Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S CI 2011 01434

LOTTERIES PTY LTD	Plaintiff
v
UMBRELLA ENTERPRISES PTY LTD (in liquidation)	First Defendant
and
SARAH VOLTEAS and SPIROS VOLTEAS (as executors of the deceased estate of PAUL VOLTEAS)	Second Defendants

JUDGE:	Mukhtar AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	13, 14, 18, 19, 20, 21, 22 March and 10 April 2013
DATE OF JUDGMENT:	(I) Post hearing Ruling No 1 published on 5 August 2013 (II) Post hearing Ruling No 2 published on 2 October 2013 (III) Post hearing Partial consent orders made on 22 January 2014 (IV) Post hearing consent order on 31 October 2014 substituting executors as defendants. (V) Balance of judgment: 4 December 2014
CASE MAY BE CITED AS:	Lotteries Pty Ltd v Umbrella Enterprises Pty Ltd (in liq) and another
MEDIUM NEUTRAL CITATION:	[2014] VSC 605

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MONEY - Joint venture type agreement - Funding by one passive venturer - Repayment due on sale of joint venture undertaking - Sale at a loss and below amount of contribution - Assertion by funder of a loan payable on demand - Whether funding a capital contribution or loan - Absence of character and features of a loan

TRUST AND TRUSTEES - Joint venture type agreement - Establishment of retail business for intended resale for profit - Funding by one passive venturer - Active establishment of joint undertaking by other venturer - Non fiduciary collaboration - Whether proceeds of sale of business held on trust for contributor - Whether equitable charge - Whether assignment of future chose in action - Whether rights purely in contract

EQUITY - Trusts - Accessorial liability for breach of trust - Necessity to show dishonest and fraudulent design to injury of beneficiary - Conduct of alleged accessory explicable as responsive to importunity of alleged beneficiary and protective of trust estate and trustee’s interests

TRADE PRACTICES - Unconscionable conduct - Pre contractual representations forming the terms of the agreement - Subsequent dispute about terms - Representor’s insistence on its version not unconscionable - No moral taint - Trade Practices Act s 51AA, 51AC

ESTOPPEL - Promissory estoppel - Expectation of a particular legal relationship or contract - Dispute over conversations and expectations preceding agreement - Genuine grounds for disputing burdens of alleged legal relationship - No estoppel

AGENCY - Authority of agent - Execution of trust deed on behalf of corporation - No actual or implied authority of agent - No corporate office held by agent - Whether directors knew of executed deeds and acquiesced - Deeds not lawful

−−−

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr I Upjohn	Comlaw
For the Defendants	Mr P Crennan	B2B Lawyers

HIS HONOUR:

There came a moment after the close of the plaintiff’s case at trial when a memorable and serious remark was made to the Bench from counsel that this was “a spectacularly messy case”. Saying so recognised the task that lay ahead for the Court in trying to: find and assimilate the facts of a laconic deal done figuratively on a handshake; understand the precise content and find mutuality in the loose conversations that constituted the agreement; discern contractual intention according to contested versions of such conversations; understand how business affairs were then carried out to see if that was in implementation of a prior agreement or unilateral conduct; and ultimately apply the law clinically to the facts in a context where counsel for each party submitted that the principal witness for the other side lacked credibility. Where the unbusinesslike and undocumented dealings gave no apparent legal rights or protections to the plaintiff, there was a wide ranging search in equitable remedies, largely the fiduciary principle. Finding a just solution has been difficult, and has called for a most cautious approach.

It all has to do with what the parties were content to describe in the case as a joint venture to set up a Degani’s café bakery business at shop premises at the World Trade Centre in the Docklands area. It was the old site of the Crown casino. The foyer area of the building was being redeveloped.

The deal sounds, and should have been, uncomplicated. The source of all the money to set up the business was to be one, Abraham Ben Cohen. He was a business development manager of a major bank. But this was purely a personal venture by him, and in the background were his parents who were financially interested. He stands behind the plaintiff corporation, alleged to be the source of the money to set up the café.

The first defendant (‘Umbrella Enterprises’) was incorporated especially to be the owner of the café business. The second defendant, Paul Volteas[1] was an experienced

and successful café operator. He had a business partner George Pezaros. He was not a defendant but was, for a time, a co-director of Umbrella Enterprises. Avoiding the side controversies in the case, I think it safe for introductory purposes to describe the deal as follows, with greater detail later. For ease of narration, I shall put aside corporate vehicles and describe the deal by reference to the active individuals.

[1]For ease of narration, I shall call him the second defendant in this judgment even though he was recently replaced as a party by his executors.

Volteas would find suitable vacant store premises for lease in a location that was also acceptable to Cohen. He would then fit out and set up the Degani’s bakery café in a hands-on way. Pezaros was the one responsible for leasing and licensing. Volteas was responsible for the set up and operation of the retail business. This was something more upmarket and extensive than a typical sandwich bar. There could be a full working kitchen and external catering services.

Cohen as passive investor would pay for the fit-out, plant and equipment. Volteas would operate the café for about a year to establish steady earnings with a view to sale, and in expectation of a handsome profit. From the proceeds of sale and, after payment of expenses Cohen would be paid back his investment as first call on the proceeds of sale. That is the return of the investment. The remains of the proceeds would then be split 50/50 between Volteas and Cohen. That is the return on the investment.

In short, and in those basic terms, it appeared to be a collaborative arrangement ― a combination of money and talent ― to carry out a common purpose or achieve a common end. A prominent issue in the case was the sort of expenses that Umbrella Enterprises was entitled to pay out of the proceeds. At the very least, it included the vendor’s selling costs and the clearing of ordinary operating and trading debts to suppliers and others.

At this early juncture, it is essential to say something about the casting of the plaintiff’s case which I think is truly crucial to the legal analysis and the determination of the case. It was no part of the plaintiff’s case that the form of association here was a collaborative fiduciary relationship. That is, a fiduciary relationship to be moulded according to the nature of the relationship and the facts of the case, and based on a mutual trust and confidence in order to collaborate towards a joint goal.[2] Nor was it put as a case of quasi partnership. To the contrary a distinct and adamant feature of the plaintiff’s case was that the funding from Cohen to set up the café was to be a loan to the joint venture; and because there was no date fixed for repayment, it was at law a loan repayable on demand by Umbrella Enterprises the joint venture company. That is, the plaintiff’s case was that this was a debtor creditor relationship. Such a relationship is anything but fiduciary. It is contractual. Each acts according to their own selfish interests subject to particular terms of the loan agreement. Yet the plaintiff as lender seeks to make the borrower a trustee and fiduciary when it comes to repayment of the loan, which ultimately became the domineering issue in the case.
[2]See Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 103 at 102. See also United Dominions Corporation Ltd v Brian Pty Ltd (1984) 157 CLR 1 at 10-11. See generally G M D Bean, Fiduciary Obligations and Joint Ventures (Clarendon Press, 1995) Ch. 7.

The deal went ahead. For introductory purposes, I shall cut a long story short. Cohen and his family’s accountant (one Steven Bendal) attended to the structure of the venture, the preparation of the accounts for the joint venture company, lodgement of statutory documents and such matters. Umbrella Enterprises was the joint venture vehicle incorporated to set up the café, operate it and sell it. Volteas and Pezaros were it directors and equal shareholders on incorporation, but Volteas subsequently became the sole director. Cohen held no official or statutory or recognisable office in that company.

The funding to pay fit out costs of $573 500 (including GST) was procured by Cohen by a number of separate instalments as needed. The money was applied by Volteas to set up the business. There was no written agreement to document the venture, or the so called loan. The provision of funds was in reality from Cohen as a medium, but there is a real question whether the plaintiff, Lotteries Pty Ltd (‛Lotteries’), a Cohen company, was in truth the lender and whether it was competent legally to sue as the contracting party.

Cohen’s set up of the structure included making Umbrella Enterprises a trustee of a unit trust called the Umbrella Enterprises Unit Trust. Of itself that is not unorthodox. For a 50/50 joint venture it would be expected there would be an equal unit holding at inception. But there lies another major controversy, for trust documents were signed by Cohen on behalf of Umbrella Enterprises (of which he was not an a director or officer), to in effect give him 100% ownership of the business as the trading trust asset until he was repaid, and only then would Volteas get 50% of the units. This was a serious issue and part of the attack on Cohen’s credibility. The defendants have maintained they knew nothing about this deed until this litigation, and say that Cohen, who was not a director, did not have the authority to sign the deed. They say the deed is invalid and the relationship of the parties is to be analysed at law according to the unwritten contract made between the parties, and the trust deed is to be disregarded.

At all events, this had no practical impact at the time because the money from Cohen came and was applied to set up the café. No one says that money was applied badly or unfaithfully in any way by Volteas. No one says Volteas was not competent in setting up the business for trading. The café was established and it traded. Despite assurances by the lessor about exclusivity of trade, other food stores began to trade in competition. The business hit real difficulties. At a time when the parties were falling out because of this adversity, Volteas and Pezaros sold the business in imperative circumstances at a loss for $400 000 on terms that allowed the purchaser to pay the price over five years by weekly instalments of $1500 with an end or ‛balloon’ payment.

I shall avoid copious reference to the pleadings just yet. The primary case was against Umbrella Enterprises for repayment of the investment moneys as a debt due under a loan payable on demand.[3] It was purely a debt claim for $538 250.[4] It was brought against Umbrella Enterprises as trustee of the unit trust, but that claim is not in any way dependant on a trust relationship. The claim is based on an agreement alleged to have been made between Cohen and Volteas in conversations about the terms of the joint venture. For this principal claim, the relevant alleged unwritten term was that Lotteries would contribute finance to establish the café by way of loans to Umbrella Enterprises which were repayable on demand.
[3]See paragraphs 1-14 of the third amended statement of claim.
[4]From the $573 500, there was a GST refund of $35 243.

The principal defence was that the funding from Cohen was certainly not agreed to be a loan, or to be characterised as one. It had none of the features or incidents of a loan; much less a loan agreed to be repayable on demand. The defendants say the assertion that it was a loan repayable on demand was manifestly repugnant to the very idea of the joint venture for a start-up business which would be vulnerable to immediate insolvency if the loan was called in at the whim of a lender. They say the whole idea was to not have debt or be at the mercy of a lender. The defendants say it has to be characterised as a capital contribution, and as such, it was at risk in the venture. And if things went wrong (with no blame on Volteas as operator), the risk has come home.

The defendants disputed Cohen’s version of the agreement underlying the joint venture. But they accepted unequivocally, on their version of the agreement, that ownership of the business was to be 50/50, and after a sale of the business, and after payment of expenses (there lies a major controversy) Cohen was entitled to first call on the proceeds of sale to get a repayment of his capital contribution, and after that, each venturer shared the rest 50/50. They analyse the relationship as purely contractual. In that regard they also contended that Lotteries was not shown to be the proper plaintiff. Lotteries was a Cohen controlled company and the unit holder under the controversial unit trust deed. But the defendants say they knew nothing of this company as a contracting party and never intended to have legal relations with it. They contend the proper plaintiff to whom they were obliged was never identified by Cohen at the time of agreement, so, Cohen as procurer of funding should be seen as the contracting party. If not, then the actual lender, the loan originator, was the proper plaintiff.

Then there was a secondary case pleaded against Umbrella and Volteas, in a number of ways.

First, there was a claim for misleading and deceptive conduct, and a companion claim under the unconscionability provisions of the Trade Practices Act; that is, sections 51AA and 51AC. The first claim was abandoned by the time of closing addresses. Yet the second claim of unconscionability, based on precisely the same facts, was not. This was a strange claim and will require detailed exposure later, but in essence Cohen says the defendants induced him by representation to invest his money on terms as alleged by the plaintiff in this proceeding, and it is now unconscionable for the defendants to deny that the terms of the agreement were as he, Cohen, alleges them to be including a term that the money be repayable on demand. On the same basis he says there is an estoppel; that is, the defendants are estopped by their prior representations from denying the agreement to be on the terms as Cohen alleges them to be. It appears to be an estoppel of the Waltons Stores[5] kind, that is, the defendants are not free to withdraw from the particular legal relationship that the plaintiff was induced to assume would exist. These claims are put against Umbrella as principal and against Volteas under the well-known statutory accessorial liability provisions of the Trade Practices Act.
[5]Waltons Stores (Interstate) Ltd v Maher (1987) 164 CLR 387.

Secondly, there were claims in equity. As I would emphasise, the plaintiff resolutely cast itself as a lender and creditor. That is a contractual relationship. It pleads the unit trust as part of its version of the agreement as governing the relationship of the parties, but make no case of fiduciary obligations arising out of that. It pleads no fiduciary relationship arising out of the form of association and the pursuit of a common venture. However, it seizes on the defendants’ version of the agreement as pleaded and says a fiduciary relationship, in the form of a trust, arose after the business was sold and “the expenses of sale” were paid out. The plaintiff says that its entitlement under the agreement (as pleaded by the defendants) to be repaid from the proceeds of sale gave rise to an express trust of those moneys for his benefit, on something analogous to a Quistclose trust.[6] Alternatively, it says a remedial constructive trust sprung into existence. Or it gave rise to an equitable charge. Then, in the plaintiff’s closing addresses, it was contended ― for the first time ― that the agreement to pay money from the proceeds of sale was an equitable assignment of future property which entailed a trust relationship.
[6]Quistclose Investments Ltd v Rolls Razor Ltd [1970] AC 567.

The plaintiff contends the first defendant as trustee has breached that trust by using the proceeds to pay expenses that were not expenses of sale, and in redirecting (really, to say misappropriating) some payments away from the first defendant. The case against Volteas is a Barnes v Addy[7] claim for a knowing assistance in a fraudulent and dishonest breach of duty by the first defendant as trustee.
[7](1874) LR Ch App 244. In Australia, see Farah Constructions v Say–Dee Pty Ltd (2007) 230 CLR 89.

This case is about analysis of legal relationships. The defendants say in essence that the relationship was contractual and not fiduciary, and that the plaintiff is engaging in contortions to find a basis for making a personal claim against Volteas. They say the case put forward by the plaintiff is based on a debtor-creditor relationship. There is no doubt the case is so predicated. They say the appropriate legal vehicle to reflect the plaintiff’s interests, if any, in the proceeds of sale could only be arguably an equitable charge, being a security right which arises where a fund is set aside to meet a liability. Even they say there are problems with that analysis. But, they say, if there is a charge, the fact that it is an equitable charge does not create a fiduciary duty of trustee and beneficiary. It is a security right, they say, which confers rights on the chargee to relief from the court to protect and enforce that security right.

How did the dispute arise?

It all goes back to the sale of the business. In February 2011, the business was in financial trouble and Volteas was inclined to cut the losses and accept an offer from a prospective purchaser (which he later did), over Cohen’s resistance. Lotteries demanded repayment of the alleged loan payable on demand on 1 March 2011 and a writ soon followed. The defendants resisted any claim that there was a debt payable on demand, for succumbing to such a claim would mean instant insolvency and an exposure to creditors or insolvent trading. They defended their position. The business was sold in May 2011 for $400 000. The purchaser made an ancillary loan agreement with Umbrella to pay the price in weekly instalments of $1500 over 5 years. The weekly payments started in May 2011, but it was not until 30 November 2012 that the plaintiff sought and obtained a Court order preserving the proceeds of sale. Before then the defendants openly plead[8] they applied the funds received from the purchaser in payment of various expenses and liabilities of Umbrella Enterprises to a total of $121 842. That included legal expenses of resisting the plaintiff’s claim. They say the money coming from the purchaser was a company asset able to be used to pay creditors, claimants (such as the tax office), and contrary to expectations, to defend themselves against action by their joint venturer Cohen. For example, they say, how could it be that they could resist paying the tax office or a creditor on the ground that the proceeds of sale were held on trust for the plaintiff?
[8]See para 41 of amended defence filed 18 March 2013.

The parties had never discussed precisely what sort of expenses would be deducted from the sale proceeds before payment of the investor’s contribution. In its pleading the plaintiff confined it to expenses of sale as if to connote expenses of actual sale such as a selling agent’s commission.[9] At trial, Cohen accepted readily that Umbrella Enterprises was entitled to use the funds obtained from the sale of the business to meet the debts and obligations it incurred in conducting the business.[10]
[9]See para 25 of amended statement of claim.
[10]Transcript (‘T’) 336.

The defendants say in essence the proceeds of sale were an asset of the company. The company and its sole director had to act in the company’s interests and defend themselves because a failure to defend the proceeding and pay what was being demanded would have affected the rights of third parties with whom it contracted, as well as the position of its directors and insolvency. To that end they say they incurred additional costs, which were reasonable and legitimate, which could only be paid from the proceeds of sale.

Pausing there, one can see the crucible created by Cohen, as it was described by Volteas’ counsel. Cohen sued Umbrella Enterprises and coextensively its director. If the company’s sole asset, the proceeds, are said to be his, then they cannot use company funds to defend themselves and would be forced to capitulate. To insist that it was a loan repayable on demand had to be defended, they say, which had the self-destructive effect for Cohen that the proceeds of sale were being eroded for every dollar that the company had to spend to defend such a claim.

Thus, the issues were as follows. First, what was the agreement? Secondly, is the plaintiff competent to sue? Thirdly, under the agreement, was there validly established a unit trust? Fourthly, was this a loan repayable on demand? Fifthly, does an agreement to pay back the investment from proceeds of sale, after deduction of ‛expenses’ create a fiduciary relationship (where it otherwise does not exist) of trust, or is a security interest? Sixthly, if a fiduciary relationship did arise, what sort of expenses could be taken out from the proceeds by the company? If it was not confined to the expenses of actual sale and included the company’s need to pay trading debts and obligations, was it wrong for the company to use the proceeds as a company asset to meet, for example, the liability of defending the claim (money repayable on demand) on reasonable grounds, or was it bound to prefer Cohen’s adverse interests?

Such an outline of the case by-passes the digressions on which the Court was taken, but it puts the basic elements of the case.

As part of this introduction it is essential to recite, with some detail, the significant events that occurred after the Court reserved its judgment on 10 April 2013. It helps not only understand why the matter has become prolonged, but creates a very important context for the remainder of the case.

Events after trial

The Court was put in an awkward position as attempts were made by the plaintiff, after trial finished, to settle with the first defendant (in liquidation) on terms, as it turned out, for a payment of the totality of all its debt claim ($538 250.89), interest ($125 574.67) plus costs. The upshot was that it was not until 22 January 2014 that orders were made giving judgment to the plaintiff against the first defendant by consent.

Amidst all this, the tragedy is that the second defendant, Paul Volteas, died on 4 December 2013. He was being treated for cancer at the time of trial.

A digression is necessary. The settlement was a remarkable turn of events because not long before the actual trial commenced the first defendant was placed in liquidation under a member’s voluntary winding up. That occurred on 18 December 2012. Its solicitors then ceased acting for the company and for Volteas its director. Liquidation occurred not long after I granted a mandatory injunction requiring the first defendant to pay the weekly proceeds of sale coming from the purchaser of the business into a joint interest bearing account to be held by the solicitors. The plaintiff had moved the Court for that preservation type order complaining that the proceeds of sale were being used by the company to fund the litigation rather than preserving the moneys for the benefit of the plaintiff. But the principal case was for repayment of a loan that was repayable on demand, and that is purely a money claim. Hence, the resistance by the company was to say it was entitled to use any income to meet ordinary and reasonable expenses including defending legitimately its interests in litigation.

To preserve the funds, the plaintiff altered or clarified its case to say that it (a lender of money payable allegedly on demand) was making a proprietary claim in equity to the proceeds of sale on the grounds of a charge, or express trust or constructive trust. The proceeds were the company’s only asset, and such a proprietary claim if sustainable would give Cohen rights ahead of all other unsecured creditors of the first defendant.

The Court decided it was just and convenient to preserve the flow of purchase moneys.[11] That order had been resisted on the ground that if granted it would lead to instant insolvency. And that is what happened. The liquidators gave affidavit evidence[12] that they had made investigations into the case. They concluded that it would prejudice creditors to spend money and resources in litigation. They said the plaintiff had lodged a proof of debt (based on an alleged loan) as an unsecured creditor, and they took the view the matter was better left to the ordinary processes of distribution in the winding up. As trial got even closer, the liquidators informed the Court unequivocally that they would not take any further step in the proceeding.[13]
[11]See order dated 30 November 2012.
[12]Affidavit of Victor Raymond Dye sworn 1 February 2013.
[13]Letter dated 28 February 2013.

Thus the case proceeded against the first defendant undefended. But the case had to be proved and there was a real and significant issue about the terms of the agreement, in particular, whether there was a loan to the first defendant or whether it was a capital contribution to a joint venture undertaking which was at risk according to the fortunes of the venture.

To add to the situation, the plaintiff saw fit to serve a voluminous and complicated Notice to Admit Facts and Documents on the liquidators at a time when it was obvious they lacked the funds to look into the case and meaningfully respond to such notice. I thought the use of the notice was dubious in the circumstances. I warned plaintiff’s counsel mid trial that I was predisposed to viewing that as an inappropriate use of the admissions procedure, more so as the notice was expressed in broad and tendentious terms on matters of mixed fact and law. The Court expected the burden of proof to be met in the ordinary affirmative way.[14] Despite that, the plaintiff’s closing submissions were still dependant on the Notice to Admit to prove the case against the company.
[14]See T 611 ff.

This may all seem a point of unnecessary detail. But it helps understand the dynamics and affiliation between the case against the company and Volteas, and the significance of the settlement to the case against Volteas.

After reserving its judgment on 10 April 2013, on 28 June 2013 the Court received an email communication from the plaintiff’s solicitors stating where relevant:

Please find attached consent orders as between the Plaintiff and the First Defendant in this proceeding.
We would ask that his Honour…make the orders on the papers without the need for the First Defendant and Plaintiff to appear.
The orders finalise the matter as between the First Defendant and the Plaintiff and obviate the need…to deliver reasons for decision in respect of the claim against to (sic) First Defendant. There only remains the judgment to be delivered in relation to the claim against the Second Defendant.

The orders amount to a capitulation by the first defendant. Avoiding detail, all moneys that were deposited pursuant to the Court’s interlocutory injunction into an interest bearing account were, according to the consent order, to be released to the plaintiff. They sought a declaration that the plaintiff was entitled to the net proceeds of the sale of the business that remained to be paid. The first defendant was to pay the sum of $538 250.89 and interest of $125 574.67 together with all costs of the proceeding. It was a strange turn of events.

A formal response was sent to the plaintiff on behalf of the Court, exposing two matters of concern. First, the Court sought to ascertain whether the orders were sought with the knowledge of the second defendant. Secondly, the Court distinctly posed the question whether there was any legal significance to the proposed consent order, and its underlying factual and legal basis, for the case to be decided as between the plaintiff and the second defendant. The Court stated it was willing to reconvene to have those matters considered.

The plaintiff did not tell the second defendant about these orders. Moreover, the subsequent correspondence from the plaintiff left the Court in some doubt about the ramifications of making the consent orders. The plaintiff’s position was to obtain the consent orders first and then provide submissions to the Court “addressing any legal significance the orders would have for the case to be decided as between the Plaintiff and the Second Defendant”.

This caused apprehensions to the Court. By a ruling (designated as Ruling No 1) published on 5 August 2013, the Court made orders that the parties sequentially file written submissions on two questions. First, is there any reason why the Court should not make the consent orders? Secondly, if the consent orders are to be made, what is their legal effect or significance, if any, to the adjudication of the case as between the plaintiff and second defendant?

It was just as well the Court did that because a real controversy then ensued. The second defendant opposed seriously the making of the consent orders. There was an apprehension of an issue estoppel being created and affecting Volteas (privy as director) if I made the consent order. Substantial written submissions were filed. The plaintiff submitted there would be no issue estoppel.

By a ruling designated as Ruling No. 2 made on 2 October 2013, I rejected the primary ground of opposition to the consent orders based on issue estoppel. My view was that the consent order did not create a preclusionary effect on the facts or the evidence or the outcome of the case as between the plaintiff and second defendant. The second defendant’s concern properly analysed seemed to be based on the forensic significance of the consent orders. But I was unwilling to make a declaration of rights and instead suggested a formulation of orders to ensure the cash flow of the proceeds to the plaintiff. I shall not refer to the precise contents of my ruling but it needs to be considered in its entirety in order to understand the basis of the Court making its decision.

Further time passed. The Court was subsequently informed by the plaintiff’s solicitors that in the meantime the liquidator had completed the administration and the first defendant had been deregistered. There was no one to therefore consent to the orders for the company. Application was then made to me, having been seized of the matter, to reinstate the registration of the first defendant to enable it to make the amended consent orders. An order to reinstate the first defendant and reappoint the liquidators was made on 12 December 2013 without opposition from the Australian Securities and Investments Commission.

This was the order made by consent (where relevant):

2. The first defendant shall pay the plaintiff the sum of $538 250.89 and interest of $125 574.67.

3. The first defendant shall pay the plaintiff’s costs of the proceeding including reserved costs to be taxed in default of agreement.

4. The claim as against the first defendant is otherwise dismissed.

5. All moneys that have already been deposited into the interest bearing trust account (identified as BSB 06 3009 Account no. 1057 0330) in the names of the solicitors for the plaintiff and Dimos Lawyers (the former solicitors for the first defendant) as was required to be so deposited under paragraph 2 and 3 of the Court’s orders on 30 November 2012, shall now be released and paid to the plaintiff together with any interest accrued.

6. Subject to further order, paragraph 2 of the Court’s order made on 30 November 2012 shall be varied so as to require the “proceeds of sale” as referred to in paragraph 2(a) or the “installments” as referred to in paragraph 2(b) to be no longer paid into a joint interest bearing account, but paid by the first defendant to the plaintiff.

It is well to pause there and survey the situation before the Court comes to decide the case against the second defendant Volteas. The plaintiff has a judgment against the company for the total amount of the alleged loan. Plus interest. Plus costs. It could do no better on any of its causes of action against the first defendant, all of which rose no higher than a return of its investment. The extent of recovery on the judgment is another matter. But the plaintiff gets the money in the joint account; and it gets the flow of the payments still coming in from the purchaser of the business. I do not know the figures, but certainly Cohen will not recover his investment from the first defendant as joint venturer. The company is now insolvent, but it was only ever set up to establish the business, trade for about 12 months, pay expenses, and then sell the business. A failure to sell at a profit was an obvious risk.

The consent judgment also creates an awkward, but unavoidable legal state of affairs. The case against Volteas cannot be segregated, factually and legally, from the elements of the case against Umbrella Enterprises. It is based on the same alleged agreement and the same underlying issues as affected the case against Umbrella Enterprises, an apprehension which was confronted in my second ruling. But it means that despite the consent order, the Court is bound to look at the merits of the case as pleaded against Umbrella Enterprises because it is the pathway or the foundation to the case against Volteas. That carries with it, unavoidably in the peculiar situation that was obtained here, the prospect of findings that are inconsistent or adverse to the pleaded case against Umbrella Enterprises. An example of that is the issue whether this was a loan payable on demand.

For the purposes of my second ruling, the plaintiff contended definitely, and I accepted, that a consent judgment would not create an issue estoppel as against Volteas in the remainder of the case. That means, the parties to the consent judgment (particularly the liquidators of Umbrella Enterprises) voluntarily now face the prospect of findings about the joint venture agreement that go against the merits of the plaintiff’s case on which the consent judgment was given. But the die is cast. In the way this case has been pleaded, I am bound to still consider the whole of the case in deciding the case against Volteas.

More delay followed in the grant of probate for Volteas’ deceased estate. Probate was granted in October 2014 to Sarah Volteas and Spiros Volteas. I made a consent order on 31 October 2014 substituting them as second defendant.

This will be an unavoidably long judgment. At the outset, I am impelled to say a number of things. I do this to step away from the detail in the case, survey the case broadly, and expose some dominant factors that inform my approach to a judgment of this case.

Overview

First, out of a simple dealing for an ordinary smaller scale retail undertaking, the plaintiff’s case became quite elaborate. Apart from a sale at a loss, it was apparent that the first defendant would be insolvent. Legal energies turned to a taxonomical search for a basis to impose liability on Volteas.

Secondly, the evidence in the case was administered without witness statements. It had to be that way as it was a case testing personal credibility of the principal players in a dealing that was mostly unwritten. I wish to cause no embarrassment for this was a vague and undocumented venture, but the Court had to intervene frequently throughout the trial (especially in the plaintiff’s case) to ensure that facts were being elicited to enable fact finding and was directed to the issues. It really was a matter of concern to the Court. That was particularly so when it came to Cohen’s evidence about conversations that informed the creation of legal relations.

Thirdly, I am afraid to say the state of evidence (especially in the plaintiff’s case) was not satisfactory. There was a tendency to delve into journals, balance sheets, financial statements, e-mails and personalia for accounting or handling details. Maybe it was the nature of the case, and of course the responsible counsel in this case had to deal with matters as they had them. It became then a credibility case, not only about the account of conversations and the terms of the agreement, but who had behaved with greater business or legal unfaithfulness or impropriety. That being so, the two principal witnesses (one of whom is no longer alive) must be prepared for the disfavour of adverse findings on credibility.

Judgment in this case will not turn wholly on credibility in the sense of the mendacity of a witness. But it will help understand my account of the facts if I say at the outset that in my judgment much of Cohen’s evidence was not an account of what was actually said, but was an account formed or embellished ex post facto in a way to suit his interests in the case. His energetic demeanour produced discursive evidence, and conclusionary assertions of what the agreement was. He may be a man of experience in banking but I am afraid to say that so much of his account of the conversations of the agreement was coloured by what he supposed the agreement to have been, or the agreement as it was in his mind for the purposes of the case, rather than being truly an account of conversations leading to a consensus. I think a lot of his evidence about the conversations was improvised and coloured by his need to justify some post contractual conduct concerning his signing of trust deeds, and the formulation of his case.

Even allowing for the passage of time since 2007 and the human tendency when in dispute to fill in the gaps as a matter of self-belief, I am afraid to say that I do not have complete confidence in Cohen’s evidence. A troubling part of his evidence seemed to show him to think that an agreement (even with a joint venturer, with mutual interests) is what he as lender can dictate it to be, or now portray it to be. The theme of Volteas’ case was that Cohen had wrongly and shrewdly turned the asset of what was supposed to be a 50/50 venture to something that he thought was entirely his to own, and was seeking equitable intervention under the fiduciary principle in a commercial dealing to in effect achieve that in financial terms. Generally speaking, in my assessment, Cohen sought to go beyond the essence or the equality of the 50/50 deal as I have portrayed it and, as counsel for Volteas put it, his evidence or account of dealings was fashioned to improve his position or seek to gain financial leverage.

This affected in my view his account of the conversations. I cannot be satisfied that for any controversial matters in this case, what he was telling me was truly what he and Volteas had discussed and on which they had reached consensus in a way the law would conclude was an agreement. All this becomes critical in the evaluation of the plaintiff’s misrepresentation, unconscionability and estoppel case against Volteas.

Fourthly, the evidence from Volteas was affected by a different type of infirmity. He was quite unwell at trial for an illness that subsequently came to take his life away. But I do not think it impaired his faculties in any way to at least explain the elements of the deal, basic as they were, as far as he was concerned. For him it was a 50/50 deal, plain and simple, and there was no way this was a loan repayable on demand. On that part of the dispute, his evidence was, at least, to the point. As I shall explain later, the problem was in a case that turned on the content of conversations, material parts of the version of conversations were not put to Volteas in cross examination as would be expected, especially in what was pleaded as a misrepresentation case. The plaintiff’s counsel contended that not putting contrary versions of the conversation to Volteas under Browne v Dunn[15] and not testing the Volteas version did not undermine Cohen’s evidence.[16] Instead the general approach was to put documents concerning the post contractual way that Cohen and his accountant structured the business and prepared tax returns and statutory accounts to show there was documentation to show there was a unit trust and accounts recorded the investment as a loan and a current liability. Conceptually it seemed the plaintiff’s approach was to say that if Volteas did not raise overtly an objection to something that Cohen had done in the implementation of the deal and the making of company accounts, then Volteas and the first defendant should be taken as agreeing to it, or being estopped from denying it. This was questionable. Cohen and his accountant had control over the preparation of documents (Volteas was preoccupied with the works and retailing) which was part of the credibility case that Cohen had done things on the documents to give an advantage to himself.
[15](1893) 6 R 67. See Cross on Evidence (9^th Ed) esp. at [17445].
[16]See T 842.

It was apparent to me in Court that Volteas was weary from medical treatment (chemotherapy for pancreatitis); wearied by the grind of the case, and not really absorbing the multitude of financial documents put to him as prepared by the accountants concerning the corporate and taxation affairs of the first defendant. These were all matters that Cohen arranged on his initiative to structure the business, leaving it to Volteas and Pezaros to do the hands on work of setting up the café and running it in preparation for ultimate sale. Eventually, as the trial went on, I could see, as Volteas himself put it despondently in Court, he just “wanted this over and done with”.

Of course, Volteas had his own responsibilities for how he conducted himself as a witness and gave his evidence, and he sought no sympathy. But I sensed that he, a practical man, was not concerned with the accounting details; or he saw the fog of those details as confounding what to him was a simple and straightforward 50/50 deal with Cohen, in which they had both lost out contrary to genuine expectations. I would read his demeanour as a man perplexed why a simple deal was being made so complicated with so many extrinsic documents. That does not make him a “vague, evasive and glib” witness as was submitted by counsel for the plaintiff. The deal was vague. I will say there were moments when Volteas appeared disaffected or resigned. But I would not say it reflected on him adversely or that he was concealing anything that might materially affect the case.

Fifthly, the case cannot be decided solely or conveniently by opinions on credibility or witness demeanour. As is often the case in commercial cases, there is less resort to making findings according to “the measurable advantage enjoyed by the trial judge in having seen and heard the witnesses”, and greater recourse instead to intrinsic merit, contemporary materials, objectively established facts and the apparent logic of events: see Fox v Percy.[17] To that is added the inherent commercial probabilities and business common sense and what two honest businessmen in the parties’ position would have understood their statements to each other to mean.[18]
[17](2005) 214 CLR 118 at [29]-[31], [65] ff.
[18]See Schenker v Maplas [1990] VR 834 at 840.

Sixthly, there was the accounting evidence from both sides, albeit for a different purpose. The justice in this case will not turn on how the plaintiff’s accountants prepared ledgers or accounts. Just because a balance sheet, prepared by Cohen’s accountant on his instructions and signed perfunctorily by Volteas shows something to be a loan or a current liability from a named entity does not therefore mean, in a legal test, that it therefore was.

Seventhly, at the outset I am impelled to say there is one issue about which I have a view free from any doubt. This was not a loan repayable on demand. It was not even a loan. It had none of the incidents of a loan. The giving of a loan was not discussed nor agreed and Cohen’s own evidence destroyed such a contention. So does an objective assessment based on commercial realities because the characterisation of it as a loan was fundamentally inconsistent with the nature of this venture. Yet the plaintiff built an edifice on such a claim, and I shall show, it was the cause of many problems and a strong factor that helps understand the defensive conduct of the defendants in dealing with proceeds of sale.

The question whether this was a loan repayable payable on demand was also relevant to the unconscionability and estoppel case against Volteas, and the question of how the first defendant and its director conducted themselves when it came to dealings with the proceeds of sale, that is, the Barnes v Addy claim. The theme of Volteas’ defence was that his financial dealings with proceeds of sale have to be seen in the context of defensive action to the severe importunity of Cohen when he demanded repayment of the loan on demand and then sued on that basis, and the need to discharge other liabilities of the company.

Eighthly, although, as I will expose, the plaintiff’s case persevered with the question of the unit trust and the ownership of the units in it, it is not at all clear if and how that matters in the ultimate analysis. The claim and the remedy did not end up being dependant on establishing a fiduciary relationship under the unit trust. It was based on a fiduciary relationship engrafted on a debtor creditor relationship. But in the way the plaintiff’s case was pleaded and conducted (including the trade practices unconscionability case) the Court is bound to deal with the validity of the unit trust deeds.

Finally, in this judgment I am looking where I can to simplify the case. I shall not refer to all the interstices of the evidence that was adduced that made the case so messy, but look to those facts and circumstances which I regard, on the case as pleaded, as informing substantially the case to be decided. In that regard, both sides made submissions based on Jones v Dunkel[19] that certain evidence was not called, from which I should draw adverse inferences. I think this case ought to be decided on evidence that was led, and not on evidence that was not led.
[19](1959) 101 CLR 298.

I shall start with the evidence of the origins of the business relationship which help inform findings about the terms of the joint venture.

The origins of the business relationship

Paul Volteas (now deceased) and George Pezaros can be described for present purposes as being business partners. About 15 years ago they commenced business as owners and operators of a “Degani’s” bakery and café business in Clifton Hill. Over time, they successfully developed the “Degani’s” brand and became experienced café operators with multiple sites in inner and outer suburban Melbourne.

They explained in Court there were two ways in which interested persons might trade under the Degani’s name or become involved in a Degani’s business. One way or another, I think this explanation of business ways was part of the early discussions between the parties.

The first way was under a type of licence arrangement. That is, a café operator might have an existing store or café, or perhaps wish to open a new café, but in either case wished to use the Degani’s brand. In either situation the café would be supplied with foodstuffs and food products by Volteas and Pezaros, and, I gather, adopt a particular way of running a Degani’s business. That is, serve particular food and refreshments in a way, or to a standard and in conditions to distinguish it from a typical sandwich bar or café bakery.

The second way involved a collaborative arrangement, suitable for a passive investor. There appeared to be no formal business like or regimented way in setting up such a collaborative arrangement. Indeed, for this case at least, there was no legal or business documentation at all, and much by practical dealing. Messrs Volteas and Pezaros, who struck me as down to earth men more concerned with the practical conduct of business, explained the usual practice for an investment in a café by a third party in this elementary way:

(a) café sites would become available or offered to them by various landlords or leasing agents in shopping centres or locales, and judgements would be made by them (particularly Pezaros) in consultation with the investor about the suitability of the site for a Degani’s café and the leasehold terms;

(b) they would arrange for a lease of the premises and for the fit-out of the site which on average would cost $400 000 to $500 000;

(c) the investor would pay for the café fit-out but Volteas and Pezaros would not enter into loan arrangements with the investor with the burden of interest or the fear of loan default, but look to the investor to fund the construction and fit-out works;

(d) as a practical matter, the funding was effectuated by looking to the investor to pay the builders and suppliers and contractors on invoice or under progress payment arrangements (that enables the investor to see how the money is being spent);

(e) ordinarily, the set-up of the business would be conducted through a corporation which would be arranged through the Degani’s accountants with a 50/50 shareholding or ownership, but there would be no objection if an investor wanted to use the investor’s own accountants to establish the business corporation;

(f) a Degani’s café might either be set up as a “grab and go” store in which pre-prepared foods are brought for ready sale, or it may have full on-line kitchen and cooking facilities on site for the preparation of food on order;

(g) they would trade and, all things being equal, revenue would meet outgoings especially if, as was often the case, premises were rent free for an initial period of time thus making the business cash positive rather quickly;

(h) upon the sale of the café, expected to take place by about one year with the possibility of a substantial sale price up to a million dollars depending on the site, any operating expenses (including rates, overdue rent, taxes and outgoings, suppliers, employee entitlements et cetera) would be paid out from the net proceeds of sale;

(i) from the net proceeds, the investor would then be paid back the amount of the investment; and

(j) any surplus would then be shared 50/50 between the investor and the Degani’s interests.

That is not a sophisticated investment model. It is all based on an assumption of a 50/50 ownership of the business. Assuming an eventual sale for a profit, the investor gets a return of capital as contributed to the venture, and the 50% sharing of the net proceeds constitutes the return on capital for the investor, and 50% as a reward for Volteas and Pezaros. It appears to be a bigger risk for the unsecured investor, but, so risk theory goes, the expected returns on money within 12 months were substantial. Any management of the risk would be a matter for proper and documented protective measures especially to a banker.

Volteas was insistent on one matter in this arrangement, which I think stands to reason as a matter of business sense. Under this investment model, he said “We never borrowed money…there was never loans.” To him, the idea of borrowing money (certainly borrowing with an obligation to repay on demand) was silly and unacceptable as he did not want to be exposed to the possibility of a tyrannical lender wanting repayment while a business was being built and in the initial stages of trading and therefore in no position to pay about $500 000. The business would be destroyed; and could the lender realistically expect repayment from a start-up business with no other assets? Worse still, there is the innate susceptibility to insolvent trading. The directors of a corporation would be incurring debts to suppliers, contractors, employees, lessors and others on a business which was being set up and established under the ever present current liability to repay an overwhelming debt.

That is why on the Degani’s model, the investor joined in on the risk, and had the common objective of seeing the café become established and trade with a view to sale of the asset. That is, the investor is not looking for income on the loan as a lender; the investment appears to be for capital works and it is looking for an accretion to its capital investment on a sale of the café.

Under that investment model, Abraham Ben Cohen (a director of the plaintiff) was once such interested investor. In 2007, he was a customer of a Degani’s store in Fairfield being run by Volteas. He was a business development manager for a branch of a major bank in Preston involved in commercial lending. In that field, as in his own affairs, he was familiar with the setting up corporate structures and trading trusts. He and his family (there was frequent reference to his parents in the background) were, so he said, very much attuned to seeking commercial investment opportunities in land and business. Cohen told Volteas that he and his family were wealthy and invested in a lot of different investments and as a banker he was in contact with the more prosperous bank customers. As part of his personal investment affairs Cohen retained one Steven Bendel an accountant for the management of the corporate affairs of Cohen’s interests. Cohen also uses bookkeepers to record the financial affairs of his various businesses.

The earliest conditions in which Cohen came to be interested in investing in a Degani’s café were something of which Cohen seemed to want to make a point. It arose after a financial dealing in which Cohen became involved with Volteas or his family to obtain planning permits to undertake a residential and commercial development over land in Eltham. It was cryptically explained, but Cohen said he and another property developer were able in some way to extricate Volteas from some planning permit difficulties. A dealing of some sort occurred with which I need not be concerned but it led to discussion with Volteas and then an agreement about Cohen’s investment “as a sweetener”, he said, to set up a Degani’s café at 818 Bourke Street in the Docklands area.

It is essential to state the facts of that deal, and make some findings, because that deal was the progenitor or template of the deal that is the subject of the present dispute over a café at the World Trade Centre. Indeed the agreement to proceed with the venture for the café at the World Trade Centre was made whilst the venture for the café at 818 Bourke Street was underway.

The first café at 818 Bourke Street, Docklands

During 2007 (sometime pre August), Volteas told Cohen that Degani’s had been approached by a commercial estate agent about a retail store premises in the Ericcson building in the Docklands area, at 818 Bourke Street. Ericsson was a telecommunications multinational. The shop premises were in the foyer of that building. There were no other food businesses in the foyer. This building was brand new and it was Ericsson’s head office at a time when the Docklands area was being developed. The National Bank was nearby. Cohen inspected the premises. He was attracted. He was willing to proceed to invest. Thereafter, an arrangement was struck between Cohen and Volteas for an investment of $450 000 to set up the café.

The arrangements to set up the Docklands café were entirely unwritten and made in conversations between Volteas and Cohen. The evidence from both of them was not clear but I repeat my opening remarks about these witnesses.

It was not clear to me whether Cohen’s evidence was based upon an account of the discussion as between him and Volteas. The recurrent problem was his evidence was adduced on the basis of “what was the agreement?” The Court stated its concern about facts being properly elicited and had to wrestle with trying to understand in truth what was said, so as to understand the consensus reached. Despite all that, the gist of Cohen’s evidence was that to his mind the deal for the café at 818 Bourke Street worked this way:

(a) a company would be set up and a trust “slipped “under it;

(b) Cohen would set up the corporate structure and use Bendel to “facilitate” as accountant;

(c) originally Cohen would not be a director of that company because the company would be the lessee of the premises as well, and he did not wish to be a guarantor on the lease (but Volteas and Pezaros would);

(d) Cohen would organise a bank account and be a co-signatory;

(e) they would divide units 50/50; if there was 100 units the Cohen interests would hold 50 and the Volteas interests would own 50 but he Cohen would hold Volteas’ units in trust “until he was repaid his capital either from the sale of other businesses or from the ultimate sale of this particular business”;[20]
[20]T 133.

(f) they should not hang on to the business for more than a year because “after a year it starts deteriorating and what’s the point of spending $500 000 and not getting any money back?”[21]

(g) when the business gets sold “then I just get my money back with 50% of the net proceeds”;

(h) if the business was sold for less than his contribution “well then we both wear the loss.”[22]

[21]T 126.

[22]T 134.

Cohen’s evidence was they were contemplating not just one but a number of cafés:

I said “Because you are doing this deal, Paul you are now opening a whole lot of cafés. I have got some idle money. How about you open up as many cafés as you can, if we like the format and we will put the money up, we own the infrastructure, we will always own the infrastructure. You will never own that and you will repay may from the sale or from other cafés” – because the aim was to get three up and going so one would be completely debt free, the second one I could go to the bank, they would have an existing cash flow and away you go from there. That was the original origins of the deal.[23]

[23]T 125.

He went on to repeat that for the café at 818 Bourke Street, that the terms upon which he was to be repaid his $450 000 was that it would come from the sale of other cafés, that is from moneys they were getting in from other businesses they had, “or ultimately from the resale of this business, at the latest.”[24] To give such evidence was fundamentally contrary to his principal allegation that the loan was repayable on demand. Yet in his evidence, Cohen insisted it was. He said “… it was never capital. It was a loan”.[25] He persevered with his insistence that it was a loan payable on demand even though in cross-examination his evidence was contrary to such a proposition. I refer to this small passage of the cross-examination:

Counsel: He [Volteas] will say that the discussion was to the effect that the amount put in would be repaid after the sale of the business. Do you agree with that? --- If they didn’t have other monies coming in, yes.

Let me just clarify this with you, Mr Cohen. Is it your evidence that the deal was that if Mr Pezaros and Mr Volteas got money from other sources that they had to repay the loan? … They didn’t have to, but that was the arrangement we wanted and they said, “yeah, yeah, we’ll do that”.
Right. So there was no obligation on them to do it? No obligation, but it was a preference because if we got that money back we would then go and do another one a lot quicker if the track record and that wasn’t there.
But that was a matter for them? … Yes.[26]

[24]T 126.

[25]T 242.

[26]T 246.

He then adapted his evidence to say that to his mind, if proceeds were not available from the sale of other café businesses, then an agreement to pay him back from the sale of the joint venture business meant that the loan was repayable on demand.[27] Yet the case was not pleaded or conducted by counsel on that basis. The case was opened and closed explicitly on the basis that the absence of a date for repayment meant, at law, the loan was repayable on demand.
[27]T 281.

What then became apparent in the course of Cohen’s evidence was a view by him that the terms of this deal were as he was able to dictate them to suit his interests because he was providing the money. His evidence was:[28]

He [Volteas] never described the deal to me, I described it to him on the terms we would do the deal. Otherwise we weren’t going to do any deal. When we go to people with investing we tell them the way the deal will work and the appetite we have for it and how we will do it and if they want to follow suit, they can.

[28]T 243.

What became more troubling was the progression of that attitude to what Cohen says were the terms as discussed concerning ownership of the business. Cohen was saying this was not a 50/50 joint venture or at least not in the way that would be naturally understood. In the course of his cross-examination, evidence came out that in Cohen’s mind ― and therefore by agreement as he would have it ― he would own the business 100% until he was repaid his loan, at which time he would then handover 50% of unit trusts to Volteas. His evidence was:[29]
[29]T 230-231.

Mr Cohen, the evidence for the second defendant [Volteas] will be that there are perhaps up to 10 occasions when they set up cafés for what they call investors and that you are but a number of investors. Do you agree with that? --- I agree with that.
Right? --- But the cafés that we were picking had to be strategic and had a competitive advantage. When I started they didn’t have many cafés and we were picking and choosing which ones. …
We, the Cohen family? --- Yes. That’s we wanted, because the deal was whether they were there or not there, I didn’t give a shit. Pardon the language.
Careful --- sorry. I could move them on. We would still own the business together and I could install another operator. I was never concerned about them running it. We had our own expertise if I had to. That was not the proposition I wanted to do, but that was my back door because I never wanted to be high and dry.
Is it your evidence then Mr Cohen that you had at the back of your mind that once the café was set up you might continue to run it without the involvement of Mr Pezaros and Mr Volteas? --- That was not the intention when I started with them because the way I do business, if I start with them, I finish with them. So if they set up a café, I was quite happy for them to run it until it was moved on, but if from my parents point of view when I went to them, the deal was going to be that if there was a fight between us, we could always push them out and put someone in, but we jointly own it until it is sold.
Is that one of the reasons you wanted to own all the units, so you could push them out as the time came? --- If we didn’t agree on things we would at least have a say in how it is controlled because they were really running it and they were using their name.
And that was the commercial objective of you and your parents, was it? --- Yeah, the family. Not to push them out, but to basically have the ability to install another manager if we didn’t see eye to eye.

This is what Mr Cohen would have the Court accept as being the good commercial sense of the agreement made with Volteas for the café 818 Bourke Street:

(a) this was to be a 50/50 joint venture;

(b) Cohen would invest $450 000 for the café as the first of a number of cafés, presumably with an investment on the same terms on each;

(c) the corporation that operates the business would be under the directorship of Volteas and Pezaros, but not Cohen as he did not wish to be liable as a guarantor on the leasehold obligations of the company;

(d) as directors, Volteas and Pezaros would be liable as guarantors, would be responsible for the company’s affairs including responsibility to ensure there was no insolvent trading;

(e) Cohen’s contribution was not capital but it was a loan repayable on demand, (yet at trial said to be possibly repayable from proceeds of other sales of cafés, but at the latest from the sale of 818 Bourke Street);

(f) the Cohen interests would have 100% ownership of the company even though, paradoxically, “we jointly own it until it is sold”; and

(g) he was never really concerned about whether Volteas and Pezaros were running the café, but as owner of the business he had the ability at any time to remove Volteas and Pezaros and install someone else to run the café if they didn’t see eye to eye.

The evidence from Volteas, in substance, countenanced no such imperious terms for a joint venture. This was Volteas’ account of the agreement concerning the venture to establish the café at 818 Bourke Street:[30]
[30]T 355 ff.

(a) “That Abraham would put up the money and then when we sold the business we’d pay out whatever business expenses were. Obviously to the business, if there was any outstanding invoices etc. He would take back his investment and the profit would go 50/50”.

(b) Cohen said there would be no problem with that and “our job was just to make sure the shop was obviously built correctly and run the business. That was it.”

(c) There was no discussion of units and unit trusts.

(d) There was no discussion of a company called Lotteries Pty Ltd.

(e) There was no discussion of the terms of a loan being repayable on demand, and had there been, he would never have gone ahead because “I can’t be involved in a store and then have over my head any minute someone’s going to ring and they want the money back. You know what I mean, it just doesn’t make sense.”

(f) The money was to be put in by paying the builders on invoice and paying according to progress payments under the building contract.

(g) Cohen never identified any particular companies as advancing those funds as “Mr Cohen always insisted that the money was his, his father’s, his families, they don’t need any financing from anyone, they are very wealthy and they’re very astute investors”.

(h) Volteas was not at all concerned with knowing the precise identity of the person who was putting the money in from the Cohen family, and it was of no interest to him.

(i) There was discussion about who would set up the company and conduct the business and on that question “Abraham said, I’ll take care of that and I’ll use my accountant to set up the company. There wasn’t any argument from us, he was investing the money, we had no issue with that at all.”

(j) Volteas had left the setting up of the bank account to Cohen; he and Pezaros would run the day to day operation; the money would go into the account and the aim was always to sell the business.

(k) There was discussion about who would be directors of the company to run the business, and Volteas and Pezaros agreed they would be the directors.

(l) The company was to be set up and the shares would be 50/50 “just normal”, that is, 50% shareholding and 50% profits.

(m)Ordinarily, Degani’s prefer to set up the shelf company and appoint all the directors and attend to the corporate matters and do that through their own accountants “But if the investor wants to do it through their accountants we have – we don’t have an issue with that.”

(n) There was never a discussion about a unit trust, “it was just a company set up. That’s all it was. Just easy. Just going to be a basic one company.”

Thus the setting up or the documentation of the company structure to facilitate what can be called the “50/50 deal” was left to Cohen and his accountant Bendal. To carry out the venture at 818 Bourke Street, Cohen’s accountants obtained a company by the name of Checoma Pty Ltd. It was incorporated in June 2007. Its inaugural directors were Volteas and Pezaros, appointed on 8 August 2007. They each held 50% of the issued capital.

The next event was very significant. On 18 January 2008, Cohen purported to execute a trust deed on behalf of Checoma as trustee to establish the Checoma Unit Trust for the café at 818 Bourke Street. He purported to sign the deed, explicitly, under s 127(1) of the Corporations Act which in substance permits a company to execute a document without using the common seal if the document is signed by two directors of the company or a director and a secretary of the company. The deed is signed only by Cohen. But he was not then a director of Checoma.[31]
[31]He became a director on 12 May 2008 after the café at 818 Bourke Street had opened for trading.

The schedule to the Checoma trust deed stated that 100 units were allocated to unit holders. It named the plaintiff Lotteries Pty Ltd (as trustee of the Lotteries Unit Trust, and a company within the Cohen interests) as having 100 units allocated to it.[32] But the schedule said that 50 units were to be transferred or allocated to P G Checoma Pty Ltd (as trustee for the P G Checoma Unit Trust). P G Checoma was incorporated on 8 August 2007 under the directorship of Volteas and Pezaros.
[32]The Lotteries Unit Trust had been set up by deed dated 1 January 2008 under which Cohen held 75% of the units.

The precise words of the schedule to the trust deed are important:

*50 Units will be allocated to P G Checoma when the following occurs:
- Repayment of funds invested by Cohen family and its entities.
- Sale of Business and repayment of half of the net proceeds of 818 Bourke Street Café.

This does not give 50/50 ownership of the joint venture business. It gives the plaintiff all the units, and therefore complete control of the joint venture business venture and confers only a half share on repayment of the “funds”.

There is no evidence at all that Cohen sought or was given the authority of the directors, Volteas and Pezaros, to sign the trust deed on behalf of Checoma. He just did it. There is no evidence that such a step was ever discussed. As he was in joint venture with these men, there was no barrier to him simply getting Volteas and Pezaros as directors to sign the trust deed as directors. If that was what the parties had truly agreed it would have been such an easy matter to have the deed executed by the directors. A man of his banking experience would have understood the plain wrongfulness of signing a deed of trust on behalf of a company as a director when he was not, and the necessity for proper authority.

Volteas and Pezaros say, I think with conviction, they did not know about the deed until this litigation. Cohen says he gave the deed to his accountant Bendal after signing it, and he Cohen posted it to the Umbrella Enterprises post office box. There was no accompanying discussion with the directors. No covering correspondence. No checking whether it had been received. Cohen’s case at trial was that as he was responsible for setting things up, and as nothing was said about the deed by the others after he posted it, he should be therefore taken as having their authority as directors to sign it, or they as directors are estopped from denying his authority. The defendants deny ever receiving the deed by post or otherwise. They squarely plead that he lacked authority and the deed was of no effect. They say their relations are governed by the 50/50 agreement, and not the trust deed.

I make this opening finding: I cannot be satisfied that the Checoma trust deed was ever sent to Volteas and Pezaros. There is no objective or circumstantial evidence to support that he did, only Cohen’s say-so. The denials by Volteas and Pezaros were not tested. I also find that Cohen did not have the authority to execute the deed for Umbrella Enterprises. The schedule to the deed was not faithful to the 50/50 deal in that it deferred Volteas’ 50% ownership interest until payment of the “loan” (on demand). I shall return to this, as strikingly similar facts occurred in the deal that is the subject of the claim.

The fortunes of the café business at 818 Bourke Street are not directly relevant but they throw some forensic light and for completeness I shall make brief reference to what occurred. The café at 818 Bourke Street opened for trading in early 2008. It ran for about 12 months. Trading was said by Volteas to be “fantastic” and “gangbusters”. An offer of $795 000 or $860 000 or something in that order was received from a purchaser but that offer was rejected by Cohen as he thought the business was worth more, and wanted a price of $1 million. Volteas explained in Court that as time passed and the Docklands area came to be developed, more cafes were being built. The added competition together with the decline of Ericsson in the telephone market resulted in redundancies in the whole building with consequential dramatic declines in the Degani’s business there. The business was eventually sold for $630 000 in February 2010 reduced to $620 000 after selling agent’s commission. The evidence is imprecise but after payment of expenses, Cohen received at least his investment of $450 000 plus a further amount of $50 000.[33] There is no clear evidence if the Volteas interests got anything.
[33]T 367.

I need to go back in time. Soon after the opening of the café at 818 Bourke Street in mid-2008, another site came to the attention of Volteas at the World Trade Centre, the former site of the casino. We now come to the deal that is the subject matter of this proceeding.

The deal for the World Trade Centre café

Discussions between Cohen and Volteas about setting up a store at the World Trade Centre (‛WTC’) occurred from mid-2008 to about November 2008, and in February 2009. The parties deliberated and decided to proceed with building a full café site with an onsite kitchen to enable catering and supply of food to offsite customers as well. But this café carried a greater risk because the rent was markedly higher at $130 000 per annum. Pezaros explained that in the commercial dealings with the lessor, in exchange they were promised the exclusive right to be the only café in the foyer to be selling coffee and operating as a café.[34] That exclusivity was not given in writing. The non-fulfilment of that promise turned out ultimately to be the reason for the venture’s loss, and money spent by Volteas and Pezaros to meet the costs owing for action to enforce that promise enforce against the lessor was one item of expenditure said to have been unlawfully deducted from the proceeds of sale.
[34]T 503.

The decision to proceed with the WTC café was effectively in Cohen’s hands as he had to be happy as the investor. He played a part in the appraisal of the WTC site and making judgments whether this was a suitable site with a competitive edge, all with a view to realising a high price after 12 months of trading. Moreover and more importantly, Cohen and Volteas agreed - so I would find - that the terms upon which he was to be repaid his investment in this café were to be the exactly the same as existed in the deal for the café at 818 Bourke Street.[35] It would be same model. That included Cohen attending to the paperwork to set up the business and corporate structure to give effect to a 50/50 ownership and profit; using his accountant Bendal for that purpose, and arranging for a bank account for the business to which Cohen would be a co signatory.[36]
[35]T 146 (Cohen) and T 371 (Volteas) and T503 (Pezaros).
[36]T 372.

On 19 May 2009, Cohen executed on behalf of the first defendant a deed to establish the Umbrella Enterprises Unit Trust. Just as he had done with the Checoma trust deed, he purported to do so in accordance with s 127 of the Corporations Act 2001. He was never a director of the first defendant, nor did he hold any office. Nor is there any evidence that he sought or obtained the authority of Volteas and Pezaros to sign such a significant document. It is one thing to take the responsibility to prepare such a document; it is quite another to pretend to sign it as a director of the company. As had occurred at the Checoma Unit Trust, the schedule to the deed modified the simple 50/50 arrangement under this joint venture. The schedule said:

*75 Units are allocated to Checoma Pty Ltd ATFT Checoma Unit trust on the following basis:
25 Units held as bare trustee for Lotteries Pty Ltd ATFT Lotteries Unit Trust
50 Units held for PG Checoma Pty Ltd ATFT PG Checoma Unit trust or nominee until the earlier of (1) Repayment of funds invested by Cohen family entities or the sale of the café located at World Trade Centre.
- Sale of Business and half of the net proceeds are received.

So, in effect, according to this writing, the Cohen interests held complete ownership of the units in both trusts, at least until sale of the businesses and repayment of the funds invested. That is, there were 100 units, 25 of which were allocated to the plaintiff, his company. The remaining 75 units were allocated to Checoma as trustee of the Checoma Unit Trust. By this time, Cohen had become a co-director of Checoma (May 2008). Further, Lotteries Pty Ltd held 100% of the units in the Checoma Unit Trust, although 50% was held on trust for the Volteas interests according to the Checoma Trust Deed.

As with the Checoma trust deed, Cohen said he gave a copy to his accountant and sent another to Umbrella’s post office box. There is no evidence of any accompanying discussion or notification on such a significant document. The defendants say they say they did not know about the Umbrella trust deed (or the deed for the other café) until this litigation. They squarely plead that he Cohen lacked authority to sign the deed, and no trust was brought into existence and relations are governed by the undocumented joint venture agreement. Cohen says as nothing was said after he posted the deed, the defendants should be taken to have approved of his conduct, and are estopped from denying his authority.

The significance of this, as an issue, is twofold. First, it is a part of the question of the terms of the agreement; that is whether the interposition of a trading trust was part of the agreement. Secondly, it goes to the question of analysing the relationship; that is, whether the relationship is referrable to the institution of the unit trust and the fiduciary obligations that come with that.

The conduct of the joint venture

The means by which the funding to establish the café was administered were unwritten and ad hoc. Volteas explained that he would await the accumulation of tax invoices as fit out works were being conducted by shopfitters and builders, and then contact Cohen and ask for the money to make payments on those invoices. Cohen or perhaps his accountant would exercise some sort of scrutiny over the invoices or pre-scrutiny of quotes and if satisfied they were in order, would then arrange for the payment by sending a cheque to Volteas. Of course, the costs themselves would form part of the financial accounting for Umbrella Enterprises.

Was there a remedial constructive trust?

This part of the plaintiff’s claim was asserted but not developed. According to the further particulars under paragraph 25, the remedial constructive trust is alleged to have arisen on the basis of the defendant’s unconscionable conduct by reason of their misrepresentations about the agreement. Paragraph 20A pleads an estoppel, based upon the alleged representations made by Volteas in his own capacity and in his capacity as director concerning the terms of the agreement. But, as I have already held, the plaintiff’s representation case is not made out. So, there is nothing unconscionable about the defendants having disavowed the terms of the agreement as the plaintiffs allege, and in advancing by way of defence their version of the agreement, which I have preferred. The highest the position could be put is that the defendants contested the rights asserted by the plaintiff. That is incapable of forming the foundation of an estoppel.

Was there a charge created?

Mr Crennan accepts that on the case put forward by the plaintiff, that is, the case based on the existence of a debtor/creditor relationship, the only arguable legal vehicle to reflect the plaintiff’s interests, if any, in the proceeds of sale is the equitable charge (a hypothecation) but even then he says, in the events that occurred there was no definite ascertainable property.

A charge is a type of security.[107] In essence, an agreement that a debt will be paid out of a specific fund will create a charge over the fund. But it is absolutely necessary that the specific fund be identified; that there be definite ascertainable property.[108] In Swiss Bank Corporation v Lloyd’s Bank Ltd,[109] it was explained this way:

An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale …
It follows that whether a particular transaction gives rise to an equitable charge of this nature must depend upon the intention of the parties ascertained from what they have done in the then existing circumstances. The intention may be expressed or it may be inferred. If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties’ intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor …

[107]See generally Young, Croft and Smith, On Equity (2009) 659-652.

[108]See Sykes and Walker, The Law of Securities (5^th ed) at 196.

[109][1982] AC 584 [595] (per Buckley LJ) (affd [1982] AC 548).

As was submitted for Volteas, the facts supporting the existence of a charge are dubious. The normal obligations and liabilities of the joint venture vehicle had to be met from its own resources, and that included the proceeds of sale. Cohen accepted, as he had to, that Umbrella Enterprises had to meet its liabilities. It is inconsistent with the nature of a charge that the charged property is subject to meeting the other liabilities of the chargor. If the charge is subject to unidentified and unquantified other liabilities, there is no specific fund. This supports the view that the contract here was to pay the investment out of the proceeds, but those same proceeds being the asset of the company were also called upon to protect the company’s interests in dealing with the debt claim and the litigation.

I think another problem with the plaintiff’s argument is that the assertion and existence of an equitable interest in property does not therefore mean a trust relationship arises. It means equity will lend its aid to preserve the interest. But the making of a contract under which a charge is created in equity does not create a trustee/beneficiary relationship between the chargor and charge, necessarily at least. It gives a right to execute. That is:

The creation of an equitable charge makes the charged property liable, or specially appropriated, to the discharge of a debt or other obligation, and confers on the charge a right of realisation by judicial process (by the appointment of a receiver or judicial sale)”.[110]

[110]Young, Croft and Smith, On Equity, [9180].

On that basis, the plaintiff has gained the proceeds of sale ever since the Court’s orders on 30 November 2012 and it has the consent judgment.

This element of the plaintiff’s case, as I understand it, was to lay the groundwork to establish a trust relationship for the Barnes v Addy claim against Volteas. I find that a trust relationship was not so created.

The equitable assignment case

As I understood the plaintiff’s submission eventually, it was not pursuing an equitable charge as a source of fiduciary duty or as the basis of creating a trust. In the plaintiff’s closing written submissions, something new or different was advanced to that end. The plaintiff contended that the agreement to repay the loan, at the latest, from the proceeds of sale of the café amounted to an equitable assignment of the proceeds. That was submitted to be analogous to the Quistclose trust but “without the complication of the primary and secondary purpose”. Further written submissions posited the case as being “an express trust arising out of the equitable assignment of future property”.

The plaintiff’s submitted that its entitlement to be repaid from the proceeds of sale amounted to an equitable assignment of future property which was a fully-fledged equitable interest, one which created a trust of that property for its benefit. That submission was based on Palette Shoes Pty Ltd v Krohn.[111] That case concerned an issue whether a particular transaction was required to be registered under the Instruments Act as an assignment or transfer of future book debts. Cases turn on their facts. Palette Shoes was based on some peculiar facts under what was described in the judgment as a “carefully drawn agreement” having “very special character”.
[111](1937) 58 CLR 1.

Palette Shoes is a case about the law of assignment, more precisely the assignment of a future chose in action. An expectancy of money to be received in the future was not assignable at common law as the subject matter had no existence; but in equity if it is of such a nature and so described to be capable of being ascertained at such later time, and if it was supported by consideration, an agreement to assign binds the conscience of the assignor and binds the subject matter when it comes into existence: see Chesire and Fifoot Law of Contract[112] and Starke, Assignment of Choses in Action in Australia.[113]
[112](10^th ed) at [8.28].
[113]At p 17.

Dixon J considered the doctrine of equity which gives efficacy to an assignment of future debts. In a passage relied heavily on by the plaintiff, his Honour explained (omitting citations):

An assignment of future debts obtained its efficacy from the doctrines of equity. In Tailby v Official Receiver Lord Macnaghten stated the principles, which he described as well-known. “It has long been settled,” he said, “that future property, possibilities and expectancies are assignable in equity for value. The mode or form of assignment is absolutely immaterial provided the intention of the parties is clear. To effectuate the intention an assignment for value, in terms present and immediate, has always been regarded in equity as a contract binding on the conscience of the assignor and so binding on the subject matter of the contract when it comes into existence, if it is of such a nature and so described as to be capable of being ascertained and identified.” … In a later passage he says: “Long before Holroyd v Marshall was determined it was well settled that an assignment of future property for value operates in equity by way of agreement, binding the conscience of the assignor and so binding the property from the moment when the contract becomes capable of being performed, on the principle that equity considers as done that which ought to be done. … Again:- “The truth is that cases of equitable assignment or specific lien, where the consideration has passed, depend on the real meaning of the agreement between the parties. The difficulty, generally speaking, is to ascertain the true scope and effect of the agreement. When that is ascertained you have only to apply the principle that equity considers that done which ought to be done if that principle is applicable under the circumstances of the case.”[114]

[114](1937) 58 CLR 1 at 26.

Having stated those principles, Dixon J proceeded to apply to the facts of that case as follows:[115]

For the purpose of deciding in the present case whether the respondents’ title to the book debts depends upon what amounts to an assignment, it is important to notice the essential elements upon which Lord Macnaghten dwells. As the subject to be made over does not exist, the matter primarily rests in contract. Because value has been given on the one side, the conscience of the other party is bound when the subject comes into existence, that is, when, as is generally the case, the legal property vests in him. Because his conscience is bound in respect of a subject of property, equity fastens upon the property itself and makes him a trustee of the legal rights or ownership for the assignee. But, although the matter rests primarily in contract, the prospective right in property which the assignee obtains “is a higher right than the right to have specific performance of the contract,” and it may survive the assignor bankruptcy because it attaches without more eo instanti when the property arises and gives the assignee an equitable interest therein …

[115](1937) 58 CLR 1 at 26-7.

In looking at the real meaning of the agreement made between Cohen and Volteas, I do not think it right to analyse or characterise their agreement here as intending to effect an assignment. An assignment involves a disposition. It is in the nature of a transfer from assignor to assignee. The rudimentary 50/50 deal here, done with the mutuality that comes necessarily in the context of a joint venture undertaking, does not purport to involve an assignment of anything. I see the proceeds of sale as a corpus of funds for the joint venture, with an obligation to apply the fund in a particular manner or by priorities, and even then it was subject to the vexed question of ‘expenses’ and the wider question of the proceeds being an asset of the joint venture company. All things considered, the closest one gets to classification of the repayment arrangement amongst these two businessmen is to see this as a type of security, just as Cohen himself had said in evidence. Even then, such a classification has its legal defects because the charged asset is of a nature making it not capable of precise ascertainment. As was submitted for Volteas, the business was the only asset of Umbrella Enterprises, and the proceeds of sale were the realisation of the company’s only asset. But the fund was not definite or ascertained because of the very controversy about the use of company assets to meet the company’s liabilities including its alleged liability to Cohen who was suing on a debt payable on demand.

The plaintiff also relied on Swiss Bank Corporation v Lloyds,[116] That case too turned on its facts and the intentions to be imputed from financial documents to see if an equitable charge over proceeds of sale was intended to be granted to a lender. The House of Lords affirmed[117] the principle that an agreement between debtor and creditor that the debt shall be payable from a specific fund coming to the debtor will create a valid equitable charge over such funds. An agreement to apply a fund in a particular way will not, without more, amount to an equitable assignment, but may found an injunction to apply the fund in another way. In my view this case does not advance things for the plaintiff. This was not a debtor creditor relationship. In any case, at best the plaintiff obtains a security interest, over a fund that is subject to competing claims.
[116][1982] AC 584.
[117]At 613 (per Lord Wilberforce) adopting Palmer v Carey [1926] AC 703. 706-7.

I would hold as follows. There was an agreement that the Cohen interests were to be repaid their investment out of the proceeds. That was not a transfer or assignment to him of such a fund. At best the plaintiff might have an equitable interest in the fund, but that does therefore not make Umbrella or Volteas a fiduciary. It means the company could be restrained form dealing with the fund in a contrary manner (which is what happened with my injunctive orders). Even then, that interest was subject to other claims on the fund. To repeat the good example used in argument, the directors were bound to pay liabilities to the Australian Tax Office, which is not an expense of sale. How could it be said sensibly that the proceeds of sale were unable to be used or claimed by the ATO on the ground that the proceeds were the property of Cohen and untouchable? A similar argument was put for legal expenses of the claim against the landlord, and in this case. Volteas and Pezaros had fiduciary obligations to Umbrella to serve its interests. That included defending the company’s position in this case, and recovering compensation against the landlord.

That brings me to the Barnes v Addy claim.

Accessorial liability

This issue arises only if (a) Umbrella Enterprises was a trustee of the proceeds of sale; (b) the trust estate was the proceeds of sale from which the only deductions were the expenses of sale; and (c) the conduct of the trustee in directing the funds to the account of Marvel Gem was a breach of fiduciary duty owed to the plaintiff. With those pre-conditions, the case put against Volteas is that he acted as human agent of Umbrella Enterprises and is liable as accessory because he was complicit, indeed carried out as alter ago the fraudulent conduct of the trustee to the injury of the plaintiff as beneficiary. This is the second limb of Barnes v Addy.[118] It makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary: Farah Constructions v Say-Dee Pty Ltd.[119] The defendant will be accountable as constructive trustee; that is, liable in equity to make good the resulting loss. That is as much of the legal principle as needs be stated. Legal submissions did not go any further. Certainly, there was no debate from the plaintiff at least on the usual controversy about the requisite degree of knowledge or the mental element involved, or the proscriptive themes of the fiduciary principle.[120]
[118](1874) LR 9 Ch App 244 at 251-2.
[119](2007) 230 CLR 89 at 159 [160].
[120]See Chan v Zacharia (1984) 154 CLR 178.

One thing is clear to my mind about the putative trust estate. If a trust was to arise over the proceeds of sale, it could only arise or attach to the proceeds after the payment of expenses (whatever that meant or whatever they were) and, as Cohen conceded, after the discharge of liabilities. But I think the case cannot be decided in the circumstances by asking what the parties meant by ‛expenses’ or what that connotes. It goes beyond that. The determination of what the parties intended to mean by ‘expenses’ is affected by a number of things.

First, in this laconic deal, the evidence does not establish what truly was said about those things. It was more a case of what was assumed would be expenses ordinarily incurred in a successful profitable sale, where trading and other liabilities incurred in the ordinary course of business would be met from trading account. I was not sure, but the plaintiff’s case seemed to be that it should be assumed or construed to mean the expenses of the actual sale. The commercial severity of that view must have become evident to Cohen because in the course of his evidence he accepted that from the proceeds of sale, there also had to be deducted “any other taxes or whatever”, and he also accepted that Umbrella Enterprises, as the entity responsible for the carrying on of the enterprise, was entitled to use the sale funds to meet the debts and obligations it incurred in carrying out that business.[121]
[121]See T165 and 336.

Secondly, as the proceeds of sale represented a realisation of the business as the defendant’s only asset, then as was submitted the funds themselves form part of the trust estate. As the plaintiff’s case was that the first defendant was trustee under the unit trust deed or otherwise, then that necessarily also brings into play the trustee’s rights at laws for reimbursement and indemnity for liabilities that are incurred by the trustee in carrying out the trust or protecting the trust estate.

I think it becomes simplistic to pitch the case, as the plaintiff does, by saying that the analysis and questions of breach turn on what was agreed to be expenses. The whole question about what was meant by ‘expenses’ comes to be expanded or overtaken by the events that occurred, including the litigation. I think that the parties assumed or envisaged in striking their business relations that there would be a sale for a handsome profit, or at least for a profit that would exceed the amount of funding put in by Cohen and which would result in a share of the excess for both of them. The assumption was, that the successful trading of the café in 12 months would give sufficient revenue or cash flows to enable all liabilities to be met in the course of trading so that by the time of sale, apart from selling expenses and maybe unavoidables such as taxation and trading liabilities, there would be no other expenses in contemplation. If the business was trading successfully, things like trading liabilities and taxes and outgoings would have been be met out of trading revenue.

What happened in this case was wholly contrary to assumptions and expectations. Trading revenue could not meet debts and liabilities; not even rent or tax. It was a sale at a loss, with a vehement dispute about the validity of the unit trust and whether it was a debt payable on demand. All of this in the context of acrimony between the parties and Volteas and Pezaros having to defend the interests of Umbrella Enterprises in the face of hostile litigation by Cohen and bearing in mind that they had fiduciary responsibilities to Umbrella Enterprises as directors and were liable or possibly liable for its insolvent trading. And, amidst this, there is no assertion that Volteas and Pezaros were somehow responsible in the management of the business or for the loss on the distress sale.

My view of the situation that the parties obtained is this: proceeds of sale ‘less expenses’ assumes no other problems or liabilities such as the many that arose here. A different or supervening legal state of affairs arose.The lawfulness of the actual application of the weekly proceeds by Volteas then comes to be considered by reference to the position he was in as director, his duties as director to the company, and the predicament of the company being sued by a joint venturer for what was asserted (speciously as I have found) to be a large debt payable on demand.

I will accept that the irregular diversion of funds into the Marvel Gem account as something not in the ordinary course of business attracts a natural sense calling for a good explanation as a matter of commercial probity. But great care has to be taken before making a finding of fraudulent and dishonest conduct especially in the circumstances that prevailed here. The Court must have regard, carefully, to all of the circumstances that actuated Volteas to do what he did. For one thing, there was no mystery in what he did. That is, the fact of the weekly instalments from the purchaser was known, and the fact that they were not going into the first defendant’s account was not being concealed. The foundation of the plaintiff’s allegation of fraud is akin to saying the facts speak for themselves: the moneys went into a bank account of a deregistered company once used for another Degani’s business and from which monthly liabilities on an asset purchase agreement were debited.

What was the state of affairs by which I am to judge the presence of fraud and dishonesty? The redirection of moneys to the Marvel Gem account occurred at a time when Cohen’s lawyers said they would replace Umbrella Enterprises as the trustee. They then demanded the entire amount advanced to Umbrella Enterprises as a debt repayable on demand. They then commenced legal proceedings. Cohen was putting a precipitate end to the venture and asserting liability. There is simply no doubt that the amount claimed simply could not be met by Umbrella Enterprises. It was dependent on revenue of $1500 per week from the purchaser and there were not only outstanding liabilities to the tax office but also prospective liabilities including having to defend the claim brought against the company. What is more, the relationship had broken down to the point where Volteas did not trust Cohen, particularly as Cohen had access to the first defendant’s funds by a cheque book. Added to that is a legal consideration. As directors, Volteas and Pezaros as directors owed fiduciary obligations to that company and, that would include, protecting the company’s assets and ensuring that its liabilities could be met and possibly pursing claims for any wrongdoing against the company.

The plaintiff submitted that if Volteas regarded himself as having acted honestly and reasonably then it was incumbent on him to seek relief under section 67 of the Trustee Act if he wished to be excused for a breach of trust. Or, it was submitted, he ought to have sought the Court’s advice or directions as trustee in an administration action under order 54 of the Rules of Court. In my view that is implausible. It assumes, controversially, a trust relationship. Volteas was not purporting to act as trustee. He was looking to protect the interests of the joint venture company in the face of attack and the prospect of instant insolvency and all that entails.

Thus, it seemed to me that the plaintiff’s case on fraudulent conduct was based upon the mere fact that moneys were directed into the Marvel Gem account, and that there were withdrawals from that account, and of itself and without more that makes a case that Volteas assisted a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee.

Volteas gave evidence to explain his conduct and his motives. In essence, he explained his distrust of Cohen, particularly after his discovery of the withdrawal of approximately $35 000 and $25 000 from the company’s account to which I have already made reference. He acknowledged that he knew the moneys belonged to Umbrella Enterprises and recognised that the monies diverted would have to be returned to Umbrella Enterprises. It was a case he said of keeping the money away from Cohen, meeting liabilities and defending the legal proceedings. For that purpose, he sought legal advice which was to the effect that the moneys were assets of the company and it was legitimate for the company to use its assets to properly defend its interests.

As events turned out, the dispute arising out of Cohen’s claim intensified. Real issues arose about the validity of the trust deed that Cohen signed. Real issues arose about the identity of the contracting parties. Real issues arose about the nature of the relationship between the parties, whether it be in contract or in trust. Allegations of fraud and misleading and deceptive conduct and unconscionable conduct were being made. Even before then, the distress sale led Volteas and Pezaros to bring claims against the landlord seeking to get compensation for the harm done to the value of the business and the loss of profit.

There was no cross‑examination of Volteas to make the Court think that his evidence about the handling of the proceeds was false. He was not discredited. The plaintiff asks me to look at what he did and conclude that his evidence was disingenuous, despite the objective truth of the dispute and the situation at hand. Volteas gave evidence as to the payment of creditors. He proved the relevant invoices upon which invoices were put into evidence. He was not challenged or cross-examined on any of this. It was not put to him that the amounts paid under these invoices were not debts of the first defendant or were not paid. It seemed to me as if the plaintiff was content to simply rely upon the diversion of funds as the basis for the Court to conclude, without more, there was a fraudulent and dishonest breach of trust. But that fact alone is not enough to make a finding of fraudulent and dishonest conduct.

Volteas went to his lawyers. The plaintiff dispelled the significance of Volteas having acted on legal advice saying that it is no defence to a breach of trust. Reference was made to what was said by Bowen LJ in Re Beddoe to which I add my emphasis:[122]

The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust—a proposition in which the word “properly” means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in the idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him.

[122](1893) 1 Ch 557 at 562.

Can it be said that the legal advice here, in the circumstances that prevailed, was wrong headed and perverse? The legal advice was unwritten and the solicitor was not called. Even so, the very question whether the proceeds of sale as an asset of the company could be used to meet liabilities and to meet the costs of fighting this proceeding and making a claim against the landlord is the very question for determination in this case. The legal advice, presumably based on the facts as given by Volteas and Pezaros in court, was that the proceeds were an asset of the company, and the directors were entitled to defend or advance the company’s interests in the pressing circumstances. That cannot be said to be wrong headed and perverse.

I would hold that, assuming contrary to all my previous findings, that there was a trust and fiduciary relationship between the parties, the plaintiff has not made out a case that Volteas assisted the company as trustee with knowledge of a dishonest and fraudulent design on the part of the trustee. The design was to defend itself against the plaintiff’s claims which I have found are not sustainable.

Was there a loss to the trust estate?

I do not think the plaintiff has made out a case to show that there was any loss to the trust estate or suffered by the plaintiff as a beneficiary, if there was a trust relationship and a fraudulent and dishonest breach of it.

The evidence given by Volteas as supported and enhanced by the reconciliation done by Hage as accountant was not really tested. The plaintiff sought to disparage the reconciliation statement as an exercise done after the even; that is, after the alleged breach. It was self-evidently. But that does not impeach its evidentiary worth to demonstrate that the net result was a rather small amount of money being payable to Umbrella Enterprises. The plaintiff did not seek as part of this long case to engage in any sort of testing of the figures or its own investigations into the proceeds that had been diverted. It put no figures to the Court. Ultimately it asked for an inquiry.

The starting point for an understanding of the figures is paragraph 41 of Volteas’ amended defence.[123] That was in response to the plaintiff’s allegation that in breach of the charge or the trust, Umbrella Enterprise failed to neglect to account to the plaintiff for receipt of a deposit of $1000 from the purchaser and weekly payments of $1500 between May 2011 and October 2012. The defence admitted that $107 500 had been received by 30 September 2012 and that those weekly payments of $1500 continued. But flow to the Umbrella Enterprises ceased as a result by the Court’s orders made on 30 November 2012. The defence then went on to say that the funds received were applied to meet the following expenses:
[123]Filed 18 March 2013.

(a) legal costs of the sale of the business of $9468.20;

(b) costs of action against landlord, including legal costs of $18 483.96;

(c) accounting fees of business of $4896;

(d) tax liabilities of $13 285.20;

(e) legal costs of this proceeding paid prior to 30 September 2012 of $37 709.42;

(f) legal costs on account prior to 30 September 2012 of $38 000; and

(g) continuing legal expenses of the first defendant.

In the course of submissions, the plaintiff conceded items (a) and (c). Item (b) was not conceded on the ground that it was an expense incurred after the sale took place. The tax liability in item (d) was conceded as proper but resisted on the basis that it was not paid from sale proceeds. The legal costs of the sale were opposed on the grounds that they were not expenses and in any event occurred well after the sale.

The accounting of these expenses was left to Hage who as I have said produced a reconciliation statement based upon tax invoices. As I have also remarked, the conduct of the plaintiff’s case was such that there was not much by way of impeachment of the evidence given by Volteas about payments, or the reliability of the invoices, or the payments made and the reliability of the reconciliation statement prepared by Hage. The whole question about the legitimacy of the application of any of the funds, I think, became tackled in a way that left the matter up in the air. In the end, plaintiff’s counsel seemed to be asking, assuming a breach was proven, for an inquiry to be ordered into the receipt and disposal of funds and expenses paid and, I suppose, conducting a cost accounting exercise according to expenses of sale.

In the course of submissions, I pressed counsel in a search for a discrimen to determine whether costs and expenses were properly incurred. For the plaintiff, the discrimen was purely to ask whether it was an expense of sale which carried with it the conclusion that any expense after the sale was illegitimate. I do not accept such a test based strictly on timing. Expenses can arise after sale. Counsel for Volteas posited a test of reasonableness in the circumstances.

I think the search for a discrimen in the events that occurred can be no more exacting than to say that the costs and expenses had to be reasonably incurred to properly meet the company’s liabilities. I conceive of it as an adaptation of the test for a trustee incurring expenses properly incurred for the benefit of the trust—a proposition in which the word “properly” means reasonably as well as honestly incurred. The liabilities include not only ordinary trading liabilities or legal responsibilities such as taxation liabilities, but also liabilities to properly defend its interests including, so I would find, liabilities for legal expenses to defend the company from a claim which the directors could well have honestly regarded as unjustified or wrong, as I have found it to be.

I will accept that the evidence about payments made to meet expenses or liabilities was not crystal clear. But, broadly speaking, so much of this case can be described in the same way. There is sufficient to accept that in the urgency and in the heat of the dispute, Volteas and Pezaros were making payments on behalf of Umbrella Enterprises from one or other of their companies or from one or other of their bank accounts, and that payments to their lawyers for the litigation were likewise coming from such sources. That was the case for example with the payment of the tax liability.[124]
[124]See T 425.

For the purposes of legal determination, of course, the Court cannot proceed by speculation or guesswork. There must be a rational foundation for findings. I think there is a rational basis from the exercise done by Hage based on the invoices and investigations to conclude that the expenses were incurred for the purposes of meeting the company’s liabilities, and that expenditure on the legal action against the landlord and the legal costs of this proceeding were in the circumstances both properly and reasonably incurred to deal with the fallout of the distress sale. Or at least, they have not been shown to be improper or unreasonable or dishonest. The best the plaintiff could do to arouse a sense of impropriety was to say that the monies went into Marvel Gem to pay the liabilities of another business. It looks that way, but as I have said, Volteas was not really cross-examined on this. The plaintiff seemed to be content to say that if it appeared that way, that was sufficient to show a breach of trust and subsequent explanations in court were irrelevant.

I think such an approach overlooked the purpose of the exercise undertaken by Hage, which was to demonstrate that amidst the controversy whether there was a trust relationship or not and whether there was a breach or not, and whatever was redirected from the proceeds of sale, the outcome is that one way or another Volteas and Pezaros paid by one means or another the liabilities of the company from funds otherwise not available in the company. The amounts involved are not great. The net result was, on Hage’s calculations, an amount of $1064 which Volteas has paid.

Thus, even assuming contrary to my conclusions that this was a relationship of trust or a fiduciary relationship, and that the remedy calls for a restoration of a diminution of the trust estate, after taking into account liabilities paid by a trustee who has a right of indemnity from the trust estate, the outcome is that the trust estate has been restored.

I would hold that there is no occasion for an inquiry or account taking. There is sufficient before the Court for me to conclude that the proceeds of sale up to September 2012 have been basically, but in the circumstances adequately, accounted for in the reconciliation. There was no residual shortfall that has not already been repaid.

Epilogue

There were high expectations for the venture to establish and sell the WTC café. The assumption was a profitable sale after 12 months trading. That was the basis for this laconic deal. Things went wrong through no fault of Volteas. It was a venture in which both parties have lost.

For someone who contended that this venture was set up through corporations so that there was no personal involvement, the plaintiff has sought in this proceeding to find any means to impose a personal liability on Volteas in equity. It was all based on an alleged agreement under which the plaintiff’s contribution was said to be a debt payable on demand. That was commercially unthinkable.

The plaintiff never put its case that the venture was a fiduciary collaboration. It has not established a trust or fiduciary relationship. Cohen signed a trust deed without any authority to do so, having configured the terms of the unit holding to give him complete ownership to enable him to remove Umbrella. That was unfaithful to the 50/50 deal.

At best, there was a question whether the terms of the arrangement created an equitable charge, a security interest.

The plaintiff has sought to make a case for unconscionable conduct and estoppel, all of which I have rejected because the terms of the agreement as alleged were highly controversial.

Volteas as director expended much money within his resources to meet the litigation and other liabilities including defending the company and suing the landlord. Those expenses were incurred for reasonable purposes.

After taking into account moneys paid by the purchaser and spent by Volteas, there has been a reconciliation to show no loss to the (putative) trust estate.

When I have careful regard to all of the circumstances, I cannot make a finding that Volteas acted dishonestly and fraudulently.

The plaintiff’s legal relations were with the first defendant, Umbrella Enterprises. It has a consent judgment against Umbrella Enterprises for the full amount of the ‘debt’ with interest and costs. On its application to the Court 18 months after the writ was filed, the plaintiff obtained a freezing order for the weekly proceeds. Since then, the plaintiff has received the proceeds.

In my judgment the plaintiff’s claim has not been made out.

The plaintiff’s claim will be dismissed.

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[2014] VSC 605

4 December 2014