SUPREME COURT OF QUEENSLAND
CITATION:
Nathan v Williams & Anor [2020] QCA 138
PARTIES:
JULIAN PAUL ELIZER NATHAN
(appellant)
v
DANIEL SATKUNAM BALARAJAN WILLIAMS
(first respondent)
NATHAN LAWYERS BRISBANE PTY LTD (IN LIQUIDATION)
ACN 154 104 426
(second respondent)FILE NO/S:
Appeal No 7325 of 2019
SC No 12663 of 2018DIVISION:
Court of Appeal
PROCEEDING:
General Civil Appeal
ORIGINATING COURT:
Supreme Court at Brisbane – [2019] QSC 127; [2019] QSC 150 (Boddice J)
DELIVERED ON:
23 June 2020
DELIVERED AT:
Brisbane
HEARING DATE:
22 October 2019
JUDGES:
Sofronoff P and Philippides JA and Brown J
ORDERS:
1. Order 1(b) of the Orders made on 14 June 2019 is set aside;
2. The appeal is otherwise dismissed; and
3. The parties are to provide submissions of no more than three pages as to costs within 14 days of these reasons being published.
CATCHWORDS:
EQUITY – TRUSTS AND TRUSTEES – IMPLIED TRUSTS – CONSTRUCTIVE TRUSTS – COMMON INTENTION – where the second respondent was an incorporated legal practice – where the appellant and first respondent had agreed to operate separate practices through the second respondent – where the appellant and first respondent each held equal shareholding in the second respondent – where the second respondent was ordered to be wound up – where the first respondent contended the second respondent held each practice for the appellant and first respondent under a common intention constructive trust – where the trial judge found that the second respondent held the separate practices on constructive trust for the appellant and first respondent – where the appellant contends that the second respondent did not hold each practice on trust for the appellant and first respondent – where the appellant contends that the corporate structure governed the distribution and the appellant and first respondent are entitled to 50 per cent of the surplus assets of the second respondent – where the trial judge found the appellant was not a credible witness – whether objective facts not considered – whether the second respondent held the separate practices on trust for the appellant and first respondent
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – JUDGMENTS AND ORDERS – AMENDING, VARYING AND SETTING ASIDE JUDGMENTS AND ORDERS – LIBERTY TO APPLY – GENERAL PRINCIPLES – where the learned trial judge found that a debt of a third party was not a debt of the second respondent – where the third party creditor was not a party to the proceeding – where the appellant contended that orders should not have been made in the absence of an entity whose rights were directly affected – whether the learned trial judge erred in ordering that the debt should not be admitted by the liquidators of the second respondent
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – JUDGMENTS AND ORDERS – AMENDING, VARYING AND SETTING ASIDE JUDGMENTS AND ORDERS – LIBERTY TO APPLY – GENERAL PRINCIPLES – where orders excluded prospective and contingent creditors of the first respondent and provided for surplus assets to be transferred in specie to the first respondent – where the first respondent not the second respondent brought action to claim monies withdrawn by the appellant – where no objections by the appellant to the first respondent claiming monies had and received – where the trial judge ordered money be repaid into an account in the name of the second respondent – whether first respondent lacked standing – whether the trial judge erred in ordering the whole of the debt be repaid and not a lesser amount – whether the orders were inconsistent with the common intention constructive trust – whether the orders were discriminatory against the appellant
Corporations Act 2001 (Cth), sch 2, s 90-15
Austin v Keele (1987) 10 NSWLR 283, distinguished
Fox v Percy (2003) 214 CLR 118; [2003] HCA 22, followed
Grundt v Great Boulder Pty Gold Mines Ltd (1939) 59 CLR 641; [1937] HCA 58, considered
Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc [2018] VSC 413, cited
John Alexander’s Clubs Pty Ltd v White City Tennis ClubLtd (2010) 241 CLR 1; [2010] HCA 19, considered
Muschinski v Dodds (1985) 160 CLR 583; [1985] HCA 78, considered
News Limited v Australian Rugby Football League Ltd (1996) 64 FCR410; [1996] FCA 870, considered
Parsons v McBain (2001) 109 FCR 120; [2001] FCA 376, considered
Ramage v Waclaw (1988) 12 NSWLR 84, considered
Raulfs v Fishy Bite Pty Ltd [2012] NSWCA 135, distinguished
Shepherd v Doolan [2005] NSWSC 42, considered
Staatz v Berry (No 3) (2019) 138 ACSR 231; [2019] FCA 924, consideredCOUNSEL:
B O’Donnell QC, with P O’Brien, for the appellant
A Crowe QC, with L Copley, for the first respondent
C Crawford for the second respondentSOLICITORS:
Mullins Lawyers for the appellant
Sparke Helmore Lawyers for the first respondent
K & L Gates for the second respondent
SOFRONOFF P: I agree with Brown J.
PHILIPPIDES JA: I agree with the orders proposed by Brown J for the reasons given by her Honour.
BROWN J: The present dispute involves two principals of a law firm where legal work was conducted through an incorporated legal practice. Each principal owned a fifty per cent share in the incorporated legal practice. Notwithstanding the adoption of a corporate structure, each principal operated his legal practice separately from the other. The relationship between the two principals has long since soured.
In late-2015, tensions began to develop between Julian Nathan, the Appellant in these proceedings (Nathan), and Daniel Williams, the First Respondent in these proceedings (Williams), as Nathan sought to assert a level of control over Williams’ practice through their shared directorship of the Company, accusing Williams of not properly discharging his obligations as a director of the Company. Williams responded on the basis that he and Nathan were always to operate their practices separately.[1]
[1]See for example: Williams v Nathan [2019] QSC 127 (Reasons) at [53].
Proceedings were brought by one principal, Nathan, to wind up the Second Respondent, Nathan Lawyers Brisbane Pty Ltd (the Company), on the just and equitable ground and an order was successfully obtained. The other principal, Williams, opposed the winding up application and subsequently sought orders that the Company (in liquidation) held his practice on constructive trust for him. That was the subject of a trial which has given rise to this appeal.
The learned trial Judge determined that notwithstanding the corporate structure that was adopted by Nathan and Williams, each principal operated their own separate practice and that it was their common intention that if the working relationship between them failed, each would continue to own their own practice.
Multiple grounds of appeal have been raised, many of which seek to revisit factual findings of the learned trial judge. Incidental orders made by his Honour are also challenged. This Court, in the present appeal, must determine whether the learned trial judge erred in finding that there was a common intention that each separate practice constituted a separate business and that the Company held the practices of Nathan and Williams on constructive trust for the benefit of each of them respectively after the Company’s outstanding liabilities were paid. This Court must also determine whether his Honour erred in his findings that Nathan had no entitlement to withdraw monies from the general account operated by Williams and that the monies were used to pay personal debts of Nathan. Finally, this Court must determine whether his Honour erred in making orders in relation to a debt owed to the Bank of Queensland and other orders affecting the constructive trust.
The Company was a party to the proceedings and admitted, in its defence, that it asserted ownership over all the assets and liabilities recorded on the books and records of the Company on, and from, November 2018. At trial, the Company did not take a position as to the arrangement between Nathan and Williams and whether there was a constructive trust. However, the Company argued that if there was an agreement as alleged by Williams, he was in breach of s 117 of the Legal Profession Act 2007 (Qld) and that the agreement should not be enforced by the Court. That allegation was rejected by the learned trial judge and is not challenged in this appeal. The Company did not adopt a position at trial, or in this appeal, as to whether there was a constructive trust over Williams’ practice. It sought, however, to defend some of the orders made by his Honour as to controversial debts.
The present case is an unusual one which turns on the peculiar factual circumstances in the conduct of the legal practices of Nathan and Williams in connection with a corporate vehicle.
This Appeal and the Findings at Trial
Grounds of Appeal
Nathan raises 12 grounds of appeal, namely that:
(a)The learned trial judge failed to find that part 5.6 of the Corporations Act 2001 (Cth) and the Company’s Constitution (the Constitution) regulated what would happen to the assets of the Company in the event of a breakdown of that practice; (Ground 1)
(b)The learned trial judge erred in that:
(i)His Honour did not find that the corporate structure created rights and obligations between Nathan, Williams and the Company which required that the remaining assets of the Company be divided equally between Nathan and Williams as equal shareholders; and
(ii)It was not unconscionable to hold Williams to the legal arrangement that had been put in place at the commencement of the Company; (Ground 2)
(c)His Honour erred in finding that Nathan accepted the agreement entered into between the parties did not include provision for the distribution of assets in the event of such a breakdown; (Ground 3)
(d)The learned trial judge erred in finding that Nathan and Williams had a common intention that they would have the beneficial interest in the legal practices that they conducted as part of the Company; (Ground 4)
(e)His Honour erred in finding that Williams had suffered detriment as the evidence does not support such a finding and the finding does not satisfy the legal test for detrimental reliance; (Ground 5)
(f)The orders made at trial were based upon the erroneous assumption that the assets of the Company, that were held on trust for Williams, could be used to pay all of the Company’s debts, including those debts that were not incurred in respect of Williams’ practice; (Ground 6)
(g)The orders made at trial discriminated against Nathan, insofar as once all of the Company’s creditors are paid, the surplus assets of the Company are held on trust for Williams; (Ground 7)
(h)No orders should have been made in relation to the Bank of Queensland debt, on the basis that:
(i)The finding was against the weight of the evidence;
(ii)Williams had not agreed that the debt was transferred to the Company upon its formation; and
(iii)The order directly affected the Bank of Queensland, such that the Bank of Queensland ought to have been a party to the proceeding; (Ground 8)
(i)The learned trial judge erred in finding that the debt owed to Mr Parker was not a debt of the Company; (Ground 9);
(j)The order that Nathan pay a sum of money to the general account of the Oxley Practice was erroneous, on the basis that Williams had no legal entitlement to the money and the Company made no claim for repayment; (Ground 10)
(k)The learned trial judge erred in failing to make a number of findings of fact in relation to the formation and operation of the Company; and (Ground 11)
(l)The learned trial judge erred in finding that both Nathan and Williams had decided what actual drawings of profit would be made from the general account of their respective practices. (Ground 12)
Based upon the learned trial judge’s analysis of the factual evidence before him, his Honour was satisfied that there was an agreement that Nathan and Williams operated separate practices and that the agreement, and their subsequent conduct, supported a finding that there was a common intention that each separate practice constituted a separate business which, upon payment of all outstanding obligations of the Company, was held by the Company on constructive trust for the benefit of Nathan in respect of what ultimately became the West End practice, and for the benefit of Williams in respect of what ultimately became the Oxley practice.[2] His Honour made a declaration that following the payment of creditors and the costs of the liquidators by the Company, in accordance with the Court Orders, the Company held the remaining assets on trust for Williams.
[2]Reasons at [116].
In the present appeal, Nathan challenges the determination that the beneficial ownership of the assets generated by Williams’ practice was held on constructive trust for Williams. Nathan contends that this Court should find that there was no such common intention, or even if there was, the provisions in the Constitution and in the Corporations Act[3] applied to how the surplus assets were to be divided. Further, Nathan submits that his Honour misapplied the law in determining there was a common intention constructive trust. Nathan also contends that his Honour erred in finding that Williams had suffered the relevant detriment required to found a constructive trust. (Grounds 1–5) Nathan challenges very few of his Honour’s factual findings but rather, relies on evidence of other objective facts. Those facts were unchallenged and presented at trial, but were not the subject of findings by the learned trial judge. (Ground 11) Nathan contends that this Court is in a position to draw inferences on factual matters, notwithstanding the trial judge’s unfavourable findings of credit in relation to Nathan.
[3]At pt 5.6.
Nathan does, however, claim his Honour erred in fact in finding that:
(a)Nathan accepted that the agreement entered into between the parties did not include provision for the distribution of assets in the event of such a breakdown; (Ground 3) and
(b)Nathan and Williams had decided what actual drawings of profit would be made from the general account of their respective practices. (Ground 2)
Williams contends that the learned trial judge’s findings were supported by the evidence and that there was no error. He further contends there was no error in his Honour’s application of the law.
Prior to seeking the winding up of the Company, Nathan withdrew monies from Williams’ Practice’s general practice account in the amount of $236,880, without the authorisation of, or notice to, Williams. His Honour found that those monies were used by Nathan to pay personal expenses,[4] or debts, which were not debts of the Company. One of those debts was a loan to Mr Parker. His Honour rejected the argument and evidence of Nathan that a debt of the Company, in the sum of $81,880, was due and payable to Mr Parker (Parker Loan). His Honour found that there was no legal basis upon which Nathan could withdraw funds from Williams’ Practice general account in payment of his own personal expenses.[5] Nathan contends that, even if the finding of a constructive trust is upheld, Williams has no cause of action to recover the monies withdrawn by Nathan, as Williams had no claim in law to bring an action to recover monies had and received since he only held a beneficial interest in the monies in question. Further, Nathan contends that his Honour erred in not finding a debt, at least in the sum of $67,775, was owed by the Company to Parker (Grounds 9 & 10). Williams contends that at trial, counsel for Nathan did not object to orders requiring the repayment of monies to Williams if a constructive trust was imposed by the Court on the basis that Williams lacked of standing. Williams further contends that the findings as to the Parker Loan were supported by the evidence relied upon by the learned trial judge. The Company contended that Nathan had no entitlement to withdraw the sum of $236,880 for his own use and benefit and Order 6, which required repayment to the Company, was the appropriate order.[6] The Company submitted that the liquidators invited the learned trial judge to determine how debts that were controversial should be dealt with in the winding up and that the Court had the power to make such an order.
[4]Reasons at [110] where it was noted that Nathan had ultimately accepted that the monies paid to TED Enterprises Pty Ltd and Mullins Lawyers were in respect of expenses incurred by Nathan.
[5]Reasons at [109].
[6]Second Respondent’s Notice of Contention dated 12 September 2019.
Nathan also challenges determinations by the learned trial judge that the monies owing to the Bank of Queensland (BOQ Debt) was not a debt of the Company, which Nathan had contended was a debt of the Company. (Ground 8) Williams had objected to the inclusion of that liability as a debt of the Company at the trial.[7] Both Nathan and Williams gave evidence in relation to that BOQ Debt.
[7]ABII vol 2 at 153, Updated Outline of the Plaintiff.
The learned trial judge rejected Nathan’s evidence that the BOQ Debt was a debt which Williams had agreed would be met by the Company.[8] His Honour ordered that the Bank of Queensland (BOQ) should not be admitted by the liquidators as a creditor of the Company. Nathan challenges that ruling and contends that the order should not have been made when BOQ was not a party to the proceeding and when no order was sought in the Statement of Claim, such that it should have been dealt with in the ordinary course of the winding up. Williams contends that that finding was supported by the evidence and should not be disturbed. The Company contends that his Honour’s ruling was not made in error and that the BOQ Debt was a matter of controversy between the parties on the basis of evidence which was admitted at trial. His Honour was invited by the Company to determine how controversial debts should be dealt with and his Honour did so. The Company further contended that BOQ was sufficiently protected by the provision that it have liberty to apply.
[8]Reasons at [114].
Nathan claims that Orders 1(a), 1(e), 3 and 4 made by the learned trial judge were in error, as they discriminate against Nathan in favour of Williams, notwithstanding that no issue was taken with the proposed orders by Nathan prior to them being made. (Ground 7) The Company objects to the argument being raised upon appeal for the first time and, in any event, contends that there is no error in the orders made. Williams similarly submits that in the circumstances in which the orders were made, there was no error by his Honour.
Nathan further claims that the learned trial judge erred by proceeding on the assumption that the assets that the Company, held on trust for Williams, could be used by the Company to pay the debts of the Company. (Ground 6) Nathan contends that the Company had no right to pay creditors of one trust with the assets of the other trust. Both Williams and the Company object to Nathan raising such an argument for the first time on appeal, especially given that no issue was raised as to those proposed orders prior to them being made and sought at trial. In any event, Williams and the Company submit that in the circumstances of the present case the order was appropriate.
The learned trial judge found that Nathan was neither accurate nor reliable. His Honour did not accept any of Nathan’s evidence unless it was supported by independent contemporaneous documentation. In contrast, his Honour found Williams’ evidence was credible and reliable.
There is no challenge the trial judge’s finding that Nathan was neither accurate nor reliable and that his evidence demonstrated a lack of candour, nor that Williams was both credible and reliable. Nathan does, however, rely on uncontroverted facts to support his contention that this Court should determine that the learned trial judge’s findings were made in error. In that regard, he relies on the fact that given his reliance on uncontroverted facts, this Court is in as good a position “as the trial judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the findings of the trial judge.”[9]
[9]Fox v Percy (2003) 214 CLR 118 at [25] per Gleeson CJ, Gummow and Kirby JJ citing Warren v Coombes (1979) 142 CLR 531 at 551.
Appellate review of factual findings
In Fox v Percy, McHugh J, having reviewed the relevant authorities with respect to appellate review, stated:[10]
“Mason CJ, Deane, Dawson and Gaudron JJ, the other members of the Court, agreed with my judgment. Abalos was applied in Devries v Australian National Railways Commission where Brennan and Gaudron JJ and I said:
“More than once in recent years, this Court has pointed out that a finding of fact by a trial judge, based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against — even strongly against — that finding of fact. If the trial judge’s finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge ‘has failed to use or has palpably misused his advantage’ or has acted on evidence which was ‘inconsistent with facts incontrovertibly established by the evidence’ or which was ‘glaringly improbable’.”” (citations omitted)
[10](2003) 214 CLR 118 at [66].
McHugh J further stated that:[11]
“It is a serious mistake to think that anything said in Abalos or Devries necessarily prevents an appellate court from reversing a trial judge’s finding when it is based, expressly or inferentially, on demeanour. Those cases recognise — in accordance with a long line of authority — that it may be done. But there must be something that points decisively and not merely persuasively to error on the part of the trial judge in acting on his or her impressions of the witness or witnesses. Recently in State Rail Authority (NSW) v Earthline Constructions Pty Ltd (In liq), for example, this Court held that undisputed and documentary evidence was so convincing that no reliance on the demeanour of witnesses could rebut it.” (citations omitted)
[11]Fox v Percy (2003) 214 CLR 118 at [90].
Constructive Trust
A common intention constructive trust, while the subject of some debate in terms of the legitimacy of its existence, has been recognised in Australian law.[12] The Full Federal Court in Parsons v McBain[13] recognised the existence of a common intention constructive trust. In Staatz v Berry (No 3) (Staatz),[14] Derrington J recently summarised the circumstances in which the courts have recognised the existence of a constructive trust, either on the basis of a failed joint endeavour or on the basis of a common intention. In that respect, his Honour referred with approval to McMillan J in Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc (Imam), where McMillan J identified the relevant principles as follows:[15]
[12]Dal Pont in “Equity and Trusts in Australia”, Thomson Reuters 7th edition at [38.220] comments that “the label “common intention constructive trust” is, in any case, misleading, as the existence of an actual or inferred common intention to create a trust by definition gives rise to an express trust…not a constructive trust.” However it states at [18.230] that notwithstanding the “juridical incorrectness” of the common intention trust “Australian (principally New South Wales) case law continues to recognise its availability as an alternative to a remedial constructive trust.” However, Ford and Lee Law of Trusts identify the point of distinction between an express trust and a constructive trust is that the latter is imposed by operation of law where, according to established equitable principles, it would be unconscientious for the holder of the property to deny the claimant a beneficial interest in that property, or for the defendant to deny that he is liable to account to the claimant as if he were an express trustee: at [22.020].
[13](2001) 109 FCR 120.
[14](2019) 138 ASCR 231.
[15][2018] VSC 413 at [402]–[405].
“Common intention constructive trust
[402]The second class of constructive trust is a common intention constructive trust, which is distinct from the joint venture constructive trust. The court will construe a common intention constructive trust where:
(a)there is an actual or inferred common intention of the parties as to their beneficial interest in a property;
(b)there has been detrimental reliance on that common intention by the claimant; and
(c)it would be an equitable fraud on the claimant to deny his or her interest in the property.
The onus of proving such a trust lies on the party asserting the beneficial interest against the legal owner.
[403]The parties’ intentions can be found or inferred from the party’s contemporaneous words and conduct, also having regard to the surrounding circumstances and context in which they were uttered or performed. The relevant intention may arise after the property has been acquired. The intention to be established need not designate a specific share of the property; it is sufficient that the claimant should have a beneficial interest.
[404]The cases considering this form of constructive trust have commonly concerned persons in a domestic relationship, but the principle can be applied to disputes between parties to a commercial relationship.
[405]A common intention constructive trust creates substantive rights and is not merely a remedy that arises when a court makes a declaration to that effect. The trust will generally take effect from the moment at which the conduct giving rise to its imposition occurs. The interest created may, however, be deferred in accordance with principles governing priority between competing equitable interests.” (citations omitted)
Although his Honour in Staatz recognised, as did McMillan J in Imam, that cases where common intention constructive trusts arise are often recognised as arising between spouses or persons in personal relationships, Staatz and Imam did not consider that the category of cases where a common intention or constructive trust arise are closed.[16] Further, his Honour in Staatz noted that there may be an important difference between the common intention constructive trust and the failed joint endeavour constructive trust, which concerns the occasions when the trust comes into existence. His Honour commented that it may not be necessary in the case of a common intention constructive trust that any unconscionable assertion of title need occur. The foundation for equitable intervention in relation to the common intention constructive trust is the suffering of detrimental reliance by the party asserting the trust. That was a matter which his Honour did not need to resolve. Nor has it been the subject of argument in the present case and there is no need for this Court to resolve the matter.
Finding of Common Intention Constructive Trust — Grounds 1–5 and 12
[16]Staatz at [168]; Imam at [405].
Trial judge’s findings
In his reasons His Honour stated at [83]–[95] that:
“[83] I accept the plaintiff’s evidence that it was agreed between the first defendant and the plaintiff that from the commencement of the operation of the incorporated legal practice by the second defendant, each would conduct their own separate practices. The email communications exchanged between them at the time are consistent with that agreement.
[84]Their conduct in the operation of those separate practices thereafter was also consistent with such an agreement. Each practice had its own areas of specialisation. Each maintained separate general accounts. Each kept separate financial records. Each accounted for its own revenue and expenses. Each kept its own files, including records of work in progress. Neither transacted on the other’s practice account. Each accepted responsibility for its share of GST or income tax liabilities.
[85]Further, whilst the second defendant operated the incorporated legal practice, the plaintiff’s separate practice traded under the name “Nathan Lawyers Brisbane Pty Ltd”, and operated a website “nathanlawyers.com.au”, which contained no reference to the first defendant, the first defendant’s separate practice, or its staff. Similarly, the first defendant traded under the name “Nathan Lawyers”, operating a website “nathanlaw.com.au”, which likewise, contained no reference to the plaintiff, the plaintiff’s separate practice or staff employed in the plaintiff’s separate practice.
[86]In addition to those arrangements, each practice operated on the basis that capital items were funded from the respective practice’s general account. Neither required the authority or approval of the other before making capital purchases. Importantly, each decided what amounts would be drawn from their respective accounts by way of wages and actual drawings.
[87]Whilst the incorporated legal practice had obligations to file taxation and other documentation, the practices were carried out entirely separately and independently. Neither the plaintiff nor the first defendant exercised control over the operation of the other’s separate practice throughout that time. Neither sought to access funds generated from the other’s practice. Neither sought to obtain any benefit from the income derived by the other’s separate practice.
[88]I do not accept the first defendant’s evidence that the agreement to operate separate practice was on the basis each would own 50% of the other’s separate practice. That contention is not consistent with the email communications exchanged between them prior to and at the commencement of the incorporated legal practice operated by the second defendant. Such a contention is also inconsistent with the conduct of the parties after the commencement of the agreement.
[89]The first defendant’s own conduct in surreptitiously seeking, for the first time, to withdraw virtually all available funds from the plaintiff’s practice general account was also inconsistent with a conclusion that the first defendant genuinely believed that was the agreement between the parties. If that was his genuine belief, there would be no reason for the first defendant to engage in such conduct. His conduct is consistent with a conclusion that his own practice having been unsuccessful, the first defendant attempted to wrongfully take the assets of what he knew to be the plaintiff’s own separate business to meet the first defendant’s debts.
[90]The agreement reached between the plaintiff and the first defendant to operate separate practices and their subsequent conduct, support a finding that it was their common intention that each separate practice constitute a separate business which, upon payment of all outstanding obligations of the second defendant, was held by the second defendant on constructive trust for the benefit of the plaintiff, in respect of the Oxley practice and for the benefit of the first defendant, in respect of the West End practice.
[91]A constructive trust arises in circumstances where it would be unconscionable for the holder of the legal title to property to assert that that property was held free of any beneficial interest in the claimant. Equity will intervene to prevent the unconscientious denial of a claimant’s legal rights if it is established the parties agreed to that claimant having an interest in the property or that it was their common intention that the claimant have such an interest, and it is further established that that claimant has acted to his or her detriment on the basis of that agreement or common intention.
[92]The requisite intention may be established by agreement between the parties or by expressed statements as to their intention, or may be inferred form their conduct. Here, the common intention that each would have the beneficial interest in their respective practices arose both from their conduct of the practices and the conduct of the second defendant. The latter conduct was evidenced by a separation, in the financial records of the second defendant, of the income and expenses of each separate practice and an apportionment of each separate practice’s liability for what were common expenses paid by the second defendant.
[93]The requisite detriment arises if the claimant has acted in a way referrable to the agreement or intention that they have that beneficial interest. A person will have acted on that common intention, if that person has engaged in conduct that could not reasonably have been expected to have occurred unless that person was to have an interest in the property. The interest will be that agreed upon or intended if it can be established.
[94]The plaintiff has conducted his separate practice and business on the basis of an agreement to conduct separate practices. That conduct was to his detriment, unless the plaintiff was to have the beneficial interest in his separate practice. The plaintiff’s conduct could not reasonably have been expected to have occurred without such an interest. In such circumstances, equity should intervene, subject to the protection of others from unjust consequences.”
[95]The fact that the plaintiff and the first defendant agreed to operate those separate practices and business under an incorporated legal practice conducted by the second defendant does not alter that conclusion. That corporate structure governs the obligations of the second defendant to third parties, such as creditors, during the operation of the incorporated legal practice. Upon the meeting of all of those obligations there is no reason equity ought not to apply to prevent the first defendant from asserting an entitlement to benefit from the plaintiff’s separate practice and business, when it would be unconscionable for him to do so.” (citations omitted)
The following matters which were the subject of findings by his Honour were not the subject of controversy at trial and are not the subject of any controversy in this appeal, namely that:
(a)The Company was operating two legal practices at the time of the winding up order;
(i)Williams’ legal practice operated almost exclusively in personal injuries law and from November 2014 was conducted by him from premises at Oxley;
(ii)After November 2014, the second legal practice conducted by Nathan primarily operated in commercial law from premises in West End;
(b)The formation of the Company had occurred after the dissolution of a legal practice known as “Nathan Lawyers” which commenced operation in 2002. Originally had as its partners, Nathan, Robert Stevenson and Matthew Stapleton with Williams joining the partnership as a salaried partner on 4 February 2008. In November 2008, Nathan Lawyers became an incorporated legal practice known by the same name. Nathan, Stapleton and Williams were all directors of the incorporated practice known as Nathan Lawyers. Subsequent to that, issues arose between the Nathan, Stapleton and Williams, as a result of which Stapleton severed ties with that practice on 31 March 2012;
(c)On 1 April 2012, the Company was incorporated and commenced operating as an incorporated legal practice known as Nathan Lawyers Brisbane;
(d)Williams and Nathan both notified the Queensland Law Society and Lexon Insurance Pty Ltd of the fact that they were operating separate practices;
(e)Up until November 2014, the practices conducted separately by Nathan and Williams were both conducted from offices in South Brisbane and the lease was in the Company’s name. The lease for the Oxley premises was in the name of a company, of which Nathan was the sole director and shareholder. The lease for the West End premises was in the name of the Company;
(f)The Company provided employees and administrative services for the separate legal practices and held the professional indemnity insurance policy for both the Nathan’s and Williams’ practices;
(g)Williams traded under the name Nathan Lawyers Brisbane Pty Ltd while Nathan traded under the name “Nathan Lawyers”. Each had separate websites which did not refer to the other’s practice;
(h)The work in progress generated by each practice was kept, billed and received by that practice;
(i)The revenue from each practice was deposited into general accounts operated solely for each respective practice. However, each general practice account was in the name of the Company at the time that the practices were conducted from premises at West End by Nathan and Oxley by Williams. Also at that time, Nathan and Williams began to each operate separate trust accounts, albeit the separate trust accounts were in the Company’s name;
(j)The direct costs and expenses for each practice were paid from that practice’s general account, including employment expenses, such as wages and superannuation;
(k)Any costs which were not a direct cost of either practice were split on a pro rata basis based on the head count for each practice between April 2012 and February 2014 or otherwise were split equally including for certain shared administrative staff;
(l)There was no mixing of funds, in the respective general accounts, as consolidated revenue;
(m)Nathan and Williams determined the amount of their wage that was drawn from their respective general accounts without consultation with the other;
(n)Neither Nathan nor Williams used or accessed funds from the other’s general account or claimed any entitlement to the income generated from the other’s practice, save for when Nathan made the withdrawal of $236,880 out of William’s general account on 14 September 2018;
(o)Until September 2015, a consolidated monthly business activity statement (BAS) was prepared for the Company to meet goods and services tax (GST) and pay as you go (PAYG) withholding tax obligations from calculations setting out the GST and PAYG withholding tax obligations of each respective practice. Each practice paid its share of those obligations using the payment slip;
(p)After September 2015, each practice was granted separate branch registration by the Australian Taxation Office (ATO), and as a result, each practice prepared and lodged its own BAS and PAYG withholding tax as individual branches and commenced reporting to the ATO for BAS and PAYG withholding tax as individual branches;
(q)The Company lodged a consolidated income tax return of income and expenses but each practice paid its respective component of income tax based on its contribution to the profit of the company;
(r)Each practice maintained separate accounting records, prepared its own profit and loss statements, prepared its own balance sheets and maintained its own work in progress and practice files;
(s)Any profit of Williams’ practice was dealt with on the instruction of Williams, and any profit from Nathan’s practice was dealt with on instruction of Nathan. Williams did not draw any profit from his practice and the profits were retained within the practice, while the West End practice had no profits and had accumulated losses at the time the Company was wound up; and
(t)Nathan and Williams did not have any knowledge of each other’s files nor how the other’s practice operated.
A number of facts were not controversial between the parties, including factual matters which were not, but according to the Appellant should have been, the subject of findings between the parties. Those factual matters have been set out in the Schedule to Nathan’s submissions. Williams took no issue with any of those facts. Nathan complains by Ground 12 that his Honour erred in not making findings about each of those matters.
The Trial
Williams contended that on or about March 2012 he and Nathan had agreed to conduct an incorporated legal practice through the Company with effect from 1 April 2012 which was partly in writing and partly by conduct.[17] Williams contended that the terms of the Agreement included a term that he and Nathan would conduct separate legal practices and that he and Nathan would each own their respective practices.[18] Nathan contended that there was no agreement as to ownership of the practice and contended that the material terms of the agreement were that: he and Williams would continue to practice law together as shareholders of the Company; that they would commence legal practice as directors of the Company; that they would continue to operate their own legal practices within their areas of expertise; and each of them would have their own general account.[19]
[17]Amended Statement of Claim at [4], [5] and [6].
[18]Amended Statement of Claim at [5].
[19]ABI vol 1 at 53, Amended Defence at [3(d)].
Evidence in chief was generally provided by way of affidavit, which was admitted without objection. The scope of dispute at the trial was limited since a large number of facts as to how Nathan and Williams operated their practices and the Company’s role were not the subject of dispute. According to Nathan, those matters were only relevant to the manner in which they would operate their respective practices. The decision largely turned on the proper characterisation of the facts. Nevertheless, there were credit issues between Nathan and Williams in relation to what had been agreed between them and in relation to Nathan’s withdrawal of funds out of Williams’ Practice’s general account and the utilisation of those funds by Nathan.
Nathan, Williams and Mr Ralph gave evidence. Mr Ralph was a director of TED Enterprises Pty Ltd which Nathan contended was providing advice to the Company. TED Enterprises Pty Ltd was also one of the companies paid by Nathan with the monies withdrawn from Williams’ Practice’s general practice account. Nathan ultimately conceded in evidence that was not, in fact, the case. Both Nathan and Williams were cross-examined as to the nature of the agreement between them and aspects of the operation of their separate practices and the role of the Company. Nathan was also cross-examined about:
(a)the circumstances of the $236,880 withdrawal from Nathan’s Practice’s general account;
(b)the expenses which he paid with the $236,880, including to TED Enterprises;
(c)allegations made by him in the affidavit evidence when seeking the winding up of the company; and
(d)the BOQ debt.
As stated above, the learned trial judge did not find that Nathan’s evidence was accurate or reliable. His Honour found that Nathan’s evidence, together with aspects of his conduct in the winding up proceeding, demonstrated a lack of candour.
Provision for the division of assets of the company — Grounds 1 and 2
Nathan relies on Part 5.6 of the Corporations Act together with the Constitution to contend that they contain detailed provisions as to how the assets of the Company will be applied in the event of the termination of the Company. In particular, Nathan points to clause 5.1 of the Constitution. Clause 5.1 provides that the holders of ordinary shares will have the right to participate in any division or distribution of surplus assets equally. Nathan contends that clause 5.1 provided a specific legal arrangement, as between the Company and Nathan and Williams, which regulated how net assets of the incorporated legal practice would be distributed upon termination. That specific legal arrangement required both Nathan and Williams to receive 50 per cent of all surplus assets. Nathan contends that the trial judge erred by failing to recognise that and to take it into account. His Honour was not specifically referred to clause 5.1 of the Constitution at trial in this context.[20]
[20]Nathan referred to clause 5.1 obliquely in the context of Nathan’s withdrawal of the $236,880 from Williams’ Practice’s general account.
Nathan further contends that, by the Parties’ adoption of the specific corporate structure of the Company, the present situation was analogous to that discussed by Deane J in Muschinski v Dodds.[21] Namely that the parties had made provision in their legal arrangement for what was to be the division of assets in the event of the failure of their relationship or joint endeavour, such that it was not unconscionable for them to be held to the arrangement and there was no cause for equity to intervene. Nathan contends that the combined effect of the arrangements put in place by Nathan and Williams, namely that: each had an equal shareholding in the Company; the adoption of the Constitution, which provided for equal division of profits and surplus assets between shareholders; and the undertaking of their practices through an incorporated legal structure; all evidenced the fact that they had agreed to put in place an arrangement in the event of the failure of the Company, such that there was no cause for the imposition of a constructive trust. Nor was it unconscionable to hold the parties to the legal structure that they adopted at the outset. It submits that the present case is similar to the decision in Raulfs v Fishy Bite Pty Ltd.[22]
[21](1985) 160 CLR 583 at 618.
[22][2012] NSWCA 135.
Williams, however, contends that the complaints of Nathan, in respect grounds 1 and 2, assume that the respective legal practices were in fact assets of the Company. Williams submits that the contention of Nathan is contrary to the undisputed facts, the evidence of Williams and the findings of the learned trial judge.
Williams contends that neither Part 5.6 of the Corporations Act nor the Constitution represent an agreement of how the assets would be applied in the event of a breakdown in their relationship. Williams asserts that Part 5.6 of the Corporations Act did not apply to the winding up of a solvent company. That is however incorrect. Part 5.6 applies to a voluntary winding of a company, which includes a solvent company.[23] However, it is true to say that Part 5.6 would not apply to an orderly informal winding up undertaken by the directors/shareholders.[24]
[23]Corporations Act 2001 (Cth), s 513.
[24]Although they would apply to a voluntary winding up under the Corporations Act. However, s 501 provides (subject to the provisions of the Act as to preferential payments) for the distribution of the assets to be distributed to members according to their rights and interests in the company unless the constitution provides otherwise.
Williams contends that clause 5.1(c) of the Constitution makes no provision for the ownership of the assets of the Company, which his Honour had found were held on trust for the benefit of Williams in respect of Williams’ practice and for the benefit of Nathan in respect of Nathan’s practice.
Williams also contends that neither Part 5.6 of the Corporations Act or the Constitution specify what the assets of the Company were, which are said to be the subject of the application of those provisions. Nor do those provisions represent any agreement as to how the assets will be applied in the event of a breakdown in their relationship.
Williams also submits that the agreement now put forward by Nathan is inconsistent with the undisputed arrangements to operate separate practices. The argument now contended by Nathan, Williams submits, is inconsistent with the evidence of Nathan. During cross-examination at the trial, Nathan gave the following evidence:[25]
“You never asserted to Mr Williams that when moneys [sic] came in on a settlement of any files, you were entitled to 50 per cent of those moneys [sic]? – No I never did…”
[25]ABII vol 6 at 2081/30–33.
In reply, Nathan submitted that to the extent that Williams asserted that the assets of the two legal practices were not assets of the Company, but were assets of the Parties respectively, that was contrary to the findings of the learned trial judge. His Honour found that the Company holds the assets of each practice on trust for Nathan and Williams respectively. Nathan contends that that finding necessarily entails that the Company is the legal owner of the assets.
Nathan contends that an orderly informal winding up undertaken by director shareholders would be constrained by cl 5.1(c) of the Constitution, such that surplus assets of the company will be required to be shared equally amongst members having similar rights.
Further, Nathan submits that there is no inherent conflict in a company, with two equal shareholders, owning and operating two separate businesses in which the financial affairs and management of each business is separate from one another.
Consideration
His Honour found that the Company’s corporate structure governed its obligations to third parties such as creditors, and upon the meeting of all of those obligations, there was no reason why equity ought not to apply to prevent Nathan from asserting an entitlement to the benefit from Williams’ Practice when it would be unconscionable for him to do so. His Honour found that neither Nathan nor Williams had turned their mind to a division of assets upon the breakdown of the relationship.
The contention that the trial judge failed to recognise that the Constitution and Corporations Act contained provisions which would apply to the division of assets upon termination cannot be accepted. His Honour stated that:[26]
“[T]he applicable provisions were not framed to meet the contingency of premature failure of the … relationship.”
[26]Reasons at [97] citing Deane J in Muschinski v Dodds (1985) 160 CLR 583 at 613.
In the context of a failed endeavour, Deane J in Muschinski v Dodds stated that:[27]
“Both common law and equity recognize that, where money or other property is paid or applied on the basis of some consensual joint relationship or endeavour which fails without attributable blame, it will often be inappropriate simply to draw a line leaving assets and liabilities to be owned and borne according to where they may prima facie lie, as a matter of law, at the time of the failure. Where there are express or implied contractual provisions specially dealing with the consequences of failure of the joint relationship or endeavour, they will ordinarily apply in law and equity to regulate the rights and duties of the parties between themselves and the prima facie legal position will accordingly prevail. Where, however, there are no applicable contractual provisions or the only applicable provisions were not framed to meet the contingency of premature failure of the enterprise or relationship, other rules or principles will commonly be called into play. If, in the last-mentioned case, the relevant relationship is merely contractual and the contract has been frustrated without fault on either side, the present tendency of the common law is that contributions made should be refunded at least if there has been a complete failure of consideration in performance…” (citations omitted & emphasis added)
[27](1985) 160 CLR 583, at 618–619.
His Honour’s statement at [97] was drawn from Muschinski v Dodds. The reference to “applicable provisions” is clearly referring to the Corporations Act provisions as the preceding sentence stated “A contrary conclusion is not mandated by the terms of the shareholding of the [Company].”[28] The clear inference is that his Honour was referring to the submissions made by Nathan in that regard, which relied on the shareholding of Nathan and Williams and the provisions of the corporate structure in contending that there was not a constructive trust.[29] That is further supported by the fact that the Plaintiff’s claim was brought in the context of the Company being wound up.
[28]Reasons at [97].
[29]ABII vol 2 at 101–103; Reasons at [17].
Notwithstanding the above, the further issue is whether his Honour was in error in not finding that the provisions of the Corporations Act were legal arrangements made by the Parties as to the division of assets in the event of the termination of their relationship or enterprise such that it should apply both in law and equity.
Generally the rights, expectations and obligations of the people standing behind a company are sufficiently and exhaustively stated in the Corporations Act and the company’s constitution.[30] That will not always be the case. While it will be an uncommon circumstance, it does not preclude equity intervening in limited circumstances where there are no specific provisions governing the circumstance that has arisen and where the evidence supports the intervention of equity, such as by the imposition of a constructive trust.
[30]Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379.
His Honour found that the fact that “[t]he lack of any specific agreement between [Nathan] and [Williams], in the event of a breakdown in the running of an incorporated legal practice by the [Company], is a consequence of neither the plaintiff nor the first defendant turning their mind to a division of assets upon the breakdown of that relationship.”[31] In that regard his Honour further found that:[32]
“The first defendant accepted the agreement entered into between the parties did not include a provision for the distribution of assets in the event of such a breakdown.”
[31]Reasons at [98].
[32]Reasons at [98].
The finding is challenged by Nathan given his evidence also referred to the fact that their respective shareholdings dictated the position between the parties, which governed what would occur between the parties. While it may be accepted that the adoption of a corporate structure with equal shareholdings was part of the arrangement between the Parties, particularly in dealing with third parties, the findings of his Honour were consistent with the evidence of Nathan and Williams that they had not discussed what would occur if their relationship broke down and particularly whether the corporate structure was to be the determinant factor. While his Honour, in [98] of his reasons, used terminology consistent with cases dealing with a constructive trust arising out of a failed joint endeavour, his Honour also found that it was the common intention of Nathan and Williams that each separate practice constituted a separate business which, upon payment of all outstanding obligations of the Company was held by the Company on constructive trust for Nathan and Williams respectively.[33]
[33]Reasons at [90].
To the extent his Honour found such a common intention, his Honour was satisfied that that was the overriding intention of Nathan and Williams to which the Company was also bound and a contrary conclusion was not mandated by the terms of the shareholding of the Company.
Part 5.6 of the Corporations Act contains provisions of general application in the context of winding up. One of the circumstances where a winding up of a company may be ordered is where there is a breakdown of the relationship between the directors of a company on the just and equitable ground. While the adoption of a corporate structure gives rise to the possibility of winding up on the just and equitable ground, that is a matter within the Court’s discretion.[34]
[34]See summary of relevant principles by Bond J in Allways Resources Holdings Pty Ltd v Samgris Resources Pty Ltd [2017] QSC 74 at [16].
Section 556 operates in relation to the priority of various debts, expenses and claims upon the company. Section 485(2) of the Corporations Act, which is also relied upon by Nathan, provides that the Court “must adjust the rights of the contributories among themselves and distribute any surplus among the persons entitled to it.” It applies to winding ups other than voluntary winding ups.[35] Section 485(2) does not, however, indicate how such a judgment will occur. According to McPhersons Law on Company Liquidation, the Corporations Act makes no attempt to prescribe, in rigid fashion, the manner in which the company’s assets are to be dealt with on winding up.[36] According to Barrett J in Visnic v Sywak,[37] the shareholder register establishes a prima facie position but his Honour considered it at least arguable that equitable interests in or claims upon the shares of contributories are cognisable by the liquidator.
[35]For voluntary winding ups, Corporations Act 2001 (Cth), s 501 applies.
[36]At [14.240].
[37](2011) 86 ACSR 569.
Upon appeal, Nathan presented a new and expanded argument insofar as it contends that part 5.6 of the Corporations Act, read together with the Constitution, contained detailed provisions as to how the assets of the Company would be applied in the event of the termination of the incorporated legal practice. Nathan had not specifically relied on clause 5.1(c) of the Constitution before the learned trial Judge, although he had referred generally to the Constitution. Williams did not object to the new argument being raised, in any event, Williams contends that clause 5.1(c) does not define the assets to which it applies and was contrary to the undisputed arrangements to operate separate practices and the conduct of the parties found to give rise to the common intention.
Clause 5.1 of the Constitution provides that:
“Holders of Ordinary shares and A Class and B Class shares have:
(a)the right to vote at all meetings of the Company;
(b)the right to participate in any dividend declared on the class of shares held; and
(c)the right to participate in any division or distribution of any surplus assets or profits of the Company equally with all other Members having similar rights.”
Clause 5.1(c) of the Constitution represents an agreement between the shareholders and the Company and between shareholders themselves. It is a provision which applies to the distribution of surplus assets generally. It is not one which specifically deals with the event of termination. It is, however, broad enough to provide the shareholders with a general right to participate in the distribution of surplus assets, which prima facie would extend to the situation where the Company had been wound up.
While the provisions of the Corporations Act and the Constitution make provision for the distribution of assets, the priority of claims upon the Company and the payments of debts, neither the Corporations Act nor the Constitution define what the Company assets are that are available for distribution. In particular, while they would prima facie apply to the assets held by the Company, that is not the case where it holds the beneficial ownership on trust for other parties. They are provisions of general application rather than specific provisions dealing with the consequences of a failed relationship between joint shareholders operating separate practices through a corporate vehicle. The Corporations Act and the Constitution did not preclude the Court from finding that there was a constructive trust which arose from the common intention of the shareholders of the Company, which would be binding upon the Company in the determination of the assets available for distribution.
The learned trial judge found that the present case was distinguishable from the case considered by the New South Wales Court of Appeal in Raulfs v Fishy Bite Pty Ltd (Raulfs).[38] In that case, there was a breakdown in the personal and business relationship between Mrs Raulfs and the second respondent. Mrs Raulfs had entered into a partnership agreement with Fishy Bite Pty Ltd which was owned and controlled by the second respondent. Consent orders had been made for the winding up of the partnership business. Mrs Raulfs sought repayment of $400,000 paid by her to Fishy Bite Pty Ltd. One of the bases relied upon by Mrs Raulfs was that there was a constructive trust over the monies. The Partnership Deed provided that the payment of $400,000 by Mrs Raulfs was a contribution to capital.[39] Clause 23.1 of the Partnership Deed provided that upon termination of the Deed that a general account would be taken and that “the assets…shall be realised and sold and in settling accounts between partners the following rules shall, subject to any contrary agreement between the partners be observed.” Clause 23.1 then set out the order in which monies would be paid including “in payment to each Partner (pro rata if necessary) of the final balance of his Capital account”.[40] Having regard to the principles stated by Deane J in Muschinski v Dodds, Campbell JA considered that it was possible for an equity of the type recognised in Muschinski v Dodds to arise in the context of a partnership.[41] His Honour accepted that the partnership had failed prematurely and assumed that there was no “attributable blame.” However, his Honour found that even if Fishy Bite Pty Ltd had the $400,000 (which it did not) paid by Mrs Raulfs, there was no occasion for the imposition of a constructive trust.[42] His Honour found that the Muschinski v Dodd trust did not arise because Clause 23 of the Partnership Deed contained an express provision specifying the manner in which the partnership assets were to be divided upon termination,[43] and that there was therefore nothing unconscionable in holding the parties to their agreement. There was no issue that the $400,000 was an asset of the partnership which was to be treated as capital.[44]
[38][2012] NSWSCA 135 (Raulfs).
[39]Raulfs at [6] citing Clause 4.4 of the Partnership Deed.
[40]Raulfs at [6].
[41]Raulfs at [83].
[42]Raulfs at [79].
[43]Raulfs at [84].
[44]Raulfs at [85].
The evidence that the Parker Loan was a Company debt also relied on the evidence of Nathan, who his Honour had not accepted as a credible witness.[139] Nor did his Honour accept Nathan’s evidence that the amount of $81,880 was owing.[140] In addition, there was a letter of demand sent by express post from Sciaccas & Associates Solicitors to Nathan, dated 14 September 2018, stating that the sum of $81,880 was due by 21 September 2018. The letter of demand does not provide any details of the debt owed, who owed it or how the amount of $81,880 was calculated, nor that it included an amount of interest. The letter in fact states “Once proceedings are commenced you may be held liable for interest…”.[141]
[139]Reasons at [112].
[140]Reasons at [111]–[113].
[141]ABII vol 2 at 374, Affidavit of Julian Nathan, sworn 21 November 2018, at exhibit JN102.
There is objective evidence that supports the fact that a loan of $50,000 from the Nathan Family Trust to Nathan Lawyers Pty Ltd was made using funds loaned from Mr Parker to the Nathan Family Trust, and that interest of 8.5 per cent was paid by the Company in respect of the loan until 2014. However, there is apparently no explanation for why the amount recorded in the accounts in 2015–2017 was a sum of $48,527.90, nor why no interest was paid after 2014. Further, Nathan, in his defence, alleged that he paid $81,880 in discharge of a liability of the Company owed to Parker with the funds withdrawn by him from Williams’ practice’s general account. The evidence does not substantiate that there was any such debt owed by the Company in September 2018, save for an equivocal letter of demand from Sciacca & Associates Solicitors. Nathan’s evidence that such a debt was owed was rejected by the learned trial judge. The onus was on Nathan to prove that he had used the monies withdrawn to pay a Company debt in the amount of $81,880.[142] He has failed to discharge that onus.
[142]See Amended Defence at [10(c)(i)], which was denied in the Further Amended Reply at [6(bi)].
While there may have been a loan from Mr Parker which was on loaned to the Company, there is no evidence that it was for the amount contended by Nathan nor that the Company owed the debt in September 2018. In the circumstances, it was open for his Honour to reject the contention that the amount of $81,880 had been used to discharge a Company debt. It was not a matter of determining whether there was a loan of a lesser amount owing. That was not the matter in issue for determination by the Court, nor was the Court asked to determine if it was a lesser amount.
This ground of appeal fails.
Bank of Queensland Debt – Ground 8
Order 1(b) of his Honour’s orders ordered that the winding up of the Company was to take place by “the Liquidators not admitting (or otherwise treating) the Bank of Queensland as a creditor of the second defendant”.
Nathan contends that order 1(b) should not have been made because:
(a)No order to that effect was sought in the claim and statement of claim;
(b)The question of admitting or not a proof of debt by the bank is a matter which the court ought to have left to be dealt with in the liquidation in the ordinary course, there being no evidence that the liquidators have received a proof of debt from BOQ; and
(c)The order directly affected the rights of BOQ and as such, BOQ was a necessary party and ought to have been joined such that BOQ had an opportunity to be heard.
Williams contends that the question of whether the Company owed a debt to BOQ became an issue at trial and that Nathan had contended throughout the proceeding that the BOQ Debt was a debt of the Company. Evidence was led at trial in relation to that matter and submissions were made. Further, Counsel for the Company submitted that the liquidators would be assisted if the court was to determine the issues in relation to the BOQ Debt, notwithstanding that normally a liquidator would adjudicate on whether the debt was provable or not. Williams contends that to the extent that BOQs rights are affected, they had liberty to apply and did not exercise it. The Company contends that his Honour did not err by making the order under section 90-15(1) of the Insolvency Practice Schedule and that the argument of Nathan should be rejected because:
(a)The court may determine a controversy between the parties on the basis of the evidence at trial, notwithstanding the controversy is not raised on the pleadings;
(b)The liquidators invited the learned primary judge to determine how debts which were controversial should be dealt with in the winding up and the Insolvency Practice Schedule section 90-15(1) is sufficiently broad to permit such a determination; and
(c)It was not necessary for BOQ to be joined as it was sufficiently protected by the liberty to apply. Further, an aggrieved party has standing to seek leave to appeal from a decision which affects it.[143]
Counsel on behalf of the Company stated it was not strictly true that there was no issue in the pleading in relation to BOQ as the Company had pleaded at [12(n)] that a contingent creditor was BOQ in the sum of $251,318, which had been expressly denied by Williams. However, it was conceded by Counsel acting on behalf of the Company that no relief was sought in relation to that debt. Further, counsel for the Company pointed to the fact that the Company’s counsel had expressly stated to his Honour that the liquidators wanted directions from his Honour as to how to carry out the winding up,[144] which had been foreshadowed in the opening.
[144]ABII vol 6 at 2137, T2-69/42–45.
His Honour rejected Nathan’s evidence that the debt owed to BOQ was a debt the Company had agreed was to be met by the Company.[145] His Honour’s determination in that regard was supported by the evidence considered by his Honour. At [115] of his Honour’s reasons, his Honour pointed to the contemporaneous evidence, none of which supported the Company owing money to BOQ, which arose out of a bill of sale entered into between Nathan, Matthew Stapelton and Robert Stephenson (the partners of Nathan Lawyers Pty Ltd in 2005). The BOQ Debt was never listed in a business separation report of assets and liabilities assumed by Nathan Lawyers Brisbane Pty Ltd.[146] Further, in the DMP accounts report of 30 June 2014, there was no record of a loan to BOQ, and in fact there was an express statement that the “Partnership Bank Overdraft 20213896” which refers to the BOQ loan, was not taken over by the Company.[147]
[145]Reasons at [114].
[146]ABII vol 4 at 802, Affidavit of Daniel Williams sworn 20 February 2019 at exhibit DW-4.
[147]Account number 20213896 is a BOQ loan.
While no relief was sought in relation to the BOQ Debt, it was clearly a live issue between the parties at the trial.
Given that the order directly affects BOQ’s rights and the recoverability of any debt which it may wish to claim against the Company, it was a necessary party and ought to have been joined before such an order was made.[148] While BOQ is not bound by the judgment because it was not a party to it, the Company and its liquidators are so bound in relation to the treatment of the BOQ Debt. The real question is whether the grant of liberty to apply after the order was made, in circumstances where the liquidator was obliged to give notice of the orders to the relevant creditors within seven days, was sufficient to accord BOQ a right to be heard.[149]
[149]Order 5 of Boddice J dated 14 June 2019.
According to the Full Federal Court in News Limited v Australian Rugby Football League Ltd,[150] providing for non-parties to make submissions after the delivery of judgment as to the form of orders, does not cure the denial of natural justice as a result of their non-joinder. The Court considered that by that stage, the non-party has been deprived of the opportunity to participate in the trial of the issues that had already been determined in the way that the trial judge thought required redress in terms of the orders made.[151] Accordingly, the Court set aside the Orders affecting the non-parties.
[150](1996) 64 FCR 410 at 527.
While the BOQ Debt was the subject of competing evidence between Nathan and Williams, it was not necessary for his Honour to make a determination in relation to the BOQ Debt in order to resolve the dispute. While the liquidators of the Company were seeking to adopt a pragmatic approach by requesting that his Honour make directions in relation to the disputed debts in order to avoid further time and costs to revisit a matter that was the subject of dispute and evidence at the hearing, the fact remains that BOQ was a necessary party to such a determination and should have been joined to the proceedings. Insofar as liberty to apply was granted to BOQ, as was pointed out above, that that does not cure the denial of natural justice to the non-party. Further, provision for liberty to apply provided for BOQ to make submissions to the court as to the appropriateness of making such an order which affected its rights but that that could not affect the substantive findings made by his Honour, namely that the BOQ debt was not a debt of the Company.[152]
[152]Ross v Lane Cove Council (2014) 86 NSWLR 34: at [70], where the New South Wales Court of Appeal found that the liberty to apply that was granted in that case gave no rights at all to the person applying to be joined as a party and the grant of liberty to apply, which merely facilitated the working out of orders and could not be used to alter their substance, was not the means by which natural justice was afforded to a person who had not been heard.
In the circumstances, Order 1(b) was made in error and should be set aside.
Errors in the terms of the Orders made – Grounds 6 and 7
Nathan submits that the orders made by his Honour discriminate in favour of Williams insofar as:
(a)Order 1(a) directs the liquidators not to realise (without first obtaining leave of the court) the plant, equipment, IT, client files and work in progress of the files in Williams’ practice, but no equivalent order is made in respect of Nathan’s practice;
(b)Order 1(e) excludes contingent and prospective creditors of Williams’ practice from needing to be paid by the liquidators out of the assets of Williams’ practice. No equivalent order is made in relation to Nathan’s practice;
(c)Orders 3 and 4 direct that after the assets of the Company have been applied in paying all liquidators’ remuneration and/or creditors, the surplus assets of the Company which are held on trust for Williams and are to be transferred in specie to Williams. Nathan states that even assuming the assets of Williams’ practice are held on constructive trust for Williams, the most that can be ordered is that surplus assets of Williams’ practice (after paying its share of the liquidator’s remuneration and the creditors of Williams’ practice) be held on trust for Williams.
Nathan submits that there is no legal basis on which the trial judge could make the Orders by which the Company preferred one of its trusts over the other. It also contends that Order 1(f) proceeds on an assumption that any assets of the Company can be used to pay any creditors of the Company, but that is inconsistent with the finding that the Company held assets pursuant to two separate trusts.
Dealing with the last matter first, it was specifically recognised in Muschinski v Dodds that in relation to constructive trusts the remedy can be framed so that the consequences of its imposition are operative only from the date of the judgment or a formal court order, to take account of the third party interests, namely those of the creditors, which is a relevant matter to be considered in any grant of equitable relief.[153] Further, consistent with the use of the Company to incur the liabilities of the incorporated practice and pay those parties, his Honour found that the common intention was not only that the Nathan and Williams’ practices were separate practices, but that upon payment of all outstanding obligations of the Company each practice was held on trust by the Company for Nathan and Williams respectively.[154] In those circumstances, the order that the remaining assets in the winding up could be used to meet the liabilities of Nathan’s practice or Williams’ practice in the event of a shortfall was open to his Honour, notwithstanding the finding that the respective practices were held on constructive trust by the Company.
[153](1985) 160 CLR 583 at 615.
[154]Reasons at [90].
The complaints now raised by Nathan were not raised when the parties were given the opportunity to do so prior to the orders being made. In particular, Nathan could have made submissions about the draft order, which encompassed the orders now the subject of complaint. No reason has now been provided as to why he should be allowed to now raise arguments against the orders made.[155] In that regard, the Company objected to Nathan being permitted to do so.
According to the submission made on behalf of Williams, the orders in 1(e) were specifically sought to address Williams’ evidence that as a part of his personal injuries practice barristers were briefed on a speculative basis. Paragraph 1(e) was sought, and made, on the basis that the contingent or prospective creditors of Williams’ practice were barristers who accepted briefs on a speculative basis.[156] Nathan did not raise the same considerations relevant to any order made in respect of contingent or prospective creditors or make submissions such that a similar order was required.
[156]ABII vol 4 at 807, Affidavit of Williams, sworn 20 February 2019 at [16(b)].
As to orders 3 and 4, it is true that they assume that all the surplus assets of the Company will be assets of Williams’ practice. In that regard, Williams contends that the evidence showed that Nathan’s practice was “hopelessly insolvent”.[157] The Company also submitted that Nathan’s practice lacked sufficient assets to pay its creditors, whereas Williams’ practice had significant assets, albeit largely contingent.[158] The Company therefore submits that the orders made were responsive to the evidence and appropriate in the circumstances.
[157]Written submissions of Williams at [45].
[158]AB II vol 5 at 1582, Affidavit of Michael McCann, sworn 14 March 2020 at exhibit MM-18.
Nathan contends that the estimates of Mr McCann regarding the assets and liabilities are of a preliminary nature only and inconclusive, on the basis that the estimates were based on information provided by only one of the directors. It appears that information was provided by Nathan.[159]
[159]AB II vol 5 at 1483, Affidavit of Michael McCann, sworn 7 March 2020 at [5(c)].
The affidavit of Mr McCann showed that Nathan’s practice lacked sufficient assets to pay its creditors, whereas Williams’ practice has significant assets, albeit that they were largely contingent. He was not challenged on his evidence. The orders made by his Honour in relation to the winding up were responsive to the evidence and appropriate, given that the evidence was that Nathan’s practice would not have surplus assets on any of the scenarios considered by Mr McCann. If Williams does not have any surplus assets the Company may apply for a variation of the orders in [1(a)]. Orders were made to meet the evidence before a Court and in the present case, his Honours’ orders were appropriate.
Nathan further complains that the orders were framed to allow Williams to continue carrying on Williams’ practice and employ his staff, when he was not provided with the same opportunity. However, Nathan was provided with the same opportunity to make submissions as to appropriate orders. Nathan did not present evidence to support the fact he would have sufficient assets to continue his practice and employ staff. Nor did he make a submission that he should be given the opportunity to do so. That is unsurprising given the evidence of Mr McCann.
In all of the circumstances, it is not appropriate to permit Nathan to raise grounds 6 and 7 when they were not matters raised below. In any event, the learned trial judge’s orders made were appropriate and open to the Court on the basis of the evidence before it.
Agreement on Actual Drawing – Ground 12
Nathan was granted leave to read and file an Amended Notice of Appeal at the outset of the appeal hearing. That Amended Notice of Appeal included a challenge to his Honour’s finding at paragraph 86 that the arrangements between Nathan and Williams allowed each to determine amounts to be withdrawn from the respective accounts by way of “actual drawings”.[160]
[160]Reasons at [86].
It is submitted by Nathan that “actual drawings” must refer to profit. There was no evidence that any profits had been drawn and a dividend paid to the shareholders. However, there was evidence that each partner determined the wages that they each would draw from their respective practice accounts without consulting the other. While that reference by his Honour may have been referring to profit and was therefore in error, it had no consequence for his Honour’s overall findings such that it requires the decision be set aside.
Conclusion
Nathan has failed to substantiate its appeal on all grounds, save in respect of ground 8 relating to the BOQ Debt and order 1(b) of the orders of the Court below made on 14 June 2019. The parties should be permitted to make submissions as to costs.
In my view the orders should be:
1.Order 1(b) of the Orders made on 14 June 2019 is set aside;
2.The appeal should be otherwise dismissed; and
3.The parties should provide submissions of no more than three pages as to costs within 14 days of these reasons being published.
- AGLC
- Nathan v Williams [2020] QCA 138
- Case
- [2020] QCA 138
- Decision Date
CaseChat Overview and Summary
The court was required to decide whether the second respondent held the separate practices on trust for Nathan and Williams and whether the trial judge erred in ordering that a debt of a third party should not be admitted by the liquidators of the second respondent. The court also needed to determine whether the orders were inconsistent with the common intention constructive trust and whether they were discriminatory against Nathan.
The court found that Nathan had failed to substantiate his appeal on all grounds, save in respect of ground 8 relating to the BOQ Debt and order 1(b) of the orders of the Court below made on 14 June 2019. The court held that the reference to “actual drawings” in the trial judge’s decision may have been referring to profit and was therefore in error, but it had no consequence for the overall findings. The court found that the orders were not inconsistent with the common intention constructive trust and that there was no evidence of discrimination against Nathan. The court concluded that the orders should be set aside in part and the appeal should otherwise be dismissed. The parties were to provide submissions of no more than three pages as to costs within 14 days of these reasons being published.
Orders
Orders of the court
1. Order 1(b) of the Orders made on 14 June 2019 is set aside;
2. The appeal is otherwise dismissed; and
3. The parties are to provide submissions of no more than three pages as to costs within 14 days of these reasons being published.
Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
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