Melrob Investments Pty Ltd & Ors v Blong Ume Nominees Pty Ltd & Ors

[2020] HCATrans 92

[2020] HCATrans 092

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A1 of 2020

B e t w e e n -

MELROB INVESTMENTS PTY LTD

First Applicant

OUWENS CORPORATE SERVICES PTY LTD

Second Applicant

MICHAEL CHRISTOPHER MICHAELS

Third Applicant

WILLEM OUWENS

Fourth Applicant

and

BLONG UME NOMINEES PTY LTD

First Respondent

ORFANOS NOMINEES PTY LTD

Second Respondent

NICHOLAS ORFANOS

Third Respondent

SEMWEB NOMINEES PTY LTD

Fourth Respondent

Application for special leave to appeal

BELL J
GAGELER J

TRANSCRIPT OF PROCEEDINGS

FROM SYDNEY BY VIDEO CONNECTION TO CANBERRA AND ADELAIDE

ON FRIDAY, 3 JULY 2020, AT 10.46 AM

Copyright in the High Court of Australia

____________________

MR A.L. TOKLEY, QC:   May it please the Court, I am here in Canberra, and my learned junior, MR R.D. ROSS‑SMITH, appears in Adelaide for the applicants.  (instructed by Stewart‑Rattray Lawyers)

MR S.D. OWER, QC:   If it pleases your Honours, I appear for the first to third respondents with MS L. GAVRANICH.  (instructed by Pedler Lawyers Pty Ltd)

BELL J:   Yes, Mr Tokley. 

MR TOKLEY:   May it please the Court.  In my respectful submission, this case raises questions of public importance concerning the imposition of fiduciary duties as well as the duties of trustees.  In my respectful submission, the decision of the court below is attended with sufficient doubt such as to warrant the grant of special leave to appeal.

There are three particular matters that we wish to bring to the Court’s attention.  The first concerns the imposition of a fiduciary duty on the three directors of a trustee company to joint venturers who are also beneficiaries of a trust and that appears at the application book pages 181 to 182 in paragraphs 72 which I will come to shortly.

The second concerns the imposition of a duty on a trustee articulated in several different ways to obtain market rent for a trust property held as a bare trust investment pursuant to a trust deed and that appears at application book 185 at paragraphs 85, 86 and 87. 

GAGELER J:   Well, it is to obtain market rent from one of the beneficiaries, is it not?

MR TOKLEY:   To obtain market rent from – no, the finding of the court below was that two of the beneficiaries had to contribute market rent ‑ ‑ ‑ 

GAGELER J:   I am sorry, two of the beneficiaries.

MR TOKLEY:   Two beneficiaries, yes.

GAGELER J:   But it is not just market rent generally, it is in a lease to two beneficiaries out of a number of beneficiaries.

MR TOKLEY:   Yes, your Honour. 

GAGELER J:   Yes. 

MR TOKLEY:   Yes.  The third matter of which we complain was the finding of a breach of statutory of duty by two of the directors in circumstances where there is simply no analysis of any section of a statute and the way in which they are said to have breached their statutory duty and that appears at page 202 of the application book in paragraph 185.  Your Honours, may I now proceed to develop each of those points. 

BELL J:   Just perhaps, at the outset, Mr Tokley, if you look at the proposed grounds of appeal, and looking at ground 1 and then turning to the first two of the special leave questions, can you indicate where we find that subject matter reflected in the orders of the court, appreciating that the court made a finding in relation to the fiduciary duty owed directly to the joint venturers.  How is it reflected in the orders?

MR TOKLEY:   The orders that were made by the court – and I will just take your Honours to the orders – are to be found at pages 215 and 216 of the application book.  The way in which it came about was that, having made the findings that there were duties and then there was a breach of those duties, the court indicated that the directors should make payment of amounts by way of equitable compensation.  That, in fact, occurred, and you will see at page 215 where it is noted:

the second and third Respondents have, in response to the reasons published by the Court on 10 December 2019, paid to the first Respondent the sum of $348,805.81.

Then, in the second order, it was that:

2.1The first Defendant account in equity to the trust declared by the deed . . . the sum of $385,822.48 -

because it was also held, of course, that the second defendant, who was then the trustee, had to account as well.  So the way in which the orders worked, your Honours, was that were it not for the fact that the second and third respondents paid the money in, there would have been orders made that they make equitable compensation.

BELL J:   Coming back to the matter that I first raised with you concerning the Court of Appeal’s finding in relation to fiduciary duties owed, not as directors of the trustee Semweb, but fiduciary duties independently owed to the joint venturers ‑ ‑ ‑

MR TOKLEY:   Yes, your Honour.

BELL J:   ‑ ‑ ‑ none of that finds expression in the way the matter was ultimately dealt with by the court, does it, in those orders?

MR TOKLEY:   Not in those terms, your Honour, no.

BELL J:   Well, I mean, it may be an interesting academic question that you raise, but it is just not clear why this would be a suitable case in which to explore that issue.

MR TOKLEY:   I understand your Honour’s point.  The only point I can make in response is that the orders were contemplated by the court in its judgment, but because the second and third respondents made the payments contemplated by the judgment, the court then did not make orders to that effect.  But it is reflected in the note that they make, and it is also reflected in paragraph 2.1 of the court’s orders.

GAGELER J:   What do you mean reflected?

MR TOKLEY:   Your Honour, the fact that the payment was made is adverted to in the note in the order, and then the difference ‑ sorry, the trustee was required to indemnify the ‑ sorry, the trustee is required to pay the money in the sum of $385,000 in paragraph 2.1, and the difference between ‑ the second and third respondents have to make up the difference between $348,000 and $385,000, and then the ‑ ‑ ‑ 

GAGELER J:   We can only hear appeals from orders, not from reasons.

MR TOKLEY:   I understand, your Honour, and from judgments of the court as well, of course, so that the judgment of the court contemplated the making of the orders ‑ ‑ ‑ 

GAGELER J:   No, no, no.  No, you are using “judgment” in the wrong sense.  The judgment is what we see at page 215.  That is the outcome; that is the binding outcome.

MR TOKLEY:   I understand your Honour’s point.  The other aspect of it, of course, is the orders made at paragraph 3.

BELL J:   The order of remittal.

MR TOKLEY:   Yes, your Honour, yes, because there needs to be a further accounting in respect of the moneys that are said to be owed after 1 December 2017.

BELL J:   I am not quite sure where that gets us, Mr Tokley.  The matter that Justice Gageler and I are raising with you firstly concerns the appropriateness of the issue that you identified in paragraph 9, namely the first of your special leave questions and, indeed, the second of those special leave questions in light of the orders that the court made.

MR TOKLEY:   Yes, your Honour.  I understand your Honour’s point.  The special leave questions arise out of the judgment of the court below because they made findings to the effect as identified in paragraphs 9 and 10.  They did not make an order directly in terms of the – requiring the directors to make the payment that arose out of the findings and those special leave questions because the second and third respondents made that payment based on the court’s orders.  That is covered in the transcript of the hearing on 24 December last year, which is in the supplementary book of papers.

BELL J:   Let it be accepted that is so, the court had made findings that Messrs Michaels and Ouwens breached their statutory and fiduciary duties as directors of Semweb.

MR TOKLEY:   Yes, your Honour.

BELL J:   That is quite a discrete basis to any further finding that the court made in relation to the breach of fiduciary duties owed directly to the joint venturers, is it not?

MR TOKLEY:   Sorry, your Honour, could you just please run that past me again?

BELL J:   Yes.  What I am drawing your attention to is that the court concluded that there was a breach of the statutory and fiduciary duties owed as directors of Semweb, the trustee.

MR TOKLEY:   Yes, your Honour.

BELL J:   That is quite distinct from the court’s further holding that Messrs Michaels and Ouwens owed fiduciary duties directly to the joint venturers.

MR TOKLEY:   Yes, your Honour.  I understand that there are those two holdings; yes, that is correct.

BELL J:   All right, Mr Tokley.  It is, for my own part, entirely unclear how in any sense it can be said that the disposition of the matter in terms of the court’s orders reflect any statement that their Honours made respecting fiduciary duties owed directly to the joint venturers.

MR TOKLEY:   I understand the force of your Honour’s point, having looked at the orders.  The only thing I can say is the fact that the note at the start of those orders obviated the need for the court to make orders in terms that your Honour just identified because the second and third respondents made the payment of the amount of money there.

So, it was in those circumstances unnecessary for the court to make an express order to that effect in terms of the breach of the fiduciary duty by the directors, but the order in 2.1 reflects, as I say, the fact that the court found that the trustee was in breach of its duty and had to make good an amount which is the amount set out in paragraph 2.1.

So, if one takes the two points that your Honour has raised with me, certainly paragraph 2.1 responds to that and it responds then to the special leave question – it responds to the ground of appeal in paragraph 2 at page 219 and then to the special leave question at paragraph 11 at page 219.

GAGELER J:   You have another point, I think, or at least two other points.

MR TOKLEY:   Yes, I do, your Honour.  In the court below, the court found that there was a duty on a trustee, as they articulated in several different ways, to obtain market rent for a trust property held as an investment.  If your Honours would please go to application book 185, your Honours will see at paragraphs 85, 86 and 87 that the duty was expressed in several different ways.  At the bottom of paragraph 85 around line 28, the court identified it as:

Semweb failed to discharge its duty to manage the property in an efficient and businesslike manner.

At paragraph 86, in the second sentence:

It was the duty of Semweb to negotiate terms and conditions for the leases granted to Sims Richmond and OCS at close to market rates –

At paragraph 87, the court says:

We conclude that a landlord in a position of Semweb exercising reasonable skill and diligence would have taken steps to obtain a market rental income from the property.

GAGELER J:   Is there anything wrong with the first sentence of paragraph 82?

MR TOKLEY:   Paragraph 82, your Honour?  No, your Honour.

GAGELER J:   Does that not lead to paragraph 86 in the circumstances?

MR TOKLEY:   No, in terms of a logical syllogism, there is no connection between the first sentence of paragraph 82 and the second sentence in paragraph 86.

GAGELER J:   If you are going to be fair to all of the beneficiaries, you do not give some of the beneficiaries a special deal, do you?

MR TOKLEY:   Your Honour, it would depend upon what is the collective interests of the beneficiaries because you see, in the circumstances of this case, there was evidence to the effect that one of the beneficiaries could not afford to pay what was considered to be market rent.  So if the interests of the beneficiaries as a whole was that one of the tenants ‑ not the beneficiaries ‑ pays less than the market rent, then there is no discrimination between the beneficiaries as contrasted with the position of the tenants.

If I may just make the point good, your Honours will see at the application book page 277 – I am sorry, your Honours, I understand my time is up.  I understand 20 minutes has elapsed since I commenced my submission.  I was simply going to make the point that at page 277 ‑ ‑ ‑

GAGELER J:   I am told by the timekeeper here that you have three minutes to go.  Our orange light looks very much like our red light, I am afraid.

MR TOKLEY:   Thank you very much, your Honour.  At page 277 we set out in diagrammatic form all of the relationships that exist, but it is also the case that at the application book in terms of the – at page 258 over to page 259, the point that we make is that the joint venturers were to acquire

and hold the property in the manner mutually agreed between them from time to time and they have agreed to further develop the property.  So it was the collective interest of the joint venturers that the property be managed in a ‑ ‑ ‑

BELL J:   Mr Tokley, did that change when Mr Orfanos fell out with his two co‑venturers and thereafter drew to attention the concern that the premises were being let at an undervalue?  It just seems difficult to talk of the collective interests of the beneficiaries in a joint venture, the express purpose of which was investment, in circumstances in which ‑ as the facts were found and Mr Orfanos’ repeated requests.

MR TOKLEY:   Your Honour, the interests of the beneficiaries under the terms of the trust deed was their one‑third shareholding.  The interests of the joint venturers ‑ ‑ ‑

BELL J:   Yes.

MR TOKLEY:   ‑ ‑ ‑ was always governed by the joint venture deed which was that they were to do things in a manner mutually agreed.  So, the fact that one of them vacated the premises did not of itself give rise to any change in the agreements under which they were operating.  Although it may have meant – sorry, I will start again.  As between them as joint venturers, there was no change because of the terms of the joint venture deed.  There was no change in their status or relationship as beneficiaries to the trustee because of the terms of the trust deed which held that they were one‑third holders of the property.

As your Honours know, our principal complaint here is that – or one of our principal complaints here – is that the court below conflated the various duties and interests such that they treated the joint venturers as beneficiaries and vice versa in circumstances where there were, in fact, separate relations existing between them and that is why the diagram at 277 is so helpful in that regard.  Thank you, your Honours, that completes my time.

BELL J:   Yes, thank you, Mr Tokley.  The Court will adjourn briefly to consider the further conduct of this application.

AT 11:08 AM SHORT ADJOURNMENT

UPON RESUMING AT 11:12 AM:

BELL J:   Thank you, Mr Ower, we do not need to hear from you.

We are of the opinion that the issue raised by the first proposed ground does not arise on the orders of the Court and that there are insufficient prospects that any appeal would succeed arising out of the proposed challenges in the remaining grounds.  For that reason, the application is dismissed with costs. 

Adjourn the Court until 11.30 am.

AT 11:13 AM THE MATTER WAS CONCLUDED