Kusumanadi v Artemas
[2016] VCC 1234
•26 October 2016
| IN THE COUNTY COURT OF VICTORIA | Revised Not Restricted Suitable for Publication |
AT MELBOURNE
COMMERCIAL DIVISON
EXPEDITED CASES LIST
Case No. CI-15-05083
| JOENG KUSUMANADI and MULJATI SULIMIHARDJA | Plaintiffs |
| v. | |
| JUN ARTEMAS and JULIA ARTEMAS | Defendants |
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JUDGE: | His Honour Judge Anderson | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15-19, 22-24 August 2016 | |
DATE OF JUDGMENT: | 26 October 2016 | |
CASE MAY BE CITED AS: | Kusumanadi & Anor v. Artemas & Anor | |
MEDIUM NEUTRAL CITATION: | [2016] VCC 1234 | |
REASONS FOR JUDGMENT
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Catchwords: Contract – Joint venture to redevelop residential property with two units – Terms for repayment of capital instalments – Determination of valid expenses in order to calculate any profit – Whether a constructive trust arose in relation to profits of the venture used by defendants to make mortgage payments over their own home – Whether a transfer of one defendant’s interest as co-owner to his wife for “natural love and affection” should be set aside as an alienation made with intent to defraud creditors – Section 172(1) Property Law Act 1958 (Vic).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr C. Gunst QC and Mr A. W. Sandbach of Counsel | AJH Lawyers |
| For the Defendants | Mr P. G. Willis SC | Liberogiannis & Associates |
HIS HONOUR:
1Joeng Kusumanadi and Muljati Sulimihardja own and operate a tea trading business in Indonesia. Jun Artemas, for many years, had a factory in Indonesia manufacturing equipment and machinery for the tea industry. The parties met in the early 1990’s and established a relationship which included both business and personal dealings.
2Mr Artemas and his wife Julia came to Australia in 1995 and, although Mr Artemas continued business activies in Indonesia, he has pursued a number of enterprises and projects in Australia. These activities were of interest to Mr Kusumanadi and Ms Sulimihardja as they too examined the possibility of moving to Australia.
3From about 1999, Mr Kusumamadi and Ms Sulimihardja received advice and assistance from Mr Artemas on a variety of practical matters related to their proposed move to Australia. Although they continue to live in Indonesia, Mr Kusumanadi and Ms Sulimihardja’s four children completed their education in Melbourne and now apparently live here. Mr Kusumanadi, and particularly Ms Sulimihardja, have regularly visited Australia and lived here from time to time.
4The business arrangement which has given rise to the present litigation arose from conversations between Mr Artemas and the plaintiffs in about 2002 and 2003. The arrangement related to the purchase, redevelopment and sale of two residential properties in Melbourne. Later, one of the projects (at Burwood) was abandoned and the arrangement continued in relation to the remaining property at 358 Middleborough Road Blackburn (“Middleborough Road”).
5The objective was to redevelop Middleborough Road by renovating the existing house, construct a unit on part of the land, subdivide the property, sell the two dwellings separately and divide the profit equally, as to 50% to Mr Kusumanadi and Ms Sulimihardja and as to 50% to Mr Artemas.
6For their part, Mr Kusumanadi and Ms Sulimihardja were to contribute a sum of money. For his part, Mr Artemas was to use Middleborough Road, a property he had recently purchased, and was to be responsible for arranging all aspects of the design, construction and sale of the dwellings and to ultimately account for the profits of the project.
7Mr Kusumanadi and Ms Sulimihardja transferred to Mr Artemas various sums. In addition, a sum previously advanced by them for a project in South Korea, and monies that related to the abandoned project at Burwood were applied to the Middleborough Road project. The total sum provided by Mr Kusumanadi and Ms Sulimihardja was $405,000.
8Mr Artemas arranged for the design and construction of the dwellings. They were completed on about 12 January 2005 (the date of the certificate of occupancy), pursuant to a building contract with PMN Home Improvements (“PMN”). Mr Artemas paid to PMN a total of $335,500. Excluded from PMN’s contract were certain items, most significantly being, the roofing and cladding materials.
9Unit 2 (the new unit) was sold by Mr Artemas in July 2007 for $420,000. Unit 1 (the renovated house) was sold in December 2012 for $500,000. Before the dwellings were sold, they were rented out.
10The receipts derived from the project were agreed, as follows:
Sale price of Unit 2
$420,000
Sale price of Unit 1
$500,000
Rental received
$149,471.40
Total receipts
$1,069,471.40
11There are substantial disputes between the parties relating to certain expenses of the project which Mr Artemas claimed, including:
a.the cost of Kubota roofing and cladding products provided for the project;
b.interest on, and the repayment of, loans obtained by Mr Artemas;
c.operation and management costs including travel and communications;
d.other costs and expenses where credible contemporaneous supporting documentation was not available.
12The issues for determination in the proceeding include:
a.Was the agreement between the parties that the sum advanced by Mr Kusumanadi and Ms Sulimihardja to Mr Artemas for the project was to be repaid before the calculation of the net profit (or loss), which was to be shared equally by the parties?
b.In calculating the net profit (or loss), what were the appropriate expenses to take into account?
c.What sum, if any, is owing by the first defendant to the plaintiffs?
13Further issues arise for determination in relation to the property at 5 Clery Court Donvale (“the Donvale property”), which was until February 2015 jointly owned by Mr Artemas and his wife Julia Artemas, as follows:
a.If the use of part of the proceeds of the sale of the units to make repayments in respect of Mr and Mrs Artemas’s mortgage over the Donvale property was not an appropriate expense of the Middleborough Road project, by the process of tracing, were the plaintiffs entitled to register a caveatable interest over the Donvale property pursuant to a “constructive, implied or resulting trust” to the extent of the payments totalling $105,312, or 10% of the value of the Donvale property?
b.Should the transfer of the Donvale property from the joint names of Mr and Mrs Artemas to the sole name of Mrs Artemas, by transfer dated 8 August 2014, be set aside as being “an alienation of property…with intent to defraud creditors” within the meaning of section 172 of the Property Law Act 1958 (Vic) (“the PLA”)?
Witness statements and experts’ reports
14Plaintiffs’ senior counsel, Mr Gunst QC with whom Mr Sandbach appeared, called both his clients Mr Kusumanadi and Ms Sulimihardja and their eldest son Nicholas as witnesses. For each of them, a witness statement had been prepared and was tendered in evidence. The plaintiffs also relied upon expert statements and oral evidence by Phillip Minto (an accountant), Peter Mackie (a building consultant) and Justin Zumpe (a quantity surveyor).
15Defendants’ senior counsel, Mr Willis QC, called his clients, Mr and Mrs Artemas, to give evidence. Witness statements had previously been prepared for them, although only Mr Artemas’s statement was tendered as part of his evidence.
16The parties provided a document to the Court headed “Objections to evidence in witness statements”. The objections also canvassed each of Mr Mackie’s and Mr Zumpe’s expert reports and summarised each party’s objections and the opposite party’s responses. The parties were content for me to take these matters into account without hearing oral argument and to make rulings on the objections only if the matter raised was significant in my determination of disputed issues.
Credibility of witnesses
17The findings of fact in this case are affected by –
a.the likely unreliability of witnesses’ memories because of the passage of time;
b.the participation by Mr and Mrs Artemas in loan applications which included admitted false statements and forged documents;
c.the absence of documentary records to substantiate many of Mr Artemas’s claims for expenses on the Middleborough Road project.
18Unreliable memories: Some of the critical events in the proceeding occurred many years ago. Of these, the most significant were the conversations Mr Kusumanadi and Ms Sulimihardja had with Mr Artemas in about 2003. The parties each plead that the agreement they reached in relation to the Middleborough Road project was comprised by a letter from Mr Artemas to Mr Kusumanadi and Mr Sulimihardja dated 30 April 2003 and by a conversation or various conversations in March 2003.
19The plaintiffs allege that the conversations occurred between Mr Kusumanadi and Mr Artemas “during various meetings conducted during May 2003 in Melbourne”. The conversations included the reaching of an “express oral term of the agreement” that, “once the two lots on the [Middleborough] property are sold, [Mr Artemas] will repay the plaintiffs’ investment in the principal sum of AUD $405,000 plus…50% of the total profit”.
20Mr Artemas, relied in his defence on a telephone conversation “on or about 24 March 2003” when Mr Kusumanadi telephoned Mr Artemas “and told him [relevantly] that the proceeds of sale [of the units] would be applied in payment of the costs of construction and repayment of all mortgage loans prior to return of any capital and payment of any profit”.
21The differences between the parties’ assertions as to what was discussed is very subtle. The evidence of each of the relevant witnesses was given solely from their recollection of what was said in a conversation or conversations over 13 years ago, with no intervening events until at least about 2013 which would cause them to try to recall what had been said.
22Counsel themselves recognised the difficulty of the Court finding that an agreement had been reached and terms finalised in a particular conversation or conversations. Both parties relied upon alternative submissions that, although there was no issue that the parties had reached an agreement, the terms of the agreement (particularly the basis and timing of the return of contributions and the calculation of profit) would need to be inferred from the surrounding circumstances and the conduct (including subsequent conduct) of the parties.
23False statements and forgeries: In respect of certain aspects of the evidence of both Mr and Mrs Artemas, I granted certificates pursuant to section 128 of the Evidence Act 2008 (Vic). This evidence related to two applications for bank loans, as follows:
a.in June 2007 to ING Bank by Mr Artemas;
b.in 2014, to Westpac by Mrs Artemas.
24The application to ING Bank was for a loan of $250,000. The loan application was submitted on 13 June 2007 by a mortgage broker, Ms Julie Chen of JC Trading Pty Ltd. The “loan application form” is signed by Mr Artemas in three places, each of them containing declarations, including that:
a.“I/We have completed or arranged for completion of and read and understood the particulars set out in this form and declare them to be true and complete”; and
b.“To the best of my/our knowledge and belief, all the information given in this form is true and correct”.
25The application contained a number of false statements under the heading “employment details”. These included that he was a salaried full time employee of Redfire Universe (“Redfire”) in an executive/managerial position and had commenced in that position on 1 July 2006. Under the heading “PAYG Income (salary/retired applicants/guarantors only)”, Mr Artemas’s “gross monthly [base] income” is stated to be $5,833.
26The application was supported by the following attached forged documents:
a.a letter from Redfire signed by “Dion Andika Payroll officer” addressed “To whom it may concern” which reads as follows:
“This is to confirm that Mr. Jun Artemas has been employed by our company from 1st of July 2006.
His prior experiences in managing businesses are valuable assets to our company. His current position is General Manager of our company. His annual gross remuneration is $70,000 plus benefits and company car.
Should you have any further queries, please do not hesitate to contact me on 03 9547 1166”.
b.two pay advices for Mr Artemas under the heading of “Redfire Universe” for the weeks ended 13 and 20 June 2007 showed “gross pay” of $1,346 and “net pay” of $1,032 after the deduction of PAYG withholding tax and 9% superannuation.
27Mr Artemas said that he had signed the application form in blank and denied any knowledge of the false statements or forged documents. Mr Artemas said that the completed application form and the attached forgeries were done without his knowledge and were the responsibility of the mortgage broker.
28Mr Artemas had previously given evidence that Redfire was a company of which his son Irving Artemas was a director and shareholder and which occupied premises in Springvale rented from a company of which Mr Artemas was a director and shareholder. Mr Artemas admitted that the telephone number at the foot of the document, showing the sender of the document when it was sent on 25 June 2007 to Ms Chen’s company, was the home telephone number of Irving Artemas.
29The application to Westpac for a loan of $1 million was made by Mrs Artemas and was signed by her in two places and dated 10 October 2015. By signing the form, Mrs Artemas acknowledged that she had “read and understood each section of this application form”. The application to Westpac was handled by a finance broker, Ms Joanna Tsapara, and submitted to and approved by a branch manager, Mr Richard Mohan, in the sum of $900,000.
30The application form contains a number of false statements:
a.that Mrs Artemas’s “current home address” was “1448 High Street Glen Iris Vic 3146” and that her “time there” was “from: 01/03/1996”. The Glen Iris address was that of her son Irving and she and Mr Artemas have lived at 5 Clery Avenue Donvale since 1996;
b.that Mrs Artemas had been in full time employment as a “real estate agency/agent manager/owner” with Ammache Real Estate since 1 June 2010. In fact Mrs Artemas had never had paid employment since coming to Australia in 1995;
c.that Mrs Artemas had net monthly income of $11,147 (or annual before tax income of $130,680) being $7,697 net base monthly income from her employment and $3,450 rental income from the “non-owner occupied” property at 5 Clery Avenue Donvale.
31The application was supported by various documents including the following false or forged documents:
a.a “residential tenancy agreement” between Mr Artemas as landlord of 1448 High Street Glen Iris and “Mansoor Ali Khan” as tenant of 5 Clery Avenue Donvale, of the Donvale property at a rental of $3,450 per month for twelve months commencing 1 April 2014. In fact, the Donvale property was not rented and Mr and Mrs Artemas continued to live there during the term of the “tenancy agreement” as they had since 1996, and continue to do;
b.a PAYG payment summary for “Julie Artemas 5 Clery Avenue Donvale Vic 3111” for the period 1 July 2013 to 30/6/2014 with gross payments of $130,580 and total tax withheld of $36,182 by “The Trustee for Ammache Real Estate”.
32Mr Artemas said that he had signed the Residential Tenancy Agreement in blank at the request of the mortgage broker and he assumed that she had completed the document and the details in the application form signed by his wife. He acknowledged that the bank would not have lent money to his wife unless she had sources of income.
33Mrs Artemas also put the responsibility for the false documents on the mortgage broker. She said that she had subsequently become aware of the falseness of the application and supporting documentation. It was pointed out to Mrs Artemas in cross-examination that her loan had received “in principle” approval from Westpac, “subject to …all information supplied to us for the purpose of assessing your eligibility being true and correct”. Mrs Artemas was asked whether she intended to advise Westpac that the information supplied to it in the application was incorrect; she replied, “Why should I?”.
34These are extremely serious matters which affect the credibility of both Mr and Mrs Artemas. In relation to Mr Artemas, I consider that his participation in the two applications reflects a very casual attitude to obligations of disclosure and honesty. I very much doubt the truth of much of his evidence given under the protection of the section 128 certificate and in particular his attempts to absolve himself from any responsibility for the false statements in the application or his participation in the preparation and/or use of forged documents.
35In these circumstances, it is almost impossible to give any credence to Mr Artemas’s evidence. If there were independent evidence of a fact, about which Mr Artemas also gave evidence, I would assess that other evidence. Otherwise, it is difficult to see how I could be satisfied where a matter is sought to be established solely upon the testimony of Mr Artemas; and a matter certainly could not be, in circumstances where there was credible evidence to the contrary.
36Absence of documents: Many of the claims made by Mr Artemas as construction costs of the project are supported by Redfire invoices, and recently prepared documents or otherwise lack adequate contemporaneous records. Mr Artemas’s lack of credibility significantly limits the scope for drawing inferences or making assumptions of regularity.
37Other credit issues: There were a number of instances where Mr Artemas credit was able to be tested by reference to independent evidence which demonstrated strong reasons for also concluding that Mr Artemas’s evidence should not be accepted. The following are examples:
a.a conversation between Mr Artemas and Ms Sulimihardja and two of her sons was recorded by Nicholas Kusumanadi. The date of the conversation was significant because on two occasions in the conversation, Mr Artemas gave answers to direct questions as to whether the units were still being rented. Mr Artemas’s explanation for the answers was that the conversation took place in 2012 before Unit 1 was sold. This evidence, together with his answer during the conversation, would be untrue if, as Nicholas Kusumanadi asserted, the conversation took place on 12 August 2013.
Mr Willis’s cross-examination of Mr Nicholas Kusumanadi on the issue of the date of the conversation terminated when I asked the witness to produce his telephone, which he showed to counsel. It was acknowledged, by counsel, that the telephone recorded the date of the conversation as 12 August 2013. When Mr Artemas gave evidence, he suggested that the recording of the date on the telephone must have been altered.
To support this conclusion he referred to an answer he had given during the conversation that one of his grandchildren was “already 4 years old”. He produced an official document (an “immunisation history statement”) showing the child’s birthdate as 14 April 2008. If the conversation had been in 2012, the child would have been 4 years old; in 2013 she would have been more than 5 years old.
One other answer given by Mr Artemas referred to the current political situation in Australia. In answer to a question about whether he could “sort out” the property in five years, Mr Artemas said, “Hopefully with the new government. If he, Abbott wins. The labour party is trying its best to win”. It is a matter of public record that Mr Abbott’s party won the Australia Federal Election on 7 September 2013, defeating the Australian Labor Party.
The answers Mr Artemas gave in the conversation about the units were as follows:
i.Ms Sulimihardja asked, “So, what about the house?” Mr Artemas answered, “It’s just the same as it has been. I’m looking for more funds to replace the other one”;
ii.Ms Sulimihardja later asked, “So, the house is still there?” Mr Artemas replied, “Yes, it’s still there. But, I’m still being careful. I’m not brave enough to make a move at the present time”. Then, one of Ms Sulimihardja’s sons asked “So, is it still being rented?” Mr Artemas answered, “Yes, it is. I will calculate everything”;
iii.Ms Sulimihardja asked, “What is the market like in Blackburn? Is it good?” Mr Artemas responded, “The property is more or less okay. The property is still going strong”. The conversation continued. Mr Artemas said, “Property prices are still going up”. He was asked by both Ms Sulimihardja and her son, “Do you plan to sell it?” Mr Artemas replied, “It’s not a problem to sell or not to sell, if I get the money first I will pay everything… We are trying to get money. I need to pay everything first. I would like to hold on until the prices go up”.
b.these portions of the conversation are consistent with the evidence of Ms Sulimihardja and Nicholas Kusumanadi that after the construction work was completed, repeated enquiries were made to Mr Artemas by Ms Sulimihardja meeting him when she was in Australia, by her sons visiting Mr Artemas and by telephone calls and text messages. These enquiries concerned the efforts Mr Artemas had made and was making to sell the units and when he would be able to account. Ms Sulimihardja said that at no stage did Mr Artemas inform her or her sons that the one unit had been sold in 2007 and the other in 2012.
Mr Artemas’s protestations that he kept Mr Kusumanadi and Ms Sulimihardja fully informed lacks credibility. It is inconsistent with the evidence of the plaintiffs’ witnesses, the transcript of the conversation in August 2013 and the text messages Mr Artemas sent Ms Sulimihardja. These included –
i.on 1 August 2007, shortly after the sale of Unit 2 in July 2007, Mr Artemas texted, “Don’t worry about the property. I won’t run away. It seems that you think I’m going to run away. When everything is sold I will definitely send the money”;
ii.on 10 March 2010, Mr Artemas gave a number of reasons for taking “a while to get back to you” and asked Ms Sulimihardja “to be patient”;
iii.on 30 May 2010, Mr Artemas said he was in hospital and “the nurse is very strict, and is annoyed with you guys calling or sending SMS”;
iv.on 2 February 2011, Mr Artemas referred to problems with the tax office that needed to be dealt with and, as a result, “there are no funds that could be used”. He said, “The property is still there, so don’t worry, I have a serious problem, and I have to deal with the police and other issues. I hope the young guys here [Mr Kusumanadi and Ms Sulimihardja’s sons] don’t go looking for me because it would create another problem”.
What was the agreement between the parties?
38I have referred to the pleadings in which the parties define the agreement between them. It is appropriate to refer to some background to their arrangement, to the terms of the letters Mr Artemas sent to Mr Kusumanadi and Ms Sulimihardja, particularly the letter dated 30 April 2003 and to the evidence of the parties regarding contemporaneous discussions, particularly in about the period March to May 2003.
39There were a number of financial dealings between the parties before the arrangement was made in relation to Middleborough Road:
a.in about 2000, the plaintiffs transferred $US25,000 to Mr Artemas for an investment in Korea involving the purchase of shares. In August 2002, the Australian equivalent, $55,000 was allocated by Mr Artemas to the Middleborough Road project;
b.Mr Artemas discussed with Mr Kusumanadi and Ms Sulimihardja the possibility of them joining him in property development investments in Australia;
c.Mr Artemas assisted Mr Kusumanadi and Ms Sulimihardja to purchase a family home at York Street Glen Waverley (“York Street”). The money for the purchase was transferred to Australia through Mr Artemas;
d.between 2002 and 2004, substantial sums were transferred by Mr Kusumanadi and Ms Sulimihardja to Mr Artemas. These sums were to be used for a variety of purposes including the purchase of York Street and proposals for property development at Middleborough Road and Burwood;
e.later the Burwood development was abandoned and the monies that has been transferred by Mr Kusumanadi and Ms Sulimihardja for that project were allocated by Mr Artemas to the Middleborough Road project.
40On 12 August 2002, Mr Artemas sent by fax to Mr Kusumanadi and Ms Sulimihardja an outline of the proposed development at Middleborough Road. The relevant parts of the proposal were:
a.to use the Middleborough Road property which Mr Artemas had already purchased and which had a present value of at least $300,000;
b.the existing house would be renovated at a “projected cost of up to $40,000” and the construction of a new 3 bedroom unit at a “projected cost of up to $150,000 (hopefully this is the maximum)”;
c.the “total investment: $490,000” with sales of the units at “between $280,000-$350,000”;
d.Mr Artemas said that he hoped “that as soon as the properties are finished they can be sold and hopefully at that time the property prices will be even higher, but right now I don’t want to speculate further about a higher profit”;
e.“renovation and construction is planned for the start of October 2002 and projected to be completed by the end of December 2002” with the sale of the units by “January-February 2003 (maximum, or to be sold as is during construction)”;
f.“the total investment could be as high as A$ 490,000.00 (note: of course it would be better if we can reduce the costs). We can equally divide the costs into two, for example $245,000 each and I will take the funds (from Korea investment US$ 25,000.00) with interest/proceeds it will be A$ 55,000.00 to be used as a part payment, so that later only $190,000.00 needs to be deposited (it doesn’t need to be all at once, it can be sent in phases for the cost of the construction)”;
g.Mr Artemas said that, “In addition there still are some other properties that are to be worked on, including an aged care facility…there are many plans and drafts that have to be prepared and if everything has been properly done then I will submit a proposal with a profitable business plan, if no profit can be made, then I don’t want to take the risk”.
41The following day, Mr Kusumanadi and Ms Sulimihardja commenced transferring funds to the equivalent of $A245,000 to Mr Artemas for the Middleborough Road project. This was done through Mr Artemas’s “assistant”, Jessymulyati, in Indonesia. Mr Kusumanadi and Ms Sulimihardja also invested in a project of Mr Artemas’s at Burwood. Later, the sum of $A160,000 sent by them for the Burwood project was allocated to the Middleborough Road project by Mr Artemas when he decided not to proceed with the Burwood project.
42By 30 April 2003, neither project had commenced. Mr Kusumanadi said he had asked Mr Artemas to “provide me with a receipt of my investment”. Mr Artemas sent a letter which he signed as “Blackburn and Burwood East Project Manager”. The letter recorded the “current investment” by Mr Kusumanadi and Ms Sulimihardja from the Middleborough Road [Blackburn] project was $245,000 and $160,000 for the Burwood project. The letter also noted that for Middleborough Road the “cost of this project was planned to be $490,000, however it will reach approximately $600,000 because it will have to comply with Council requirements and Building regulations in Victoria, and the quality of the building needs to be developed because the property prices in this area have soared in the last year and we have to provide a building that will have a good sale price in order to increase the profit”.
43In response to a question from his counsel as to what had been agreed with Mr Artemas about the two units to be constructed at Middleborough Road, Mr Kusumanadi said that, “The two houses would be sold and I would receive my $405,000 that I invested and 50 per cent of profits, and also 50 per cent of rent [and that], every time we met with him he always said that”.
44Mr Kusumanadi said that Mr Artemas “never mentioned” and Mr Kusumanadi had “never agreed” that “the cost of any borrowings that [Mr Artemas] had from banks or the like should be deducted from the cost of this [Middleborough Road] project”.
45Mr Kusumanadi gave evidence that “my entire investment” of $490,000 in the Middleborough Road project “would be split in two, $245,000 each”. The 13 August 2002 letter states that “we can equally divide the costs into two, for example $245,000 each”. The 30 April 2003 letter did not state how the revised costs estimate for the Middleborough Road project of $600,000 would be met.
46Mr Kusumanadi, in cross examination, was asked about the conversations with Mr Artemas when “on several occasions he said ‘come and invest’, and he explained to me about Middleborough”. Mr Willis QC commented upon Mr Kusumanadi’s evidence, “It’s a long time, it’s very vague?” Mr Kusumanadi responded, “I still recall this, but as a human being, my recollection is limited”.
47Mr Willis SC asked Mr Kusumanadi, “What I put to you is it’s unlikely that any business venture would guarantee to you, you will get your money back and there will be guaranteed profit?” Mr Kusumanadi answered, “In relation to my investment with Mr Jun Artemas, he convinced me that everything would be profitable. Even to this very day he’s never said anything about loss”.
48Ms Sulimihardja gave evidence that in the discussions with Mr Artemas, “I was promised that if I invested my money in the Middleborough property that I would receive a large and positive profit from this property”.
49Mr Artemas gave evidence that he told Mr Kusumanadi and Ms Sulimihardja about his plans for Middleborough Road and Burwood. He said, “I cannot recall exact words after so many years, but they showed interest to invest in what I was doing”. He said that there were also telephone conversations with Ms Sulimihardja as she was “more dominant in the matter of financing of this”.
50Mr Artemas sent them the “business plan” for the Middleborough Road project, although he said “they never sent me any written reply or written fax. It’s just over the phone”. When asked, “Do you remember any conversation…?” Mr Artemas replied, “I don’t remember exactly”. Mr Artemas was asked whether he phoned or spoke with Mr Kusumanadi or Ms Sulimihardja after receiving the money they sent after receiving the business plan. Mr Artemas replied, “I don’t remember. Probably, yes, but to be precise, I don’t remember”.
51Mr Artemas gave evidence that he received further money and agreed he had “further discussions with the plaintiffs about the projects”. He said, “I cannot recall”, when asked about the conversations between August 2002 and 2003.
52During cross-examination, Mr Artemas was asked by Mr Gunst QC whether, “You agree that you were obliged to pay the plaintiffs 50 per cent of the profit of the Middleborough Road project?” Mr Artemas responded, “There is no agreement but based on an Indonesian way, they put money and they say bagi bagi, if you make a profit”.
53The following exchange then took place:
Mr Gunst:“Translated into English, does that mean that you agree that you were obliged to pay the plaintiffs 50 per cent of the profit on the Middleborough Road project?”
Mr Artemas: “Of the net profit”.
Mr Gunst:“And that’s net profit after repayment to you of your contribution, the value of the land, you say?”
Mr Artemas: “Yes”.
Mr Gunst: “Is that right?”
Mr Artemas: “Yes”.
Mr Gunst:“As I understand your argument, you say that there was no profit on this project?”
Mr Artemas: “Yes”.
Mr Gunst: “There was, you say, a very considerable loss, is that right?”
Mr Artemas: “That’s correct”.
54The issue I must determine is whether it was agreed that Mr Kusumanadi and Ms Sulimihardja were to be repaid their capital contribution towards the Middleborough Road project before the sharing of the profits.
55In the exchange with Mr Gunst, Mr Artemas appears to have conceded that his own capital contribution must be repaid before any profit from the project can be determined. Mr Artemas said that he had no recall of the conversations he had with Mr Kusumanadi and Ms Sulimihardja in 2002 and 2003. This is unsurprising as it is many years ago. Mr Kusumanadi did give specific evidence of an agreement that he “would receive my $405,000 that I invested and 50 per cent of profits”, although on the detail of other matters from that time he said his recollection was “limited”.
56Mr Kusumanadi and Ms Sulimihardja agreed to invest in the Middleborough Road project on about 23 August 2002. Shortly afterwards, they transferred $245,000 to Mr Artemas as their half share of the expected costs of the project. It seems, at that time, Mr Artemas also accepted that he would contribute a like sum.
57I consider that, in these circumstances, it was the intention of the parties at that time that the parties’ contributions would be repaid from the sale proceeds of the units, before any profit could be calculated. This conclusion appears to be also reinforced by what Mr Artemas said was the “Indonesian way” of bagi bagi.
58Mr Kusumanadi and Ms Sulimihardja assert that the parties’ contributions were not equal, that their contribution by the transfer of $405,000 exceeded the contribution of Mr Artemas. That contribution, they would contend, was limited to the provision of the Middleborough Road property. If the contributions were unequal, there would appear to be even more reason why the contributions should be repaid before any profit is calculated.
59Mr Artemas claims that the expenses of the project exceeded the income derived and in those circumstances there can be no question of a party’s capital contribution being returned. Mr Artemas does not, however, seek a further payment from Mr Kusumanadi and Ms Sulimihardja to meet their share of the losses of the project. It is likely that if there were a loss on the project, because of the shortfall of income to meet expenses, the return of Mr Kusumanadi and Ms Sulimihardja’s contributions would not be repaid in full.
Was there a loss on the Middleborough Road Project?
60The calculation of whether there was a profit or loss on the project is a complex matter. The task has been very much assisted by the preparation by Mr Willis SC of a spread sheet detailing the “Middleborough Road project cashflows”.
61I have used both the hardcopy and electronic copy of the spreadsheet as the basis for the calculations which follow. A hardcopy version of the spreadsheet reflecting the decisions I have made is attached as a schedule to these reasons for judgment. An electronic copy of the spreadsheet will also be made available to the parties.
62On the revenue and expenditure sides, I have considered the following matters:
Revenue
a.the payments made to Mr Artemas by Mr Kusumanadi and Ms Sulimihardja;
b.the loan monies obtained by Mr Artemas from financial institutions;
c.rental income from units 1 and 2;
d.receipts from the sale of the units;
Expenditure
e.general items of expenditure;
f.operational and management costs;
g.Redfire invoices;
h.payments to “handyman”;
i.payments to the builder, PMN Home improvements;
j.payments for Kubota materials;
k.sundry disputed items;
l.interest on loans obtained by Mr Artemas.
63a. payments made to Mr Artemas by Mr Kusumanadi and Ms Sulimihardja: The parties agreed that Mr Kusumanadi and Ms Sulimihardja paid the total sum of $405,000 to Mr Artemas for the project.
64b. loan monies obtained by Mr Artemas: Mr Artemas claims that two separate revenue streams are applicable to the project:
a.on 3 August 2001, Mr Artemas settled the purchase of Middleborough Road using a loan of $200,000 obtained from HSBC;
b.a loan of $300,000 taken out by Mr Artemas with McKean & Park solicitors on 16 February 2004 and refinanced by Westpac on 12 April 2005 and by ING Bank on 15 August 2007.
65HSBC loan: The purchase price of Middleborough Road was $210,750. Further sums of $27,500 and $77,500 were later borrowed from HSBC. Part of the loan ($77,500 that had not been repaid) was refinanced with Perpetual Trustees Victoria (“Perpetual”) (through Iden Loan Services Pty Ltd) on 28 August 2008. This sum was repaid on 28 July 2013.
66Mr Artemas claims the interest paid on these two loans should be included as part of the expenses of the project. This includes:
a.total interest of about $101,948.38 paid to HSBC in respect of the loan facility between 3 August 2001 and 28 August 2008;
b.total interest of about $44,058.10 paid to Perpetual from 28 August 2008 to 28 July 2013.
67In respect of the HSBC loan, I consider that the loan was appropriately taken out by Mr Artemas to purchase the Middleborough Road property. The question of whether the interest payments on the loan for the whole of its term and the taking out of the Perpetual loan were proper project expenses will depend on two matters:
a.what revenue was available to Mr Artemas from the advances made by Mr Kusumanadi and Ms Sulimihardja (and later from the rental and sale price from the units) to enable him to pay the expenses of the project;
b.what project expenses were required to be paid by Mr Artemas at particular times.
68McKean & Park loan: Similarly, it will be necessary to consider whether the project necessitated the loan of $300,000 from McKean & Park in February 2004, and/or the refinancing of that loan with Westpac and Perpetual. The determination of that matter will affect whether the interest charged on those loans was a proper project expense. Interest is claimed from 16 February 2004 to 24 December 2012.
69These matters will only be able to be determined after the other expenses, and the revenue of the project, at particular times, have been finalised.
70c. rental income from units 1 and 2: There is no dispute about the rental receipts from the units.
71d. receipts from the sale of the units: There is no dispute about the receipts from the sale of the units, including the expenses associated with those sales.
72e. general items of expenditure: In Mr Willis’s spreadsheet, he marked in red certain entries and italicized others. These are generally the disputed items. Under this heading, “general items of expenditure”, I will consider the items where there is apparently no dispute.
73In respect of these “non-contentious” items I have nevertheless examined the documents listed as evidencing the item as an appropriate project expense. In the revised spreadsheet attached as a schedule to these reasons, I have amended certain items as follows:
a.19 December 2002, KH Associates $3,885. The invoice is for $3.765. The invoice has a handwritten calculation adding “Alfred: $120” to bring the total to $3,885. There is no other evidence to substantiate this sum. $3,765 will be allowed;
b.30 September 2003, Freeker Fencing $3,385. This item will be allowed at the total invoiced cost of $3,385.80;
c.13 November 2003, Cope Industries $63.68. This item will be allowed at the invoiced cost of $63.85;
d.5 March 2004, Whitehorse Council $150. No evidence for this item was found. It will nevertheless be allowed as it had not been disputed and as it is likely to be a genuine expense;
e.31 October 2004, Blind factory $2,700. No evidence for this item was found. It will nevertheless be allowed as it had not been disputed and as it is likely to be a genuine expense;
f.26 November 2004, Leeton Landscape $17,483. This item will be allowed at the invoiced cost of $17,843 as it is likely to be a genuine expense;
g.11 June 2005, Hocking Stuart $2,464.82. No evidence for this item was found. It will nevertheless be allowed as it had not been disputed and as it is likely to be a genuine expense;
h.other items, including for electricity, water and gas and for council rates will be allowed, notwithstanding the absence of complete records as there was no dispute raised and the amounts claimed do not seem unreasonable;
74f. operational and management costs: There are 17 claims for operational and/or management costs for the period from March 2001 to December 2012. There are three periods in which no claims are made – from March to July 2005, January to December 2006 and for August 2007.
75Otherwise, each period of claim is supported by a typed summary. Mr Artemas said in evidence that he thought that these summaries had been prepared by junior counsel who had previously acted for the defendants.
76The summaries generally refer to motor vehicle running costs and to telephone and internet expenses. There are some supporting dockets including some petrol dockets and telephone accounts. The amounts claimed vary from period to period depending, apparently, on the amount of time Mr Artemas was involved in the project, for example, in searching for a property to purchase, during construction of the units, or later, when the units were rented or Unit 2 had been sold. Occasionally, one-off expenses are claimed, for example $8,794 in July 2001, an unspecified part of the cost of Mr and Mrs Artemas and their daughter to travel “to Osaka and Tokyo, to research and select the products that we are going to use for this property”.
77It is necessary to analyse each of the 17 claims and to make a determination in relation to each claim and the evidence which supports it.
a.March to June 2001 - $6,422. The claim is for 600km each week at a cost of $444 for motor vehicle expenses to drive around suburban Melbourne looking for a suitable development property, plus telephone and internet expenses of $50 per week. Mr Artemas had always had other business interests beside the Middleborough Road project including other property developments. He has over the years been a director of a large number of companies.
I consider that I should allow relatively modest amounts for travelling and telephone expenses during the periods both before and after the construction period for the units and greater sums during the period of construction. The builder signed the contract on 2 March 2003. Certificates of occupancy were granted on 12 January 2005.
I will allow travelling costs for the project at the following rates:
March 2001 to December 2002 $200 per month January 2003 to February 2005 $400 per month March 2005 to July 2007 $80 per month
(this rate takes account of the fact that a claim is only pursued for a limited number of months in this period)
August 2007 to December 2012 $80 per month I will allow telephone and internet costs for the project at the following rates:
March 2001 to December 2002 $50 per month January 2003 to February 2005 $100 per month March 2005 to July 2007 $20 per month August 2007 to December 2012 $20 per month
b.accordingly, I will allow the following amounts:
March to June 2001 – claimed $6,422, allow $1,000.
July to December 2001 – $19,662. I disallow the claim for $8,794 as the costs of the travel to Osaka and Tokyo. These expenses were apparently related to Mr Artemas’s business which promoted the Kubota products, and for reasons stated elsewhere, they are not valid project expenses.
For the remaining claim of $10,868 for travelling and telephone expenses, I will allow 6 months at $250 per month = $1,500.
January to December 2002 – $13,600 for travelling and telephone expenses claimed. I will allow 12 months at $250 per month = $3,000.
January to June 2003 – $10,535 for travelling and telephone expenses claimed. I will allow 6 months at $500 per month = $3,000.
July to December 2003 – $5,917.60 for travelling and telephone expenses claimed. I will allow 6 months at $500 per month = $3,000.
January to June 2004 – $4,763.20 for travelling and telephone expenses claimed. I will allow 6 months at $500 per month = $3,000.
July to December 2004 – $10,438.60. I disallow the claim for $5,290.60 as the costs of travel to Tokyo “to get some more information about the Japanese roof that we are using for this property and to make sure that we are installing it properly”. I do not consider that this was a valid project expense for reasons I have stated elsewhere.
For the remaining claim of $5,148 for travelling and telephone expenses, I will allow 6 months at $500 per month = $3,000.
January to February 2005 – $1,382.66 is claimed for travelling and telephone expenses. I will allow 2 months at $500 per month = $1,000. I will also allow 5 months from March to July 2005 (although no claim is pursued) at $100 per month = $500, to maintain consistency in the application of the rate I have fixed.
August to December 2005 – $1,790 for travelling and telephone expenses claimed. I will allow 5 months at $100 per month = $500.
January 2006 to August 2007 – $6,960 for travelling and telephone expenses claimed. I will allow 20 months at $100 per month = $2,000.
September to December 2007 – $1,112 for travelling and telephone expenses claimed. I will allow 4 months at $100 per month = $400.
January 2008 to December 2012 – $16,680 for travelling and telephone expenses claimed. I will allow 60 months at $100 per month = $6,000 (or, for each period of 12 months, $1,200).
78Redfire invoices: Mr Artemas has claimed six Redfire invoices dated between December 2006 and November 2010 at a total cost of $20,218 as project expenses. There are a number of factors which cast doubt on the veracity of these invoices:
a.Mr Artemas’s lack of credibility;
b.the production of a false letter and false pay slips under the letterhead and in the name of Redfire that were used by Mr Artemas to support a loan application to ING Bank in June 2007;
c.Mr Artemas said that Redfire was his son Irving’s company and that his son “has a building licence. He was doing shopfitting…and he had all the tradespeople there [and] can negotiate a better price than I can”;
d.Mr Artemas and Redfire apparently “set off” the obligation to pay for the invoices against the liability of Redfire to pay rent to one of Mr Artemas’s companies, Virginina Lagerhaus Pty Ltd, for the premises Redfire occupied;
e.the lack of detail of the work done by Redfire, including labour hours and rates and the cost of materials;
f.the absence of evidence of alternative quotations or costings;
g.the lack of detailed evidence from Mr Artemas or any other witness of the work done.
I consider it is likely that work, generally as described in the invoices was carried out. The work was apparently performed some years after the construction and renovation of the units. The units were tenanted, offered for sale and sold during this period and the managing agents’ annual reconciliations record very little expenditure on maintenance.
However, for the reasons set out earlier, it is appropriate that I only allow a proportion of each claim to reflect the unreliability of the evidence, both oral and documentary. I will allow 30% of each claim as the likely reasonable cost of performing the work, as follows:
Date Claimed Allowed 15 December 2006 $1,430 $430 28 September 2007 $3,740 $1,120 26 February 2008 $4,400 $1,320 5 February 2010 $3,388 $1,015 6 July 2010 $4,180 $1,255 19 November 2010 $3,080 $925 Total: $20,218 Total: $6,065
79h. payments to “handyman”: Mr Artemas has made nine claims for amounts apparently paid in cash to a handyman, who is at times named as “Albert”. The only evidence for the payments are generally typed summaries, which may have been prepared by Mr Artemas’s former junior counsel. The claims are as follows:
a.“Cash Rp 1,200.00…Handyman to install timber flooring 359 Middleborough Road Blackburn…October/November 2003”.
Although $1,200 is claimed, the summary appears to refer to rupiahs. The abbreviation “Rp” for rupiahs was used by Mr Artemas when converting Australian dollars to rupiahs in relation to the cost of Kubota products. In that conversion an exchange rate of $A1 = Rp 4.850 was used (so that $A136,668 converted to RP662,839.800). Applying the same conversion rate Rp 1,200 would be equivalent to $A247.42.
It is not clear what precise work was performed, where the timber flooring was located or why it was not performed as part of the building contract work. In the circumstances, I do not propose to allow this item as a project expense;
b.The document supporting the claim for $1,902.50 purports to be an invoice addressed to Mr Artemas dated “Nov/Dec 04”. It is difficult to read the document. There is reference to “concrete”, “shelving” and “sealant”. The amount claimed is calculated as follows:
“Alberts [unreadable]” $762.25 “sealant” $80.00 “time – 3 ½ days 2 people = 56 hours – 2 ½ days 1 people = 20 hours 76 hours $1,140.00 Total $1,902.50” The total of the figures, excluding $80 for sealant, is $1,902.25. The labour rate claimed is $15 per hour. The document has other notations on it. It is in evidence. I consider that I should give it some credence, whether or not the purported invoice has been reconstructed more recently. The description of the work performed is not superficial and there is a breakdown of the amount claimed. However, the work was apparently performed during the contract works and without explanation as to why the work was not performed by the builder.
I will discount the claim by 50% to take account of these uncertainties and allow the sum of $951.
c.The claim summary reads, “02.12.2004 Cash – Handyman: $50.00 to fix dropped gutter of carport Unit 1”. The claim is allowed in the amount of $50;
d.The claim summary reads, “15.01.05: Albert cash: cleaning car-port unit 2, pruning neighbour’s creeping plants on carport roof and fence. Paid cash $550”. The work was probably performed. The reasonable cost is problematic. At $15 per hour, this would represent about a week’s work. I will allow the claim at $250;
e.The claim summary reads, “21-22.01.2005. Albert, cash. Fix car port plank, and fix position of exterior lamps (dropped due to wind). Clean whole interior of the units (bathrooms, toilets, kitchens, laundries). 2-3 days work…paid cash $900.00”. This item is included in the spreadsheet on 15 January 2005.
At $15 per hour, the cost of 2.5 days work would be $300. In the absence of further details, I will allow $300;
f.The claim summary reads, “04.02.2005 Installing bollard to protect gas meter as required by safety authority: Handyman to install, cash $50”. There is an invoice for the purchase of the bollards. The claim for installation is allowed in the amount of $50;
g.The claim summary reads, “29.01.2005. Albert, cash. Clean and mow garden, take out all garden wastes. Paid cash $250”. This item is included in the spreadsheet on 23 December 2006. At $15 per hour, 1 day’s work would cost $120. In the absence of further details, I will allow $150;
h.The claim summary reads, “Cash payments. Albert and Bow. Light routine maintenance of the properties: 358 Middleborough Rd. Blackburn Spraying anti weed, pruning driveway and fixing paling fence etc.etc… During almost the 5 years, if no tenants or requested by tenants (2005-2009) Paid cash from time to time, to a total of $2,500.00”. This item is included in the spreadsheet on 31 December 2008.
This claim is totally unsupported by anything more than mere assertion. The properties were both commercially rented, one for many years. It is likely that some maintenance was required and that this work was performed by someone to whom Mr Artemas paid money. I will allow $50 a quarter for 5 years = $1,000;
i.The claim summary reads, “Handyman – cash. $150. To fix leakage in the Ensuite Unit – 1.07.12.12”. In the absence of any further documentation or evidence, I will allow $100.
80i. payments to PMN House improvements: There is no issue between the parties that Mr Artemas paid a total of $335,500 to the builder for the constructions of the units. This apparently was calculated as follows:
Contract price $320,000 add variation (footing) $12,000 add variation (driveway) $12,500 $344,500 less deduction $9,000 $335,500
81There is a dispute about the deduction. The builder, Mr Loprete said that he did not sign the variation deducting certain items which the owner was to supply, although the document purports to bear his signature. There is no dispute, however, that $9,000 was deducted from the contract price. It also appears that Mr Artemas supplied certain materials and fittings, not all of which were specified as omissions in the contract document. I consider that it is unnecessary for me to attempt to determine whether the variation document was forged, as plaintiffs’ counsel contended.
82j. payments for Kubota materials: The contract between Mr Artemas and PMN Home Improvements for the renovation of the existing home (unit 1) and the construction of a new unit at the rear of the property (unit 2) was a standard form contract produced by the Master Builders Association of Victoria.
83The contract provided in clause 10.1 a warranty by the builder that it “will carry out the works in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract”. The contract listed six architectural drawings (M100/02-M105/02) as the contract “plans”.
84Drawing M101/02 revision B dated November 2002 contains the following notations:
Unit 1- indicating the roof on the east and west elevations and what appears to be the north elevation, “Remove existing roof tiles and replace with shingle tile slate type with water resistance particle board and membrane”;
-indicating the roof – section AA, “Remove existing roof tiles and replace with ‘Kubota’ shingle tile slate type with water resistant particleboard and membrane”;
-indicating the wall on the east elevation, “selected prefinished planking”;
-indicating the wall on the south elevation, “selected prefinished planking”.
Unit 2- indicating the roof on what appears to be the south elevation, “single tile slate type with water resistant particle – board and membrane”;
-indicating the roof on the east elevation, “‘Kubota’ shingle tile slate type with water resistant particle – board and membrane”.
85Mr Loprete, the builder, said in evidence that he could not remember the particular elevations he was shown although he had a drawing “like it”.
86The contentious variation that Mr Loprete denied he signed, reads as follows:
“This is to confirm that the Owner will supply:
- the granite bench top for the kitchens, and builder will install accordingly.
- all the tap wares (hot and cold, or mixer type) for the bathrooms and the kitchens.
- all the Kubota Roofshingles and the accessories (top ridge, valley gutters, etc) and the nails.
- all the required Kubota Cladding (siding) materials and the accessories.
This is to confirm that the Builder will reimburse (or deduct) the amount of $9,000.00 from the total amount of $320,000.00 and the Owner will pay the GST of $818.20 to the Builder”.
87Neither Mr Artemas nor Mr Loprete disagreed that Mr Artemas had specified the Kubota products for the roof and the cladding and that Mr Artemas was responsible for supplying the necessary materials.
88Mr Loprete was not previously familiar with the Kubota products. When he commenced installing the roof shingles, his workers found it difficult to affix the tiles without damaging them. He travelled with Mr Artemas to Osaka, Japan and spent a week with the Kubota people learning the appropriate techniques. Mr Artemas claims as a project expense the sum of $3,820 for the travel costs of the visit to Japan.
89Mr Artemas has a history of involvement with Kubota products. When Mr Artemas was living in Indonesia, he imported Kubota products for resale.
90In Australia, Mr Artemas set up the company Kubota Building Materials Pty Ltd. He is a director and shareholder of the company. The company’s tax return for 2004, including the financial reports for the years ended 30 June 2003 and 2004, are in evidence. The financial reports contain the trading figures for the years ended 30 June 2002, 2003 and 2004, including:
2002 2003 2004 Sales $22,154 $62,424 $51,646 Opening stock Nil $40,589 $46,334 Purchases – Import $58,464 $15,592 Nil Purchases - Local $19,132 $8,108 $13,920 91Mr Artemas’s evidence about these figures was very vague. For example, Mr Artemas asserted that the “sales” figures were basically limited to the supply of “samples” to parties who wished to “try out” the products. There was no attempt to explain whether, or how, the sales figures related to the amounts Mr Artemas claimed were expenses of the project.
92The costs claimed by Mr Artemas were as follows:
Date Description $A Rp 2001 7 pallets of roof shingles $98,700 roofing accessories $37,968 $136,668 Rp 662,839.800 2002 17 pallets of wall cladding $81,600 cladding accessories $76,460 $158,060 Rp 768,171.600 Rp 1,431,011.400
93Mr Artemas produced two documents to substantiate these costs:
a.an undated typed summary which he had prepared which contained, at the bottom of the sheet, his handwritten notes;
b.a Bank Central Asia cheque, dated 15 December 2002, for Rp 1,431,011.400 signed by Mr Artemas on the account of PT Virnamas Metra and payable to “Paulus Nyoman”.
94The typed summary sets out the calculation of the costs using prices in Australian dollars and the conversion of the separate totals for roof shingles and wall cladding into Indonesian rupiahs. The total is Rp1,431,011.400. This is the amount of the cheque. Mr Artemas said that Kubota products were supplied through Indonesia and the cheque was payment to a friend in Indonesia who had paid for the products in 2001 for the roof singles and accessories, and in 2002 for the wall cladding and accessories.
95This account had some semblance of credibility until Mr Artemas explained that he had calculated the prices in Australian dollars from original Japanese catalogues, which had the prices of the products (including the accessories) in Japanese yen. Mr Artemas had converted these prices in yen to Australian dollars by multiplying by 3, rather than using the exchange rate which, he said, was about 2.5 times.
96Somehow, the conversion of the calculation in Australian dollars to Indonesian rupiah resulted in the total figure which was paid to the person in Indonesia, apparently in December 2002. This was said to be to reimburse him for payments he made, in 2001 for the delivery of roof shingles and accessories, and in 2002 for the delivery of wall cladding and accessories, both of which had been supplied from Japan through an Indonesian intermediary.
97The improbability of this evidence is apparent when one studies the detail of the claims originally made by Mr Artemas, and the modified claims pursued by Mr Willis SC during final submissions. The total of the roofing and cladding material including accessories originally claimed to have been purchased for the project was $294,728. This figure can be contrasted with the total amount paid to the builder of $335,500. The estimated costs in Mr Artemas’s “Business Plan” dated 12 August 2002 were, $40,000 for Unit 1 and $150,000 for Unit 2.
98Mr Artemas notes on the summary that the products supplied to the project included:
5,100 roof shingles at $16 per shingle
(comprising 17 pallets each of 300 pieces)
420 cladding sheets at $255 per sheet
(comprising 7 pallets of 60 pieces).
99The plaintiffs relied upon the evidence of two expert witnesses who gave evidence as follows:
a.Mr Peter Mackie, a building consultant, said that:
i.he had calculated the roof cladding area of each unit (Unit 1 – 150m2 and Unit 2 – 180m2) and estimated that 1,000 shingles were required for the roof of Unit 1 and 1,600 for Unit 2. Mr Mackie conceded during his evidence that allowing for wastage, breakages and spares, these estimates would increase, although he thought an allowance of 10% or 15% was “certainly quite high”;
ii.he had calculated the wall cladding area of each unit (Unit 1 – 84.63m2 and Unit 2 – 39.64m2) and estimated that, including “10% for cuts and wastage”, 143 boards were required for Unit 1 and 37 boards for Unit 2;
iii.he was unable to price the cost to supply a “market comparable roofing shingles” as cement shingles “were stopped being manufactured around 1987 due to the materials not being durable”;
iv.he said that a “market comparable” cladding product was “7.5mm thick Hardiplank Wood grain Planks” and that the cost of the material for Unit 1 would be $2,539 and for Unit 2, $1,189;
b.Mr Justin Zumpe, a quantity surveyor, said that:
i.his instructions were to provide an expert opinion of the reasonable cost to renovate the roof and external cladding of Unit 1 and to construct the roof and external cladding of Unit 2 based on Unit 1 being 139.9m2 in size and Unit 2 being 153.3m2 in size and having various specified roofing materials and a particular cladding material “and/or industry comparable product”;
ii.his opinion was that the reasonable range of cost of roofing material for units that size in the period 2002 – 2005 was:
Material Unit 1 Unit 2 Cement roofing shingles
$4,600 - $4,900
$6,600 - $7,100
Cement tiles
$5,600 - $6,400
$8,100 - $9,500
Terracotta tiles
$6,100 - $6,900
$10,100 - $11,000
iii.his opinion was that the reasonable range of cost of “James Hardie Seyon Stria Cladding and/or industry comparable product” for units that size in the period 2002 – 2005 was:
Unit 1 Unit 2 $6,100 - $6,900
$8,000 - $8,300
iv.Mr Willis SC objected to much of the evidence given by each of these witnesses in their respective reports. His objections are both general and specific and principally related to the relevance of their evidence of products other than the Kubota materials.
100I consider that in relation to the evidence I have referred to, that the witnesses were suitably qualified to give the evidence. I rely upon the evidence as demonstrating that the costs claimed by Mr Artemas for the roofing and cladding materials used on the units were substantially more than was appropriate for an investment project and that the costings by Mr Zumpe for alternative materials should be used as the basis for assessing reasonable project expenses.
101Mr Artemas said that he wanted the fixing of the materials on the units to provide the opportunity for the units to be used as “display homes”. This would showcase the materials, and presumably lead to further business for his business supplying Kubota products into the Australian market. Mr Artemas suggested that the use of the materials was also likely to increase the sale price of the units. There was no other evidence to support the view that the sale price was increased by using the materials.
102I consider, in the circumstances, that Mr Artemas is not entitled to claim the cost of the Kubota products as project costs, insofar as the actual costs of those materials can not be determined on the available credible evidence and those costs exceed the reasonable cost of using comparable products which were more readily available.
103I will use the figure at the higher end of the range provided by Mr Zumpe for terracotta files and the comparable cladding material and will add 30% to cover exigencies, including breakages, wastage, spares and any additional area covered. The costs I allow for the roofing and cladding materials in lieu of the Kubota materials are:
Roofing Cladding Unit 1
Add 30% allowance
$6,900
$2,070
$8,970$6,900
$2,070
$8,970Unit 2
Add 30% allowance
$11,000
$3,300
$14,300$8,300
$2,490
$10,790Total allowances
$23,270
$19,760
104I will not allow the sum of $3,820 claimed as the costs of Mr Artemas and Mr Loprete travelling to Osaka in July 2003, to receive instruction on the installation of the Kubota products.
105k. Sundry disputed items: The following further claims for project expenses were disputed by the plaintiffs:
a.26 February 2003 Parthenon Marble – granite tops $4,620
b.August 2003 Bosch appliances $6,850
106Granite bench tops were installed in both units. There is in evidence a quotation from Parthenon Marble, dated 26 February 2003, for the supply of 2 marble kitchen bench tops at a total cost of $4,620.
107New Kitchen appliances, including oven, hot plates, range hood, dishwasher, a sink pack and taps and (perhaps) a microwave were installed in each unit. They were supplied by Mr Artemas and at his cost. The cost is an appropriate project expense. Mr Artemas does not have the invoice for these items. He has produced an invoice for appliances supplied to his home at Donvale at an unknown date. The appliances installed in the units were different models to those referred to in the invoice.
108Mr Artemas claims for 2 sets of appliances at a cost per set of $3,425, a total of $6,850. The total of the one set of different models supplied to Donvale, less the microwave, is $5,377. It is suggested that a comparison of the costs of the Donvale set indicates the reasonableness of the claim for the two sets (of different models) for the units.
109The appendix to the building contract with PMN Home Improvements has the following items:
“18. Fixtures and fittings not included in the contract price but shown on plans and/or specifications…
19.Materials to be supplied by, or items of work to be carried out by the owner”.
110The table under both items is struck through, suggesting that there were no such items. However, under item 18, the following matters are handwritten into the table:
“Tap-wares
Kitchen appliances
Sink
Granite kitchen top”.
111I have already referred to the purported variation to the agreement which noted, as was the reality, that for the “granite bench top for the kitchens” and “all the tap ware…for…the kitchens”, the owner would supply and (in the case of the bench tops, but presumably also the tap-ware) the builder would install.
112Mr Loprete confirmed that Mr Artemas supplied the kitchen appliances and he thought he had ordered and paid for the bench tops and said they were installed by his contractor. I consider it is likely that in this case Mr Loprete is mistaken. There is a dispute about the variation and there is a discrepancy in the striking through and handwritten items included in item 18 of the appendix to the building contract. Nevertheless, a $9,000 allowance has been made by the builder to adjust the contract price.
113In these circumstances, I will allow both items as project expenses; the bench tops at $4,620 and the kitchen appliances at $6,850.
114l. interest on loans obtained by Mr Artemas: In order to calculate what interest is appropriately claimed as a project expense it is necessary to calculate, at various stages during the project, what justifiable expenses had been or would shortly be incurred and what financial resources were otherwise available (for example from contributions by Mr Kusumanadi and Ms Sulimihardja, from the rental for the units or the sale proceeds) to meet those expenses.
115In calculating which of the interest charges were appropriately included as project expenses, it is necessary to determine which of the loans was required at the time it was taken out. I have therefore looked at the money flow at various critical stages in the project.
116I have done this by looking at the column “allowed balance” in the spreadsheet in the schedule. If there is a minus figure, there was obviously a need for an external source of funds to meet the expenses of the project. I have also examined the “allowed balance” at the time additional loans were obtained by Mr Artemas and determined whether the loan funds were required.
117I have not individually checked the interest figures claimed by Mr Artemas, although I have noted that the amounts claimed in the table in the spreadsheet varied from the figures at the end of the spreadsheet after the table. For example, the claimed interest for the Westpac loan between April 2005 and August 2007 appears to be about $11,000 less that the summary on the last page of the spreadsheet. Similarly, the interest claimed for the ING Bank loan is about $7,000 less. I have not however adjusted the figures in the spreadsheet.
118As a consequence of my analysis, I have made the following adjustments to the “claimed receipts” and “claimed expenses”:
a.for the period from 20 June 2001 until the first contribution of funds by the plaintiffs on 16 August 2002 I have:
i.regarded the borrowing of $200,000 from HSBC as a legitimate loan for the project. The loan was used to pay for the purchase of the Middleborough Road property. I have allowed all interest payments on the HSBC loan until the settlement of the sale of Unit 2 on 18 July 2007;
ii.I consider that the refinancing of the HSBC loan to Perpetual through Iden was unnecessary. The further loan of $77,500 should not have been taken out as the whole of the loan of $227,500 from HSBC should have been repaid on 18 July 2007 and not simply $150,000;
iii.although the allowed balance for the start of this period had a minus balance, the plaintiffs were not part of the project at that stage. As soon as the plaintiffs agreed to be involved in the project in August 2002, they transferred about $100,000 to Mr Artemas. In addition, Mr Artemas had been holding $US25,000 that the plaintiffs had transferred to him for an investment in Korea. It appears that Mr Artemas invested that sum and earned interest which he accounted for by allowing the sum of $A55,000 as a contribution by the plaintiffs towards the Middleborough Road project. In my view, this sum cancels out the fact that Mr Artemas had himself needed to spend money on the project before the plaintiffs became involved;
b.between June 2003, when the “allowed balance” became a minus figure and February 2004, when the $300,000 borrowed from McKean & Park brought the “allowed balance” into credit, the “allowed balance” was substantially in arrears.
Mr Artemas did not attempt to borrow funds to cover these arrears until February 2004. I consider, however that I should allow a sum as “notional” interest to cover the cost of borrowing the outstanding amount.
I have allowed “national” interest of $10,000 from the mid-point of this period – 16 October 2003. This sum is calculated on an approximate average monthly arrears balance of $150,000 x 8 months x 10% per annum. This allowance will also cover the small shortfall between May and July 2005;
I consider that the additional borrowing of $27,750 on 31 October 2003 was probably necessary having regard to the finances available for meeting project expenses at that time;
c.for the period from 16 February 2004 to 18 July 2005, when the plaintiffs’ contribution to the Burwood project was transferred to the Middleborough Road project, the “allowed balance” was in credit for most of the time. I do not consider that it is necessary to make any adjustment for this period as it was not inappropriate to have available some funds in reserve during the period construction was completed.
I consider that it was necessary for Mr Artemas to have borrowed the sum of $300,000 from McKean & Park for 12 months and for that loan to have been refinanced with Westpac on 12 April 2004.
The Westpac loan was refinanced with ING Bank on 15 August 2007 after the settlement of the sale of Unit 2 on 18 July 2007. Much of this loan was unnecessary. A loan of $100,000 rather than $300,000 from ING Bank would have been sufficient to meet the project costs, which by this stage were largely bank interest. I will therefore reduce each of the interest charges for the ING loan to one third of the amount claimed;
I note the claim by Mr Artemas that $643,760.12 borrowed from Westpac by a line of credit as necessary to meet the expenses of the project was withdrawn by Mr Willis SC in his final submissions, and in his version of the spreadsheet;
d.in the period from 18 July 2005 until the proceeds of the sale of Unit 2 ($420,000) were received at settlement on 18 July 2007, the available funds were sufficient to meet the project expenses;
e.the $300,000 loan, originally from McKean & Park on 16 February 2004 and refinanced with Westpac on 12 April 2005, was refinanced with ING Bank on 15 August 2007. This was after the receipt of the sale proceeds from Unit 2 on 18 July 2007 and only a lesser sum ($100,000) should have been refinanced.
After the sale of unit 2, $150,000 was repaid from the HSBC loan. In fact, the whole amount owing to HSBC of $227,500 should have been repaid from the proceeds of the sale of unit 2. No further borrowings were required apart from the further $100,000.
The $100,000, that should have been the limit of the refinancing with ING Bank, should have been repaid from the sale proceeds of Unit 1 in December 2012.
Should a constructive trust arise in relation to the Donvale property?
119By their statement of claim, Mr Kusumanadi and Ms Sulimihardja claimed a declaration that Mr Artemas held the Middleborough Road property or the proceeds of sale of the property “on trust for the plaintiff representing the sum of $405,000 plus profit” from the project.
120In their final submissions, plaintiffs’ counsel had converted this claim to “an order that [both] defendants hold their interest in the Donvale property on constructive trust for the plaintiffs to the extent of the plaintiffs’ proportionate contribution of 10%”.
121This latter claim was not the subject of a formal application by the plaintiffs for amendment of their statement of claim, but was said to be made as necessary relief pursuant to the claim for “such further or other orders as the Court deems appropriate”.
122The basis of the original claim for the declaration of a constructive trust was not specifically stated, save for what appeared to arise from the following matters:
a.Mr Kusumanadi and Ms Sulimihardja had a contractual claim for the return of their $405,000 contribution and a 50% share of the profit from the project;
b.further or alternatively, by reason of a “fraudulent breach of trust” which arose from Mr Artemas failing to notify and inform Mr Kusumanadi and Ms Sulimihardja that the units had been sold and his “failure, neglect or refusal” to pay what was due to Mr Kusumanadi and Ms Sulimihardja after the property was sold.
123A caveat was lodged on behalf of Mr Kusumanadi and Ms Sulimihardja on about 28 August 2015 which claimed an absolute interest in the property on the basis of an “implied, resulting or constructive trust”. Although it is not entirely clear, the caveat appears to be the forerunner of the claim for a constructive trust articulated by the plaintiffs’ counsel in final written submissions.
124The basis for this claim was stated in the final submissions as follows:
a.Mr Artemas “had a fiduciary duty to account to the plaintiffs in relation to the proceeds of the sale of units 1 and 2 [and had] failed to do so”;
b.instead of accounting to the plaintiffs, Mr Artemas “lied” by falsely informing them in 2007 and 2012, that the units had not been sold;
c.the net proceeds of the sale of the units, $217,557 for Unit 2 in 2007 and $192,431.17 for Unit 1 in 2012 were “paid into the private bank account” of Mr Artemas;
d.part of these proceeds, totalling $105,312, was applied by Mr and Mrs Artemas as repayments towards the mortgage loan on their Donvale property;
e.the sum of $105,312 (in fact $105,552.37) was made up of:
payments in 2007 to HSBC totalling $11,600.00 payments in 2013 to Perpetual totalling $93,952.37 $105,552.37
125The proceeds of sale of unit 2, $217,557, were paid on about 18 July 2007 into an account with the National Australia Bank (“NAB”), number 65-413-7225. From this account, Mr Artemas made payments totalling $11,600 to HSBC Bank Australia Ltd (“HSBC”) (account number 085281-165), as follows:
a.20 July 2007 - $3,900;
b.6 August 2007 - $3,900;
c.3 September 2007 - $2,000;
d.12 September 2007 - $1,800.
126Mr and Mrs Artemas had obtained a loan of $200,000 from HSBC on about 3 August 2001. The loan was secured by a mortgage over their Donvale property. The loan was taken out by Mr Artemas for the purchase of Middleborough Road. An additional sum of $27,500 was borrowed on 31 October 2003.
127On 18 July 2007, the sum of $150,000 was paid off the loan leaving $77,500 owing to HSBC. The loan was repaid in full on 28 August 2008 when a further loan was taken out by Mr and Mrs Artemas from Perpetual through Iden Loan Services. The loan was repaid on 28 July 2013, well after the settlement of the sale of Unit 1 in December 2012.
128The balance of deposit of $37,750 in respect of the sale of Unit 1 was paid on about 20 December 2012 into Mr Artemas’ account number 65-413-7225 with NAB. The net proceeds of the sale of Unit 1 of $154,681.17 were paid on about 24 December 2012 into Mr Artemas’ account number 65-413-7225 with NAB. From his NAB account number 65-413-7225, Mr Artemas made the following payments:
a.21 December 2012 - $37,000 to his NAB account, number 58-797-8365;
b.15 January 2013 - $48,664.58 to Perpetual account number TN30/0630.000.44831.5201;
c.29 January 2013 - $8,247.93 to Perpetual account number TN30/0630.000.44831.5201.
129Mr Artemas made payments totalling $93,912.50 (in fact $93,952.37) to Perpetual account number TN 30/0630.000.44831.5201. The payments from his NAB account number 58-797-8365 were as follows:
a.28 March 2013 - $8,247.93;
b.26 April 2013 - $8,247.93;
c.28 May 2013 - $8,247.93;
d.27 June 2013 - $7,736.19;
e.26 July 2013 - $4,559.88 (as part of a payment of $7,736.19).
130Mr and Mrs Artemas had obtained a loan from Perpetual through Iden Loan Services on about 28 August 2008. The loan was secured by a mortgage over their Donvale property. The loan was repaid in full in February 2015 when a further loan was taken out by Mrs Artemas from Westpac. The interest charges to 28 July 2013 are claimed by Mr Artemas as part of the expenses of the Middleborough Road project.
131Mr Kusumanadi and Ms Sulimihardja assert that a constructive trust arises in their favour, as the persons rightly entitled to funds which have been knowingly received and applied in breach of fiduciary duty. The alleged breaches were the payments totalling about $105,000 made in reduction of the mortgages over the Donvale property, which payments were solely for the benefit of Mr and Mrs Artemas.
132Plaintiffs’ counsel relied upon the statement of principle set out by Warren CJ in Dennis Hanger Pty Ltd v Brown & Ors [2007] VSC 495 (“Dennis Hanger”) at [34]-[36]:
“[34] In relation to the plaintiff’s claimed interest, the relevant principles of equity are as follows. A person who misappropriates funds holds those funds on trust for the defrauded party. Where those trust funds are used exclusively to acquire property, ‘so long as the trust property can be traced and followed into other property into which it has been converted, that remains subject to the trust’. The beneficiary does not lose its equitable rights by the mere fact that the misappropriated funds are mixed with other funds. The beneficiary may claim a charge over the acquired property to the value of the misappropriated funds… [36] Quoting Lord Millet in Foskett v McKeown [2001] 1 AC 102 (“Foskett”) at [131], ‘Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset, the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of money misapplied’” (footnotes omitted).
133Plaintiffs’ counsel submitted that the evidence established that:
a.the loans from HSBC and Perpetual were obtained by Mr Artemas not for the Middleborough Road project but “were wholly and substantially used for his personal interests”;
b.no loans were required for the Middleborough Road project because;
i.the rent received from units 1 and 2 before their sale “was more than sufficient to cover any loan interest repayments”;
ii.the payments by Mr Kusumanadi and Ms Sulimihardja totalling $405,000 were “more than sufficient to cover the costs of construction”.
134The claim that the trust in respect of the Donvale property should be limited “to the extent of the plaintiffs’ proportional contribution of 10%” is made on the basis that the value of the Donvale property was $1,05m in August 2008 and $1.15m in February 2015, and the “misappropriated funds [totalling about $105,000] represented some 10% of the value of the Donvale property”.
135One of the more common examples of where the law will impose a constructive trust is where a person contributes to the acquisition and maintenance of properties acquired by another person with whom they are in a joint personal relationship or endeavour characterised by a pooling of assets or resources. In Cressy v. Johnson [2009] VSC 52, Kaye J analysed the relevant High Court decisions. At paragraph 187, Kaye J noted that the decisions “emphasised that the law does not impose a constructive trust in accordance with ‘idiosyncratic notions of what is just and fair’. Rather, the existence of a constructive trust, and its content, will only be recognised to the extent necessary to prevent conduct regarded as unconscionable, pursuant to equitable principles, upon the failure of a relationship between two parties”.
136Justice Kaye referred to the judgment of Deane J in Muschinki v. Dodds (1986) 160 CLR 583 at 621 where Deane J stated that the “rationale and operation” of the relevant equitable principles “is to prevent wrongful and undue advantage being taken by one party of a benefit derived at the expense of the other party in the special circumstances of the unforseen and premature collapse of a joint relationship or endeavour”.
137In Dennis Hanger, Warren CJ summarised the facts of the application before her at paragraph [29] as follows:
“This application for removal of the caveat is an interlocutory application in a proceeding in which the plaintiff seeks final declarations at trial against the defendant of constructive trust over the caveated land. It is alleged that the first defendant defrauded funds from the plaintiff by forging cheques and used those funds to finance mortgages in respect of the caveated property. The plaintiff claims an interest in the property in such proportion as the total proceeds of the forged cheques, plus interest”.
138At paragraph [37] Warren CJ found that, “On the evidence, it is at least arguable that funds misappropriated from the plaintiff were used, either separately or mixed with the first defendant’s own funds, to make loan repayments. It is further arguable that the equitable principles of tracing would give rise to the plaintiff’s claim of a caveatable interest in the property”. In the circumstances, the application for the removal of the caveat was dismissed.
139Warren CJ referred at paragraph [35] to the facts in Foskett “which dealt with misappropriated funds, mixed with other funds, that were used to make insurance premium payments. In what Lord Millet commented was ‘a textbook example of tracing through mixed substitutions’ [at paragraph 126], it was held that the misappropriated funds could be traced, not only to the premium payments, but to the moneys paid out under the policy. Moreover, even where the policy was first acquired, and premium payments made, with the trustee’s own money, if misappropriated funds were subsequently used to make one or more premium payments then a proportionate, or pro rata, amount could be traced to proceeds paid out under the policy. As stated by Lord Millett, these principles form part of the law of property, as opposed to the law of unjust enrichment, the rights of the claimant are determined by fixed rules and are not discretionary; ‘they do not depend upon ideas of what is fair, just and reasonable’ [at paragraph [127]]”.
140The High Court has cautioned against too readily assuming that a particular relationship gives rise to the duties of a fiduciary (see Maguire v Makaronis (1996) 188 CLR 449 at 463-4 per Brennan CJ, Gaudron, McHugh and Gummow JJ).
141In the present case, I do not consider the fact that Mr Artemas made mortgage payments from moneys derived from the sale of the units gives rise to a constructive trust in favour of Mr Kusumanadi and Ms Sulimihardja, for the following reasons:
a.when Mr Artemas received the proceeds of the sales of the units, they were not funds “defrauded” or “misappropriated” from Mr Kusumanadi and Ms Sulimihardja, or that Mr Artemas held those particular funds as a fiduciary;
b.the parties contemplated that, at the conclusion of the project and the sale of the two units, there would be an accounting to determine whether a profit had been made after the repayment of the capital contribution by Mr Kusumanadi and Ms Sulimihardja to the project, and then that 50% of any profit would be distributed to them;
c.Mr Artemas had a duty to account to Mr Kusumanadi and Ms Sulimihardja but not, in my view, the obligations of a fiduciary;
d.Mr Artemas was the “manager” of the Middleborough Road project. Provided an appropriate accounting was made in respect of Mr Kusumanadi and Ms Sulimihardja’s capital contribution and any profit, no complaint could be made of the application of funds by Mr Artemas up until the obligation to account arose;
e.in the absence of a properly articulated claim by the plaintiff’s in their statement of claim, the relief sought by way of a declaration of trust is not a necessary consequence of the issues I was required to determine on the pleadings.
Should the transfer of the Donvale property into the sole name of Mrs Artemas be set aside?
142Mr and Mrs Artemas had been the joint proprietors of the Donvale property since they purchased it in 1996, shortly after they came to Australia. By transfer dated 8 August 2014, Mr Artemas transferred his half share in the property to his wife specifying as the consideration, “natural love and affection”.
143In the proceeding, Mr Kusumanadi and Ms Sulimihardja seek an order that the transfer be set aside as being an “alienation of property made…with intent to defraud creditors”. Mr Kusumanadi and Ms Sulimihardja, as persons prejudiced by the registration of the transfer, claim that the transfer is voidable pursuant to section 172 of the Property Law Act 1958.
144By their defence dated 3 September 2015, Mr and Mrs Artemas denied the allegation and asserted that the claim was an abuse of process and was made in the absence of proper:
“a.particulars of any state of mind of the defendants or particulars of fraud, [or]…
b.reasonable evidence of dishonesty in the transfer of the property to justify any ethical or proper pleading of fraud or serious misconduct against the defendants in the alleged circumstances”.
145In their written opening submissions dated 15 August 2016, plaintiffs’ counsel stated that, “It is important to note that no legitimate reason for the making of this transfer is put forward by the Defendants; by their pleadings, by discovery, or by evidence. The Defendants do not plead any purpose for this transfer other than the intention to defraud, the Defence consists of bare denials on this issue. No document has been discovered by the Defendants which suggests any legitimate purpose for the transfer, and neither Defendant gives any evidence to explain or justify the transaction. The Second Defendant (the transferee wife) is not called as a witness at all, and the First Defendant (the transferor husband), giving evidence-in-chief by witness statement”.
146On 16 August 2016, defendant’s counsel Mr Willis SC provided to plaintiffs’ counsel and to the Court an “Outline of second defendant’s evidence” and a bundle of documents extracted from the file of the defendants’ former solicitor Mr Con Kiatos.
147The witness statement asserted that the transfer was executed by Mr and Mrs Artemas in the context of an application by them to refinance with Westpac the loan from Perpetual secured over the Donvale property. The advice of the mortgage broker, Joanna, was that Westpac would only approve the refinancing of the loan if the loan was in the name of Mrs Artemas alone, as Mr Artemas’s “credit history was bad”.
148In the solicitor’s file, there is an email dated 10 July 2014 from Mr Artemas to Mr Kiatos which reads as follows:
“Anna [Joanna] called me that loan is approved by Westpac but it has to be under my wife’s name, because I have bad credit history. Anna told me to change the property from two names only to my wife’s name, to erase my name from the title. I have no objection, it is ok for me, but whether any stamp duty on this? Please what is the best way, you can communicate with Anna”.
149Mr Kiatos responded by email to Mr Artemas later that day, “There is no issue if the property is transferred to your wife – there will be no stamp duty payable. Please call to discuss”.
150Section 172(1) of the Property Law Act 1958 provides that, “Save as provided in this section, every alienation of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced”.
151The principles arising under section 172 have been recently discussed by the High Court, in Marcolongo v Chen (2011) 242 CLR 546 (“Marcolongo”). At [20]-[25] the plurality (French CJ, Gummow, Crennan and Bell JJ) said:
“20. … in accordance with that case law, exemplified by remarks of Lord Mansfield, and more recently of Arden LJ, the provision and its modern representatives should receive a liberal construction in effecting their purpose of suppressing fraud…
22. In his treatise on equity jurisprudence, Story had seen the object of the Elizabethan Statute as the protection of creditors ‘from those frauds which are frequently practised by debtors under the pretence of discharging a moral obligation [to] wives, children, and other relations’.
24. …the 19th Century case did support a related distinction bearing upon the sufficiency of proof in these cases. The effect of the decisions was summed up as follows in the treatment under the title ‘Fraudulent and Voidable Conveyances’ in the first edition of Halsbury’s Laws of England: ‘In an action to set aside an alienation under the statute the onus of proof of actual fraud on the part of the grantor, and that the grantee was privy to the intent, rests upon the plaintiff where the alienation is for valuable consideration. Where, however, the alienation is voluntary, then on proof that the grantor was at the time of its execution contemplating his entry upon a hazardous business, or that the natural consequence of the alienation was to delay, hinder, or defraud creditors, or that the circumstances under which the alienation was effected bore one of the indications or badges of fraud hereafter mentioned, the onus of upholding the alienation is imposed on the defendants’.
25. The point sought to be made in the text of Halsbury…may be expressed by saying that it would be the duty of the judge to direct a jury that they might infer an intention by the settlor to defeat or delay creditors, even in the absence of direct evidence of that intention, where this outcome was the necessary consequence of a voluntary settlement”.
152The principles were also summarized by Sifris J in Perpetual Nominees Limited v Rytelle Pty Ltd & Ors (No. 2) [2012] VSC 440 at [16]:
“[16] The following relevant principles are not in dispute and are supported by high authority –
a. The phase ‘intent to defraud’ includes an intent to delay or hinder.
b. Although ‘intention’ is critical, it is not necessary to establish that the debtor had a sole (or predominant) purpose or even a purpose of causing loss.
c.An inference of intent to defraud is more likely to be drawn where a disposition diminishes a fund otherwise available for the payment of debts to such an extent that debts cannot be paid and some creditors remain unpaid.
d.It is not necessary that all creditors be affected. It is sufficient if one or some creditors are adversely affected. Further, creditors may include future creditors”.
153In Talacko (as executor of Estate of Talacko) v Talacko [2015] VSC 287 at [235], McDonald J said that “the requisite intention can be established by an intention to defeat, delay or hinder. The intent to defeat, delay or hinder need not be the sole or predominant intent. It may co-exist with a good faith intention to dispose of the property. In ascertaining intent, it is the mind of the transferor rather than the transferee which is critical”.
154Recently, in Commissioner of Taxation v Oswal (No 6) [2016] FCA 762 (29 June 2016) at [66], Gilmour J summarized the circumstances in which the intention to defraud may be inferred:
“There are various circumstances in which it is recognised that the Court will move readily to infer the existence of the requisite intention. These include where:
1)the ‘natural and probable consequences’ of the disposition is the defeat or delay of creditors;
2)the alienation is made voluntarily;
3)the alienation is made, relevantly, for no consideration by a person in financial difficulties;
4)the alienation is made in favour of a family member; and
5)the alienation is made in haste or proximately to one or more events indicating financial stress on the part of the disponor.” [citations omitted]
155Mr and Mrs Artemas took out the loan from Perpetual in about August 2008. The loan was to be repaid by 28 August 2038. The interest rate was “variable”. The initial rate was 12.75% per annum with a default rate always 4% higher. By 9 February 2009, the interest rate was 10.7% rising to 12.45% on 19 November 2010 and falling to 10.67% on 19 August 2013. The loan was discharged on 18 February 2015 by the payment of $797,010.25, from the loan of $920,000 obtained from Westpac. The Westpac loan also had a term of 30 years and a variable interest rate, which as at 29 January was 5.98% per annum with a discount of 1%. The effective rate was 4.98% per annum. The default rate had a margin of 2% and was 6.98% per annum.
156During the term of the Perpetual loan, a number of monthly repayments were marked “dishonoured” in the bank statements although this generally indicated a payment not made on the due date, although usually it was later paid, after default interest had been charged.
157The following table sets out, for each calendar year, the number of “dishonoured” payments (including those later paid) and the total number of monthly payments not dishonoured:
Year Dishonoured Not Dishonoured 2009 6 11 (made up to 12 payments by a further payment on 18 January 2010) 2010 7 9 + 4 half payments (11) 2011 7 + 4 half payments (9) 9 + 10 part payments (13) 2012 6 6 (made up to 12 payments by a lump sum payment of $48,664.58 on 15 January 2013) 2013 Nil 12 2014 3 10 + 2 part payments (11) 158On 7 November 2012, Perpetual issued a writ in the Supreme Court of Victoria against Mr and Mrs Artemas claiming possession of the Donvale property and the sum of $827,381.73 as the balance owing as at 2 November 2012.
159Mr Artemas said that he had no recollection of the writ. He could not recall it being served on him. He said it may have been served on his accountant, Mr John Topalides. In fact, there is in evidence a fax header from Mr Topalides sending the writ to Mr Kiatos on 14 November 2012 and describing, as the “subject” of the fax, “Re: Jun Artemas, served on him on 12th Nov”.
160The Perpetual statements show that from April 2013 to April 2014, the repayments were consistently paid each month. As at 15 April 2013, $796,453.66 was owing. At 30 April 2014, after 13 monthly payments made on time, the amount owing was $788,449.12.
161Mr Artemas said that the regular repayments were made on behalf of him and his wife by their son’s company, Redfire. It seems likely that this arrangement was made in order to effectively “reinstate” the mortgage and to terminate the Supreme Court proceeding.
162The May 2014 repayment was made, dishonoured but then paid in early June. The June repayment was made late but was dishonoured. The June and July repayments were never made. The August repayment was made as to $6,000 on time and the balance a few days later. The September repayment was made. Presumably a catch up repayment was made in mid-October. The October repayment was made, dishonoured and paid in early November. The November, December and January 2015 repayments were made on time.
163The steps taken by Mr and Mrs Artemas in their application to Westpac are set out in the following chronology of events:
Date Event 17 June 2014 Mr Kiatos forwarded to Mr Artemas a Westpac Application Form for signature by Mr and Mrs Artemas. 25 June 2014 Mr Artemas returned the pages of the form signed by him and his wife with personal details completed (including “current residential address” as “5 Clery Avenue Donvale” and “date moved there” as “03/96”.
The “Detail of property to be mortgaged” referred to “5 Clery Avenue Donvale” and the question, “Will you rent out the property?” was answered by marking the box, “No”.
The “Employment details” and “Accountant details” on the form and the pages not signed by Mr and Mrs Artemas were not completed or returned.
3 July 2014 Mr Kiatos emailed Mr Artemas to arrange a meeting between Mr and Mrs Artemas and “the finance broker (and banker)”. 5 July 2014 Mr and Mrs Artemas met with the finance broker, Joanna. 10 July 2014 Mr Artemas emailed Mr Kiatos to advise that Joanna “called me that loan is approved by Westpac but it has to be under my wife’s name, because I have bad credit history. Anna told me to change the property from two names only to my wife’s name, to erase my name from the title. I have no objection, it is ok for me, but whether any stamp duty on this?” 10 July 2014 Mr Kiatos advised Mr Artemas by email that, “There is no issue if the property is transferred to your wife – there will be no stamp duty payable”. 25 July 2014 Westpac confirmed to Mrs Artemas the offer of a loan of $900,000 in a document headed “Loan entitlement” and signed by Mr Richard Mohan, a Westpac Manager. 28 July 2014 Mr Artemas emailed Mr Kiatos advising, “Met Joanna this afternoon, the documents have been signed, and she is waiting for the transfer documents, probably in a week[s] time”. 8 August 2014 Date on the transfer of the Donvale property into Mrs Artemas’s sole name in consideration of “natural love and affection”. 10 August 2014 Mr Artemas emailed Mr Kiatos advising, “The documents have been signed by my wife and me, and are with Joanna, she told me for the bank”. 10 January 2015 Date beside Mrs Artemas’s signatures on the Westpac “Loan Application” form. 18 February 2015 Settlement of the discharge of the Perpetual mortgage upon payment from Westpac of $796,790.25.
164Mr Artemas said that he and his wife had made the application to Westpac in order to pay out the Perpetual loan because of the high interest they were paying. It was in the course of making this application that the mortgage broker, Joanna, told him that Westpac would only approve the loan application if he removed himself from the application and it was made only in his wife’s name. This was the only reason he transferred the title into her sole name and the transfer had nothing to do with his creditors.
165There is no doubt that the interest on the Perpetual loan was at a higher rate of interest than the subsequent Westpac loan – a variable rate of between about 10 and 12% with a default rate margin of 4% compared to a starting rate with Westpac of about 5% and a default rate margin of 2%.
166The monthly repayments to Perpetual were about $7,500 to $8,500. The Westpac starting repayments were variable and therefore could not be specified, although it appears that after 5 years the repayments would be fixed at $5,368 per month.
167The Perpetual loan was taken out in August 2008 and was to run for a term of 30 years. The interest rates charged would have reflected not only the commercial realities, including the likely cost to the financier of the money it was advancing, and also the risks. In 2008, Mr Artemas was aged about 63 and his income was derived from various businesses and investments in Australia and Indonesia. It is difficult to assess whether the terms of the Perpetual mortgage simply reflected the age and position in life or Mr and Mrs Artemas.
168The only evidence that Joanna told Mr Artemas, Westpac would only approve a loan under his wife’s name because of his own “bad credit history”, was the email from Mr Artemas to his solicitor dated 10 July 2014 and Mr and Mrs Artemas’s oral evidence. Mr Artemas stated in the email that, Joanna “told me that loan is approved by Westpac but it has to be under my wife’s name, because I have bad credit history. Anna told me to change the property from two names only to my wife’s name, to erase my name from the title”.
169Mr Artemas appears to have made the decision to follow this course without seeking further advice, except from his solicitor in regard to the stamp duty implications. He said in his email to the solicitor, “I have no objection, it is ok for me, but whether any stamp duty on this?” The solicitor in his answering email confirmed that “there will be no stamp duty payable” if the property were transferred to Mrs Artemas. The solicitor said, “Please call to discuss”.
170There was no evidence called in relation to the following matters:
a.whether any discussion between Mr Artemas and his solicitor, if it occurred, covered any broader issues than the stamp duty implications of the transfer. I will not speculate about that matter;
b.what precisely Joanna told Mr Artemas including what she was told by the bank and the advice she gave Mr Artemas.
171The only evidence on the issue is effectively the self serving written statement in the email which consists of a representation made by another person who was not called to give evidence. The email was written at a time when Mr Artemas and his wife were participating in a fraudulent application to Westpac, for which they said Joanna was responsible. In the circumstances, I consider that there is very little, if any, reliable evidence I can act upon to support the defendants’ contention as to the reason the transfer was made.
172Both Mr and Mrs Artemas conceded in evidence that there had been recent contact between them and Joanna. However, Joanna was not called to give evidence by the defendants and no explanation was given for this failure. I cannot speculate on what evidence Joanna might have given of what she told Mr Artemas about Westpac’s attitude to the loan application.
173However, in Mr Artemas’s evidence, he squarely laid the responsibility with Joanna for the false information and forged documents supporting the application. It is impossible to untangle the web of deceit around the issue of the preparation of the application. It would therefore be inappropriate to speculate as to what Joanna or Mr Kiatos or the bank manager might have said if called by the defendants to give evidence.
174The plaintiffs’ position is different. They raised the issue of section 172 of the PLA in their statement of claim. The absence, until after the commencement of the trial, of more than effectively a bare denial in the defence and the failure to provide documents in the solicitor’s file, make it difficult to criticise the plaintiffs for the absence of Joanna, Mr Kiatos or a bank official as witnesses.
175Even if it were accepted that there is credible evidence from Mr Artemas, and by the email dated 10 July 2014, that in the course of refinancing the Perpetual loan, Mr and Mrs Artemas were obliged to transfer the property into Mrs Artemas’s name, it is unlikely that this was the only reason for the transfer and it was not also a convenient method of avoiding the claims of Mr Artemas’s creditors, including the plaintiffs.
176In this regard, it is significant that:
a.Mr Artemas knew that without the application to Westpac including critical fraudulent information and supporting forged documents to substantiate his wife’s supposed financial position, the application would have had no chance of success;
b.the fact that Mr and Mrs Artemas needed to participate in this criminal activity supports the conclusion that they were both aware of the precarious financial circumstances of Mr Artemas;
c.the credible evidence of Mr Artemas’s financial position at that time indicates that there was inadequate income to meet the liabilities associated with the Perpetual mortgage loan and the demands of Mr Kusumanadi and Ms Sulimihardja for the payment of their entitlements in respect of the Middleborough Road project.
177The Perpetual loan had given rise to regular defaults in the making of the monthly repayments. Through 2009 and 2011, the defaults were generally quickly remedied although default interest was charged and the unreliability of the borrowers would have been obvious.
178During 2012, the defaults were regular and many remained unsatisfied. The writ was served in November 2012. The defaults were remedied on 15 January 2013 by the payment of $48,664.58, which came from the proceeds of the sale of unit 1. During 2013, the mortgage payments were apparently paid by the company owned by Mr and Mrs Artemas’s son.
179In 2014, the defaults recurred regularly, although make-up payments generally seem to have kept Perpetual from taking further action. It is likely, however, that further action by Perpetual must have always been understood by Mr and Mrs Artemas to have been a real possibility.
180It is difficult to have a real understanding of Mr Artemas’s financial position in July 2014 when Mr Artemas wrote the email, and on 8 August 2014 when he and his wife apparently executed the transfer of land. The joint application to Westpac was signed by Mr & Mrs Artemas shortly before 25 June 2014. Only the pages of the application form signed by them were returned to Mr Kiatos. They contained no relevant financial information.
181The application made to Westpac by Mrs Artemas is dated 10 January 2015. Apart from the information in the document which is patently false, the other financial information is limited to Mrs Artemas’s own financial position though it was stated to include “joint assets”. This information is probably unreliable. It includes:
Cash/bank accounts
$83,868
Life assurance/ superannuation (cash value only)
$185,000
Motor vehicles (market value)
$60,000
Furniture, Personal effects etc. (market value)
$260,000
182Mr Artemas was asked about his bad credit rating in cross-examination. He said that his credit rating was “no good” because there was a payment of “less than $2,000 to Mercedes Benz…[and]…the credit company submit that the default to the credit rating company, but it was already paid and it stayed there for a few years, and by the time the Westpac check…I got the bad credit rating”.
183Mr Artemas was shown a document addressed “To whom it may concern”, headed “Re: Credit rating”, dated “10 July 2008” with Mr Artemas’s signature and the notation that the document was “Declared by Jun Artemas”. The document records, “It was an argument between myself and Origin regarding their bill,…after a few weeks Origin came to informed me that it was for the last gas bill. I then understood and paid the bill in full, it was less than 400 dollars. I owe not a single cent to Origin, but unfortunately after Origin bill was paid in full, a suspicious ‘law’ company…sent a letter asking me to pay this ‘law’ company money on behalf of Origin, while I owed nothing to Origin. I replied their letter why I had to pay them and not to Origin, but they never came back to me,…I suspect they did something with my bad credit rating”. Notwithstanding this problem, Mr Artemas was able to borrow from Perpetual Trustees in August 2008.
184Mr Artemas’s evidence is that the reason he put the title to the property in his wife’s name alone was because he was told by the mortgage broker that, because of his poor credit history, the bank would only approve a loan if this were done.
185The following comments can be made about this evidence:
a.Mr Artemas has limited credibility. The fact that the statement of what the mortgage broker said is recorded in a contemporaneous document makes it more likely to be true than if no written record existed. However, because so much of the documentation associated with the transaction was fraudulent, this particular statement by Mr Artemas, although written at the time, should be treated with caution;
b.no explanation has been given for the absence of oral evidence from the mortgage broker, the bank manager or the former solicitor. Whilst ordinarily this might entitle me to infer that the evidence of those witnesses would not have helped Mr Artemas, in the circumstances of this case that will not take the matter any further. I cannot reason that because those witnesses have not been called, that their evidence, if called, would have been contrary to what is recorded in the email. I consider that I must simply conclude that, if the witnesses had been called, I would be left in the same position I am now; of having to assess the credibility of the email and the supporting oral evidence of Mr Artemas;
c.in assessing the available evidence, I must have regard to the surrounding circumstances and any inferences which arise therefrom;
d.the advice said to have been given by the bank manager was that:
i.Mr Artemas had a bad credit history;
ii.the bank would not lend money on the security of the property if he remained on the title as a co-proprietor;
iii.the bank would lend money on the security of the property if it were transferred into the sole name of Mrs Artemas;
e.ordinarily, one would expect that a bank advancing money to a borrower would wish to have all the persons involved in the transaction as parties to it, so that recovery would be available from the assets of each of them;
f.if the bank would only deal with Mrs Artemas, and lend a substantial amount to her, the fact that the bank would only do so if the name of the applicant, Mr Artemas, was removed from the title, indicates that the bank saw the fact that he was a co-owner as a fact which detrimentally affected the security that was being offered. The bank must have regarded his credit history as so poor that there was the risk that, even if the bank were to obtain a first mortgage from Mr and Mrs Artemas, it was possible this would be inadequate security;
g.it is difficult to speculate as to what possible risk there would have been to a bank paying out the existing first mortgagee and obtaining a similar priority as a security holder. However, what the purported attitude of the bank demonstrates is that Mr Artemas’s financial position was probably particularly parlous;
h.it is not possible to accurately describe Mr Artemas’s financial position at that time. The available contemporaneous documents are limited. There are some debts which were disclosed, including the indebtedness to Perpetual Trustees. The history of that liability is one of regular default and, apparently, the need to obtain financial assistance by Mr and Mrs Artemas from their son. Other debts were not disclosed, including the likely liability to account to Mr Kusumanadi and Ms Sulimihardja for their advances and their share of profit from the development.
i.what is clear, however, is that both in June 2007 when application was made for the loan from ING Bank and in January 2015 when the application was made to Westpac, that there was a need to provide false information and forged documents about the income Mr and Mrs Artemas received. Otherwise, Mr Artemas knew that the loans would not have been approved;
j.Mr Artemas’s evidence about what he believed had given him a “bad credit history” was not believable. In my view, it is likely there were matters which made it advantageous for him to remove his name from the title to the Donvale property and effectively transfer the matrimonial home of 20 years into the sole ownership of Mrs Artemas, thus putting it beyond his personal creditors;
k.Mr Artemas knew that at some stage he would need to account to Mr Kusumanadi and Ms Sulimihardja. He had for a number of years misled them about the current position of the units; not telling them that one unit had been sold in 2007 and the other in 2012, and actively deceiving them as to whether the units remained as rental properties.
186In these circumstances, the “natural consequences of the alienation” of the interest of Mr Artemas in the property to his wife was clearly “to delay, hinder or defraud creditors”. Further, the transaction “under which the alienation was effected”, that is, the obtaining of an advance on the security of the property, “bore [at least, but probably more than] one of the indications or badges of fraud” referred to in the authorities.
187The “onus of upholding the alienation” is upon Mr Artemas and Mrs Artemas as she took his interest as a “volunteer”. They have not satisfied that onus. Accordingly, Mr Kusumanadi and Ms Sulimihardja, as persons prejudiced by the alienation of Mr Artemas’s interest, have satisfied the general onus of proof upon them and are entitled to a declaration that the transfer to Mrs Artemas dated 8 August 2014 is void.
Proposed orders
188These reasons for judgment, and particularly the attached spreadsheet, contain numerous calculations and other details which the parties should have the opportunity to examine before I pronounce final judgment.
189I will, however, be making orders which reflect the following findings:
a.Mr Artemas was obliged to repay the capital advances made by Mr Kusumanadi and Ms Sulimihardja, and half the profit from the project;
b.no basis has been established for the maintenance of the caveat lodged by Mr Kusumanadi and Ms Sulimihardja over the Donvale property;
c.the transfer of the Donvale property will be set aside.
190In the circumstances, orders in the following form would seem appropriate:
1.Judgment for the plaintiffs against the first defendant that the first defendant pay to the plaintiffs the sum of [to be inserted with appropriate interest in due course].
2.Judgment for the plaintiffs against the defendants for a declaration that the transfer dated 8 August 2014 from the first defendant to the second defendant (“the transfer”) of the first defendant’s interest in the property at 5 Clery Avenue Donvale, being the whole of the land contained in Certificate of Title Volume 9003 Folio 769 (“the property”), is void pursuant to section 172 of the Property Law Act 1958 (Vic).
3.Upon the restoration of the Register to show the defendants as the joint proprietors of the property, the caveat lodged by the plaintiffs in dealing number AM141987G with the Office of Titles on 28 August 2015 shall forthwith lapse.
4.Certificates pursuant to section 128 of the Evidence Act 2008 are given in respect of the following evidence:
a.the evidence of Jun Artemas given on 19 August 2016 as recorded in the transcript as follows:
i.between page 372, line 22 and page 384 line 21 (inclusive);
ii.between page 388, line 1 and page 389 line 11 (inclusive);
b.the evidence of Julia Artemas given on 23 August 2016 as recorded in the transcript as follows:
i.between page 493 line 21 and page 503 line 26 (inclusive);
ii.between page 506 line 20 and page 507 line 21 (inclusive).
191I shall hear further from the parties, after they have had time to examine these reasons for judgment, on questions of interest, costs and the form of the orders proposed.
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Certificate
I certify that the preceding 52 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 26 October 2016.
Dated: 26 October 2016
Carla Cianfaglione
Associate to His Honour Judge Anderson
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