Literski v Fresh 2 U Pty Ltd
[2013] VSC 307
•14 June 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
No. SCI 2012 03824
| GEOFFREY GRANT LITERSKI | Plaintiff |
| V | |
| FRESH 2 U PTY LTD & ORS | Defendant |
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JUDGE: | SIFRIS J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27-29 May 2013 | |
DATE OF JUDGMENT: | 14 June 2013 | |
CASE MAY BE CITED AS: | Literski v Fresh 2 U Pty Ltd & Ors | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 307 | |
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TRUST AND TRUSTEES – Misconduct and breaches of duty by trustee of trading trust – Relevance of knowledge of unitholders.
TRUSTEE – Whether removal is appropriate remedy in the circumstances – Removal ordered.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D G Robertson | Mahons with Yuncken & Yuncken |
| For the Defendant | Mr D Baker | George Liberogiannis & Associates |
HIS HONOUR:
A. Introduction
Fresh 2 U Pty Ltd (“the Company”) is and was at all relevant times trustee of the Fresh 2 U Trust (“the Trust”). The plaintiff (“Literski”) holds 20 per cent of the units in the Trust. He is not and was never a director of the Company. Demarte Pty Ltd holds the other 80 per cent. Vincenzo Demarte (“Vince”) is and was at all relevant times a director of the Company and Demarte Pty Ltd. His wife, Mara, is and was at all relevant times a director of the Company.
For many years, the Company, in its said capacity, operated a wholesale fruit and vegetable market business called Fresh 2 U (“the Business”).
On 14 November 2011 and pursuant to a written agreement (“the Sale Agreement”), the Company sold the Business to H & A Fresh Family Pty Ltd (“the Purchaser”). The Sale Agreement was varied and ultimately settlement took place on 23 March 2012 for a purchase price lower than that stated in the Sale Agreement. A number of side agreements were entered into at settlement.
Literski alleges that in conducting the sale and thereafter (and indeed before), the Company as trustee (“the Trustee”) failed to act properly and in the best interests of the Trust in a number of respects. He seeks declaratory relief in relation to certain assets of the Trust and the removal of the Trustee for misconduct. Other related and ancillary relief is claimed against the Company and against Vince and Mara as participants in the breach of duty. These matters have not presently been fixed for trial.
The breaches are denied by the Trustee, Vince and Mara.
B. Relevant Factual Background
Diversification of the Business into Retail Sales
Prior to 2009 the Business operated as a wholesale fruit and vegetable business with a range of wholesale clients including hotels, schools, retailers and supermarkets.
In 2009 the Business decided to begin offering retail sales of its fruit and vegetables to domestic households and offices. Such sales would occur by the delivery of boxes of fruit and vegetables to such customers. To promote these new business divisions, two business names were registered — “It’s Fresh Home Deliveries” was registered in 2009 (for the domestic sales) and “Great Fruit” was registered in 2010 (for the office sales).
However, despite operating out of the Business’s premises, using the Business’s staff and otherwise being part of the Business, the two new business names were not registered in the name of the Company. Rather, “Great Fruit” was registered in Mara Demarte’s maiden name, Mara Cecchini; and “It’s Fresh Home Deliveries” was registered in Mara’s married name. Trademarks for the two new ventures were also registered, though these were registered in the name of the Company. The defendants allege that the registration of the business names was done in this way to ensure that Aussie Farmer’s Direct, a client of the Business and potential competitor in the home delivery market, would not be aware of the Business’s retail plans. Literksi was unaware that the business names were not registered in the name of the Company. He only became aware of this fact upon seeing the Sale Agreement (discussed below) in late 2011. At all times Literski assumed that the Business owned the two new business names and that the retail operations were part of the Business itself.
The Sale of the Business
In early 2011, Vince and Mara decided to sell the Business. They appointed an agent who found an interested buyer — Alam Kamal (“Kamal”). By 1 August 2011 negotiations between Kamal and the Demartes had advanced to the point where a draft sale agreement was drawn up.
The final Sale Agreement was executed on 14 November 2011 with H & A Fresh Family Pty Ltd as the purchaser. The purchase price was $7 million, comprising a $5.6 million purchase price and a $1.4 million “Earn-Out Amount” payable upon the achievement of a certain level of turnover in the first 12 months following the sale.
The Treatment of “It’s Fresh Home Deliveries” in the Sale Agreement
The Sale Agreement defined the Business being purchased by the Purchaser as “the wholesale fruit and vegetable supply business conducted by the Vendor from the Premises”. It also provided for a specific carve-out for the “It’s Fresh Home Deliveries” retail business (the “It’s Fresh Carve Out”). Further, the Sale Agreement was specifically amended to reflect that the “It’s Fresh Home Deliveries” was owned by Mara.
As part of the sale, the Purchaser also agreed to supply fruit and vegetables to “It’s Fresh Home Deliveries” and to licence part of the Business’s premises to It’s Fresh Home Deliveries for $50 per year. These obligations were contained in a Supply Agreement and Licence Agreement which formed part of the schedules to the Sale Agreement. The two agreements were between Mara and the Purchaser only. No reference was made in the carve-out provisions or the agreements to Mara holding the business on trust for the Company. There is no document to such effect.
Variations to the Sale Agreement and Settlement
Pursuant to the Sale Agreement, settlement was to take place on 23 December 2011. However, settlement was delayed due to difficulties in arranging finance on the part of the Purchaser.
As part of a number of steps taken to assist the Purchaser in financing the purchase, the parties executed a Variation Deed on 23 March 2012. This varied, among other things, the purchase price payable (reducing it to $5.6 million, $1.4 million of which was payable only upon the achievement of certain revenue goals), the date for completion (to 23 March 2012) and the deposit amount (increasing it to $1.2 million).
A second deed was entered into on 23 March 2013 (the Consideration Deed) by which 20 per cent of the units of the “F2U Unit Trust” were issued to Demarte Pty Ltd “as consideration” for Demarte Pty Ltd procuring the reduction in the purchase price of the Business for the Purchaser (“the Sale Units”). The F2U Unit Trust was a trust established by Kamal with the Purchaser as trustee and the Business as its main asset. Vince said he had planned to establish a new unit trust with Demarte Pty Ltd as trustee, which would hold his and Literski’s interest in the F2U Unit Trust in the same proportion as their holdings in the Trust. That is, Literski would end up with 20 per cent of the 20 per cent interest held by Demarte Pty Ltd in F2U Unit Trust — this would be equivalent to a four per cent interest in the Business. However, the relevant trust deed was never executed.
Ultimately, settlement of the sale and possession took place on 23 March 2012, pursuant to the amended Sale Agreement. Settlement was only able to take place upon the further agreement between the Company and Purchaser in relation to a shortfall in the amount paid at settlement by the Purchaser. Following settlement and possession, the Purchaser continued to experience a variety of problems in relation to the payment of the balance of the purchase price.
The Deed of Annulment and Notice of Rescission
According to Vince, he and Kamal continued to negotiate after settlement. Those negotiations resulted in the signing of a Deed of Annulment on 2 July 2012. The Deed of Annulment purported to annul the Sale Agreement, and its related agreements, the Variation Deed, Loan Agreement, Licence Agreement and Supply Agreement (together the “Sale Documents”). It provided that the Purchaser forfeited any right or entitlement to possession of the business. The precise purpose and effect of the Deed of Annulment is unclear. Vince said that he and Kamal intended the annulment to have effect from signing, as they were intending to draw up a new sale agreement based on new finance arrangements with a new bank. Mara gave evidence that the annulment was always to be conditional on Kamal obtaining new financing, but the deed itself makes not mention of any conditions precedent to it being effective.
In any case, the Purchaser never vacated the premises and no new financing agreement was reached with a bank. On 4 April 2013 Vince signed a notice purporting to rescind the Deed of Annulment on the basis that the Purchaser had ‘repudiated’ the Deed of Annulment by refusing to annul the Sale Agreement (and related agreements) and evicting the Company from the business premises.
Subsequent to the purported rescission, the Company served the Purchaser with a statutory demand for the payment of monies due pursuant to the Sale Agreement and related agreements (in particular a loan agreement between the Company and the Purchaser in relation to the payment of the deposit). Despite the purported rescission of the Deed of Annulment, the Purchaser purports to rely upon the Deed in answer to a statutory demand for payment made by the Company.
C. Summary of Issues and Conclusions
So far as Literski seeks declaratory relief in relation to the assets of the Trust (the Business names and the Sale Units), it is common ground that these assets are indeed assets of the Trust and accordingly declaratory relief is appropriate. However, although this may dispose of the matter of the proprietorship of the assets, the conduct of the Trustee is still relevant in relation to its alleged breach of duty.
The main issue in this case relates to the misconduct and alleged breaches of trust associated with the sale of the Business. Three breaches are alleged. It is these breaches (and others) that Literski submits warrant the removal of the Trustee and, in due course, appropriate orders against Vince and Mara.
The first alleged breach is the It’s Fresh Carve Out. The question is whether diverting or carving out part of its business to a related party (Mara) for no consideration, instead of simply retaining it, constitutes a breach of trust. In my opinion, and for reasons that follow, the breach is made out.
The second alleged breach relates to the 20 per cent unitholding in the new F2U Unit Trust — the Sale Units. It is alleged that having H & A Family Fresh Pty Ltd issue units to Demarte Pty Ltd, in circumstances where it gave no consideration and the Trust gave all the consideration, constitutes a breach of trust. In my opinion, and for reasons that follow, the breach is made out.
The third alleged breach relates to the Deed of Annulment. It is alleged that the failure to enforce the substantial rights given to the Company under the Agreement, in circumstances where the Purchaser was in default, constitutes a breach of trust compounded by the inexplicable rescission of the Deed of Annulment. In my opinion, and for reasons that follow, the breach is made out.
In addition to the three breaches associated with the sale of the Business, two other breaches are alleged. The first relates to certain actions in 2009 and 2010, well before the sale. The second relates to conduct after the sale and during the course of the proceeding.
The earlier breaches relate to the registration in the name of Mara personally of the business names of It’s Fresh and Great Fruit. Literski contends that they should have been registered in the name of the Company notwithstanding it being common ground that these businesses were owned and operated by the Company. In my opinion, and for reasons that follow, the breach is made out.
The conduct breaches involve the failure of the Company to measure up to the high standard expected of trustees in a number of respects, including holding documents evidencing title to ownership and conducting itself with the high standard expected of trustees. In my opinion and for the reasons that follow, the breaches are made out.
The final question relates to the form of relief against the Trustee.
Literski seeks the removal of the Trustee. The question is whether that is the appropriate remedy. The Company in its said capacity still trades. In my opinion, and for reasons that follow, the Trustee should be removed.
D. Declaration – the Assets of the Trust
In my opinion, there is utility in making the declaration sought by Literski, despite the fact that there is common ground in relation to the question as to what comprises the assets of the Trust.
The Business names are clearly and admittedly held by Mara on trust for the Trust and there will be declarations made to such effect.
The units in the F2U Unit Trust, acquired as consideration under the Consideration Deed, are also clearly and admittedly an asset of the Trust. If the units are held by the Company, no declaration is required. However, it appears, whatever the legal effect, that the units were issued to Demarte Pty Ltd as trustee of the DM Co Unit Trust even though this Deed of Trust was not signed. Out of an abundance of caution, declarations to such effect will be made.
E. Misconduct by the Trustee
In my opinion, there has been continuous and sustained misconduct and breaches of duty on the part of the Trustee.
Business Names
By having the business names Great Fruit and It’s Fresh Home Deliveries registered in Mara’s name rather than in the name of the Trustee, the Trustee breached its duty.
The question of whether in some cases it might be proper for a trustee to make use of a nominee to hold trust property or to create or allow a sub-trust to exist, does not arise. Mara did not execute a declaration or acknowledgment of trust nor was there any other document acknowledging, on her part, the beneficial interest of the Company as trustee of the Trust. Further, the It’s Fresh Carve Out provides further evidence that the It’s Fresh business name was not intended to be and was not held on trust.
It is the duty of a trustee to get in the trust assets.[1] The trust property should be vested in the Trustee or suitable declarations or acknowledgements obtained.
[1]See Harold Ford et al, Thomson Reuters, The Law of Trusts (at June 2013) [9.2210].
In my opinion, the evidence, to the extent that it is relevant, does not establish to the requisite degree that Literski agreed to the registration of the Business names in Mara’s name. Rather, the evidence points to his lack of knowledge.
The Issue of Units to Demarte Pty Ltd as Trustee for the DM Co Unit Trust
H & A Fresh Family Pty Ltd was required to issue units to Demarte Pty Ltd and not to the Company, in consideration of the reduction of the purchase price.
This involved the alienation of the property of the Trust. It was never intended that Demarte Pty Ltd would hold the Sale Units for and on behalf of the Trust.
The reason for the involvement of Demarte Pty Ltd and the reason for the proposed DM Co Unit Trust was “the heavy liabilities to which the Fresh 2U Unit Trust was subject”. On 10 April 2012, Vince said in an email to Literski that his “major concern” was “staving off bankruptcy for Fresh 2U”. Thus the creditors of the Company were of central concern to Vince at about the time that the Consideration Deed was entered into.
The pleaded justification for this transaction is that Literski has the same proportionate interest in a new trust, the DM Co Unit Trust, of which Demarte Pty Ltd is trustee, as he has in the Trust. However despite such pleading the new trust was not created. The new trust deed required the signature of Literski but this was never sought or obtained.
Even if some such new trust had in fact been created with units held by Literski and Vince Demarte Pty Ltd in the same proportions as their units in the Trust, the property of the Trust was nonetheless alienated with the assistance of the Trustee. This is the critical point. Further, in my opinion it is not sufficient for the Trustee to contend that the Sale Units were never issued or if issued, the new trust was never created and as a consequence the Trust owns the Sale Units. This convenient and unintended fall back position is self-evidently disingenuous.
In my opinion, the evidence, so far as it may be relevant, does not establish to the requisite degree that Literski was, at the relevant time, aware of the Consideration Deed or the proposal to issue units to Demarte Pty Ltd. Rather, the evidence points to his lack of knowledge.
The Supply Agreement and Licence Agreement
The Supply Agreement and the Licence Agreement, which are schedules to the Sale Agreement, treat Mara as owner of the It’s Fresh business.
Both Vince and Mara said in cross-examination that these agreements accurately depicted the legal relationship between the Purchaser and Mara.
There could be no business justification for keeping the Purchaser ignorant of the true ownership of the It’s Fresh Home Deliveries business whatever the previous position.
This separate treatment of the It’s Fresh Home Deliveries business in dealing with H & A Fresh Family Pty Ltd as if the business were owned by Mara was in my opinion grossly improper conduct on the part of the Trustee. It was disposing of an asset without any consideration.
Deed of Annulment
The Company, the Purchaser, and the guarantor of its obligation, Kamal, executed a Deed of Annulment on 2 July 2012 which purported to annul the Sale Agreement and its related agreements and for the purchaser to forfeit any right or entitlement to possession of the business. The Deed of Annulment was executed by Vince and Mara on behalf of the Trustee.
Vince said in cross-examination that the Deed of Annulment was immediately effective, that it annulled the Sale Documents and that it was agreed between himself and Kamal that new agreements would be negotiated. Mara said in cross-examination that the Deed of Annulment was never effective because it was conditional upon the Purchaser successfully refinancing its funding arrangements. Both Vince and Mara said in evidence that the Deed of Annulment was executed to assist the Purchaser with its refinancing.
The Purchaser relies on the Deed of Annulment in answer to a statutory demand by the Company dated 12 April 2013 for the sum of $1.2 million due under the Loan Agreement together with interest thereon.
However, despite the Deed of Annulment, the Purchaser has remained at all times since 23 March 2012 in possession of the business.
Agreeing to the annulment of the sale and the related obligations of the Purchaser without recovering possession of the Business was, without more, conduct rendering the Company unfit to continue as trustee.
The Company is now, and has since 2 July 2012, been entitled to possession of the Business, given the affirmation of the Deed of Annulment by Kamal in his affidavit in opposition to the statutory demand. No steps have been taken by the Company in this regard. In fact the contrary is the position.
On 4 April 2013, Vince signed a notice purporting to rescind the Deed of Annulment on the basis that the Purchaser had repudiated it in that it had refused to annul the Sale Documents and on 23 October 2012 had “summarily evicted” the Company from the business premises. The reason stated in the notice and indeed the very giving of the notice is ridiculous and contradicts the evidence given by Vince.
Vince has sworn on 2 April 2013 that:
(i)the “next payment” to be made by the Purchaser “an amount of $1.2 million, is due to be made on 23 March 2013”; and
(ii)he has a “concern that H&A Fresh Family Pty Ltd will not complete the contract to purchase the business of Fresh 2U Pty Ltd”.
These statements by Vince are self-evidently false if the Deed of Annulment was effective at the time they were made. Vince’s position is that the Deed of Annulment remained effective until the rescission notice of 4 April 2013.
If the Deed of Annulment was never effective, executing it without obtaining a formal agreement as to the relevant conditions precedent was unacceptable conduct on the part of the Trustee. In addition, if the Deed of Annulment was never effective, the Trustee has been dilatory in enforcing its rights for the benefit of the Trust under the various agreements.
Whatever the true position as between the Company and the Purchaser, it is clear that the conduct of the Trustee in relation to the Deed of Annulment has been inappropriate and has prejudiced the Trust in relation to its main asset.
Finally, the casual approach and conduct of the Trustee throughout this proceeding and in particular in relation to discovery and its lack of candour in relation to its dealings makes it unfit to continue as Trustee.
F. Removal of the Trustee
The Court has ample power to remove the Company as trustee both in equity and by statute.[2]
[2]Miller v Cameron (1936) 54 CLR 572, 580; Tomasevic v Jovetic [2012] VSC 405, [5].
The Trustee’s breaches justify its removal. It cannot continue in such a capacity. The removal is not penal in character. The main concern is the stakeholders in the Trust,[3] primarily[4] the unitholders which of course include Literski and a company controlled by Vince.
[3]Craven Sands v Koch (2000) 34 ACSR 341, [204]; Miller v Cameron (1936) 54 CLR 572.
[4]The welfare of the trust estate as a whole would also include creditors.
G. Disposition
I propose to make declarations and orders in accordance with these reasons. I will hear from the parties as to the appropriate form of order and generally in relation to the further conduct of the proceeding and costs.
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