their public examinations, are in turn relevant to whether the McNivens were entitled to rely on any representations allegedly made by the Trustees to the effect that they would not sell the Properties because there was insufficient equity to warrant them doing so. In short, during public examinations, it was in substance put to the McNivens that they understood that the effect of the Anylock Mortgage was as if it was blotting paper for equity.
I note for completeness that Mr Voitin was also publicly examined by the liquidators of Timbercorp.
2016 Anylock Settlement
Following the public examinations, there was a settlement of Anylock’s claims in relation to the Properties in 2016.
More specifically, on 18 March 2016, a Deed of Settlement and Release was entered into between Timbercorp, Anylock, Stanton Grant Legal (the law firm acting on behalf of Anylock) and Mr Downey (Mrs McNiven’s Trustee) (the 2016 Anylock Settlement). Pursuant to that settlement, Anylock agreed to withdraw its caveats over the Properties, which it did so on 1 April 2016, and agreed not to lodge any further registerable dealing against the Properties. Anylock also agreed not to lodge any proof of debt in the McNivens’ bankruptcies; however, the terms of the settlement did not expressly provide that Anylock forgave the debt owed by the McNivens, waive the interest accruing under the Anylock Loan Agreement nor release the Anylock Mortgage. In return, Timbercorp agreed to conclude public examinations of Mr Voitin and to various releases in relation to Mr Voitin and his related entities.
The McNivens each gave evidence that, at the time, they had no knowledge of, or involvement in, the 2016 Anylock Settlement. Indeed, until these proceedings, the McNivens said they were not aware of the existence of the Deed of Settlement and Release, nor the substance of it. Further, the McNivens say there had been no disclosure to them of how that agreement was arrived at, or why such an agreement was negotiated between the parties to the Deed of Settlement and Release at that time, or at all, nor were they informed as to the basis on which, or for what consideration, the Anylock Caveat was withdrawn.
The evidence indicates that Mr McNiven’s Trustees were first notified of the 2016 Anylock Settlement on 9 May 2016, when Mr Voitin, under the letterhead of Stanton Grant Legal, wrote to Mr Burness and said: “We confirm that the [Anylock] caveat was withdrawn on 1 April 2016. We’re instructed that there is no indebtedness owing to Anylock and that there is no claim against or interest in the properties.”
Shortly thereafter, on 11 May 2016, Mr Burness said the following in an advice to creditors:
This report is prepared on the assumption that the reader is familiar with our earlier circulars. …
Despite [Mr McNiven’s] discharge from bankruptcy, assets which vested in the bankrupt estate continue to be vested. These assets can be realised to satisfy the claims of creditors whose debt arose prior to the date of bankruptcy.
There are the following material developments since our latest circular to creditors…
Real property
…
At the time of our earlier circular, there were two parties claiming a secured interest in the property; St George bank and Anylock Pty Ltd (“Anylock”). Based on the value of secured claims we determined that there was likely to be little, if any, equity in the Properties. As a result, no action was taken by our office to realise the Properties at the time.
It has recently come to our attention that the Anylock creditor has withdrawn any claim they have to the Properties. Anylock has earlier contended to have a secured claim to the value of some $790,000. The circumstances behind the withdrawal are unknown and we are presently making enquiries with Anylock and the bankrupt to determine if the claim was paid out, and if so, by whom. Notwithstanding, following the withdrawal of the Anylock claim we now consider there is substantial equity in the Properties.
[Emphasis added]
Mr Burness then set out a preliminary assessment of the equity in the Properties, estimating there was a surplus of $1,129,879 (or $564,940 when divided equally between each of the bankrupt estates).
I turn now to the contents and relevance of the without prejudice communications which followed the 2016 Anylock Settlement. I note for completeness that Anylock was deregistered with ASIC on 10 November 2019.
Without prejudice negotiations
The 2016 Anylock Settlement led to a series of communications between the Trustees and the McNivens’ representatives between 31 March 2016 and 6 December 2017, including negotiations concerning the realisation of the Trustees’ interests in the Properties and the finalisation of their administration of the bankrupt estates. In their evidence, both Mrs and Mr McNiven categorically and steadfastly denied they had any knowledge of the communications between their representatives, Mr Watters and Mr Mark Madafferi, and the Trustees during this period. I reject their evidence on this question for reasons I shall explain below.
I pause briefly to note that Mr Madafferi was a solicitor engaged by the McNivens in or around 2015, at the suggestion of Mr Watters, to provide specialist legal advice in relation to their bankruptcies. Mrs and Mr McNiven said that this was the first time they realised Mr Watters was not a lawyer so they “stopped dealing with” him. Mrs and Mr McNiven both gave evidence to the effect that Mr Madafferi’s engagement was for the limited purpose of assisting them with the Timbercorp public examinations and they were not aware until these proceedings that he was negotiating with the Trustees between March 2016 and December 2017.
At the commencement of the trial, the McNivens claimed without prejudice privilege in respect of those communications. They submitted that any application to inspect the relevant documents or admit any of them into evidence should be referred to another Judge of this Court. I referred the privilege dispute to the Court’s National Operations Registry for allocation to another Judge on 2 December 2020.
On 3 February 2021, McKerracher J published reasons in Jess v McNiven, in the matter of McNiven [2021] FCA 53 and ordered that the Trustees were permitted to adduce evidence of the without prejudice communications in this proceeding pursuant to s 131(2)(g) of the Evidence Act 1995 (Cth). Relevantly, his Honour said at [27]-[29]:
… On any view of s 131(2)(g) the paramount consideration is whether the Court is likely to be misled by the maintenance of the privilege. In my view, it is fatal to the McNivens’ maintenance of privilege over the communications that they, not the Trustees, plead, and propose to lead positive evidence of, silence and inaction by the Trustees. That is now a directly relevant issue in the proceeding.
A plea of silence to support an estoppel or reliance claim necessarily implies an absence of communications to substantiate the alleged representations on which the McNivens relied to their detriment. In those circumstances, it is not just the content of privileged communications which are relevant, but the very fact of the existence of the communications as well. There is no real dispute that the content of the communications contradicts the respondents’ assertions.
This is not simply a case where the content of the privileged communication is sought to be adduced to contradict a party’s position. For instance, this is not a case where a party seeks to adduce evidence of a settlement offer or an admission of liability from the privileged communication to counter or discredit a position advanced by that party before the Court. Here, the relevance and centrality of the issue on which the Court is likely to be misled is critical. An essential element of the pleaded defence requires a finding that the Trustees made certain representations by their silence. To disallow the admission into evidence of the privileged communications, the very fact and existence of which go to the basis of the pleaded case, would be to allow the Court to be misled.
I turn now to the relevant contents of the without prejudice communications.
On or around 30 March 2016, Mr Watters phoned Mr Burness and made an offer to purchase the Trustees’ caveats on the Properties for $250,000. In response, Mr Burness told Mr Watters that he should put the proposal in writing. Mr Burness also said the Trustees would be reactivating Mr McNiven’s Bankrupt Estate and would have to get valuations of the Properties before considering any settlement offer.
On 31 March 2016, Mr Watters sent a letter to Mr Burness in which he indicated that Mr McNiven’s father was prepared to offer $250,000 as full and final settlement of all outstanding matters in Mr McNiven’s bankruptcy in exchange for “a release of [the] caveat”. The letter also enclosed a ‘kerbside’ assessment of the Properties, which valued the Blackburn North Property at $960,000 to $1m and the Templestowe Property at $870,000 to $930,000.
On 2 May 2016, Mr James Currie, an employee working for Mr McNiven’s Trustees, phoned Mrs McNiven to make arrangements for a valuer to attend the Properties and to ascertain whether there were tenants in the Blackburn North Property (which Mrs McNiven confirmed was presently occupied by tenants). On 9 May 2016, the Blackburn North property was inspected for the purposes of a valuation. On 11 May 2016, the Templestowe property, where the McNivens lived, was inspected for the purposes of a valuation.
On 24 May 2016, Mr Burness sent a letter to Mr Watters. Mr Burness referred to the letter dated 31 March 2016, in which Mr Watters outlined an offer from Mr McNiven’s father to settle the claims for $250,000, and advised “that the offer is rejected”.
On 25 May 2016, Mr Adelmo Di Battista, an employee working for Mr McNiven’s Trustees, spoke to Mrs McNiven on the phone and explained to her that it was necessary for the rent received in relation to the Blackburn North property to be redirected to the Trustees. Mr Di Battista also “explained the reactivation of the [Trustees’] appointment”. Mrs McNiven queried why the Trustee “would have to reactivate [their] appointment”, to which she was told it “could be due to further matters that required investigation”.
On 5 July 2016, Mr Jack Juresko, an employee working for Mrs McNiven’s Trustee, wrote to Mr Jess and asked whether he was available to “catch up soon” to discuss Mrs and Mr McNiven’s Bankrupt Estates. Mr Juresko said Mr Madafferi had recently called asking for an update and, during that conversation, Mr Madafferi explained the McNivens wanted to try to keep the Templestowe Property and sell the Blackburn North Property to pay out both bankrupt estates.
On 6 July 2016, there was a telephone conversation between Mr Madafferi and Mr Juresko. The file note is quite difficult to read and is erroneously dated “6/7/15” but it appears to say “keep – 19 Lowan St Templestowe” (referring to the Templestowe Property) and “sell – 120 Surrey Road Blackburn Nth” (referring to the Blackburn North Property).
On 7 July 2016, Mr Di Battista sent an email to Mrs McNiven’s Trustee advising as to the balances of the St George sub-accounts (being approximately $933,619) and valuing the Properties at $1.05m (Blackburn North Property) and $1.1m (Templestowe Property), respectively.
On 10 July 2016, Mr Watters sent an email to Mr Burness saying he had not yet heard from the Trustees in relation to a settlement of the McNiven matter and asked if they could organise a meeting to discuss the bankrupt estates. Mr Watters also sought confirmation as to whether the Trustees would accept the Blackburn North Property as a full and final settlement, albeit with a qualification that he did not have any instructions as yet from the McNivens.
It is significant that Mr Watters thought it necessary to state that he did not yet have instructions from the McNivens in relation to the offer made on 10 July 2016. I infer from that statement that Mr Watters was otherwise negotiating with the Trustees on instructions from the McNivens, contrary to their evidence that they were unaware of the without prejudice negotiations. This is one of the pieces of evidence that has led me to reject the McNivens’ evidence that they were unaware of the without prejudice communications.
On 11 July 2016, Mr Jess sent an email to Mr Watters in which he indicated that he would shortly be meeting with Mrs McNiven’s Trustee to assess the provable debts in each bankrupt estate. Mr Watters added,:
Ultimately we will need to sell for market value or obtain sufficient funds to annul the estate. We can consider whether that can be achieved in the manner you have suggested [in the email dated 10 July 2016] following our meeting.
On 13 July 2016, Mr Madafferi sent an email to the Trustees headed “without prejudice” and prefaced by a statement that he acted for both Mrs and Mr McNiven. In the email, Mr Madafferi acknowledged that Timbercorp had reached some sort of arrangement to withdraw the Anylock Caveat over the Properties. Mr Madafferi also said that he understood the Trustees now wanted to claim the equity in the Properties to settle their interests in the matter. Mr Madafferi sought information about how each of the Trustees intended to proceed and what steps, if any, would be taken against the McNivens.
On 13 July 2016, Mr Jess responded to Mr Madafferi, copying in Mr Downey, stating:
…
Our position is that we will need to sell the interest of the Bankrupt Estate of Cameron McNiven in the properties for market value, or alternatively obtain sufficient funds to annul the estate.
We are preparing an estimate of the amount required to annual the Bankrupt Estate of Cameron McNiven which we will provide once finalised, and would suggest a meeting may be worthwhile shortly thereafter…
On 19 July 2016, Mr Juresko sent an email to Mr Madafferi which estimated that the equity in the Properties was between $1,000,000 and $1,100,000 and contained a calculation of the amount required to pay out Mrs McNiven’s Bankrupt Estate. Mr Juresko said that he needed to make some further enquiries with creditors such as Timbercorp and Agripay but would soon be in a position to “provide you with a fairly accurate payout figure” for Mrs McNiven’s Bankrupt Estate. Mr Juresko concluded the email by adding that Mr McNiven’s Trustee would be doing the same.
On 22 July 2016, Mr Di Battista sent a letter addressed to Mr McNiven, care of Mr Madafferi, regarding his bankrupt estate. The letter relevantly said:
…
I understand that you may be interested in annulling your Bankrupt Estate in an effort to protect the Bankrupt Estate's interest in properties situated at and known as 120 Surrey Road, Blackburn North Victoria and 19 Lowan Avenue, Templestowe Victoria (Properties).
In order for an annulment of your Bankrupt Estate to occur you must payout all debts of your estate, including interest on interest bearing debts.
The letter from Mr Di Battista dated 22 July 2016 then set out details and calculations for an annulment, estimating the amount required to annul Mr McNiven’s bankruptcy to be approximately $733,323. Mr McNiven denied ever receiving this letter but the fact it is addressed to him personally is yet another consideration which informs my view that the McNivens knew Mr Madafferi was negotiating with the Trustees on their behalf. I am fortified in making that finding by the fact that by this time, the Trustees had become active in taking steps towards the sale of the Properties, including by obtaining valuations. I therefore infer the McNivens were aware of the demonstrable change in attitude and approach by the Trustees to recover the equity in the Properties.
On 28 July 2016, Mr Juresko sent an email to Mr Madafferi, which included a revised calculation of the amounts owing to creditors and the potential equity available in the Properties. The letter concluded:
To make this matter go away would require the payment of … $564,940 less costs as agreed, or alternatively the sale of the two properties.
On 9 August 2016, Mr Madafferi sent a letter to Mr Jess, copying in Mr Juresko and Mr Watters, explaining he was trying to arrange a meeting to progress the matter. The letter also raised a multiplicity of tangential issues, including assertions that there were “glaring irregularities in the reports and claims to date” and referring to debts which were incurred without the “knowledge and consent” of the McNivens.
On that same date, Ms Sarah Peters, an employee working for Mr McNiven’s Trustees, received a telephone call from Mr Madafferi, the file note of which recorded that:
(1)Mr Madafferi thought a meeting with both Trustees would be beneficial to ensure everyone was “on the same page”;
(2)the McNivens were concerned with the claims made in the bankrupt estate, especially in relation to loans they did not sign or where they did not receive the benefit of the funds contributed; and
(3)although the McNivens would like to come to a resolution that is “palatable to all parties involved”, they have basically lost everything and therefore have nothing more to lose. As such, the McNivens “would not have any issue in frustrating the situation” so that they can keep the Properties for as long as possible.
On 16 August 2016, Mr Jess and Mr Juresko had a meeting with Mr Watters and Mr Madafferi. The detailed file note of that meeting indicates the parties discussed the “Anylock debt issue”, though particulars of that conversation are not recorded. Mr Madafferi noted that the McNivens had received “bad advice” from Mr Holt in relation to their investments and alleged that applications were fraudulently completed on their behalf. Mr Madafferi also said that the McNivens simply wanted to settle claims against the Properties given they were discharged from bankruptcy almost three years earlier.
On 12 September 2016, Mr Madafferi sent a letter to Mr Juresko and Mr Burness concerning the potential purchase of the Trustees’ interests in the Properties. In that letter, Mr Madafferi made a joint offer on behalf of the McNivens to the Trustees of $600,000 to pay out debts of the estates within 30 days. The letter suggested that the McNivens were able to get “family assistance” to facilitate the settlement but indicated the McNivens were not prepared to accept the figures calculated by the Trustees.
On 14 September 2016, Mr Juresko had a meeting with Mr Madafferi. The file note of that meeting records the following:
They are talking [sic] caveat – we are taking transmission – ie we will be registered on title and be in a position to sell, and have all the equity available across both properties.
Equity position only changed after the Anylock caveat/mortgage was withdrawn and it was withdrawn because it was fraudulent – and again the bankrupts must accept responsibility for not only the delay – but engaging in deceptive conduct to put their assets out if the reach of creditors.
The Statements of Affairs belong to each bankrupt – that is – notwithstanding any advice or assistance offered – they signed off on its contents including the creditors listed.
…
They claim the loans weren’t signed by their clients. (They were listed in their Statement of Affairs but now claim that was a mistake).
The improvements made and payments under mortgage – aren’t relevant
They state they are prepared to take legal action rather than accept each Trustee’s position – unless disputed matters are settled in their favour.
…
If we sell properties they intend seeking an order to quarantine the proceeds until matters referred to above are resolved.
[Emphasis added]
On 11 October 2016, Mr Jess wrote in a letter to Mr Madafferi:
I refer to your correspondence dated 12 September 2016 which contained an offer of $600,000 to pay out all debts of the Bankrupt Estate [of Mr McNiven] and the Bankrupt Estate of Heather McNiven.
The letter dated 11 October 2016 then set out the proofs of debt that have been lodged in relation to the Bankrupt Estate of Mr McNiven and said that:
So that I may consider the offer further, I propose to adjudicate on all claims lodged in the Bankrupt Estate [of Mr McNiven] and in this regard, I would appreciate if your client would provide full details of the nature of any disputed creditor claims together with all documentations in support of the same within fourteen (14) days of the date of this letter.
There was no evidence of any response to the letter dated 11 October 2016. However, in brief, Mr Jess gave evidence that he adjudicated on the proofs of debt and, on the basis of those adjudications, it became clear that the settlement offer was inadequate to meet the claims of creditors, such that the offer was formally rejected and settlement discussions ended.
In this respect, Mr Jess sent a letter to Mr Watters on 4 December 2017 stating:
I wish to advise that I have formally rejected a joint offer to pay out all the debts…of the Bankrupt Estate of Cameron McNiven together with the Bankrupt Estate of Heather McNiven. Accordingly, I will now take steps to obtain transmission of title and sell the two Properties in which the Bankrupt Estate holds an interest, in conjunction with Trustee of the Bankrupt Estate of Heather McNiven.
As I have said previously, the McNivens each gave evidence that they were not aware that either Mr Watters or Mr Madafferi were negotiating on their behalf with the Trustees in the period between March 2016 and December 2017. However, that is at odds with the correspondence sent by Mr Watters and Mr Madafferi during this period. For instance, Mr Madafferi said on multiple occasions that he had instructions to act on behalf of the McNivens on the basis that his clients “would like to come to a resolution that is palatable to all parties involved”. Similarly, Mr Watters made various offers to the Trustees, purportedly on the basis that the McNivens were able to obtain “family assistance”. I do not accept the McNivens categorical denials in light of the objective evidence, all of which supports the conclusion that Mr Watters and Mr Madafferi were professional advisers acting with proper instructions.
Further, neither Mr Watters nor Mr Madafferi were called as witnesses in this proceeding (for which the McNivens offered no adequate explanation). By reason of the failure to call either of them as witnesses, in circumstances where they were undoubtedly able to give highly probative evidence concerning whether the McNivens were informed of the without prejudice negotiations, I am entitled to infer that their evidence would not have corroborated the McNivens’ denials of any knowledge of the negotiations: see Jones v Dunkel [1959] HCA 8; 101 CLR 298 at 308 (Kitto J), 312 (Menzies J) and 320-321 (Windeyer J). Indeed, that view is supported by the evidence consistently given by the McNivens; namely, that they outsourced almost all of their dealings and communications to a set of professional advisers who had the requisite expertise in bankruptcy.
Attempts by Trustees to realise equity in the Properties
Following the unsuccessful conclusion of without prejudice negotiations, the Trustees applied to the Registrar of Titles for transmission of the Properties pursuant to s 51(1) of the Transfer of Land Act 1958 (Vic). The Trustees subsequently became the registered proprietors of the Properties on 21 December 2017.
In January 2018, AFSA sent a letter to each of the McNivens advising them of the effect of discharge from bankruptcy, including that the Properties remained vested in the Trustees and that they could not deal with the Properties without the Trustees’ permission.
On 8 March 2018, the Trustees wrote to the McNivens’ representatives and said, among other things, that the Properties:
(1)vested in the Trustees pursuant to s 58 of the Bankruptcy Act at the commencement of Mrs and Mr McNiven’s bankruptcies;
(2)were transmitted to the Trustees on or about 21 December 2017, such that the Trustees are now the registered proprietors of the Properties; and
(3)the Trustees would be selling the Properties pursuant to their duty to recover and realise property for the benefit of unsecured creditors pursuant to s 19 of the Bankruptcy Act.
In the agreed list of issues, filed on 25 November 2020, the parties raised the following (presently relevant) issues to decide:
E. EQUITABLE ACCOUNTING OR SIMILAR PROCESS
11.Whether there should be an equitable accounting or similar process.
12.What principles would apply in an equitable accounting or similar process.
13.Whether the former bankrupts are entitled to credit in respect of principal repayments, and if so what amount(s) and over what period(s).
14.Whether the former bankrupts are entitled to credit in respect of interest repayments, and if so what amount(s) and over what period(s).
15.Whether the former bankrupts are entitled to credit in respect of personal effort claims, and if so what amount(s) and over what period(s).
16.Whether the former bankrupts are entitled to credit in respect of expense payments, and if so what amount(s) and over what period(s).
17.Whether the trustees are entitled to credit in respect of the Blackburn rent, and if so what amount(s) and over what period(s).
18.Whether the trustees are entitled to credit in respect of notional rent on the Templestowe property, and if so what amount(s) and over what period(s).
At my request, the parties subsequently provided an agreed list of issues in relation to the equitable accounting claim, which I use as the structure of the analysis which follows.
LIST OF ACCOUNTING ISSUES
This list of accounting issues is intended to be read as expanding upon issues set out in the agreed list of issues filed 25 November 2020 and particularly issues 8 and 12 to 18 therein.
1.Are the respondents entitled to an interest in the properties or any part of the proceeds of sale of the properties, by reason of:
(a)“the Equity Payments” (as defined in paragraph 4 of the amended defence);
(b)“the Personal Effort” (as defined in paragraph 4 of the amended defence),
during the following periods:
(c)prior to bankruptcy;
(d)during bankruptcy;
(e)after discharge from bankruptcy;
(f)after the time when the respondents became aware that the trustees were seeking to realise the properties; and
(g)after the commencement of this proceeding?
2.Under what principle(s) do the respondents have any entitlement as set out in question 1?
3.In calculating the entitlements under question 1, do the respondents need to give credit to the applicants for:
(a)their use of the Templestowe property in the period since late 2010 (ie notional rent);
(b)the net rent that they received in respect of the Blackburn property since late 2010 after deduction of all expenses?
4. In respect of:
(a)Equity Payments in relation to maintenance, repairs, improvements and renovations of the properties; and
(b)Personal Effort,
is the rule that the respondents are entitled to the:
(c)Cost or alternatively the value of the improvements;
(d)amount by which those improvements have enhanced the value of the properties as at the relevant date(s); or
(e)the lesser of (c) or (d) (ie minimum equity)?
5.At what point in time are the values of the Equity Payments or Personal Effort referred to in question 4 to be determined:
(a) the date of the relevant “Equity Payments” and “Personal Efforts”; or
(b) the date at which the trustees get possession of the properties.
6.Put another way, in answering questions 4 and 5, to the extent that the respondents are entitled to any value for the Equity Payments or Personal Effort referred to in 4, is it the case that:
(a)the respondents are entitled to credit for the actual cost or value of such contributions when they were made; or
(b)an adjustment should be made to the amounts in (a) in respect of depreciation on the maintenance, repairs, improvements and renovations as at the date at which the applicants gain possession of the properties; or
(c)the respondents are only entitled to a credit for the value by which such contributions are reflected in the actual value of the properties as at the date at which the applicants gain possession of the properties, if such an order be made?
7.Alternatively, are the respondents entitled to the benefit of any of the capital growth of the properties in any of the periods set out in question 1 (d) to (g) above, considering:
(a)the answers to question 1 above;
(b)the fact that on the trustees’ case, the properties have been vested in the trustees since the date of the respondents’ bankruptcies pursuant to section 58 of the Bankruptcy Act 1966; and
(c)the abandonment by Anylock of its claim to an interest in the properties, after the respondents’ bankruptcies were discharged.
It is of assistance in understanding the unjust enrichment claims to commence with a summary of the relevant evidence contained in the Fourth Joint Expert Report of the expert accountants, Mr Gary Fettes and Mr Mark Lipson, dated 29 September 2021. There were various earlier iterations of joint expert reports, though the substance of the expert evidence is summarised in the Fourth Joint Expert Report.
Question 1 – Are the McNivens entitled to an interest in the Properties or any part of the proceeds of sale by reason of the equity payments or personal efforts claims and, if so, during which period?
I analyse the McNivens’ entitlement as a result of the equity payments and personal efforts claims below. The guiding principle is that neither party should take the benefit of an increase in the value of the Properties without making an allowance for expenses incurred by the other in order to achieve that outcome. However, I have approached the question also having regard to whether the Trustees have been unjustly enriched by the equity payments and personal efforts in the context of the scheme for the administration of bankrupt estates in the Bankruptcy Act.
Interest payments
There is agreement between Mr Fettes and Mr Lipson, as expressed in the Fourth Joint Expert Report, that the McNivens made no repayments of principal to reduce the St George Mortgage but paid a total of $432,399 in interest repayments. That amount includes $160,377 in income received from the Blackburn North Property, which was applied to maintain the St George Loan, and is $46,992 less than the interest incurred in respect of the St George Mortgage over the Properties since the commencement of the McNivens’ bankruptcies.
The Trustees contend that the McNivens are not co-owners of the Properties and do not have a right to an equitable accounting in accordance with the principles in Draper. However, as a matter of principle, the Trustees say that they do not seek to be enriched by an unjust benefit and, in accordance with the rule in Ex Parte James (1803) 32 ER 385, acknowledge that a trustee in bankruptcy should avoid invoking strict legal rights where that would result in outcomes contrary to ethical standards of commercial fairness: see also Draper at [110]-[116] (Rares J).
In order to determine the McNivens’ entitlement to any credit for the interest payments made in relation to the St George Mortgage, it is necessary to distinguish between the following periods:
(1)the period before their bankruptcy;
(2)the period during their bankruptcy; and
(3)the period after their discharge from bankruptcy.
In my view, the McNivens are not entitled to any credit for either of the first two periods described above. As to the first period, the Trustees are not unjustly enriched by any interest payments made prior to the McNivens’ bankruptcy and, even if the interest payments did give rise to a relevant interest, that would have vested in the Trustees as before acquired property: see s 58(1)(a) of the Bankruptcy Act. As to the second period, the Properties having vested in the Trustees, any interest payments made during bankruptcy would simply give rise to an interest that vested in the trustees as after acquired property: see s 58(1)(a) of the Bankruptcy Act.
In relation to the third period described above, I would allow a credit for the interest payments made by the McNivens from 7 March 2014, being the day after Mrs McNiven was discharged from bankruptcy, to 4 December 2017, being the date on which Mr Watters was advised the Trustees would take steps to obtain transmission of title and sell the Properties. It is during that period which the Trustees have enjoyed an unjust benefit because, by maintaining the St George Loan, the McNivens avoided the prospect that the St George would exercise any power of sale over the Properties. The maintenance of the St George Loan in turn enabled the Trustees to realise the increase in the capital value of the Properties.
I have demarcated the outer boundaries of the McNivens’ entitlement as 4 December 2017 because from that time, it became indisputable that the Trustees intended to sell the Properties and they promptly took steps to become the registered proprietors on 21 December 2017. From December 2017 onwards, it was the McNivens who resisted the Trustees’ lawful claim for possession of the Properties. As I have found that the legal basis for the McNivens’ asserted right to remain in the Properties should be rejected, I can see no basis to make any allowance for the interest paid to maintain the St George Loan thereafter. In my view, there is no unjust benefit to the Trustees from that date onwards, as they have been prevented in the meantime from recovering the Properties. Therefore, to give the McNivens any allowance for interest paid in that period would be to reward them for their own wrong. That is inconsistent with the principle of restitution for unjust enrichment. I would thus regard such payments as involving the gratuitous conferral of a benefit to the Trustees.
According to calculations prepared by Mr Fettes in the Joint Expert Report dated 11 May 2021, the total amount of interest repaid in relation to the St George Mortgage during that period is approximately $181,008.94. On account of some revisions made to the calculations following the final conclave between Mr Fettes and Mr Lipson, the Trustees noted in closing submissions that this figure likely overstates the interest paid. However, it is not necessary for further evidence in relation to this issue because, for reasons I shall explain, the McNivens are not entitled to any restitution by reason of the equity payments and personal efforts claims.
Payment of rates, taxes and outgoings
There is also consensus between Mr Fettes and Mr Lipson in the Fourth Joint Expert Report that the McNivens jointly paid $125,383 on rates, taxes and outgoings. The experts both accepted that those amounts included amounts paid during the bankruptcies and after the transmission of the Properties to the Trustees. The experts also accepted that those amounts may have included some component of charges for consumption.
The Trustees contended that the McNivens do not have an entitlement to expenses incurred as rates, taxes and outgoings. This is because Mrs and Mr McNiven gave evidence that the expenses claimed in this category included expenses such as water bills, gas bills and electricity bills, all of which include a component for consumption. Similarly, the McNivens’ insurance bills included a component for contents insurance.
Moreover, the Trustees said that the rates, taxes and other outgoings identified by the McNivens are expenses for which the Trustees will not receive any benefit. Rather, it is the McNivens that have had the benefit of water rates, energy costs and expenses associated with the pool. Further, the Trustees contended that rates are a tax imposed, at least in part, to pay for local amenities and infrastructure during a period in which the McNivens have occupied, and had exclusive use of, the Properties.
In all of the circumstances, the Trustees said they have not been unjustly enriched by such expenses and it would be a curious outcome indeed if creditors were disadvantaged by reason of such payments through an equitable accounting or claim for restitution.
In my view, the question of what, if any, entitlement to a reimbursement the McNivens have as a result of rates, taxes and outgoings depends on the nature and characterisation of those expenses.
Prima facie, if the expenditure relates to a service provided to the McNivens which was available to be consumed by them; for example, electricity, water and gas bills, then there is no basis upon which any reimbursement could be made. This is because the McNivens merely paid for the services they enjoyed and have consumed at least a proportion of the benefit. The same may be said in relation to various expenses incurred at retail stores such as Amart Furniture, Ikea or Just Pools, in relation to which Mrs McNiven’s evidence was that she did not know whether they were personal expenses or property expenses. That is not sufficient proof of the claims to be satisfied that restitution to the McNivens is warranted.
However, in relation to any expenditure that would have been incurred by the Trustees irrespective of whether the McNivens retained possession of the Properties, the McNivens are prima facie entitled to a reimbursement. This is because such outgoings are, in effect, an incident of the ownership of the Properties. One example of these types of expenses are municipal rates and land tax, both of which are payable irrespective of whether any person occupies the Properties or receives a benefit from local amenities.
I do not accept the Trustees’ contention that the outgoings in this latter category are not recoverable at all because the McNivens have enjoyed the benefits of local infrastructure and amenities provided by the relevant municipal council throughout the entire period of their exclusive use and occupation of the Properties. However, having regard to the many years during which the McNivens have occupied the Properties, I assume that some proportion of the outgoings conferred a benefit to the McNivens. Accordingly, I discount the McNivens’ claim in respect of rates, taxes and outgoing by 50%. I would thus recognise $62,691 as the contribution towards rates, taxes and outgoings in relation to which the Trustees have been unjustly enriched. In my view, this is (if anything) a generous allowance in respect of the McNivens for the reasons given above.
Personal efforts
As I explain below, the McNivens personal efforts ought only be taken into account to the extent those works involved capital improvements or maintenance that increased the value of the Properties. That is consistent with the approach taken by Besanko J in Draper; namely, that a party undertaking improvements, repairs and capital maintenance is restricted to the lesser of the cost of the improvements or the increase in the value of the property as a result of the improvements: see Re Pavlou (a bankrupt) [1993] 1 WLR 1046 at 1049; Forgeard v Shanahan (1994) 35 NSWLR 206 at 223 per Meagher JA (with whom Mahoney JA agreed). In the context of resolving question 4, I shall explain why the McNivens are therefore only entitled to only $11,500 for their personal efforts claim.
Question 2 – Under what principle do the McNivens have any entitlement as set out in question 1?
In my view, the principles of equitable accounting do not strictly arise in this context. Unlike Mrs Draper, the McNivens do not have a legal or beneficial entitlement to the Properties. Any rights that the McNivens had vested in the Trustees upon their bankruptcies and any rights that they otherwise acquired in the Properties during their bankruptcies vested in the Trustees. Further, for the reasons I have explained, the Properties did not revest in the McNivens after discharge from their bankruptcies.
That being so, the focus of the enquiry, and the juridical basis for the McNivens’ entitlement to the amounts in question 1, is a claim for restitution to avoid unjust enrichment to the Trustees.
The principles applicable to restitutionary claims of this kind were set out in Mann v Paterson Constructions Pty Ltd [2019] HCA 32; 267 CLR 560 at [212]-[213]:
Until recently, one view of English restitutionary jurisprudence was to treat the concept of unjust enrichment as if it were a definitive legal principle that supplies a sufficient premise for direct application by rigid, uniform application of questions concerning whether there is (1) an enrichment, (2) at the plaintiff's expense, (3) in circumstances of an unjust factor, and (4) subject to defences. Within that rigid approach, there was something of a tendency to treat tests for and measures of "enrichment" as governed by a single principle; thus encouraging a view of the benefit abstracted from the contract price. More recently, some members of the Supreme Court of the United Kingdom have cautioned against mechanical application of the "four questions" of enrichment, expense, injustice and defences. In Swynson Ltd v Lowick Rose Llp, Lord Sumption JSC denied that English law had a universal theory which explains all of the cases in which restitution is available. In view of those developments, it may be that the law of restitution in the United Kingdom and the law of restitution in Australia are no longer quite as far apart as was previously imagined.
Whether or not that is so, however, in this country restitution arises in recognised categories of case and is not necessarily available whenever, and to the extent that, a defendant is enriched at the plaintiff's expense in circumstances that render the enrichment unjust. Although, over time, novel categories of case may come to be recognised, or existing categories refined, that must occur in accordance with the common law's ordinary process of incremental development: by analogy with decided cases, albeit that, within that process of development and refinement, the four questions may serve to focus attention on the nature, availability and measure of restitutionary relief, and so assist in structuring understanding as to avoid the development of the law of unjust enrichment degenerating into an exercise in idiosyncratic discretion.
[Emphasis added; footnotes omitted]
In Commissioner of State Revenue (Vict) v Royal Insurance Australia Ltd [1994] HCA 61; 182 CLR 51, Mason CJ said at [41]:
Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched…
That passage was cited with approval in Roxborough v Rothmans of Pall Mall Australia Limited [2001] HCA 68; 208 CLR 516 at [25]-[26] (Gleeson CJ, Gaudron and Hayne JJ). See also Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14; 253 CLR 560 at [19] (French CJ, Hayne, Crennan, Kiefel, Bell, Gageler and Keane JJ).
Question 3 – In calculating the entitlements under question 1, do the McNivens need to give credit to the Trustees for notional rent of the Templestowe Property and/or rent received from the Blackburn North Property?
To the extent that the McNivens claim credit for the repayment of interest of loans secured against the Properties, they ought to give credit for notional rent on the Templestowe Property as well as rent received from the Blackburn North Property. This is consistent with the approach taken in relation to equitable accounting claims between co-owners; namely, that where the occupier seeks from the other co-owner their share of amounts the occupier spent on maintaining and improving the property, an occupation fee is payable as a set-off to any claim by the occupier to account: Campbell v van der Velde [2019] FCA 1871 at [175] (Farrel J). Further, this approach akin to the solution suggested by Millet J in Re Pavlou (a bankrupt) [1993] 1 WLR 1046, which was referred to by Rares J in Draper at [107]:
this may well be a case where it would be practicable to apply the solution suggested by Millett J [in Re Pavlou]…where he said that if the trustee in bankruptcy insisted on strict accounts being taken, then he is entitled to do so unless it could be seen in advance that the amounts were likely to be so similar that the taking of accounts would be a waste of time and the costs would outweigh any possible advantage to be gained thereby. He continued:
‘In such a case the Court might well impose its own solution of directing the interest element in the mortgage instalments to be set off against the use and occupation without any further enquiry. In some cases the Court may be able to infer an agreement between the parties that that procedure should be adopted …’
In the Fourth Joint Expert Report, it was agreed that the McNivens made no repayments of principal but paid interest of $432,725 in relation to the St George Mortgage. As I have already explained, I do not accept that the McNivens are entitled to the full amount of those interest repayments. In any event, those contributions should be offset by a credit to the Trustees for rental income received from the Blackburn North Property and notional rent on the Templestowe Property. That should be assessed in the amount of $461,411 for the following reasons.
Mr Fettes was instructed that he should account for the values of rental income from the Blackburn North property and notional rent in Templestowe in his calculations. Based on his instructions, and relying on the unchallenged evidence of Bertacco Ferrier Property Consultants Pty Ltd, Mr Fettes calculated the rent received from the Blackburn North Property as $160,377 between 25 November 2010 and 31 July 2020. In my view, it is uncontroversial that the Trustees are entitled to this amount as income from the Properties which vests with them as after-acquired property.
Mr Fettes, again pursuant to instructions, calculated the notional or imputed rent for the Templestowe Property as $301,034, calculated based on a weekly rent figure that was provided by Bertacco Ferrier between 25 November 2010 and 31 July 2020. Consistent with the observations of Mansfield J at [56] and Rares J at [113] in Draper, the use and occupation of the Templestowe Property should also be taken into account in an assessment of whether there has been unjust enrichment to the Trustees.
Question 4 – What is the rule for determining the McNivens entitlement to the equity payments in relation to maintenance, repairs, improvements and renovations of the properties and exertion of personal effort?
Consistent with that observations of Besanko J at [163] in Draper, in my view the McNivens are entitled to the lesser of the cost of the improvements or the increase in the value of the Properties as a result of the improvements. The rule serves to focus the enquiry on restitution for unjust enrichment rather than any alleged detriment to the McNivens, the latter being the focus of the estoppel claim.
Mr Fettes approached the calculation in the Fourth Joint Expert Report by comparing the cost of expenditure of the Properties to the increase in value of the property. The increase in value was only taken into account to the extent that increase was greater than the capital, maintenance and repair works undertaken by the McNivens. Approaching the analysis in this way, Mr Fettes allowed $11,500 for the property expenses and personal efforts claimed by the McNivens, which is the amount which Bertacco Ferrier determined that the Templestowe property had been improved by McNivens’ expenditure and personal efforts. Indeed, the $11,500 amount is directly referable to a pool refurbishment undertaken by Mr McNiven which straddled the period before and after the McNivens were discharged from bankruptcy.
Mr Lipson, on the other hand, gave the McNivens credit for $193,499 in respect of capital expenditure, maintenance and repairs on the Properties. Mr Lipson justified his opinion on the basis that if such expenses had not been incurred, the Properties would have fallen into disrepair and that would have had a negative effect on the market value of the Properties (as well as the value of the rent received from the Blackburn North Property).
I do not accept Mr Lipson’s evidence in this regard for a number of reasons. First, Mr Lipson expressly disavowed having any expertise to determine whether capital expenses in fact lead to an increase in the value of property. It follows that I reject Mr Lipson’s evidence that the Properties would have fallen into disrepair, and thereby diminished in value, if not for the expenses and efforts incurred by the McNivens.
Second, the assumption that the McNivens should be entitled to restitution of one dollar for each dollar claimed proceeds on a series of false premises. For instance, Mr Lipson’s opinion erroneously assumes that each dollar spent on capital works or maintenance equates to a commensurate increase in value. His opinion also assumes that each dollar spent can be aggregated to produce a commensurate increase in value. Each of those assumptions is flawed due to depreciation of capital works and maintenance over time, and the changes in the value of money over time.
During cross-examination, Mr Lipson accepted that there may not be a direct correlation between what was spent or exerted by the McNivens and the improvement in value of the Properties. In this regard, I refer to what Millet J said in Re Pavlou at 1049 with approval:
Much expenditure on property is not reflected in any increase in value, and most expenditure on property results in a much smaller increase in value than the amount expended.
Third, and relatedly, it appears that Mr Lipson’s expert opinion is merely a consequence of his instructions and does not involve any independent analysis or active intellectual engagement. Any difference in the analysis is entirely driven by Mr Lipson’s instructions and the conclusions reached are, in effect, bootstrapped to the false premises underpinning that assumption.
Thus, in my view, as concerns maintenance, repairs, improvements and renovations of the properties and exertion of personal effort, the McNivens are only entitled to $11,500.
Question 5 – At what point in time are the amounts in question (4) to be determined?
The trustees contend that consistently with the concept of “enrichment”, the value must be the value at the time when the trustees gain possession of the properties, rather than the date of the relevant equity payments and personal efforts. I endorse that proposition, though it is unnecessary to decide whether that is so given the conclusion I have reached above.
Question 6 – Should an adjustment be made in respect of the depreciation on the maintenance, repairs, improvements and renovations for the period prior to which the Trustees obtain possession of the Properties?
Having expressed a view that the maintenance, repairs and improvements did not materially enhance the value of the properties, as per the unchallenged valuation evidence, no adjustment should be made in respect of these items.
Question 7 – Are the McNivens entitled to the benefit of any of the growth in the capital value of the Properties?
In my view, the Trustees are entitled to any capital growth of the Properties from the time those Properties vested in them upon the McNivens’ bankruptcies. I have reached that view for the following reasons.
First, there is nothing unjust or unconscionable about the Trustees receiving the benefit of capital growth of the Properties. The substantial equity in the Properties is the consequence of the abandonment of the Anylock Mortgage. If the Anylock Mortgage had not been abandoned, the interest on that loan would have far exceeded any equity available in the Properties. As the legal owner of the Properties, there is no unjust enrichment to the Trustees by reason of these events. Further, as against unsecured creditors, the McNivens cannot an equity of any description, and certainly no equity with priority to the unsecured creditors.
Second, it is relevant that the McNivens’ contributions to the St George Mortgage did not reduce the principal debts secured against the Properties. That is a critical distinguishing factor from the present circumstances and those in Draper, where the wife of the bankrupt paid the principal and interest in relation to the mortgage, increasing the overall equity of redemption, such that in Draper the trustee would have been unjustly enriched if they retained that increase in the value of the property.
In short, the increase in the capital value of the Properties is a benefit vested in the Trustees. It must therefore be to their benefit, unless it can be shown that it would be unjust for the Trustees to retain that benefit as an incident of ownership, having regard to any contributions made by the McNivens to the increase in value. For the reasons discussed above, the contributions made by the McNivens’ did not lead to an increase in the value of the Properties.
Conclusion in relation to unjust enrichment claims
It follows from what I have said above that although, in theory, the McNivens are entitled to restitution on the basis of unjust enrichment for the interest repayments on the St George Loan for some of the relevant period, and a proportion of the amounts paid for rates, taxes and outgoings, those amounts are offset by the rent received from the Blackburn North Property and notional rent on the Templestowe Property. Thus, in aggregate, I have concluded that the Trustees are not required to make any contribution to the McNivens out of the proceeds of sale of the Properties.
For the sake of completeness, I note that on 22 April 2022, the McNivens filed (without leave) further affidavit material which contains updated calculations of various expenses in the categories I have considered above. For the reasons I have explained in relation to the unjust enrichment claims, if those updated figures were applied to the analysis, the outcome would be the same in that any expense recoverable by the McNivens would be less than the ongoing benefit they have enjoyed from their ongoing occupation of the Templestowe Property and receipt of rent for the Blackburn North Property. For this reason, it is unnecessary for me to consider whether the affidavits proffered to my chambers should be admitted as evidence in the proceeding.
DISPOSITION
For the above reasons, I have concluded that the Trustees’ claim should succeed and the McNivens’ cross claim should be dismissed. Costs should follow the event and be paid on a standard basis. I shall make orders accordingly.
I certify that the preceding three-hundred and fifteen (315) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anastassiou. Associate:
Dated: 29 April 2022
SCHEDULE OF PARTIES
VID 1571 of 2018 Cross-Claimants
Second Cross-Claimant:
HEATHER ANNE MCNIVEN
Cross-Respondents
Second Cross-Respondent
JAMES PATRICK DOWNEY AS TRUSTEE FOR THE BANKRUPT ESTATE OF HEATHER ANNE MCNIVEN
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