Malek Fahd Islamic School Limited v The Australian Federation of Islamic Councils Inc

[2017] NSWSC 1712

Supreme Court

New South Wales

• Summary available

Medium Neutral Citation:	Malek Fahd Islamic School Limited v The Australian Federation of Islamic Councils Inc [2017] NSWSC 1712
Hearing dates:	8, 9, 15, 16, 20 and 21 November 2017
Decision date:	12 December 2017
Jurisdiction:	Equity
Before:	Ball J
Decision:	See paragraphs [132] to [134] of this judgment
Catchwords:	CIVIL PROCEDURE – Pleadings – No application to amend made – Whether plaintiff should be permitted to advance case that goes beyond pleadings CIVIL PROCEDURE – Pleadings – Pleading material facts – Whether case argued raises new material factual issues not pleaded – Whether unconscionability case pleaded with sufficient precision EQUITY – Equitable remedies – Equitable compensation – Where plaintiff beneficiary entered into interest free loan with defendant fiduciary – Duty not to procure plaintiff to enter into uncommercial agreement – Whether it was in interests of plaintiff to enter loan – Whether defendant breached fiduciary duties in being party to the loan – Whether plaintiff entitled to claim interest on loan EQUITY – Equitable remedies – Equitable compensation – Where defendant breached fiduciary obligations in not offering plaintiff a discount for prepayment of rent – Whether plaintiff entitled to compensation in respect of prepayment EQUITY – Fiduciary duties – Scope – Whether fiduciary had duty to acquire property for beneficiary but chose to acquire for own benefit – Whether fiduciary prevented from acquiring property which beneficiary had interest in acquiring EQUITY – Trusts and trustees – Constructive trust – Whether defendant obtained benefit by reason of breach of fiduciary duty – Whether remedial constructive trust should be imposed – Whether gain on disposal of property held on constructive trust EQUITY – Trusts and trustees – Constructive trust – Institutional constructive trust – Whether defendant used funds belonging to plaintiff to acquire property – Whether loan funds should be characterised as properly belonging to lender or borrower – Whether overpayment of rent properly characterised as belonging to tenant or landlord LIMITATION OF ACTIONS – General – Statute of limitation – Limitation Act 1969 (NSW) – Postponement of the bar – Whether equity retains residual discretion not to apply bar – Whether residual discretion arises in context of breach of fiduciary duty – Whether unconscionable conduct defeats limitation bar
Legislation Cited:	Australian Consumer Law s 20 Corporations Act 2001 (Cth) ss 9, 180-183, 1317K Limitation Act 1969 (NSW) s 47 Trade Practices Act 1974 (Cth) s 51AA(1)
Cases Cited:	Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; [2003] HCA 18 Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER 721 Cassegrain v Gerard Cassegrain & Co Pty Limited (2013) 305 ALR 648; [2013] NSWCA 454 Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36 Gerace v Auzhair Supplies Pty Ltd (In Liq) (2014) 87 NSWLR 435; [2014] NSWCA 181 Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; [1984] HCA 64 In the Matter of Auzhair Supplies Pty Ltd (in liq) (2013) 272 FLR 304; [2013] NSWSC 1 Issa v Issa [2015] NSWSC 112 Shiu Shing Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462
Category:	Principal judgment
Parties:	Malek Fahd Islamic School Limited (ACN 000 038 648) (Plaintiff) The Australian Federation of Islamic Councils Inc (ABN 37 002 757 155) (Defendant)
Representation:	Counsel: KC Rees SC with T Hollo and R Mansted (Plaintiff) MR Elliott SC with N Dewan (Defendant)   Solicitors: Hoffmann & Koops (Plaintiff) McCabe Lawyers (Defendant)
File Number(s):	2016/280690
Publication restriction:	None

Judgment

Introduction

1. The plaintiff, Malek Fahd Islamic School Limited (MFIS), was established in 1989 by the defendant, The Australian Federation of Islamic Councils Inc (AFIC), to operate schools in New South Wales. Currently, MFIS operates three schools located at 405 Waterloo Road, Greenacre (the Greenacre Property), 612 Hoxton Park Road, Hoxton Park (the Hoxton Park Property) and 20 Mungerie Road, Beaumont Hills (the Beaumont Hills Property) and has approximately 2,300 students. AFIC is the registered proprietor of each of the three properties.

2. From the time MFIS was established until March 2016, AFIC had the right to appoint all or a majority of its board members. It was granted a number of other rights by the Memorandum and Articles of Association of MFIS, which varied over time. AFIC’s right to appoint all or a majority of the board of MFIS and the other rights it had under MFIS’s Memorandum and Articles of Association enabled it to exercise a considerable degree of control over the affairs of MFIS.

3. AFIC admits, for the purposes of these proceedings, that the directors of MFIS were accustomed to act in accordance with AFIC’s wishes with the consequence that, at all relevant times, AFIC was a director of MFIS within the meaning of s 9 of the Corporations Act 2001 (Cth) and in that capacity owed MFIS a number of statutory and fiduciary duties. MFIS also claims that in view of the degree of control that AFIC exercised over MFIS it owed MFIS fiduciary duties independently of the operation of s 9 of the Corporations Act. However, given the concession made by AFIC, it is difficult to see how that claim adds anything to the concession.

4. In these proceedings, MFIS seeks equitable relief against AFIC including declarations concerning the ownership of the Hoxton Park Property and the Beaumont Hills Property, equitable damages and ancillary relief in respect of a number of transactions entered into by it with AFIC during the period that AFIC exercised the control that it did.

5. AFIC has filed a cross-claim in the proceedings claiming rent said to be owing by MFIS in respect of the Greenacre Property and the Hoxton Park Property.

6. Shortly before the hearing commenced, AFIC served a document entitled “Open Statement by the Defendant” in which AFIC made a number of admissions and offered to consent to the court making certain orders against it. Those orders were made on the second day of the hearing. It will be necessary to refer to the Open Statement and the orders in more detail. For present purposes, it is sufficient to observe that those documents have substantially narrowed the issues between the parties.

7. One other point should be made by way of preliminary observation. MFIS is heavily dependent on Commonwealth and State funding to finance the operation of the schools. The transactions about which complaint is made in these proceedings came to the attention of the relevant authorities in 2011. Following investigation, those authorities concluded that MFIS had at least for a period of time operated for profit with the consequence that it was not entitled to the funding it had received and that further funding should be suspended or discontinued. Those decisions generated considerable publicity and a number of court proceedings, not all of which have been finally resolved. MFIS contends that the outcome of this case may affect the rights of MFIS to obtain funding in the future or the future viability of the schools operated by MFIS. For that reason, the case was brought on urgently. It needs to be borne in mind, however, that the outcomes of those other cases and the merits or otherwise of MFIS’s entitlement to continued funding are not relevant to the issues to be determined in this case, which turn on the relationship between MFIS and AFIC, the duties that gave rise to, the extent to which AFIC breached those duties and the remedies the court should grant in respect of those breaches.

8. Before seeking to identify the issues that remain between the parties, it is necessary to give a brief history of the relevant dealings between them.

Background

Purchase of the Greenacre Property

9. On 29 April 1983, Mr Ibrahim Attallah, then the President of AFIC, and Mr Yasser Nasser, then on the executive committee of AFIC, purchased the Greenacre Property, which at the time was vacant land, for $2,400,000. The purchase was financed by a gift of $2,000,000 from King Khalid of Saudi Arabia and a loan from Westpac which was secured by a mortgage over the land. The Greenacre Property was transferred to AFIC in 1985.

10. In September 1989, AFIC established MFIS, a company limited by guarantee, to operate a school on the Greenacre Property. The school commenced operations in October 1989 with 85 students in demountable buildings. Its first Principal was Dr Intaj Ali, who remained in that position until 2012.

11. In 1989, AFIC provided MFIS with two interest free loans, one of which (described in MFIS’s financial statements as “AFIC Loan Number 01”) was for $49,775 and the other of which (“AFIC Loan Number 02”) was for $500,000 for administrative and site development costs. Those loans were fully repaid by MFIS by 2003.

12. MFIS constructed improvements on the Greenacre Property funded by bank loans, Government grants and its own funds. The loans were secured by a guarantee from AFIC and a mortgage over the Greenacre Property. MFIS commenced paying AFIC rent in 1990 initially in the amount of $24,000 per annum, although a formal lease was not signed until August 1992. The lease was for a term of 10 years commencing on 1 January 1990, with an option exercisable by MFIS for a further 10 years. The rent was increased during the term of the lease and by December 1999 it was $75,000 per annum. MFIS also paid AFIC fees for accounting management and cleaning services.

13. The term of the lease expired without MFIS exercising the option.

Purchase of the Condell Park Property

14. By 2000, the school was looking to acquire an additional campus. In May 2000, Mr Farouk Hadid, a local real estate agent who had been appointed to MFIS’s board, raised the possibility of acquiring a property at 17 Eldridge Road, Condell Park (the Condell Park Property). On 20 June 2000, Mr Amjad Mehboob, the Chief Executive Officer of AFIC and the Building Project Manager of MFIS, and Dr Intaj Ali attended the auction for the property and were the successful bidders at a purchase price of $7,100,000. The deposit was paid by a cheque drawn on an account held by MFIS. However, the purchaser was stated to be AFIC.

15. Following exchange, there was debate between Dr Mohammad Tahir, a member of the board of MFIS, and representatives of AFIC concerning whether the property should be bought by MFIS or AFIC. Ultimately, the members of the board of MFIS met on 2 July 2000 and resolved to support AFIC’s purchase of the property and ratified the borrowing by AFIC of $710,000 to pay the deposit for the property. Dr Tahir resigned from the board in protest.

16. It is not entirely clear why the decision was made for the property to be bought by AFIC rather than MFIS. The reasons are not recorded in the minutes of the meeting of AFIC’s executive committee on 1 July 2000 or of the MFIS board meeting the following day, although the minutes of the executive committee meeting do record:

Br Haset Sali (legal adviser) said that there is no other option but the property to be purchased in AFIC’s name. Br Abbas concurred with this opinion and stated that it was AFIC’s loan guarantees that have been used to develop MFIS. He considered that there was nothing legally or morally wrong in MFIS paying a commercial rent so it can develop schools throughout Australia. Br Abbas said that MFIS can afford a commercial rent.

Why there was no other option, however, is not explained. Other contemporaneous correspondence suggests that AFIC was concerned that if the property was bought by MFIS, AFIC might ultimately lose control of it. So, for example, in a letter dated 21 July 2000 that Mr Abbas Ahmed, the then president of AFIC, wrote to members of the executive committee, among others, he said, among other things:

AFIC purchased the property in the name of AFIC to ensure that the Muslim community of Australia will always own the property and not lose it to some groups or individuals as has happened to the property AFIC bought for King Khalid Islamic School in Victoria some years ago.

17. The purchase of the Condell Park Property was settled on 1 August 2000. The balance of the purchase price was funded by a loan that AFIC had obtained from Westpac. That loan was secured by a mortgage over the property and a guarantee from MFIS.

18. On 21 October 2000, AFIC’s executive committee resolved to charge MFIS rent of $75,000 per month (that is, $900,000 per annum) from 1 August 2000 for the Greenacre Property. The following day, MFIS board members met and agreed to pay rent at that rate from that date. The contemporaneous documents suggest that the rent was increased to give AFIC sufficient funds to meet its obligations under the Westpac loan. It is common ground that the appropriate basis on which to determine the rent for the Greenacre Property was by reference to its unimproved value. AFIC had obtained a valuation from Colliers Jardine dated 7 September 2000 assessing the then current market rent for the Greenacre Property on that basis at $400,000 per annum.

19. By January 2001, AFIC had received a refund of $710,000 in respect of GST paid on the purchase price of the Condell Park Property. On 13 January 2001, AFIC’s executive committee resolved to treat that amount together with the deposit of $710,000 as a loan to it from MFIS. The loan was recorded in the financial records of AFIC and MFIS. However, no formal loan agreement was signed by the parties and no interest was paid by AFIC.

20. The Condell Park Property proved to be unsuitable for a school and in December 2003 it was sold for $10,350,000 plus GST. After paying out the mortgage, the proceeds of sale were paid into an investment account in the name of AFIC. It is agreed between the parties’ accounting experts that, after taking account of holding and development costs, the gain on disposal of the property was $956,712. Despite the sale, AFIC retained the $1,420,000 that it had characterised as a loan from MFIS, apparently in the expectation that it would be applied towards the purchase of an alternative property.

Increase in rent for the Greenacre Property

21. At a meeting of AFIC held on 19 and 20 March 2005, it was resolved to accept a valuation that AFIC had obtained from National Property Valuers (NSW) Pty Ltd and to increase the rent for the Greenacre Property to $1,500,000 per annum with effect from 1 January 2005. That valuation was prepared taking account of the improvements on the land.

22. The board of MFIS did not accept the proposed increase in rent and, on 4 June 2005, it resolved to agree “on the lease payment of $1.1M p.a.”, although later, on 25 March 2006, the board of MFIS resolved that the rent would remain at $900,000 per annum. The issue of rent remained unresolved for the next 2 years. During that time, there was an upheaval at AFIC following an adverse report in The Weekend Australian on 25 March 2006 headed “Islamic body using school to milk funds”. In July 2006, AFIC’s bank accounts were frozen for a period of time during which MFIS made payments on AFIC’s behalf instead of paying rent and in September 2006 AFIC went into receivership. The receivership came to an end in February 2007 following election of a new executive committee.

23. On 25 June 2007, MFIS obtained a valuation from Chesterton International of the market rent for the Greenacre Property on an unimproved basis of $916,000 per annum plus GST. On 5 August 2007, the MFIS board resolved to pay AFIC rent at that rate from 1 April 2007, which MFIS did.

Purchase of the Hoxton Park Property

24. Both AFIC and MFIS continued to look for an additional site for a new school. At a meeting of the board of MFIS held on 5 August 2007, the board resolved to form a sub-committee to find a new site. One of the members of that sub-committee was Mr Hafez Malas. At that time, Mr Malas was the Chairman of MFIS and a member of AFIC’s executive committee. At an AFIC executive committee meeting held on 4 November 2007 Mr Malas reported that he had been looking for land in the western suburbs of Sydney for a school and recommended that AFIC negotiate to buy the Hoxton Park Property at a cost of $4 million to $5 million. The executive committee accepted that recommendation.

25. On 20 January 2008, AFIC agreed with the vendor to buy the Hoxton Park Property for $4,970,000, with the intention of redeveloping the site as a school. There was an internal dispute within AFIC over whether the property should be purchased by MFIS or AFIC and how to finance the acquisition. The dispute was similar to the dispute that had arisen in relation to the Condell Park Property. Some, such as Dr Ali, thought that MFIS should buy the property and that if it lent money to AFIC to enable it to do so, that would threaten its not-for-profit status. Others, such as Mr Mehboob, thought that having regard to what AFIC had contributed to MFIS in the past and the need to prevent the property from slipping from AFIC’s control, the property should be bought by AFIC using MFIS’s funds.

26. Ultimately, on 30 March 2008, MFIS’s board resolved that it would pay AFIC rent for the Greenacre Property of $1,300,000 per annum plus GST in advance for a period of 5 years from 1 January 2008 “to enable AFIC to purchase the property at 612 Hoxton Park Road, Hoxton Park, for a campus for [MFIS]” and would pay rent in respect of the Hoxton Park Property of $500,000 per annum plus GST from the date of settlement. It appears that the rent for the Hoxton Park Property was fixed at 10 percent of the purchase price paid for the land. There is some evidence that AFIC had received advice from local valuers and real estate agents that it was reasonable and commercial to fix rent on that basis. However, AFIC did not obtain a valuation of the current market rent for the property.

27. AFIC invoiced MFIS for the 5 years rent in advance on the Greenacre Property. That invoice was paid on 31 March 2008. The total sum paid was $6,965,273.35. At about that time, AFIC paid the deposit in respect of the purchase of the Hoxton Park Property. Settlement occurred on 14 May 2008.

Subsequent events

28. On 15 April 2008, Mr Richard Wood of Amalgamated Property Valuers Pty Ltd provided AFIC with a report on the fair rent for the Greenacre Property excluding improvements. Mr Wood initially expressed the opinion that a fair rental for the property on that basis was $325,000 per annum excluding GST. Following discussions with Mr Ikebal Patel, who was then the president of AFIC, Mr Wood prepared an amended valuation on the basis that the property was leased to MFIS for a period of 50 to 99 years. On that basis, he expressed the view that a fair rent was $977,500, which he rounded up to $1,000,000.

29. In August 2008, MFIS signed leases for the Greenacre Property and the Hoxton Park Property. Both leases were expressed to be for 10 years with a 10 year option. The rent payable in respect of the Greenacre Property was $1,300,000 plus GST. The rent payable in respect of the Hoxton Park Property was $500,000 plus GST. Each lease contained a rent review clause providing for annual increases in the rent each year by reference to increases in the CPI and increases every three years by reference to the market. Subsequently, the two leases were amended to provide for a term of 25 years commencing on 1 January 2008 with an option of a further 25 years. The leases in their amended forms were registered on 6 May 2009.

30. On 23 October 2008, AFIC requested MFIS to pay rent in advance for the Hoxton Park Property for five years “from October 2008 to October 2013” at the rate of $500,000 per annum, making a total, including GST, of $2,750,000. MFIS paid that amount on 29 October 2008.

31. On 6 July 2009, AFIC issued an invoice to MFIS for $2,790,758 plus GST which was expressed to be for “Repayment of Financial Assistance from AFIC for below market rental charged during the period 2004 to 2009”. MFIS paid that amount on 21 August 2009. At about the same time, a variation of the Greenacre Property lease was executed. That variation provided for an increase in the rent to $1,500,000 per annum backdated from January 2004. That variation was registered on 31 August 2009.

28. On 22 April 2010, AFIC issued MFIS with a further invoice for $2,200,000 plus GST of $220,000 expressed to be for “Project Management, Accounting & Administration Service”. MFIS paid that invoice on 3 May 2010.

29. In December 2010, AFIC purchased the Beaumont Hills Property which had been the St Gregory’s Armenian School.

30. On 7 January 2011, AFIC sent MFIS an executed lease in respect of the Beaumont Hills Property together with an invoice for 9 years rent in advance from 2011 to 2020 including CPI adjustments of 3 percent per annum totalling $9,346,377 plus GST. MFIS paid that invoice on 10 January 2011.

31. On 11 January 2011, MFIS entered into a Services Agreement with AFIC under which MFIS agreed to pay AFIC $959,800 plus GST per year for the provision of insurance, consultancy services, electricity, gas and telephone, and accounting and information technology services. On or around 16 October 2012, AFIC and MFIS entered into a Deed of Termination terminating the Services Agreement with effect from 31 December 2011. Under the terms of that Deed AFIC agreed within 60 days to refund to MFIS the amount MFIS had paid under the Services Agreement, totalling $530,474.81 including GST. That amount had not been paid at the commencement of the hearing.

32. A rent review to market value has not occurred under the leases in respect of the Greenacre Property or the Hoxton Park Property. MFIS has paid rent for the Greenacre Property of $2,818,181.82 since 1 January 2013. It has not paid any rent in respect of the Hoxton Park Property since 1 October 2013.

33. During the period 23 November 2015 to 25 February 2016, AFIC loaned MFIS a total amount of $791,047.22 in respect of building costs incurred by MFIS. AFIC claims that amount together with an administration fee of $23,731.42, making a total of $814,778.64.

34. On 20 July 2016, MFIS demanded repayment of the loan of $1.42 million. That amount had not been paid at the commencement of the hearing.

The issues

39. By its Open Statement, AFIC offered, without admission:

1. To repay to MFIS the $1.42 million loan together with interest on that amount from the date the demand for its repayment was made (that is, from 20 July 2016);

2. To pay to MFIS the amount of $530,474.81 due under the Deed of Termination dated 16 October 2012 together with interest on that amount since 15 December 2012;

3. To refund to MFIS the payment of $2.2 million made by MFIS on 3 May 2010 together with interest on that amount from that date;

4. To refund to MFIS the payment of $2,790,758 in respect of arrears of rent made by MFIS on 21 August 2009 together with interest on that amount from that date;

5. To pay to MFIS the difference between the rent paid on the Greenacre Property and the Hoxton Park Property since 2013 and the rent that would have been paid if the rent had been set as the current market rent (on an unimproved basis) at the relevant review dates (AFIC denies that any such amount is payable);

6. To vary the leases in respect of the Greenacre Property and the Hoxton Park Property to make it clear that any rent review to market rent is to be determined on an unimproved basis; and

7. To transfer the Beaumont Hills Property to MFIS.

40. As I have said, on the second day of the hearing the court made orders to give effect to this offer, although the orders in relation to the payment of money were stayed pending determination of any right of set-off in respect of AFIC’s cross-claim. At the same time, the court also ordered that MFIS repay to AFIC the loan of $814,778.64 plus interest from 16 June 2017.

41. As a result, the following issues remain to be determined:

1. Whether AFIC holds the gain on disposal of the Condell Park Property on trust for MFIS and whether AFIC is liable to account for the interest that is said to have been paid by MFIS on the Westpac loan in respect of that property (which totals $2,699,142) together with interest on that amount;

2. Whether MFIS is entitled to recover interest from AFIC in respect of the $1.42 million loan;

3. Whether AFIC holds the Hoxton Park Property on trust for MFIS;

4. Whether MFIS is entitled to recover equitable compensation to the extent that it overpaid rent in respect of the Greenacre Property for the period 1 January 2008 to 31 December 2012;

5. Whether MFIS is entitled to recover equitable compensation to the extent that it overpaid rent in respect of the Hoxton Park Property for the period October 2008 to October 2013;

6. What rent, if any, MFIS is obliged to pay AFIC in respect of the Greenacre Property and the Hoxton Park Property; and

7. What amount, if any, AFIC is entitled to recover in respect of its cross-claim.

The trust claim in respect of the Condell Park Property proceeds

42. The claim that the gain on the disposal of the Condell Park Property was held on trust for MFIS was put in final submissions on two bases. The first (in the nature of a remedial constructive trust) is that AFIC acquired the Condell Park Property in breach of the fiduciary duties it owed to MFIS and therefore held the profits it earned on trust for MFIS. In this respect, the case is said to be analogous to cases such as Boardman v Phipps [1967] 2 AC 46; [1966] 3 All ER 721 and Chan v Zacharia (1984) 154 CLR 178; [1984] HCA 36. In the former case, a solicitor acting for a trust was held liable to account for the profit he earned on the sale of shares he had acquired (in conjunction with one of the beneficiaries of the trust) using information he had gained while acting for the trust and in circumstances where there was a possible conflict because, if the trustees had required advice on whether to acquire the shares for the trust, they may have sought that advice from the solicitor. The Court held that the solicitor had breached his fiduciary duties either by making a personal profit from his fiduciary position or by putting his personal interests ahead of the fiduciary duties he owed to the trustees.

43. In the latter case, Dr Chan, a partner in a medical practice that had been dissolved, renewed the lease of premises occupied by the medical practice in his own name before the partnership had been wound-up rather than joining with the other partner in exercising, for the benefit of the partnership, an option to extend the lease for two years. The lease was valuable and as a result of Dr Chan’s action it no longer formed part of the partnership assets to be dealt with in accordance with the partnership agreement. The High Court (Murphy J dissenting) affirmed the decision of the Full Court of the Supreme Court of South Australia holding that Dr Chan held the lease on trust for the partnership. Notwithstanding the dissolution of the partnership, Dr Chan continued to owe fiduciary duties at least in his capacity as trustee of the partnership assets. He breached those duties by preferring his own interests over those of the partnership.

44. In Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41; [1984] HCA 64 at 107-8 Mason J explained the principle underlying these decisions in the following terms:

… the fiduciary cannot be permitted to retain a profit or benefit which he has obtained by reason of his breach of fiduciary duty. … A fiduciary is liable to account for a profit or benefit if it was obtained (1) in circumstances where there was a conflict, or possible conflict of interest and duty, or (2) by reason of the fiduciary position or by reason of the fiduciary taking advantage of opportunity or knowledge which he derived in consequence of his occupation of the fiduciary position ... Any profit or benefit obtained by a fiduciary in either of the two situations already described is held by him as a constructive trustee. … Neither principle nor authority provide any support for the proposition that relief by way of constructive trust is available only in the case where a profit or benefit obtained by the fiduciary was one which it was an incident of his duty to obtain for the person to whom he owed the fiduciary duty. Once it is established that the fiduciary is liable to account for a profit or benefit which he has obtained there can be no objection to his being held to account as a constructive trustee of that profit or benefit. It can make no difference that it was not his duty to obtain the profit or benefit for the person to whom the duty was owed. What is important is that the advantage has accrued to him in breach of his fiduciary duty or by his misuse of his fiduciary position. The consequence is that he must account for it and in equity the appropriate remedy is by means of a constructive trust. [Citations omitted]

45. The second way in which the claim is put (in the nature of an institutional constructive trust) is that AFIC held the profit earned on the sale of the Condell Park Property on trust for MFIS because it used funds belonging to MFIS to acquire that property for itself. In this respect, the case is said to be analogous to cases such as Cassegrain v Gerard Cassegrain & Co Pty Limited [2013] (2013) 305 ALR 648; NSWCA 454 and Shiu Shing Sze Tu v Lowe (2014) 89 NSWLR 317; [2014] NSWCA 462. In the former case, the director of a company, in breach of his fiduciary duties, credited his loan account with the company with the sum of $4.25 million and then drew on that account for personal and other expenses and to pay the costs of acquiring a farming property. The claim ultimately made against the director was for equitable compensation because he had transferred the farming property to his wife. However, the Court of Appeal took the view that before that transfer the director held the property on a constructive trust for the company. In the latter case, a partner in breach of his fiduciary duties used partnership funds to buy a number of properties in his own name. The Court of Appeal held that the partner’s estate held the properties on trust for the partnership.

46. The first way in which MFIS now puts its case is not supported by the pleadings. The relevant pleading is contained in paras 25 to 31 of the Amended Commercial List Statement. Paragraph 25 pleads that AFIC asked MFIS to fund the purchase of the Condell Park Property by (a) advancing an interest free loan of $1,420,000 to pay the deposit and GST (defined in the pleading as “the Loan”); (b) guaranteeing the Westpac loan; and (c) increasing the rent payable in respect of the Greenacre Property. Paragraph 26 pleads that it was not in MFIS’s interest but was in AFIC’s interest to buy the Condell Park Property using MFIS’s funds. Paragraph 27 pleads why the Loan was not in MFIS’s interests (undocumented, unsecured, no interest and no repayment date) and para 28 pleads why the increase in rent for the Greenacre Property was not in MFIS’s interests (no lease, improvements on the property funded by MFIS, no valuation and the option to renew the lease was not exercised). Paragraph 29 pleads that MFIS advanced the Loan. Paragraph 30 pleads that the conduct pleaded in paras 25 to 29 involved a breach of fiduciary duty by AFIC. Paragraph 31 pleads that by reason of the matters pleaded in paras 25 to 30, AFIC held the Condell Park Property on trust for MFIS. There is no allegation of a conflict of interest and duty or that AFIC had used its position as a fiduciary to gain a benefit for itself.

47. Superficially, the pleading appears to be consistent with the second way in which MFIS now puts its case. The allegation in the pleading appears to be that AFIC used MFIS’s funds to buy the Condell Park Property. However, that allegation is not consistent with other paragraphs of the pleading. So, for example, the Loan is expressed to be a loan. In the hands of AFIC, it was AFIC’s money. The rent is described as the payment of rent. It is difficult to see why rent in the hands of AFIC is not its money. It is not even actually alleged that the rent was excessive, let alone that the excessive rent somehow or another was not AFIC’s money.

48. No application to amend was made and no reason was advanced for why MFIS should be permitted to advance a case that goes beyond the pleading. For that reason alone, this aspect of MFIS’s case should be rejected.

49. The pleading aside, in my opinion, this aspect of MFIS’s case fails on its merits. The scope of AFIC’s fiduciary duty depends on the precise relationship between it and MFIS. As Mason J explained in Hospital Products at 102 “The categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the circumstances which generate the relationship”. In the present case, for example, it could not be a breach of AFIC’s fiduciary duties to MFIS to exercise any of the rights it had under MFIS’s Memorandum and Articles of Association.

50. It is an over-simplification to say that in this case AFIC obtained knowledge of the sale of the Condell Park Property as a consequence of its fiduciary position and appropriated that opportunity to itself. Rather, this is a case where AFIC had established MFIS and it and MFIS had co-operated over a substantial period of time to develop a school in Sydney for the Muslim community. It was open to AFIC to acquire properties other than the Greenacre Property with the intention of making those properties available to MFIS to enable it to expand, and it was not a breach of its fiduciary duty for it to do so. It is true that MFIS and AFIC first became aware of the Condell Park Property because it was raised by one of the directors of MFIS at an MFIS board meeting. But I do not think that that fact alone meant that it would be a breach of fiduciary duty for AFIC to acquire the property. Rather, the property having been identified, the question faced by AFIC and MFIS was whether it was better for the property to be owned by MFIS or by AFIC and how that was to be done.

51. Ultimately, both AFIC and MFIS agreed that the property should be acquired by AFIC. Mr Mehboob and Dr Ali attended the auction. MFIS submits that Mr Mehboob had a conflict of interest, since it was both in AFIC and MFIS’s interest to acquire the property. However, even accepting that, it was Dr Ali who signed the cheque for the deposit and after the auction instructed Tress Cocks & Maddox to prepare a contract for the purchase of the property in the name of AFIC. Dr Ali’s actions were ratified at a board meeting of MFIS on 2 July 2000. There is no evidence that the members of the board were pressured by AFIC at that time. Dr Tahir, who was Chairman of the board of MFIS at the time, was against AFIC acquiring the property. But that opposition does not mean that AFIC breached its fiduciary duties. Rather, AFIC thought that it would be preferable for it to acquire the Condell Park Property and MFIS accepted that conclusion.

52. For similar reasons, I do not think that it would be correct to characterise the position as one in which AFIC had a duty to acquire the property for MFIS but chose to acquire it for its own benefit. It had no duty to see that the land on which any future school was to be built was owned by MFIS. It had its own interests in seeing that it continued to own the land on which schools for the Muslim community were built. In a paper dated 26 June 2000 prepared for the AFIC executive committee, Mr Mehboob explained those interests in these terms:

There is no doubt that it is more desirable for AFIC and AFIC related properties to be held directly by AFIC. Properties held by individual AFIC Schools will create proliferation of groups within AFIC that own property and have no or little legal link with each other. All properties held in AFIC’s name will create security, uniformity, unity, and provide strength in financial terms for future large projects to be managed. Each school on its own will have limitations. AFIC’s strength [through its unified approach] has enabled it to acquire a number of properties, substantial loans and indeed this current purchase which is the highest ever in the history of Muslims in this country. All this has been possible only because of pooling together of the resources and talents through AFIC as a vehicle. After all, what is AFIC? It is the personification of the Muslim Ummah in this country. Such steps will enhance and strengthen AFIC’s standing and image as a national organization of Australian Muslims at all levels – within the Muslim community and the wider Australian community. This will auger well for Islam in Australia.

MFIS had been established by AFIC to further those interests. Having regard to their history and relationship, it could not be the case that having established MFIS, AFIC was required to subordinate its own interests to those of MFIS when it came to the acquisition of further property.

53. Of course, AFIC did owe other duties to MFIS. One was a duty not to cause MFIS to breach any obligation MFIS had in respect of government funding. Another was as a director of MFIS not to procure that MFIS pay an excessive amount of rent to AFIC or enter into some other uncommercial agreement with AFIC. But those duties did not extend to refraining from buying property to be used as a school, even if it was also in MFIS’s interest to buy that property.

54. The second way in which MFIS puts its case suffers from equal difficulties. As I have said, the underlying assumption is that the money used to acquire the Condell Park Property was MFIS’s money.

55. There are two components. One is the loan of $710,000 to pay the deposit. The other is the increase in rent that is said to have been used to pay interest on the Westpac mortgage.

56. For reasons which are not clear from the evidence, AFIC chose to treat the refund of GST as money belonging to MFIS and its retention of that money as a loan to it, with the result that MFIS was treated as having lent AFIC $1.42 million in connection with the acquisition of the Condell Park Property. As I have said, that amount is pleaded as a loan from MFIS to AFIC. In AFIC’s hands, it was AFIC’s money; and it is not now open for MFIS to assert otherwise. Moreover, it was treated as a loan by the parties. Consequently, to the extent that money was used to acquire the Condell Park Property, the property was acquired with funds belonging to AFIC.

57. It is not seriously disputed that AFIC was entitled to charge market rent for the Greenacre Property. It is pleaded that AFIC breached its duty to MFIS in some way because MFIS did not exercise the option granted by the lease signed in August 1992. However, that lease provided for increases in rent to market value. Consequently, even if there was a breach, it does not affect the proposition that AFIC was entitled to charge MFIS market rent. According to the report from Colliers Jardine dated 7 September 2000 the then current market rent for the Greenacre Property was $400,000 per annum. It is not suggested that AFIC was not entitled to rely on that valuation in increasing the rent. It follows that AFIC was entitled to increase rent to that amount.

58. There are, therefore, two difficulties with MFIS’s contention that its money was used to pay the Westpac mortgage.

59. First, on 21 October 2000, AFIC’s executive committee resolved to charge MFIS rent of $900,000 per annum from 1 August 2000 and MFIS agreed to do so the following day. Rent paid by MFIS to AFIC is AFIC’s money in its hands. The character of that payment cannot be affected by the fact that MFIS agreed to pay too much rent or that that agreement was brought about by a breach of fiduciary duty on the part of AFIC. The payment still has the character of rent. It could not, therefore, be treated as MFIS’s money.

60. Second, on any view $400,000 per annum did belong to AFIC. MFIS has not attempted to demonstrate that that amount taken together with AFIC’s other income at the time was insufficient to pay interest on the Westpac mortgage.

61. There is a suggestion in the way in which MFIS puts its case that it is sufficient for a constructive trust to arise over property if MFIS can establish that AFIC breached its fiduciary duty in connection with the acquisition of the property. Put like this, MFIS’s case appears to be that AFIC breached its fiduciary duties in connection with the acquisition of the Condell Park Property by increasing rent in respect of the Greenacre Property so that it could afford to repay the Westpac mortgage and by procuring MFIS to pay the deposit. That was sufficient to give rise to a constructive trust over the property. However, to the extent that MFIS puts its case in that way, it is not consistent with authority. A constructive trust will be imposed, or found to exist, over the profits and benefits that a fiduciary has obtained as a consequence of his or her breach of fiduciary duty: see Hospital Products at 107-108 per Mason J. It is not suggested that AFIC breached its fiduciary duties by obtaining a loan from MFIS. It is only suggested that it did so because of the terms of that loan. It is not suggested that AFIC breached its fiduciary duties by increasing the rent for the Greenacre Property. Relevantly, it is only said that it did so because it charged rent that was not market rent. There is no evidence that the profit earned on the sale of the Condell Park Property was earned because AFIC failed to pay interest on the loan from MFIS or charged rent in excess of market rent.

53. AFIC also raises a limitation defence to a claim based on a constructive trust relying on s 47 of the Limitation Act 1969 (NSW). That section provides for a 12 year limitation period in respect of certain causes of action to recover trust property or money on account of a wrongful distribution of trust property. MFIS accepts that the claim is statute barred but submits that equity retains a residual discretion not to apply a statute of limitations, relying on the decision of White J in Issa v Issa [2015] NSWSC 112 at [66]. It will be necessary to say more about the application of limitation periods in other contexts. It is sufficient to make two points in the present one. The first is that, having regard to the conclusions that I have reached, the question does not arise. The second is that the discretion on which MFIS relies is a discretion not to apply a statute of limitations in respect of a claim at law to an equitable claim by analogy. That is the discretion with which White J was concerned in the passage relied on by MFIS. To the extent that discretion exists, it is not a discretion to ignore a statutory limitation period which in its terms applies to a claim in respect of a trust, as s 47 does.

The claim that AFIC must account for interest paid to Westpac

63. There are three difficulties with this claim.

64. First, it appears to proceed on the basis that AFIC used money belonging to MFIS to pay the amounts due under the mortgage to Westpac. That involves characterising excessive rent paid by MFIS as money belonging to MFIS. As I have explained, that characterisation is incorrect.

65. Second, the claim assumes that amounts charged by AFIC in excess of market rent were used to pay the Westpac mortgage. However, MFIS has not sought to prove that that is the case. MFIS does refer to documents that suggest that the rent was increased to enable AFIC to pay amounts due in respect of the Westpac mortgage. In particular, the minutes of the meeting of the board of MFIS held on 22 October 2000 record that “Dr Abbas Ahmed, referring to the acquisition of the new school site in Bankstown and the earlier decision to review the rental payment by MFIS to AFIC to enable payment of Bank loan, requested that the Board to consider the matter urgently….”, following which the board agreed to an increase in the rent. However, those documents do not establish that it was necessary for rent to be increased beyond market rent in order to enable AFIC to meet the loan repayments. At most, they only establish that some increase was necessary.

66. Third, the claim involves double counting. MFIS would not be entitled to recover the profit earned on the sale of the Condell Park Property on the basis that the property was bought with its money and at the same time seek to recover the money said to have been used to acquire the property.

The claim for interest on the $1.42 million loan

67. The claim for interest on the $1.42 million loan is a claim for equitable compensation for breach of fiduciary duty. The relevant breach presumably is that as a director of MFIS, AFIC participated in a decision of the board to provide AFIC with an interest free loan in circumstances where it was not in MFIS’s interests to provide AFIC with a loan on those terms.

68. There can be no question that when MFIS wrote a cheque for the deposit for the Condell Park Property, it lent that sum to AFIC. It appears that AFIC treated the refund of GST as a loan from MFIS because at least some people within AFIC characterised the arrangements in relation to the Condell Park Property as involving AFIC buying the property in its name using funds from MFIS. Consequently, to the extent that AFIC received a refund, the refund was treated as belonging to MFIS. As I have sought to explain, that was a mischaracterisation of what happened.

69. It is difficult to see in those circumstances why the component of the $1.42 million which relates to the refund of GST should bear interest. That amount was a benefit that AFIC chose, for whatever reason, to confer on MFIS in the form of a loan. There is no reason why that benefit should carry with it an obligation to pay interest simply because it was characterised as a loan.

70. As to the loan of $710,000, AFIC submits that there are three reasons why interest is not recoverable on the loan. First, it submits that there was no breach of duty by AFIC. It submits that in the past AFIC had made interest free loans to MFIS. There was a close relationship between AFIC and MFIS. There were cultural reasons for not charging interest. Consequently, it was not a breach of fiduciary duty for AFIC, as a director of MFIS, to be party to a decision that the loan of the deposit be interest free. Second, AFIC submits that MFIS has not established that it suffered any loss as a consequence of any breach of fiduciary duty because it has not established that the other directors of MFIS, sitting alone, would have reached a different conclusion on the terms of the loan. Third, it submits that the claim for interest is statute barred in any event.

71. I do not accept the first two submissions. However, I accept the third.

72. It is undoubtedly correct that there was a close relationship between MFIS and AFIC. A director of MFIS was entitled to take that relationship into account in determining what was in the best interests of MFIS. However, it is important to bear in mind that the interests of MFIS were not the same as the interests of AFIC. The interests of MFIS were to further the interests of the school, which were set out in more detail in the Memorandum of Association. They included the following:

(a)   to register and manage Malek Fahd Islamic School which is being established by Australian Federation of Islamic Councils Inc (AFIC), as a pioneering private non-profitmaking institution to provide a balanced general education in an Islamic atmosphere to Muslim children in the state of New South Wales. The said school is being set up with a generous donation from the Government of Saudi Arabia.

(b)   to provide a centre of educational activities which will produce good citizens imbued with Islamic spiritual values.

(c)   to provide for the pupils, staff and employees of the School, conveniences, necessaries and other facilities.

73. The interests of AFIC were set out in its Constitution. They included “To establish and maintain schools and kindergartens with an Islamic atmosphere, and assist State Councils and Societies to establish and maintain mosques and Islamic libraries” (cl 7(1)(ee)). Consistently with its objects, AFIC might well make gifts to MFIS. But the converse is not true. It is difficult to see how it would be in the interests of MFIS to make gifts to AFIC.

74. Normally, if there were financial dealings between AFIC and MFIS which benefitted AFIC, it is to be expected that MFIS would only agree to those financial dealings if they occurred on commercial terms. Otherwise, MFIS would be using its financial resources for the benefit of AFIC rather than for the benefit of the school. A director consistently with his or her fiduciary duties could not agree to that. In general, AFIC accepts that to be the case. So, for example, it accepts that it, exercising its powers as a director of MFIS, could not bring about a situation in which MFIS agreed to pay more than market rent for properties it leased from AFIC. To pay more than a market rent would involve conferring a benefit on AFIC at the expense of MFIS. It is difficult to see why the same reasoning does not apply to a loan by MFIS to AFIC. If the loan is on commercial terms and MFIS has no immediate use for the funds, MFIS obtains a benefit from the loan. The same is not true if the loan is interest free.

75. In certain exceptional circumstances, it may be in MFIS’s interest to make an interest free loan to AFIC. That may occur, for example, where there is a course of dealing between MFIS and AFIC where each makes the other interest free loans for limited periods of time or where the loan is made in circumstances where MFIS expects that it will require money from AFIC in the future and will seek to do so on interest free terms. It may also occur where the loan was needed to enable AFIC to buy a property for the school which MFIS was not in a position to buy itself. However, there is no evidence that those considerations were motivating AFIC or the other directors of MFIS at the time the loan of $710,000 was made or ratified. Rather, it appears that AFIC thought that the Condell Park Property should be bought in its name but MFIS should fund that acquisition through the payment of the deposit and the payment of increased rent so that AFIC could retain control of the property and that the other board members of MFIS (with the exception of Dr Tahir) went along with that. In my opinion, it was not in MFIS’s interest to provide AFIC with an interest free loan for that purpose.

76. In final submissions AFIC sought to demonstrate that there would have been difficulties in MFIS acquiring the property itself because it could not use recurrent funding to do so and there is a question whether it would have been able to obtain funding for the capital costs. There are, however, two difficulties with that submission. The first is that, even accepting AFIC’s analysis, it does not demonstrate that MFIS was incapable of borrowing the funds necessary to acquire the property and servicing that loan. The second is that there is no evidence that that was a factor considered by AFIC or the board of MFIS at the time.

77. On the other hand, I accept that any claim for interest is now statute barred. The relevant breach of duty occurred in 2001 when the loan was advanced on interest free terms. The claims of breach of fiduciary duty made by MFIS are analogous to claims that could be made for breach of the duties imposed by ss 180-183 of the Corporations Act. The limitation period in respect of claims of that type should be applied by analogy. As Brereton J said in In the Matter of Auzhair Supplies Pty Ltd (in liq) 272 FLR 304; [2013] NSWSC 1 at [79] the analogy between the statutory causes of action and the equitable claim is “as close an analogy as one can conceive”. The limitation period in respect of the statutory causes of action is six years commencing from the time of the contravention: s 1317K of the Corporations Act. Applying that limitation period, the claim for equitable compensation for the breach of fiduciary duty arising from the agreement to an interest free loan is plainly statute barred.

78. MFIS took issue with the conclusion of the previous paragraph, relying on the decision of the majority of the Court of Appeal (Basten and Macfarlan JJA; Beazley P dissenting on the point) in Cassegrain. A brief summary of the facts of that case is set out earlier. The claim ultimately made against the director was a claim for equitable compensation. Nonetheless, the Court of Appeal held that the analogous limitation period was the period set out in s 47 of the Limitation Act. As Basten JA explained at [193]:

As s 47 applies not merely to an action to recover trust property but also one for a remedy of the conversion of the property and to recover money on account of a wrongful distribution of trust property, it has application in the present case against Claude Cassegrain [the director of the company who had misappropriated the company’s funds] as a constructive trustee of the property upon transfer.

However, that reasoning has no application in the present context. In Cassegrain, the claim was a claim for equitable compensation in respect of property that the director had held on constructive trust. In the present case, the claim for interest is simply a claim for equitable compensation arising from a breach of fiduciary duty.

79. MFIS submits that the court retains a discretion not to apply the limitation period by analogy, that that discretion can be exercised whenever reliance on the limitation period would be unconscionable and that the court should exercise that discretion in this case. In making that submission, MFIS relies on the decision of the Court of Appeal in Gerace v Auzhair Supplies Pty Ltd (2014) 87 NSWLR 435; [2014] NSWCA 181. In that case, Meagher JA (with whom Beazley P and Emmett JA agreed) said (at [70]):

The authorities referred to above, and in particular R v McNeil [(1922) 31 CLR 76], show that in purely equitable proceedings, where there is a corresponding remedy at law in respect of the same matter and that remedy is the subject of a statutory bar, equity will apply the bar by analogy unless there exists a ground which justifies it’s not doing so because reliance by the defendant on the statute would in the circumstances be unconscionable. They do not support the proposition that equity retains any broader discretion whether to apply the bar. The description of such a ground, or the conduct giving rise to or constituting it, as unconscionable or unconscientious leaves to be identified the principles according to which equity justifies that conclusion: Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63; 208 CLR 199 at [45] (Gleeson CJ) and Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; 214 CLR 51 at [41]-[42] (Gummow and Hayne JJ).

80. MFIS submitted that this passage must be interpreted as saying that any conduct that can be regarded as unconscionable provides a ground for not applying a limitation period by analogy; and that the question whether conduct is unconscionable is to be decided in the same way as the question whether conduct is unconscionable for the purposes of s 51AA(1) of the Trade Practices Act 1974 (Cth). That section (now replaced by s 20 of the Australian Consumer Law) provided that a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law from time to time of the States and Territories. It was the provision considered by the High Court in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; [2003] HCA 18.

81. In my opinion, the approach taken by MFIS involves a misreading of the quoted passage, with the result that it has stated the exception to the application of a limitation period by analogy too broadly. All Meagher JA is saying in the quoted passage is that, having concluded that unconscionability provided a basis for not applying a statutory bar by analogy, that left open the question of what conduct would be characterised as unconscionable conduct in that context. That is made clear by the reference to paras [41]-[42] of the judgment of Gummow and Hayne JJ in CG Berbatis, where their Honours emphasise the breadth of the term “unconscionable” and the contexts in which it is used rather than consider its precise meaning in any particular context. In later paragraphs of his judgment, Meagher JA considers what is meant by “unconscionable” in the present context. He concludes (at [75]):

The grounds on which equity declines to permit a defendant to rely upon a statutory bar by analogy include where there has been fraudulent concealment, which requires either fraudulent conduct as an element of the right of action or conduct consisting of active concealment of a right of action that does not include fraud as an element… The equitable doctrine is not confined to common law fraud or deceit and requires a consciousness on the part of the defendant that what is being done is wrong or that to take advantage of a particular situation involves wrongdoing: see Beaman v A.R.T.S. Ltd [1949] 1 KB 550 at 559-560 (per Lord Greene MR); Kitchen v Royal Air Force Association [1958] 1 WLR 563 at 572-573 (per Lord Evershed MR); Applegate v Moss [1971] 1 QB 406 at 413 (per Lord Denning MR); King v Victor Parsons & Co [1973] 1 WLR 29 at 33-34 (per Lord Denning MR).

82. One insuperable difficulty with MFIS’s reliance on unconscionable conduct as a bar to AFIC’s limitation defence is that the point was not pleaded and an application to file a reply raising the point was only made during the course of the hearing. Leave should not be given to MFIS to raise the point now.

83. If MFIS wished to raise the point, it had to do so specifically. AFIC pleaded in its Commercial List Response that the claim was statute barred. If MFIS wished to contend that the bar did not operate because it would be unconscionable to apply the bar on the facts of this case, it would have had to have pleaded and proved those facts. Absent a reply pleading those facts, AFIC would be caught by surprise.

84. MFIS sought to answer the conclusion of the previous paragraph by pointing out that the Commercial List was not a court of strict pleading. It also contended that AFIC could not be taken by surprise by the defence since it depended on AFIC’s control of MFIS, which has always been an issue in the case. It was MFIS’s case that AFIC had acted unconscionably because its control of MFIS had prevented MFIS from bringing any claim against AFIC for breach of fiduciary duties.

85. MFIS is correct to say that the Commercial List is not a court of strict pleading. However, it is a list where the parties are expected through List Statements, List Responses and Replies, if necessary, to identify the real issues in dispute between the parties so that, among other things, a party is not taken by surprise. As I have said, it was for MFIS to identify the facts which made it unconscionable for AFIC to rely on its pleaded defence. Unless it did so, AFIC would be taken by surprise.

86. It is no answer to say that MFIS simply relies on the facts already raised by it in support of its case that AFIC owed MFIS fiduciary duties in relation to a number of transactions between it and MFIS because of the degree of control it exercised over MFIS. As AFIC points out, it took very significant forensic decisions shortly before the trial commenced by making the admissions set out in the Defendant’s Open Statement. At the time it took those decisions, it had no means of knowing that MFIS intended to rely on the control said to be exercised by AFIC over it as a means of defeating any limitation defence. It took the forensic decisions it did on that basis. It would be prejudiced if MFIS were permitted now to raise an issue that was not an issue at the time it took those decisions.

87. Moreover, it is not correct to say that the case based on unconscionability does not raise any new factual issues. As put by MFIS, the factual issue in relation to the case that AFIC owed MFIS fiduciary duties turns on whether AFIC exercised control over MFIS’s decisions in relation to the impugned transactions so that it could be said that AFIC owed MFIS fiduciary duties in relation to them. Given the concessions that AFIC chose to make, it was not necessary for it to investigate those factual matters, since AFIC concedes that it owed MFIS fiduciary duties by virtue of the fact that it was a director of MFIS. On the other hand, the case that any limitation defence is defeated by unconscionable conduct turns on the extent to which the board members of MFIS considered the question whether MFIS had any claim against AFIC and the extent to which any action they might otherwise have taken was stifled by the control that AFIC exercised over MFIS. That involved a different factual enquiry. It was not one that AFIC was given an opportunity to undertake. It would cause AFIC irremediable prejudice to permit MFIS to raise the issue now.

88. A further difficulty with this aspect of MFIS’s case is that it never identified the conduct that is said to be unconscionable with any precision or explained why that conduct involved “a consciousness on the part of the defendant that what is being done is wrong or that to take advantage of a particular situation involves wrongdoing” (to use the words of Meagher JA in Gerace at [75]). In its proposed reply it pleads that it would be unconscionable for AFIC to rely on the proposed bar and gives the following particulars of that allegation:

At all material times until March 2016, the defendant controlled the plaintiff as described in paragraphs 3 to 14 of the Amended Commercial List Statement and as evidenced by the events and transactions described in paragraphs 18 to 102 of that statement.

But neither in the proposed pleading nor anywhere else does MFIS articulate how the control that AFIC exercised involved AFIC unconscientiously preventing MFIS from bringing the claims that it now does.

89. In the present context, the question is whether it would be unconscionable for AFIC to rely on a limitation defence to defeat a claim for interest on the loan of $1.42 million. There is no evidence that it ever occurred to anyone at AFIC or MFIS that the loan should bear interest, let alone any evidence of anything done or not done by AFIC in relation to the recovery of interest on the loan which satisfied the requirements of unconscionability in this case. It is perhaps not surprising that in those circumstances MFIS has not attempted with any specificity to identify the facts that disentitled AFIC from relying on the bar. But if that is a case it wanted to advance, that is what it had to do.

The trust claim in respect of the Hoxton Park Property

90. This claim raises many of the same issues as the constructive trust claim in respect of the proceeds of sale of the Hoxton Park Property, although AFIC does not suggest that there is any limitation defence in respect of this claim.

91. Again, MFIS appears to put its claim in two principal ways. The first is that the property was held on constructive trust for MFIS because it was acquired by AFIC in breach of its fiduciary duties. The second is that it was held on constructive trust because it was acquired using funds belonging to MFIS.

92. There does not appear to be a suggestion in this context that the relevant breach of fiduciary duties included using information gained as a fiduciary to obtain a personal benefit. However, in other respects the claim mirrors the claim in respect of the Condell Park Property and must fail for similar reasons.

93. The claim that the Hoxton Park Property was held on a constructive trust for MFIS because it was acquired using money belonging to MFIS turns on characterising the pre-paid rent as money belonging to MFIS. Again, the complaint must be that the money belonged to MFIS to the extent that rent was over-paid by MFIS. There is no suggestion that the pre-payment itself involved a breach of fiduciary duty.

94. I have already explained in the context of the claim in respect of the Condell Park Property that an overpayment of rent, even one involving a breach of fiduciary duty, cannot alter the character of the payment. In the hands of AFIC, the paid rent is AFIC’s money and any property bought with it is AFIC’s property. The position is the same in the present context.

95. There is a question in the present context concerning the extent to which rent in respect of the Greenacre Property was overpaid and whether, having regard to the rent to which AFIC was entitled, it could be said that the Hoxton Park Property was bought using money obtained by AFIC in breach of its fiduciary duties.

96. The question of overpayment has two aspects. The first concerns the correct market rent for the Greenacre Property. The second concerns the fact that no discount was given for rent paid in advance.

97. AFIC accepts it breached its fiduciary duties by not proposing that the pre-payment of rent in respect of the Greenacre Property be discounted to reflect the time value of money, that an appropriate discount was 15 percent and that to that extent it was overpaid.

98. AFIC contends that at the time MFIS prepaid rent for the Greenacre Property, it was entitled to proceed on the basis that the market rent for the property was $1 million per annum and that consequently it only breached its fiduciary duties to the extent that it sought (and was paid) rent above that figure. That submission is based on the fact that MFIS had received a valuation from Chesterton International on 25 June 2007 stating that the market rent was $916,000 per annum plus GST. AFIC contends that it was reasonable for it to assume that rent had increased since that date.

99. I accept AFIC’s submission. MFIS takes issue with the Chesterton International valuation. It contends that the valuation relied heavily on the rent that MFIS was then currently paying ($900,000 per annum). Moreover, the valuation was inconsistent with the original valuation obtained from Mr Wood. Mr Wood’s subsequent valuation was given only after he had been contacted by Mr Patel who had sought a valuation on an assumption that was clearly false (that there was a lease in place for a term of 50 to 99 years). It was also inconsistent with the evidence given by Ms Felicity Hoolihan, an expert valuer retained by MFIS, who concluded that the current market rent of the Greenacre Property as at 1 January 2008 was $340,000.

100. In my opinion, these points do not undermine the significance of the Chesterton International valuation. The question is not whether that valuation was correct. The question is whether AFIC could reasonably have relied on that valuation to conclude that it was entitled to agree to MFIS paying rent of $1 million per annum without breaching its fiduciary duties. In my opinion, it could.

101. It is not correct to say that the Chesterton International valuation was heavily influenced by the rent that MFIS was actually paying at the time. The valuation did not seek to determine the rent by reference to comparables. Rather, it sought to determine the rent by reference to a reasonable return on the value of the property. Although not the primary means of determining the current market rent of a property, it is a methodology that is frequently used, particularly when direct comparables are difficult to find. The author of the valuation concluded that the value of the Greenacre Property was $11,440,000 rounded to $11,450,000. The author used a rate of return of 8 percent per annum based on leases of land from the Crown to school colleges that the author had seen that indicated that the rent payable under those leases was based on 8 percent of the land value. It was accepted by the expert valuers retained by the parties in this case that an appropriate rate of return would generally lie within the range of 5 percent to 10 percent.

102. In my opinion, it was reasonable for Mr Patel to reject the valuations obtained from Mr Wood. The first valuation contained no reasoning at all. It was inconsistent with the Chesterton International valuation and it was difficult to reconcile with the Colliers Jardine valuation obtained a number of years earlier. It was not plausible that the value of the land had decreased during the eight years between the valuations. The second valuation prepared by Mr Wood also appears to be unsatisfactory. Mr Wood arrived at that valuation by assessing the market value of the land to be $11,500,000 and applying a rate of return of 8.5 percent. That is very similar to the approach taken by Chesterton International. Mr Wood offers no explanation for how the new assumption that he was asked to make (that the term of the lease was 50 to 99 years) factored into his calculations. In any event, that assumption does not appear to be an unreasonable one to make. It seems plain that, although MFIS had been occupying the Greenacre Property on a month to month tenancy, it was always contemplated that MFIS would remain in occupation for the long term. Consequently, it was reasonable to determine the rent by reference to that assumption.

103. The report of Ms Hoolihan does not alter the position. That report was not available at the time. In any event, I found Ms Hoolihan to be an unsatisfactory witness. On a number of occasions, she was unable to explain the reasons for the conclusions she had reached, preferring instead to insist dogmatically that the conclusions were correct even though they were implausible. So, for example, she refused to accept the proposition that the less comparable a property or transaction is, the more difficult it becomes to use the information from the transaction as a guide to value, ultimately conceding only that “It can be less reliable but it still provides a good guide as to what happens in a school, in this case a school situation”. Similarly, Ms Hoolihan would not agree with the proposition that the more incoherent the picture that emerged from the comparables chosen, the more doubt there was about whether the chosen valuation methodology was appropriate. And when it was pointed out to her that one of the comparables she had used was between related parties she maintained that “I think it’s excellent evidence even if the parties are related … Because it still provides evidence of a school. On the face of the lease it appears to be an arm’s length transaction.”

104. In the case of Ms Hoolihan’s valuation of the rent for the Greenacre Property as at 1 January 2008, she relied primarily on rent paid for what were said (with appropriate adjustments) to be comparable sites. She concluded, and it is not disputed, that the rent should be determined by reference to the unimproved value of the land and on the basis of a lease of 25 years with a 25 option. On that basis, she identified three comparables. One was Georges River Grammar at Georges Hall. That lease was entered into on 1 July 2001 and the rent payable worked out at $3.95 per square metre. The second was Green Valley Islamic College. That lease had been entered into on 1 November 2008 and rent payable worked out at $17.91 per square metre. The third was part of Moriah College at Queens Park. That lease had been entered into on 6 January 2005 and the rent payable worked out at $5.85 per square metre. Taking those comparables, Ms Hoolihan concluded that the rent for the Greenacre Property was $9.51 per square metre or $340,000, although how she arrived at that conclusion is not explained.

105. As a check, Ms Hoolihan used the rate of return method. She identified four comparable properties. One in Kellyville sold in September 2009 for $271 per square metre. A second in Glenwood sold in December 2008 for $297 per square metre. A third in Oatlands sold in August 2008 for $521 per square metre. Each of those was zoned for an educational establishment. The fourth was in Marsden Park and sold in March 2009 for $77 per square metre. It was zoned “Rural Small holdings”. Based on those comparables, Ms Hoolihan concluded that the Greenacre Property land was worth $6,260,000, although again how she arrived at that figure is not explained. Applying a rate of return of 5 percent to 6 percent per annum, she concluded that the annual rent was $345,000, a figure remarkably similar to her valuation based on comparable rents.

106. Mr David Lunney, the expert valuer retained by AFIC, was justifiably critical of the conclusions reached by Ms Hoolihan. He pointed out that the large range of rents for premises that Ms Hoolihan regarded as comparable itself shed doubt on whether they really were comparable. He also pointed out that an examination of each example reinforced that doubt. The rent paid by the Georges River Grammar was a poor comparable because it had been fixed in 2001 and was difficult to explain given the rent paid for a neighbouring property. The lease of Green Valley Islamic College was between related parties and the property was in a substantially inferior position compared to the Greenacre Property. In the case of Moriah College, the college paid a lease premium over the first five years of a 99 year lease. Rather than escalating that premium to reflect the time value of money, Ms Hoolihan simply divided the premium by 99 to arrive at an annual rent.

107. As to comparable sales used by Ms Hoolihan in applying the rate of return method of valuation, Mr Lunney points out the property at Kellyville is located 30 kilometres by road from the Greenacre Property and the property at Glenwood is 27 kilometres away by road and in a very different locality. Even the Oatlands property is 17 kilometres away, although to the extent that it is comparable Mr Lunney suggests that the value of the Greenacre Property as at 1 January 2008 was substantially greater than the value used by Ms Hoolihan. The property at Marsden Park is in an essentially rural environment approximately 41 kilometres from the Greenacre Property by road.

108. Underlying the approach taken by Ms Hoolihan is the view that the only comparables that should be taken into account are the prices paid for properties that were or were to be used as schools however dissimilar the properties otherwise were and the view that other properties should not be used as comparables whatever other similarities they have. However, as Mr Lunney points out in the experts’ joint report by reference to a substantial number of examples, there is no evidence to suggest that properties that are used or are proposed to be used as schools command a lower price than similar properties which were zoned or acquired with the intention of a different land use. I accept Mr Lunney’s evidence. For that reason also, no weight can be placed on the evidence given by Ms Hoolihan.

109. Mr Lunney determined the market rent for the Greenacre Property using the rate of return method. The comparables he used appear to be more appropriate than those used by Ms Hoolihan. He also used a rate of return of 7 percent, which appears to be more reasonable than the one used by Ms Hoolihan, which was near the bottom end of the acceptable range. On that basis, Mr Lunney concluded that the market rent for the Greenacre Property as at 1 January 2008 was $938,437 per annum, which is consistent with the Chesterton International valuation.

110. It follows from what I have said that at the time that rent was prepaid, a pre-payment of rent of approximately $5 million discounted by 15 percent (that is, $4.25 million) would not have involved AFIC in a breach of its fiduciary duties. On any view, that was an amount that AFIC was entitled to apply towards the purchase of the Hoxton Park Property. AFIC had other funds available to it, including an amount held in a Westpac account of $4,872,405.49 as at 31 March 2008. In those circumstances, MFIS has failed to prove that any part of the purchase price for the Hoxton Park Property came from money that had been overpaid by it. For that reason also, the claim based on a constructive trust must fail.

111. MFIS also advances a case based on a resulting trust. That claim must fail for the same reasons. The Hoxton Park Property was acquired with money belonging to AFIC. In those circumstances, no question of a resulting trust can arise.

Equitable compensation in respect of the pre-payment of rent for the Greenacre Property

112. As I have said, AFIC admits that it breached the fiduciary duties it owed to MFIS by not proposing to MFIS that the rent paid in advance for the period 2008 to 2012 inclusive in respect of the Greenacre Property be discounted to reflect the time value of money and by charging rent in respect of that period for that property in excess of $1 million per annum. I have already concluded that AFIC did not breach its fiduciary duties to the extent that it charged rent of $1 million per annum. Consequently, the only remaining question is whether a claim for equitable compensation in respect of those breaches is time barred.

113. This question raises similar issues to those raised in relation to the claim for interest on the loan of $1.42 million.

114. The claim for equitable compensation for breach of fiduciary duty is analogous to a claim for damages for breach of ss 180-183 of the Corporations Act. Consequently, the same time bar of 6 years from the date of breach should be applied. The breach occurred no later than the time the advance payment of rent was made – that is, no later than 31 March 2008. That was more than 6 years before these proceedings were commenced. It follows that the claim is time barred.

115. MFIS’s argument that the time bar should not be applied (by analogy) because AFIC engaged in unconscionable conduct must fail for two reasons.

116. First, the issue was not pleaded or raised before the trial. AFIC made very significant concessions on the basis of the issues that had been raised. It may not have made those concessions, or may have made different concessions, had the issue been raised earlier. Moreover, the allegation of unconscionable conduct raises new factual issues. In the present context, those factual issues include whether it occurred to AFIC or MFIS that a discount should be allowed for pre-paid rent, whether MFIS gave any consideration to the question whether a claim should be made against AFIC in respect of over-paid rent within the 6 year limitation period and, if so, the results of those considerations. On the available evidence, it appears that none of the directors of MFIS turned their minds to these issues. However, that is something that might have been investigated by AFIC; and it is not obvious that those investigations would have been fruitless. On occasions, the directors of MFIS did act independently of AFIC. An example is their refusal to pay the rent sought by AFIC in 2005. AFIC would be irremediably prejudiced if MFIS were permitted to raise the issue now.

117. Second, MFIS has not identified with any specificity the conduct which is said to be unconscionable. The relevant conduct must involve a consciousness on the part of AFIC that what it did was wrong. Neither in its proposed pleadings nor anywhere else has MFIS come close to identifying just what it is said that AFIC did in relation to the overcharging of the pre-paid rent and the failure of MFIS to pursue any claim in respect of it before the limitation period expired that met the requirements of unconscionability in this context; and on the evidence as it stands it is far from obvious what that conduct could be.

Equitable compensation in respect of the pre-payment of rent for the Hoxton Park Property

118. There is a question concerning the extent to which the rent of $500,000 per annum charged in respect of the Hoxton Park Property exceeded the market rent for that property. That question aside, the issues raised in relation to the claim for equitable compensation for the overpayment of rent in respect of this property are the same as those raised in relation to the claim for equitable compensation in relation to overpayment of rent in respect of the Greenacre Property. The claim must fail for the same reasons.

119. As to the question of overpayment, MFIS relies on the evidence given by Ms Hoolihan who expresses the opinion that the market rent for the Hoxton Park Property as at 1 March 2008 was $210,000 per annum plus GST. Ms Hoolihan reached that conclusion primarily by relying on the rental paid for comparable sites. However, she also determined the market rent as a return on the unimproved value of the property. Curiously, in determining the unimproved value of the property, she did not refer to the price that AFIC had recently agreed to pay for the Hoxton Park Property itself, although that was clearly an arms-length transaction and there were no improvements on the land at the time it was purchased.

120. Mr Lunney expressed the opinion that it was not possible to determine the market rent by reference to comparables because no reasonable comparables existed. Instead, he chose the rate of return method. He expressed the view that the actual purchase price paid by AFIC for the property was the best evidence of its value. Applying a rate of return of 7 percent he concluded that the market rent as at March 2008 was $347,900 per annum.

121. Had AFIC complied with its fiduciary obligations, it would have obtained expert advice on the market rent for the Hoxton Park Property. In my opinion, it is reasonable to assume that that advice would have been to the same effect as the opinion expressed by Mr Lunney. On that basis, AFIC would have been entitled to charge rent of $347,900 per annum.

Payment of rent from 2013 onwards and AFIC’s cross claim

122. It is common ground that since 1 January 2013 MFIS has paid rent in respect of the Greenacre Property totalling $2,818,181.82.

123. Under the terms of the lease in respect of the Greenacre Property, rent reviews to market were to occur on 1 January 2013 and 1 January 2016, with increases by reference to increases in the CPI to occur in intervening years. Under cl 3.03 of the lease, reviews to market were only to occur if AFIC, within 12 months before the “Market Review Date”, gave written notice to MFIS of the amount of rent AFIC believed was the market rent for the premises as at that date. No such notice was given in respect of the market reviews that were to occur on 1 January 2013 and 1 January 2016. However, in circumstances where the original rent ($1.3 million per annum) was in excess of the market, and to the extent that that amount was still above the market rent on those dates, AFIC was in breach of its fiduciary duties by charging the excessive rent. MFIS would be entitled to recover equitable compensation calculated as the difference between the rent actually payable under the lease and the rent that would have been paid if AFIC had charged market rent. In other words, to the extent that AFIC seeks to recover unpaid rent, it should only be permitted to do so on the basis that the rent was fixed as the market rent on 1 January 2013 and 1 January 2016 and increases in other years occurred by reference to increases in the CPI. That raises the question of what the market rent was at those two dates.

124. Mr Lunney expressed the opinion that the market rent as at 1 January 2013 was $1,179,750 and as at 1 January 2016 was $1,268,486.

125. Ms Hoolihan has not expressed an opinion on the market rent for the Greenacre Property as at 1 January 2013 and 1 January 2016. She did express an opinion that the market rent for the Greenacre Property as at 27 April 2017 was $390,000 per annum. However, I do not accept that that provides a reliable indication of the market rent of the property as at the earlier dates. Ms Hoolihan’s valuation suffers from the same faults as her other valuations. In arriving at her conclusion, Ms Hoolihan used as comparables the rent payable for Georges River Grammar and Green Valley Islamic College. I have already explained why I accept Mr Lunney’s criticism of the use of them as comparables. Ms Hoolihan also uses as comparables the rent paid by Burnside Public School in North Parramatta and Anzac Park Public School in Cammeray. Mr Lunney is also critical of Ms Hoolihan’s use of those two leases. The lease in respect of Burnside Public School was entered into in 1922 and no subsequent lease appears to be available, which makes investigation of the degree to which it is a comparable very difficult. In the latter case, Ms Hoolihan has again averaged the payment of an upfront premium over the term of the lease which is 99 years without making any adjustment for the time value of money. I accept those criticisms. Ms Hoolihan’s valuation based on a rate of return on the market value of the property suffers from the same flaws as her earlier valuation using that method. The comparables she uses are not reasonable comparables because she has incorrectly placed too much emphasis on the use to which the properties are put to the exclusion of all other factors and she has used an unreasonably low rate of return.

126. It follows that it is appropriate to use figures for rent set out in Mr Lunney’s report. On the basis of those figures, Mr Goodwin Gower, the expert accountant retained by AFIC, has calculated the difference between the rent paid by MFIS for the Greenacre Property and the rent that should have been paid by MFIS up to 30 June 2017 as being $2,717,089.47. Adding interest, the amount is $3,328,617.

127. MFIS has not paid any rent in respect of the Hoxton Park Property since 1 October 2013.

128. The position in relation to rent payable in respect of the Hoxton Park Property is similar to the position in relation to the Greenacre Property, with one qualification. Rent reviews to market were due on 1 January 2014 and 1 January 2017. According to Mr Lunney, the market rent as at 1 January 2014 was $434,137 per annum and the market rent as at 1 January 2017 was $561,211. For the reasons I have given, I accept Mr Lunney’s opinions.

129. It follows that for the period from 1 October 2013 to 31 December 2016 AFIC is entitled to recover rent at the rate of $434,137 with CPI adjustments on 1 January 2015 and 1 January 2016 – or, more accurately, AFIC is entitled to recover rent in accordance with the lease and MFIS is entitled to recover equitable compensation calculated as the difference between rent at the rate of $434,137 (with CPI adjustments) and the rent to which AFIC is entitled under the lease.

130. The position, however, is more complicated in relation to the period from 1 January 2017. There is no evidence that AFIC served a notice seeking a rent review as at that date. It is not clear why it should be entitled to recover rent as if it had. Consequently, the rent it is entitled to recover from that date is the lesser of the market rent as at 1 January 2017 and the actual rent payable under the lease. The actual rent payable under the lease was originally fixed at $500,000 per annum. There was no review to market on 1 January 2014 or 1 January 2017 because AFIC did not give the requisite notices under cl 3.02(1) of the lease. Clause 3.02(2) provides that, absent a notice, “the rent payable for the Lease Year commencing from that market Review Date will be the same rent as was payable in the preceding Lease Year”. The result is that the rent under the lease from 1 January 2017 is $500,000 adjusted by CPI increases on 1 January 2009, 2010, 2012, 2013, 2015 and 2016. There is no evidence concerning which of the actual rent or rent assuming a review to market is less. However, the difference is likely to be small. Consequently, it seems sensible to proceed on the basis that AFIC is entitled to recover market rent from 1 January 2017.

131. Mr Gower has calculated the rent payable by MFIS from 1 October 2013 to 30 June 2017 using the market rent determined by Mr Lunney with CPI adjustments in the appropriate years to be $1,702,607.74 (exclusive of GST). Inclusive of interest, the amount becomes $1,929,786 (exclusive of GST).

Conclusion

132. On the conclusions I have reached, MFIS is not entitled to any orders in its favour in addition to those made by the court on 9 November 2017.

133. I have also concluded that AFIC is entitled to recover rent on the Greenacre Property from 1 January 2013 in the amount determined by Mr Gower using the market rent determined by Mr Lunney subject to any further adjustments to allow for the recovery of rent for the period from 1 July 2017 to the date of judgment together with interest up until that date. AFIC is also entitled to recover rent on the Hoxton Park Property from 1 October 2013 in the amount determined by Mr Gower using the market rent determined by Mr Lunney subject to any further adjustments to allow for the recovery of rent for the period from 1 July 2017 to the date of judgment together with interest up until that date. AFIC may set off those amounts against any amount it owes to MFIS.

134. The parties should bring in short minutes of order to give effect to the conclusions I have reached. If there are any outstanding questions in relation to the terms of the short minutes of order, I will determine those questions, together with the question of costs, if costs cannot be agreed, at a time to be fixed with my Associate.

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Decision last updated: 12 December 2017