JGM Nominees Pty Ltd v Caveat Finance Pty Ltd
[2009] VSC 604
•18 DECEMBER 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7321 of 2007
| JGM NOMINEES PTY LTD (ACN 006 210 402) | Plaintiff |
| v | |
| CAVEAT FINANCE PTY LTD (IN LIQ) (ACN 117 242 627) AND OTHERS | Defendants |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 26 AND 27 NOVEMBER 2009 | |
DATE OF JUDGMENT: | 18 DECMBER 2009 | |
CASE MAY BE CITED AS: | JGM NOMINEES PTY LTD v CAVEAT FINANCE PTY LTD (IN LIQ) | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 604 | |
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Practice and Procedure – Refusal of adjournment of trial – Failure to comply with pre-trial directions for filing of affidavits – Refusal to grant leave to issue subpoenas with less than five days’ notice – No satisfactory explanation for not issuing subpoenas earlier – Calling extra 41 witnesses would have converted agreed 4 day trial into at least 3 week trial – Supreme Court (General Civil Procedure) Rules 2005, rules 42.02(2)(a)(ii) and 42.03(8).
Trusts and Trustees – Misappropriation of trust funds – Following trust property – Used to assist in purchase of property in conjunction with trustee’s own funds and borrowed funds – Property later sold – Calculation of claimants’ entitlement to surplus sale proceeds – Funds borrowed on security of property not taken into account.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr IW Upjohn | John Matthies & Co |
| For the First Defendant | Mr AA Nolan SC | Pinto Law Pty Ltd T/as Isaac Brott & Co |
| For the Third Defendants | Mr DJ Williams | Saxbys Lawyers |
| For the Sixth Defendant | Mr M Kyriakou (director in person) | |
HIS HONOUR:
Introduction
This proceeding concerned competing claims to a fund of money paid into Court in February 2008 by the first mortgagee of a property at 10 St Vincent’s Place, South Melbourne (“the Property”), which was registered in the name of MK River Pty Ltd (“MK River”), the trustee of the MK Investment Trust. The money paid into Court represented the sale proceeds remaining after satisfaction of the first mortgagee’s debt and costs. At the start of the trial, the fund totalled approximately $208,225 plus interest from 1 June 2009.
The plaintiff, JGM Nominees Pty Ltd (“JGM”), claimed to be a chargee and an equitable mortgagee, pursuant to loan agreements dated 20 and 25 September 2006 between JGM, MK River and Australian Property Management Pty Ltd (“APM”), and pursuant to another loan agreement dated 30 November 2006 between JGR and MK River. On 20 November 2006 and 6 December 2006, JGM lodged caveats over the title to the Property. At the trial, it claimed that MK River was indebted to it in the sum of $529,932.27 as at 1 November 2009. This amount was calculated using the interest rates of 65% and 33% per annum compounding monthly payable under the respective loan agreements.
The first defendant, Caveat Finance Pty Ltd (in liquidation) (“Caveat Finance”), claimed to be an equitable mortgagee, pursuant to an unregistered mortgage. It relied on a loan agreement made between Caveat Finance and Walter Percival Edwards, the sole director of MK River, on 1 November 2006 and amended on 8 December 2006. As part of the agreement, on 10 November 2006 MK River mortgaged the Property to Caveat Finance as security for the payment of principal and interest due under the loan. On 14 November 2006, Caveat Finance lodged a caveat over the title to the Property. At the trial, it claimed that MK River was indebted to it in the sum of $1,481,516.16 as at 1 November 2009. This amount was calculated using the interest rate of 120% per annum compounding monthly payable under the loan agreement.
The third defendants were 34 individuals and companies, being the members of two syndicates of lenders. The third defendants claimed an equitable interest in the Property pursuant to a constructive trust which was said to have arisen as a result of $127,956 of their funds being wrongfully used in the purchase of the Property by MK River in March 2006. I will refer to these facts in more detail below. On 7 March 2007, the third defendants lodged a caveat over the title to the Property. At the trial, the third defendants calculated that they were entitled to the sum of $333,916 from the proceeds of sale of the Property. I will consider this calculation below.
The sixth defendant, Australvic Finance Pty Ltd (“Australvic”), is now the trustee of the MK Investment Trust. Australvic was joined as a party to this proceeding, on its own application, on 29 April 2009. As trustee, Australvic would have been entitled to any proceeds left after all secured creditors had been paid, but as can be seen from the quantum of the competing claims, the money paid into Court was not sufficient to satisfy even one of the claimants let alone all three. Moreover, in the Other Matters part of the order of Evans AsJ made on 29 April 2009 it was recorded that Australvic “conceded” that Caveat Finance was “entitled to the monies in Court”. Nevertheless, Australvic’s interest in the outcome of this proceeding was that it disputed the claims of JGM and the third defendants.
As set out below, during the course of the trial each of these parties, apart from the third defendants, withdrew. After considering the evidence, I was satisfied that the third defendants were entitled to judgment for the money in Court and I made orders accordingly. What follows are my reasons for reaching this conclusion. But, first, it is appropriate to explain how this rather extraordinary course of events occurred.
The Course of the Trial
By a summons dated 19 November 2009 and filed by Buxton & Associates, the then solicitors for the sixth defendant, Australvic sought orders that the hearing date fixed for 25 November 2009 be vacated and that JGM make further and proper discovery. On 20 November 2009, Mahony AsJ referred the application for vacation of the trial date to the Judge hearing the trial and set out a timetable for the service of further affidavits relating to that application.
The trial was listed before me on 26 November 2009. At the start of the hearing, Mr Noor Dean, a legal practitioner employed by Buxton & Associates, sought leave for his firm to cease acting for Australvic. In an affidavit sworn that day at my direction Mr Dean said that Buxton & Associates had only been instructed to act for Australvic on the application before Mahony AsJ. (Prior to that, Pinto Law Pty Ltd trading as Isaac Brott & Co (“Isaac Brott & Co”) had been acting for both Australvic and Caveat Finance. Eventually, it was realised that there was a potential conflict of interest and Isaac Brott & Co ceased acting for Australvic.) Mr Dean also said in his affidavit that no funds had been paid to his firm, that the relevant files and documents had not been obtained and that Michael Kyriakou on behalf of Australvic had terminated his firm’s retainer. In the circumstances, I gave Buxton & Associates leave to file and serve a Notice of Solicitor Ceasing to Act in accordance with rule 20.03 of the Supreme Court (General Civil Procedure) Rules 2005 (“the Supreme Court Rules”).
This left Australvic unrepresented. Mr Kyriakou, a director of Australvic, sought leave to appear on behalf of the company and asked for an adjournment. Given that all of the other parties were ready to present their claims for the small amount of money in Court, it was obviously undesirable to adjourn the hearing in order to give Australvic the opportunity to obtain legal representation. In all the circumstances, I reluctantly gave Mr Kyriakou leave to appear for Australvic.
It was not entirely clear that Mr Kyriakou was persisting with his application for an adjournment if he was granted leave to appear for Australvic because he said:
I would like to see an adjournment. In the alternative, if Your Honour doesn’t grant me that adjournment, I would request that Your Honour grant me leave to subpoena some people in to enable the cross-examination to go ahead. I’m based on the documents and the material that I have, I’m ready to proceed. I’m not asking for an adjournment. … Your Honour, based on the material that I have before me, if I can get it into evidence, then I’m ready to proceed. I have no trial affidavit, I’ve got a number of exhibits but I need leave from the Court to issue the proper subpoenas so I can get these people in the box. Not that I’m requesting an adjournment, I’m asking for an adjournment, Your Honour. …
In the circumstances, I treated him as still applying for the adjournment.
After hearing argument, I refused to adjourn the hearing. In order to understand the reasons for my refusal it is necessary to set out some of the interlocutory history in this and another proceeding. On 8 December 2008, Australvic’s application to be joined as a party was dismissed by Master Evans (as he then was). On 26 March 2009, Australvic commenced a proceeding against JGM and each of the 34 members of the two syndicates of lenders comprising the third defendants in this proceeding. As previously stated, Australvic was joined as a party to this proceeding on 29 April 2009. At the same time, Evans AsJ stayed Australvic’s other proceeding until the hearing and determination of this proceeding. One of the orders made by Evans AsJ in this proceeding on that day was that:
Any affidavits on which the added Defendant intends to rely be filed and served on or before 20 May 2009.
No affidavits were filed or served by Australvic by the due date. On 2 June 2009 Kings AsJ ordered that:
The date by which the Sixth Defendant file and serve any affidavit material on which it intends to rely is extended to 17 July 2009.
Again, no affidavits were filed or served by Australvic by the due date. On 28 July 2009, Kings AsJ again extended the date for the filing and serving of Australvic’s affidavit(s) to 28 August 2009. Still no affidavits were filed or served. No satisfactory explanation was given for the failure of Australvic to comply with repeated directions by the Court for the filing of affidavits.
It was not until 19 November 2009 that Mr Kyriakou swore an affidavit, but it referred to matters in support of Australvic’s application to vacate the trial date so that further and proper discovery could be made by JGM. One issue raised by Mr Kyriakou was whether some other entity and not JGM had in fact advanced the loans to MK River. By a second affidavit sworn on 23 November 2009, Mr Kyriakou raised another issue, namely whether JGM’s claim had been extinguished by the terms of settlement entered into in respect of another proceeding in which APM and JGM had been parties. However, it appeared that Mr Kyriakou had in his possession copies of all of the documents relevant to these issues.
With respect to the subpoenas, I deferred until the following morning the question of whether leave would be granted, pursuant to rules 42.02(2)(a)(ii) and 42.03(8) of the Supreme Court Rules, to issue them with less than five days’ notice, and directed Mr Kyriakou to draft them and send them to the Court and the parties before the end of the day so that everyone could know who was involved.
Counsel for JGM then opened its case and called its first witness. He was cross-examined by counsel for Caveat Finance and by Mr Kyriakou. His evidence was not completed by the end of the first day of the hearing.
On the morning of the second day, Friday 27 November 2009, Mr Kyriakou sought leave to issue eight subpoenas, including one subpoena which was addressed to all 34 members of the two syndicates of lenders constituting the third defendants. The proposed subpoenas required the respondents to attend Court on Monday 30 November 2009. I refused to give leave to issue the subpoenas.
Nearly all of the proposed subpoenas related to Australvic’s disputing of the third defendants’ claim. It appeared that Mr Kyriakou wanted to argue that the advance of the $127,956 to MK River had been authorised by members of the two syndicates of lenders constituting the third defendants and that not all of those members had given instructions to the third defendants’ solicitors to act on their behalf. The latter point was of doubtful utility given that the entitlement of the members of the two syndicates of lenders was, as their counsel submitted, joint and several.
By the order of Kings AsJ made on 28 July 2009, the proceeding had been set down for trial and fixed for hearing on 25 November 2009 on an estimated duration of four days. Australvic was represented at Court on that day by counsel, so it must be assumed that Australvic did not dispute that estimate. The calling of even a few of these witnesses would have meant that the estimate of four days could never have been achieved. As Mr Kyriakou said, if he called all of the witnesses the subject of the subpoenas it would be at least a three week trial. Thus, giving leave to issue the subpoenas would be extremely disruptive both to the other parties and to the Court. Moreover, I was not convinced that Mr Kyriakou understood the limitations he would be under in calling all of these witnesses because he constantly referred to cross-examining them.
I have already set out above the repeated breaches by Australvic of the pre-trial directions. No satisfactory explanation was given as to why no affidavits had been filed by Australvic referring to its disputing of the claim by the third defendants or why subpoenas had not been issued earlier by Australvic or why Australvic had not advised the other parties and the Court at the appropriate time of its desire to conduct a trial of at least three weeks. In all the circumstances, therefore, I was not prepared to grant the leave sought.
After a short adjournment, following my ruling on the subpoena question and a discussion about how to keep the dispute within the four day estimate, counsel for Caveat Finance announced that the liquidator had decided not to lead any evidence in support of its claim and to withdraw from the proceeding on the agreed basis that none of the other parties sought any costs against Caveat Finance.
The cross-examination and re-examination of JGM’s first witness was then completed. After another short adjournment, counsel for JGM announced that it was no longer making any claim to the money in Court and was withdrawing from the proceeding on the agreed basis that the third defendants did not seek any costs from it. On behalf of Australvic, Mr Kyriakou sought costs from JGM. I declined to make any such order as the only steps taken by lawyers on behalf of that defendant had been to successfully apply to be joined as a party and to seek extensions of time for the filing of affidavits and to unsuccessfully apply for the vacation of the trial date. It was not suggested that Mr Kyriakou had any entitlement to costs in respect of his appearance on behalf of Australvic.
Counsel for the third defendants then opened their case by tendering with the consent of Mr Kyriakou documents from the file of a solicitor, Stuart L Carter, who acted for the vendors of the Property in the sale to MK River. After yet another short adjournment, Mr Kyriakou informed me that Australvic was also withdrawing because it had no “material before the Court” and he did not want to waste the Court’s time cross-examining a witness “that’s not relevant to the material”. He also said that:
in light of the material that is before the Court I cannot present the true facts and if I can’t present the true facts there’s no use for me proceeding and wasting the Court’s time.
This left the third defendants as the only remaining claimant of the money in Court.
The Claim by the Third Defendants
The third defendants’ claim to the money in Court was supported by an affidavit of Grace Ciavarella sworn on 19 September 2008. Ms Ciavarella deposed that she was a member of, and the facility agent of, the Abbotsford Property Syndicate and a member of the 13th Beach Property Syndicate, and that she was authorised to make her affidavit on behalf of the members of both syndicates, who together constituted the third defendants.
Ms Ciavarella said in her affidavit that in about November 2003 the members of the Abbotsford Property Syndicate advanced the sum of $1 million to a company controlled by one David Kirkham for the purpose of funding a property development in Johnson Street, Abbotsford. There had been no repayment of any principal or interest. Ms Ciavarella also said that in about November 2003 and March 2004 the members of the 13th Beach Property Syndicate advanced the sums of $1.27 million and $365,000 to another company controlled by Mr Kirkham for the purpose of funding a property development in Barwon Heads. There had been no repayment of any principal or interest.
In about September 2005 the members of the two syndicates engaged the firm of solicitors, WP Edwards, to advise on recovering their loans. In order to secure an extension of time for repayment, Mr Kirkham agreed to provide additional security over assets owned by him or entities related to him. A second mortgage was granted to the members of the two syndicates over one such property at Sorrento just prior to it being sold. Ms Ciavarella deposed that in about February 2006 she was informed by Mr Kyriakou, a law clerk employed by WP Edwards, that a sum of approximately $180,000 was available from the proceeds of sale of the Sorrento property (“the Sorrento property sale proceeds”) and that they had been paid into the trust account of Mr Kirkham’s solicitors, Newbury Bell, on behalf of the members of the syndicates. Failing satisfactory responses from Mr Kyriakou as to when they would be receiving these funds, the members of the syndicates terminated WP Edwards’ retainer and appointed Saxby Lawyers as their new solicitors in October 2006. When contacted, Newbury Bell advised in November 2006 that it did not have the Sorrento property sale proceeds in its trust account.
Amongst the documents provided by Newbury Bell to Saxby Lawyers was a letter dated 14 March 2006 from WP Edwards to Newbury Bell, signed by Walter Edwards, requesting that the funds held by Newbury Bell in its trust account be disbursed by way of the following bank cheques - $127,956 in favour of Stuart L. Carter and the balance of just over $52,000 to APM. Ms Ciavarella deposed that no member of either syndicate was aware of this letter until it was obtained by Saxby Lawyers.
Ms Ciavarella said that in about February 2007 she was told by Mr Edwards that the bank cheque made payable to Stuart L. Carter was used to pay the deposit on the purchase of the Property. Subsequent searches revealed that MK River became the owner of the Property on 17 March 2006 and that the sole director and shareholder of that company from 15 September 2005 was Mr Edwards, the sole proprietor of WP Edwards. Ms Ciavarella further deposed that no member of either syndicate was aware until about 6 March 2007 that the Sorrento property sale proceeds that were meant to have been placed in the trust account of WP Edwards had been misappropriated by Mr Edwards and used to pay the deposit on the purchase of the Property.
Documents from Mr Carter’s file showed that the bank cheque obtained by Newbury Bell at the request of Mr Edwards from the Sorrento property sale proceeds was the same bank cheque received by Mr Carter at settlement of the sale of the Property to MK River. That is, the bank cheque was used to pay part of the balance of the purchase price, and not the deposit as Ms Ciavarella had thought.
Further, there was oral evidence from Christopher Lilley, the solicitor for the third defendants, that he had recently obtained access from the Australian Securities and Investments Commission to the original file of WP Edwards in respect of that firm acting for the members of the two syndicates between about September 2005 and October 2006. Mr Lilley said that he had searched the file and had found no written authority from the members of the two syndicates to WP Edwards to disburse the sum of $127,956 to assist MK River to purchase the Property.
In the circumstances, I was satisfied that the sum of $127,956 from the Sorrento property sale proceeds belonging to the members of the two syndicates had been used in the purchase of the Property without their knowledge or authorisation. This was a breach of fiduciary duty entitling the third defendants in equity to trace their funds into the Property. Thus, the third defendants were entitled to lodge a caveat over the Property in respect of their equity or equitable interest under a constructive trust. This was done on 7 March 2007. As the prior-in-time caveators had withdrawn from the proceeding, there was no issue about priority. All that remained was quantifying the extent of the third defendants’ interest in the Property.
The evidence before me established that the price paid by MK River to purchase the Property was $1,080,000. Of this, the deposit of $108,000 came from MK River or other unidentified sources, the sum of $127,956 came from the third defendants’ funds and the balance from the first mortgagee. The sale price obtained by the first mortgagee was $1,460,000. Thus, there was a capital appreciation of $380,000.
Mr Williams of counsel, who appeared for the third defendants, submitted that the funds borrowed on the security of the Property should be excluded from further consideration in accordance with the principles, enunciated in Paul A Davies (Australia) Pty Ltd v Davies[1] and Australian Postal Corporation v Lutak.[2] Those cases stand for the proposition that in calculating the proportionate shares of a profit or gain from the acquisition of a property using, in breach of fiduciary duty, a mixture of trust money and the trustee’s personal money, any money provided by way of a mortgage loan on the security of the property is not to be taken into account.
[1][1983] 1 NSWLR 440 (Moffitt P, Hatley and Mahoney JJA).
[2](1991) 21 NSWLR 584 (Bryan J).
Following that approach, the proportionate contribution made by the third defendants’ funds to the purchase of the Property was $127,956 divided by $235,956 ($127,956 plus $108,000) or 54.2% of the whole of the relevant contributions. Thus, in addition to having an entitlement to the return of their funds, the members of the two syndicates are entitled to their proportionate share of the capital appreciation, being 54.2% of $380,000 or $205,960. When added together, the amounts of $127,956 and $205,960 came to a total of $333,916, which was well in excess of the amount of money in Court.
Judgment was therefore entered for the third defendants, in the form proposed by the Associate Justice who is the Senior Master, for payment out to Saxbys Lawyers for the third defendants all of the money in Court in the relevant account including interest from 1 June 2009, “but subject to retention of a sum sufficient to cover any taxation liability”.
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