Nicholson Street Pty Ltd (Receivers and Managers Appointed) (In Liquidation) v Letten
[2015] VSC 583
•4 November 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2014 03756
| NICHOLSON STREET PTY LTD (ACN 069 104 089) (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) & ORS (according to the schedule attached) | Plaintiffs |
| v | |
| MARK RONALD LETTEN and Anor | Defendants |
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JUDGE: | JUDD J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 31 July 2015 |
DATE OF JUDGMENT: | 4 November 2015 |
CASE MAY BE CITED AS: | Nicholson Street Pty Ltd (Receivers & Managers Appointed) (In Liquidation) & Ors v Letten & Anor |
MEDIUM NEUTRAL CITATION: | [2015] VSC 583 |
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PRACTICE AND PROCEDURE — Application by plaintiff for leave to file further amended pleading — Adequacy of pleading — Proper plaintiff — Leave refused.
TRUSTS — Breach of trust — Errant trustee as plaintiff — Second limb of Barnes v Addy — Accessorial liability of controlling director — No independent assistance given to trustee — Breach induced by director.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Dr I Hardingham, one of Her Majesty’s Counsel with Mr R Strong | King & Wood Mallesons |
| For the First Defendant | Mr I Waller, one of Her Majesty’s Counsel with Mr S Hibble | Baker & McKenzie |
| For the Second Defendant | Mr S Rubenstein | Maddocks |
HIS HONOUR:
Introduction
On 11 November 2010, Gordon J delivered judgment in Australian Securities and Investments Commission v Letten (No 7),[1] in which orders were made authorising the receivers of certain property of unregistered managed investment schemes, in which the defendants in this proceeding, Mark Ronald Letten and Paul James Lane, were involved, to establish a Common Fund of pooled assets, applied in a particular order of priority. The receivers, Damien Templeton and Philip Hennessy, had been appointed as joint and several receivers and managers of the property following the winding up of certain of the schemes.
[1][2010] FCA 1231.
In June 2014, the receivers sought a direction from the Federal Court of Australia that they were justified in deploying part of the Common Fund for the purpose of commencing and prosecuting a proposed proceeding against Letten and Lane. Letten had been a director and secretary of the proposed plaintiffs, Nicholson Street Pty Ltd, The Glen Centre Hawthorn Pty Ltd and Twinview Nominees Pty Ltd. Lane had also been a director of each company. On 26 June 2014, Gordon J delivered judgment and made orders authorising the deployment of funds by the receivers to institute and prosecute the proposed proceeding.
At the hearing before Gordon J, Letten was represented by solicitors and counsel. He advanced submissions as to why approval sought should not be given. He contended that the commencement and prosecution of the proposed proceeding was beyond power, an abuse of power, and was brought for an improper purpose. He further contended that, by bringing the proceeding, the receivers would be improperly appointed as agents of investors, that the benefits and burdens of the proceeding would not be equally shared among investors or beneficiaries, and that the draft statement of claim was defective or incomplete. When dealing with the last ground of objection, her Honour noted that:
Counsel for Mr Letten submitted that the Draft SoC does not comply with the Supreme Court Rules as it does not plead the necessary material facts as required by r 13.02(1)(a), does not fully particularise each instance of a breach of trust required by r 13.10(3)(a), and does not fully particularise each allegation of fraud as required by r 13.10(3)(b). As Counsel for the Receivers submitted, those matters should be dealt with by the Supreme Court in the event they are pursued after the Proposed Proceeding has been filed and served. The Receivers are not asking this Court to settle or endorse the precise form of the pleading, and the points raised do not go to the real issue for the Court: whether such a proceeding should be instituted.[2]
[2][2014] FCA 681, [72].
Pursuant to the authority granted by the Federal Court, the receivers commenced this proceeding by writ filed on 23 July 2014. The plaintiffs are, as was proposed, Nicholson Street, The Glen Centre Hawthorn and Twinview Nominees, and the defendants are Letten and Lane. The plaintiffs alleged that in and between 1999 and 25 February 2010, Letten promoted unregistered managed investment schemes, inviting investors to invest in real estate joint ventures to be carried out through a company managed and controlled by him. The plaintiffs alleged that each such company acted as trustee on behalf of the investors.
LGH Administration Pty Ltd, which is neither a plaintiff nor defendant, is alleged to have operated as the central treasury vehicle for the project trusts. Letten was a director of LGH and alleged to be its controlling mind and will. Lane, who had been a director of the plaintiffs and LGH in later years, was alleged to be intimately involved in the day to day financial affairs of LGH.
Each plaintiff alleged breaches of trust procured by Letten, and that each of the breaches was part of a dishonest and fraudulent design. They alleged that Letten and Lane assisted each plaintiff in its conduct in breach of trust.
The plaintiffs’ claims against Letten and Lane were framed under the second limb of Barnes v Addy. In Farah Constructions Pty Ltd v Say‑Dee Pty Ltd,[3] the plurality said:
As conventionally understood in Australia, the second limb makes a defendant liable if that defendant assists a trustee or fiduciary with knowledge of a dishonest and fraudulent design on the part of the trustee or fiduciary.
[3](2007) 230 CLR 89, [160].
The plaintiffs alleged that were it not for the breaches of trust, the financial position of the trusts would have been vastly improved. They alleged losses suffered by the trusts and an obligation to restore trust losses. The plaintiffs claimed against each defendant compensation in equity for the amount each plaintiff had assessed as its liability to the trust.
On 9 December 2014, orders were made by consent authorising the plaintiffs to file and serve an amended statement of claim by 19 December 2014, and extending the date for defences to 20 March 2015. An amended statement of claim was filed, with substantive amendments made to the allegations that the plaintiffs were trustees. New allegations were also made concerning the way in which the trusts were managed by ‘the LGH Group’, which included companies in addition to LGH. Further particulars were provided of the breaches of trust and the consequent loss suffered.
On 9 April 2015, Letten and Lane each filed a summons seeking orders that substantial parts of the new pleading be struck out. The applications came on for hearing on 5 May 2015. On that occasion, the plaintiffs sought an opportunity to review their statement of claim and file a draft further amended statement of claim. Directions were made for the hearing of any application by the plaintiffs, were it to become necessary, for leave to file the proposed new statement of claim. A draft further amended statement of claim was eventually filed and served. The defendants objected to the new pleading on a number of grounds, and opposed the plaintiffs’ application for leave, which was heard on 31 July 2015.
In opposing the application for leave, Letten and Lane contended that there were a number of pleading deficiencies. They also contended that the trustees were not competent to prosecute the claims in the absence of beneficiaries, or at least a representative beneficiary under each trust as a party.
Proper plaintiffs
The formulation by the plaintiffs of claims under the second limb of Barnes v Addy exposed a conceptual anomaly. They claimed compensation for an alleged liability to restore lost value to the trust fund, caused by their own dishonesty and fraud. There is no independent plaintiff, such as a new trustee, or a representative beneficiary, to represent the interests of the beneficiaries in addition to the errant trustee who, it was proposed, would make its own assessment of the extent of its liability to restore the trust. An objective observer might reasonably experience some disquiet at the prospect of such an important issue in the proceeding, advanced within an adversarial framework, wholly defined and prosecuted by ‘dishonest and fraudulent’ plaintiffs against defendants who knowingly assisted the plaintiffs in the dishonest and fraudulent design.
This is not a case in which a beneficiary under a trust, or of a fiduciary duty, claims compensation from a third party under the second limb of Barnes v Addy. The defendant Letten is not a true third party to the dishonest and fraudulent actions of the trustees; they allege that his mind was their mind. There is no material distinction between the conduct of the plaintiffs and Letten.
When dealing with the accessorial liability of Della Court Pty Ltd to the plaintiff in Re‑Engine Pty Ltd (in liq) & Ors v Fergusson & Ors,[4] Dodds‑Streeton J observed:
It seems self-evident that assistance should “make a difference” and forward or advance the primary breach or misconduct in some way. Mere passive acquiescence in the breach would not, in the ordinary case, suffice to establish liability on the ground of assistance. Further, it appears clear that assistance must take the form of some activity or conduct over and above mere knowledge of the fiduciary’s breaches.
Lord Nicholls in Royal Brunei v Tan, stated that “honesty and its counterpart dishonesty are mostly concerned with advertent conduct.” Similarly, in Nightingale Finance Ltd v Scott, Carnwath J held that “for a third party to become liable as a ‘knowing assistant’ he must be an active participant in the breach of trust.”
Consistent with that approach, the courts have eschewed the imposition of liability for mere passive acquiescence in the primary breach. In Brinks Ltd v Abu-Saleh (No. 3), Rimer J held that a wife who accompanied her husband on trips to Switzerland where he laundered misappropriated funds was not liable for knowing assistance, indicating that something more than passive acquiescence was required, despite the fact that her presence may have lent an appearance of legitimacy to the trips.
It has been recognised that the Court’s reluctance to impose liability in the absence of a positive act is defensible, given the many difficulties posed by the hypothetical question of what steps an honest person would have been required to take in given circumstances.
It would seem that the assistance must also have some causal significance, which is more than minimal “for if there is no causative effect and therefore no assistance given … the requirements of conscience [do not] require any remedy at all.”[5]
[4][2007] VSC 57, [120]–[124] (citations omitted).
[5] Emphasis added.
On the plaintiffs’ case as pleaded, there is no question about the ‘active participation’ of Letten. On the other hand, the authorities reveal an underlying assumption and expectation, when applying the second limb of Barnes v Addy, that an assessment must be made of the conduct of two independent actors, the perpetrator of the primary breach — in this case, the errant trustee — and a secondary player, who provided knowing assistance. When a third party has wholly procured the errant conduct by the trustee or fiduciary, resort to the second limb of Barnes v Addy, as the basis for accessorial liability, seems unnecessary, and invites confusion. The only dishonest and fraudulent mind, if it is established, is that of the party procuring the trustee to act in a particular way.
If directors of the corporate trustee are shown to have exercised their controlling influence to expose the trustee to a liability to restore the trust, they should be held accountable. The conceptual anomaly, evident in this proceeding, would not exist if the court‑appointed receivers had brought this claim. They might have alleged that the defendants procured the trustees to act in breach of their obligations. Alternatively, the receivers might have invoked the second limb of Barnes v Addy, or taken a less tortured path by alleging a breach of duty by the defendants as directors. These less complex approaches would not require proof of any dishonest or fraudulent design on the part of the plaintiffs.[6] But that is not the way in which the plaintiffs have pleaded their case.
[6]Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6, [242]–[248].
While I have some doubt about the validity of the plaintiffs’ case as formulated, under the second limb of Barnes v Addy, the defendants have not contended the case is hopeless, or bound to fail, or without any reasonable prospect of success. Letten confined his challenge to the competency of the errant trustees to sue in the absence of a representative beneficiary as a party. Lane appeared to go a little further, by contending that the claims ought to be brought, if at all, against the directors for breach of their statutory and general law duties.
Stripped of the straightjacket of the requirement for a dishonest and fraudulent design under the second limb of Barnes v Addy, there is no reason why a corporate trustee, under the control of court‑appointed receivers, should not be entitled to recover losses caused by an errant director who procured it to act in breach of trust. Thus, the first issue for determination on the plaintiffs’ application for leave, is whether they are required to join a representative beneficiary or beneficiaries.
The plaintiffs contended that they were and remained proper plaintiffs in the absence of representative beneficiaries. They contended that each had a duty as trustee to get in trust property, including rights of action against third parties, such as the defendants, to make good a loss to a trust fund; that they remained duty bound to do so, even though they had acted dishonestly and fraudulently; that there was no necessity to name beneficiaries as parties to the proceeding; and that excepting special circumstances, such as where the trustee cannot or will not proceed, the recovery proceeding should not be brought by beneficiaries.
The plaintiffs placed much reliance on Young v Murphy, in which Brooking J observed:[7]
[7][1996] 1 VR 279, 281 (emphasis added).
The standing of a trustee to take proceedings to have a breach of trust redressed against a trustee or former trustee or a stranger who has become liable to redress a breach of trust is well recognised. Not only may a trustee take such proceedings, but he runs the risk of himself committing a breach of trust if he fails to do so: Scott on Trusts, s177, s223 and s223.3; Bogert, Law of Trusts and Trustees, s592; Bogert, Handbook of the Law of Trusts, s97; Re Brogden (1888) 38 Ch D 546. His obligation to take the proceedings (unless they would be futile) is part of his duty to get in the trust estate, which includes rights of action against co-trustees or former trustees and strangers for breach of trust. This is clear as a matter of both principle and authority. Moreover, since the trustee will take the proceedings for breach of trust for the benefit of the beneficiaries, he can sue even if he was a party to the breach of trust or some other breach of trust. The principle is shortly stated in Snell's Equity, 29th ed, at 286-287, where it is said of a new trustee:
If ... he discovers that breaches of trust have been committed, he must obtain satisfaction for them from the old trustee, just in the same way as an original trustee must get in any part of the trust estate which is outstanding: and the only excuse for not doing so is that it would be useless to take proceedings against the old trustees.
…
In general, if the trustee takes proceedings to have a breach of trust redressed, he need not make the beneficiaries parties. For in general the trustee sufficiently represents their interests for the purposes of proceedings to have a breach of trust redressed. …
But, while the trustee in general sufficiently represents the beneficiaries' interests for the purposes of proceedings to redress a breach of trust, they should be made parties if their interests may not be properly represented by the trustee. If it can be said that for any reason the trustee should not be regarded as a party who will properly represent the interests of all beneficiaries, then he should not be regarded as able to sue without joining any beneficiary. Cases of suggested fraud or collusion or a hidden interest of the trustee may be put to one side. The proceedings which the trustee brings may be such as to raise, or be capable of raising, questions between one beneficiary and another or questions between the beneficiaries and himself. In such a case the trustee does not sufficiently represent the interests of the beneficiaries for the purposes of the proceedings. Accordingly, if in the proceedings the trustee seeks the execution or administration of the trust in addition to seeking to have the breach of trust redressed, the beneficiaries will or may be necessary parties, since their interests inter se or their rights against the trustee may have to be determined. This is not so if in the proceedings the trustee seeks only to get in the trust fund, or seeks in addition only any account necessary for that purpose. On the other hand, in proceedings for the execution or administration of the trust the interests of the beneficiaries may conflict among themselves and there may in addition be a conflict of interest between the trustee and the beneficiaries with regard to the accounting by the trustee required for the purposes of the general distribution of the trust estate which is asked for in the proceedings. So a distinction is drawn between proceedings which seek merely to get back the trust fund and proceedings for the execution or administration of the trust. The former can be maintained by the trustee without joining the beneficiaries; the latter are or may be incapable of being so maintained…
The plaintiffs submitted that these principles had been applied in a number of cases, which demonstrate that even where a breach by the trustee was dishonest and fraudulent, which will always be a requirement if the plaintiffs rely on the second limb in Barnes v Addy, the trustee/plaintiff will have standing to proceed alone.[8] They submitted that beneficiaries should only be joined as parties if the trustees will not or cannot themselves proceed.[9] The last proposition is, in my view, too narrow.
[8]The plaintiffs relied on the following: Koorootang Nominees Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] 3 VR 16; Glazier v Australian Men’s Health [2000] NSWSC 253; Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq) [1999] FCA 1820; LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291; Robb Evans of Robb Evans & Associates v European Bank Ltd [2004] NSWCA 82; Australian Securities and Investments Commission v Letten (No 22) (2014) FCA 681.
[9]El Sayed v El Hawach [2015] NSWCA 26; Robert Deutsch & Ors v Erwin Deutsch & Ors [2012] VSC 227.
Letten contended that the authorities advanced by the plaintiffs did not support the proposition for which they were advanced. He did not challenge what his counsel described as uncontroversial propositions — namely, that it was a duty of a trustee to getting trust property, including taking action against third parties to make good losses to the trust fund; that while a loss of trust property is ultimately the beneficiaries’ loss, it is nevertheless generally appropriate that the trustee proceed to recover that loss for the beneficiaries; and that generally there is no necessity for a trustee to name beneficiaries as parties to a proceeding to getting trust property. He submitted, however, that the plaintiffs advanced two further propositions, critical to their case, which did not find support in Young v Murphy: first, that a trustee involved in a dishonest and fraudulent breach was entitled to sue in the absence of a representative beneficiary; and second, that except in special circumstances, such as where a trustee cannot or will not proceed, the recovery proceeding should only be brought by the trustee.
Letten submitted that the Full Court in Young v Murphy made it clear that where the claim involved a suggestion of fraud or collusion by the trustee, the trustee alone was not the proper plaintiff. He submitted that if there was reason to believe that a trustee should not be regarded as a party who would properly represent the interests of all beneficiaries, then the trustee should not be regarded as able to sue without joining at least a representative beneficiary. Furthermore, he submitted, where the trustee sought the execution or administration of the trust in addition to seeking to have a breach redressed, the beneficiaries may be necessary parties, since their interests or their rights against the trustee may have to be determined.
In the present case, central to the plaintiffs’ case for relief against the defendants, is the allegation of their own dishonest and fraudulent design, assisted by the defendants. Letten submitted that a trustee who engaged in fraudulent and dishonest conduct stood in a qualitatively different position vis-à-vis the beneficiaries when compared with the trustee whose breach of trust may be described as inadvertent, careless or even negligent. He submitted that the trustee cannot rely upon its own fraudulent conduct to maintain a claim against the third party alleged to have assisted in that breach, without joining at least a representative beneficiary as a party. Letten submitted that the authorities upon which the plaintiffs relied to demonstrate a consistent application of the principles in Young v Murphy did not support the plaintiffs’ position.
Letten drew a distinction between those cases in which there was a claim for knowing receipt of trust property under the first limb of Barnes v Addy, which did not depend upon proof of fraud and dishonesty, and claims for knowing assistance, which did. He submitted that none of the cases relied upon by the plaintiffs involved a claim under the second limb of Barnes v Addy, with the exception of L H K Nominees Pty Ltd v Maureen Ada Kenworthy (as Administratrix of the Estate of Lionel Kenworthy) & Anor.[10]
[10][2002] WASCA 291.
In L H K Nominees, the plaintiff company was trustee of the Kenworthy Trust. Lionel Kenworthy, deceased, had controlled the plaintiff, although his sons were directors, and appeared to have been instrumental in commencing the proceeding to recover trust property. The judgments of the members of the Full Court of the Supreme Court of Western Australia did not dwell on the family dynamic reflected in a proceeding brought by the sons of the deceased father against his estate. It would also appear that Mrs Kenworthy, administratrix of the estate, was not their mother. The identity of the beneficiaries under the trust was not fully explored, although it would appear that the directors of the plaintiff were beneficiaries under the trust.
The appellant’s case in L H K Nominees was that the deceased knew that his expenditure of trust money was not for the purpose of the trust, or in the interests of the beneficiaries. There was also an allegation that a property had been transferred to the deceased at a very substantial undervalue. The appellant alleged that the deceased was either a knowing recipient of trust property, or knowingly participated in the breach of trust. They relied upon both limbs of Barnes v Addy. The plaintiffs in this proceeding relied in particular on the following paragraphs in the joint judgment of Anderson and Steytler JJ:[11]
The term "misappropriated" takes its meaning from its context and counsel for the appellant made it clear that the misappropriation pleaded in this case was Barnes v Addy misappropriation. The appellant's case was that Mr Kenworthy knew that the money he was spending was trust money and that the expenditure was not for the purposes of the trust or in the interests of the beneficiaries of the trust. As in the case with respect to the property at 141 The Esplanade, Mount Pleasant, the case with respect to misappropriation was not put upon the basis that Mr Kenworthy stood in a fiduciary relationship to the appellant or to the beneficiaries of the trust. It was not the appellant's case that, in drawing cheques on the appellant's bank account and on the bank account of the trust, Mr Kenworthy was himself in breach of trust. The case was (a) he was liable to repay the money or to compensate the trust to the extent of the misappropriated funds because he received the proceeds of the cheques knowing the bank accounts to be trust property which was being misapplied and (b) that he knowingly caused or assisted the appellant dishonestly to breach its duties as trustee by allowing him to operate the two bank accounts for his own benefit.
There was no dispute at trial, and it was not in contention before us, that if a cheque was written by Mr Kenworthy on either bank account, and the cheque was not for the purposes of the trust, but was for his own benefit, he would be liable under one or other of the two limbs of Barnes v Addy to make reparation to the extent to which the trust assets were thereby diminished; and that the appellant is the proper entity to pursue the remedy even although the cheque may have been drawn on the bank account maintained in the name of the trust.
The main issue was whether there was sufficient evidence to support the allegation implicit in the claim that cheques amounting in the aggregate to approximately $380,000 were written by Mr Kenworthy for his own benefit and not for the purposes of the trust or for the benefit of the beneficiaries.[12]
[11][2002] WASCA 291, [239]–[241].
[12]Emphasis added.
The trial judge had dismissed the trustee’s claims. One claim related to the Mount Pleasant property, sold at an undervalue, and the other to the alleged misappropriation of cash, which was described as a very serious allegation of dishonesty. The transfer of the Mount Pleasant property at undervalue had not been pleaded as a breach of trust, although it was found to involve a failure to exercise the ordinary degree of prudence which ought to have been exercised. The more serious allegation of misappropriation was framed by the appellant as a misappropriation in circumstances where the deceased stood in a fiduciary relationship to the trustee or the beneficiaries of the trust.
In my opinion, L H K Nominees does not stand for the proposition that a dishonest and fraudulent trustee may always bring or maintain a proceeding under the second limb of Barnes v Addy in the absence of a beneficiary as a party. As Anderson and Steytler JJ pointed out, there was no dispute at trial that the appellant was the proper entity to pursue the remedy. That may be explained by the presence of its directors, who actively participated in the trial, and who were also beneficiaries under the trust. This was not a case in which beneficiaries were, in the meaningful sense, absent from the trial. There was simply no issue before the court that involved a consideration of the questions raised in this proceeding.
The plaintiffs also relied on Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd[13] to contend that the principles enunciated in Young v Murphy applied to a claim made under the second limb of Barnes v Addy. However, Koorootang Nominees involved a claim for knowing receipt of trust property under the first limb of Barnes v Addy.
[13][1998] 3 VR 16.
The plaintiff, Koorootang Nominees, was the trustee of The Koorootang Trust. Koorootang, in its personal capacity and as trustee, brought two proceedings. The first was against the ANZ Banking Group to recover the proceeds of sale of shares. The second proceeding involved a claim against the bank and Jock Jefferies, a director of Koorootang, who had exerted effective control over the management of its affairs. Jefferies was not a beneficiary of the trust. He carried on a separate business, which was in financial difficulties and owed money to the bank. When pressed for additional securities, Jefferies offered the bank security to be provided by Koorootang, in the form of a mortgage and scrip lien. Jefferies eventually authorised the bank to sell some of the shares and to pay the proceeds in reduction of his debt. The bank was sued by Koorootang for knowing receipt of trust property under the first limb of Barnes v Addy.
When dealing with Koorootang’s right to sue, Hansen J said:[14]
[14][1998] 3 VR 16, 75–6.
Although Koorootang's submissions on this point were not the subject of any direct dispute, it is important to note them none the less, for they may have a bearing upon the plaintiff's claim in respect of the scrip lien. Counsel for Koorootang submitted that the company had a right to commence a proceeding as trustee even if it could be said that Koorootang had disposed of property in breach of trust. The authorities made it clear, so it was said, that a defaulting trustee is obliged to make good the trust property and, if necessary, institute proceedings in order to satisfy that obligation. That submission is clearly right: see the Appeal Division's decision in Young v. Murphy [1994] I V.R. 279 e.g. at 281-2 per Brooking J. (as his Honour then was). That case is also authority for the general proposition advanced by Koorootang that a trustee who takes proceedings to recover misapplied trust property need not join the beneficiaries as parties. At 283 Brooking J. said:
In general, if the trustee takes proceedings to have a breach of trust redressed, he need not make the beneficiaries parties. For in general the trustee sufficiently represents their interests for the purposes of proceedings to have a breach of trust redressed. As was said by Porter M.R. in Carson v. Sloane (1884) 13 L.R. Jr. 139 at 147, “If one of the cestuis que trust could fol1ow this fund, why cannot the trustee who represents them all?”
At 286 Brooking J. said:
Where a trustee sues to redress a breach of trust, seeking only to have the trust fund restored, the trustee and the beneficiaries are in privity.
There are other features of Koorootang Nominees that distinguish it from the present case as pleaded by the plaintiffs. The fraud was perpetrated by Jock Jefferies, who forged security documents which purported to bind the plaintiff. It was not the trustee which had acted fraudulently and dishonestly. Jefferies had defrauded the trustee. Nor was it clear that the case proceeded on the basis that Koorootang had disposed of property in breach of trust. While a great deal of the judgment concerned the scope of Barnes v Addy, the claims were ultimately resolved on the basis that the bank had actual knowledge of the fact that the mortgaged property was held on trust, and had at least constructive knowledge that it was being misapplied. Moreover, counsel for the bank agreed that it was unnecessary to join the beneficiaries in the proceeding. In any event, the other directors of the trustee were beneficiaries. There was no occasion to contend that the interests of the beneficiaries and trustee were not coterminous in every material respect.
The plaintiffs made reference to Glazier v Australian Men’s Health,[15] as a case in which Young v Murphy had been applied. At paragraph 138, Austin J said:
Glazier begins with proposition that it is the duty of a trustee to take action to recover trust property by legal proceedings, if it has not been properly accounted for within a reasonable time; and the only excuse for not doing so is a well-founded belief on the part of the trustee that proceedings would be fruitless: Re Brogden (1888) 38 ChD 546. The duty of a corporate trustee to make good the trust property extends, in an appropriate case, to the institution of proceedings against its directors, where the directors are alleged to have participated in breaches of trust by the trustee. If a defaulting trustee is replaced, the new trustee has standing to sue the directors of the former trustee, according to Young v Murphy [1996] 1 VR 279.
I do not disagree with these legal principles, but they assume that the trustee has at least a reasonable prospect of proving his case. The problem confronting Mr Madden, as his Report makes abundantly clear, is that in the state of the facts known to him, he has been unable to reach firm conclusions as to the explanations for the numerous discrepancies he has discovered. In this case it would be too simplistic to purport to solve the problem by recourse to textbook statements about the trustee’s duty.
[15][2000] NSWSC 253.
Apart from the limited reference to Young v Murphy on the question of standing to sue, Glazier v Australian Men’s Health is of no assistance in the application of the principle when a trustee relies on the second limb of Barnes v Addy.
Next, the plaintiffs relied on Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd (in liq).[16] The issue before the court in that case was whether a cause of action to recover trust property was maintainable by reason of the operation of s 47(1) of the Limitation Act 1969 (NSW). The relevant claim involved an allegation by Morlea that in making sham loans to Richard Walter, Morlea had caused trust property to be paid away in breach of trust, and was also guilty of breaches of fiduciary duty as an agent and partner in a partnership. It alleged that Richard Walter received the sham loan moneys with knowledge of the breaches of trust and fiduciary duty. The claim was under the first limb of Barnes v Addy. At paragraph 51 the Full Court said:
Notwithstanding the two trustees in 1984 had knowledge of the relevant breaches of trust and of the Taxpayer's participation therein, the cross-claimants nonetheless submit that that knowledge does not preclude the bringing of the present cross-claim. We put to one side in this the distinct argument raised by AT Holdings as to its knowledge of the causes of action. As we understand it the trustees’ submission is that the cross-claims are brought to vindicate not some right of each trustee, but the rights of the respective beneficiaries of the two trusts. Even though a trustee is itself a wrongdoer, it nonetheless is entitled to take proceedings to have a breach of trust redressed and, in general, it need not make the beneficiaries parties: Young v Murphy [1996] 1 VR 279 at 283: see also O 6 r 13 of the Federal Court Rules. A trustee that fails so to do runs the risk of itself committing a breach of trust: Young, at 281-282. If, though asserting the beneficiaries’ rights, the trustee’s own knowledge would allow the limitation period to run - and expire - the beneficiaries could be precluded from vindicating their rights without ever being aware within the limitation period that they had a cause of action originating in the trustee’s own wrong. It is said that the legislative intent could not have been that s 47 was to have such an effect: cf Hawkins v Clayton (1988) 164 CLR 539 at 590.
[16][1999] FCA 1820.
The distinction between the trustee and beneficiary rights for the purpose of a limitation period may be one circumstance in which there is good reason to join beneficiaries in the proceeding. The court in Morlea also considered the possibility that the right of a beneficiary to recover from a third party recipient may differ from the right of the trustee, by reason of the trustee’s conduct in dealing with trust assets. In such circumstances, the trustee may be disentitled from suing a third party either at all or without joining the beneficiaries.[17] In any event, Morlea did not concern a claim made under the second limb of Barnes v Addy, involving a plaintiff/trustee alleging its own dishonesty and fraud, assisted by the defendants.
[17][1999] FCA 1820, [76]–[77].
Next, the plaintiffs relied on Robb Evans (of Robb Evans & Associates) v European Bank Ltd.[18]The Robb Evans case involved an appeal from a decision dismissing proceedings commenced by the appellant to recover the proceeds of a credit card fraud on the basis of knowing receipt, under the first limb of Barnes v Addy. In the judgment of the court, Spigelman CJ said:
The Appellant’s starting point is the obligation of Benford to get in the trust estate, i.e. the defrauded creditors’ funds. That a trustee has such a duty is well established. The case on which the Appellant relied, Young v Murphy [1996] 1 VR 279 esp at 281-286 per Brooking JA, is a clear application of the principle.
Mr T Bathurst QC submitted that this right and power applies to an express trustee but not to a constructive trustee. In the latter case, he submitted, there is not the same degree of privity between trustee and beneficiary. In my opinion, that submission should be rejected. Privity is not a useful concept in this area of the law. Often beneficiaries have no prior relationship with an express trustee. The relationship is not necessarily closer because of the mode of creation of the fiduciary obligation.[19]
[18][2004] NSWCA 82.
[19][2004] NSWCA 82, [109]–[110].
After reviewing the requirements of accessorial liability for ‘knowing receipt’, the Chief Justice concluded:
As a trustee of the funds for the defrauded credit card holders, Benford had an obligation to refund the money to them as soon as they could be ascertained. That was by no means able to be done immediately, even if all the knowledge of Mr Taves and his associated companies was to be fictionally attributed to Benford. Until the beneficiaries could be identified and the precise total of the monthly debits computed in each case, Benford was under a duty to properly invest the trust fund. An interest bearing deposit with a bank in the currency of the fraud would appear to me to be perfectly appropriate. If European Bank is to be credited with constructive knowledge of the fraud, there seems no reason why it should not also have such knowledge of the processes required for repayment.
The deposit with Benford only lasted a few months before the account was frozen in the way described above. In these circumstances, I do not believe that the Benford deposit with European Bank should be seen to involve a misapplication of trust funds on the part of Benford.[20]
[20][2004] NSWCA 82, [162]–[163].
The Robb Evans case offers no support for the plaintiffs’ contention that a claim by a dishonest and fraudulent trustee against an assisting third party under the second limb of Barnes v Addy, in the absence of beneficiaries as parties, is always competent.
Finally, the plaintiffs relied on ASIC v Letten (No 22).[21] They submitted that Gordon J had approved the proceeding as presently constituted. It is true that her Honour addressed the application of Young v Murphy in the context of granting approval to the receivers to deploy funds to institute and prosecute the proceeding. The issue now raised by the defendants on the plaintiffs’ application for leave was not argued before her Honour. The plaintiffs did not, in any event, contend that the defendants were unable to repeat arguments, advanced before her Honour in ASIC v Letten (No 22), in this court. It was accepted that this court has unfettered jurisdiction to supervise proceedings commenced and prosecuted in this court. Furthermore, her Honour expressly noted that the receivers were not asking the Federal Court to settle or endorse the form of the pleading. The issue before the Federal Court was whether the receivers should be entitled to draw upon the Common Fund to institute and maintain a proceeding. Nevertheless, the plaintiffs relied upon the observations of Gordon J to support their contention that beneficiaries were not necessary parties, or that the plaintiffs were competent to bring the proceeding to recover trust property in the absence of participation by the beneficiaries as parties.
[21](2014) FCA 681.
The plaintiffs’ reliance on Young v Murphy to support their standing to maintain the proceeding in the absence of beneficiaries as parties, was misplaced. They sought to elevate aspects of the decision as if an inflexible rule. It is necessary to ask whether, in all the circumstances, the plaintiffs sufficiently represent the interests of the beneficiaries in this case. In my opinion, they do not. This is not a case in which an errant trustee is merely seeking to recover trust property on behalf of beneficiaries. Rather, they seek compensation from those they allege procured them to act dishonestly and fraudulently, thus exposing them to liability.
Brooking J identified cases in which the trustee might not sufficiently represent the interest of beneficiaries for the purpose of the proceeding. In Morlea, the Full Court of the Federal Court identified particular instances in which that may be the case. The categories of circumstances are not closed. Nor, in my view, must there exist exceptional or special circumstances. The question remains whether, in the present circumstances, the plaintiffs fairly represent the interests of the beneficiaries.
As Gordon J pointed out in ASIC v Letten (No 22), the receivers in control of the plaintiffs were appointed by the court and remain under its supervision. That is no doubt correct, but they are not parties. The plaintiffs have chosen a litigation path that requires proof of their own dishonesty. While it is true that they had no independent mind, intention or purpose other than the mind, intention and purpose of at least one of the defendants, the objective observer might reasonably conclude that in the absence of some transparently independent party representing the interests of the beneficiaries, their interests will be at risk. In the absence of an alleged common dishonest and fraudulent design, perpetrated by the plaintiffs and assisted by the defendants, the requirement for an independent representative of the beneficiaries may not be so compelling. But for so long as the plaintiffs maintain their case based on the second limb of Barnes v Addy, I am of the opinion that the interests of the beneficiaries must be transparently protected.
The joinder of an independent representative beneficiary or beneficiaries might be achieved under r 16.01 of the Supreme Court (General Civil Procedure) Rules 2005. Alternatively, transparency might be achieved if the receivers were to become plaintiffs, alleging their appointment and the basis upon which they represent the interests of the investors/beneficiaries.
Statement of Claim
The defendants formulated a range of objections to the proposed further amended statement of claim, although the focus of their attention was the adequacy of the pleading of fraud and dishonesty. While the less substantive objections were advanced by written submissions, dated 7 July 2015, most fell away in the course of the application for leave, or were not pressed. These were largely technical complaints about the lack of definition of ‘the LGH Group’ (paragraphs 5, 7, 9 and 11); the existence of a practice or policy (paragraph 14); and the plaintiffs’ failure to characterise certain conduct as fraudulent and dishonest (paragraphs 19, 22, 27, 30, 35 and 38). Given the centrality of the plaintiffs’ allegation of dishonesty and fraud, which was the real focus of the complaints, it is not surprising that these other matters were swept to one side. Insofar as the defendants intended to persist with any of the other objections, I am not persuaded that any one of them had real substance.
Letten contended that the pleading of fraud and dishonesty was inadequate. He argued that the allegation of fraud and dishonesty was pleaded as a conclusion, without pleading and particularising material facts. In paragraph 45, the plaintiffs alleged:
Mr Letten assisted each plaintiff as alleged in paragraph 44 above with knowledge that the breaches of trust alleged in paragraphs 15 to 38 above were dishonest and fraudulent.
Particulars
(i)By reason of paragraphs 39 to 42 above, Mr Letten had knowledge of the fact that the conduct of each plaintiff was dishonest and fraudulent;
(ii)Further or alternatively, from the matters alleged in 39 to 42 above, Mr Letten had knowledge of circumstances that would indicate to an honest and reasonable person that the conduct of each plaintiff alleged in paragraphs 15 to 38 above constituted dishonest and fraudulent breaches of trust.
(iii)Further or alternatively, having the knowledge alleged in paragraphs 39 to 42 above, Mr Letten wilfully or recklessly failed to make the inquiries which an honest and reasonable person would make, namely obtaining legal and accounting advice, as to whether the conduct of each plaintiff alleged in paragraphs 15 to 38 above constituted dishonest and fraudulent breaches of trust.
One difficulty with paragraph 45 is its dependency on paragraphs 15 to 38, which in turn refer to other paragraphs. The reference in particulars under paragraph 45 back to paragraphs 39 to 42 and then to paragraphs 15 to 38 became circular and confusing.
Paragraphs 15 to 38 are not confined to breaches, as paragraph 45 would suggest. In paragraph 15 the plaintiffs allege duties as trustee. In paragraph 16 they allege that Nicholson Street knew that the proper performance of its duties required it to receive all moneys subscribed by investors. Particulars of its knowledge refer forward to facts pleaded in paragraphs 39 and 40. In paragraph 39 the plaintiffs allege that by reason of Letten’s position with the various entities he knew of the facts pleaded in paragraphs 11 and 14. In other words, he knew of the existence of the trusts and the manner in which the LGH Group conducted its business. In paragraph 40, the plaintiffs allege that Letten knew of the existence of the trusts and the consequential obligations and constraints on the ability of the trustee to deal with investor funds, and that the funds were not deployed strictly in accordance with the obligations.
In paragraphs 17 and 18, the plaintiffs made further allegations about the conduct of the first plaintiff, which is later described in paragraph 45 as a breach of trust. The particulars of knowledge, under paragraph 17 and 18, refer forward to the facts pleaded in paragraphs 39 and 40.
Paragraph 19 contains an allegation of what the first plaintiff actually did with funds. Paragraph 20 contains an allegation that the first plaintiff knew of its obligations when dealing with the money. Particulars of its knowledge, once again, are the facts pleaded in paragraphs 39 and 40.
In paragraph 21, the first plaintiff is alleged to have permitted money to be applied in a particular way, in the knowledge that it was not solely for joint venture purposes. Particulars of knowledge, once again, are the facts pleaded at paragraphs 39 and 40.
In paragraph 22, the plaintiffs allege that by reason of the conduct described in paragraphs 17, 19 and 21, the first plaintiff intentionally applied or permitted the application of trust moneys otherwise than solely for the relevant joint venture. Once again, particulars of its knowledge are the facts pleaded at paragraphs 39 and 40.
A similar cycle of allegations is made in relation to the second plaintiff in paragraphs 23 to 30, with similar, although not identical, allegations of knowledge. In relation to the third plaintiff, a similar cycle is repeated in paragraphs 31 to 38.
Pleadings that involve extensive cross‑referencing can be difficult to follow, and confusing. In the present case, the circularity of the pleading compounds the difficulty. Material facts are deployed as particulars by reference to other parts of the pleading. There is excessive cross‑referencing and unnecessary repetition.
The allegation in paragraph 45 makes two substantive and distinct allegations. The first is that Letten assisted each plaintiff in its alleged conduct in breach of trust, with knowledge that the breaches by the trustee were dishonest and fraudulent. The plaintiffs appear to proceed on the basis that, by establishing knowledge that the investors’ funds were not deployed solely for the benefit of the particular investment, they would establish the necessary degree of dishonesty and fraud. There may be circumstances in which proof that a director deliberately conducted the affairs of a company or companies in a particular way will be sufficient to establish the necessary degree of fraud and dishonesty, for the purpose of the second limb of Barnes v Addy. The defendants did not contend otherwise. The question remains whether the allegations of fraud and dishonesty are adequately pleaded.
The particulars under paragraph 45 indicate that the plaintiffs rely upon three categories of knowledge: actual knowledge; wilfully or recklessly failing to make such enquiries as an honest and reasonable man would make; and knowledge of circumstances that would indicate the facts to an honest and reasonable man. These categories of knowledge, recognised as available to establish liability under the second limb of Barnes v Addy, are pleaded as particulars, relying upon the facts alleged in paragraphs 15 to 42. Paragraphs 39 to 42 deal with knowledge and intention.
While the form of the plea in paragraph 45 (and the particulars thereunder) is circular and confusing, the allegations in paragraphs 39 to 42 provide a basis upon which the plaintiffs might establish their own dishonesty and fraud, assisted by the person who apparently procured them to so act. In that respect, the allegation of material fact in paragraph 45 is sufficiently particularised by the allegations of material fact in paragraphs 39 to 42.
Proper basis
Letten also contended that the plaintiffs did not have a proper basis pursuant to s 18(d) of the Civil Procedure Act 2010 to make the allegations that there were express trusts in relation to the Nicholson Street joint venture or The Glen Centre joint venture, or that the breaches of trust were dishonest and fraudulent. I disagree.
In relation to the allegations of express trust, the plaintiffs relied on Disclosure Reports referred to in particulars under paragraphs 6 and 8, by which they alleged that the express trust was constituted by the terms of joint venture agreements. Letten’s point was that the joint venture agreements had not been executed in most instances. That defect may or may not constitute a difficulty for the plaintiffs at trial, when attempting to establish the existence of the trusts. It is not a basis upon which to strike out the allegations of material fact.
While reference to Disclosure Reports may be a convenient shorthand way in which to provide particulars, it is unhelpful. Particulars should be provided. Letten does not, however, make a complaint to the effect that the reference to the Disclosure Reports is prejudicial or embarrassing.
Lane’s complaint
Lane’s central complaint about the pleadings was that the proposed further amended statement of claim failed to identify the material facts, with particulars, alleging how he assisted each of the plaintiffs in their breaches of trust. Lane also contended that the pleading failed to identify the material facts, or provide particulars, on which the allegation of dishonesty and fraud is based.
The allegation of knowing assistance, made against Lane, is based on his alleged knowledge of the existence of the trusts, the manner in which LGH dealt with money received from investors, its function as the central treasury, the frequency of transfers, the borrowing policy, and the failure to quarantine investor funds and debt. The plaintiffs alleged that such facts would indicate to an honest and reasonable man that the conduct of each of the plaintiffs, in breach of trust, was dishonest and fraudulent. They alleged:
46By reason of his position in the LGHA Group as described in paragraphs 13(a) and 13(b) above, and the performance of the functions described in paragraph 13(c) above, Mr Lane had knowledge at all material times after 1997 that:
(a)the trustees of the Letten trusts including the plaintiffs held the properties respectively registered in their names as trustees for investors who had been invited to invest money in a joint venture relating specifically to each property;
(b)LGHA treated the money held by the trustees of the Letten Trusts, including the plaintiffs’, as if those monies were held by wholly owned subsidiaries of the LGH Group;
(c)LGHA acted as a central treasury for the LGH Group and the trustees of the Letten Trusts including the plaintiffs;
(d)there were frequent transfers of money between the trustees of the Letten Trusts including the plaintiffs and LGHA which money was used by LGHA as it saw fit;
(e)it was the policy of the LGH Group to maintain a level of borrowings on each property held by the trustee of a Letten Trust equal to 65% of the value of that property from time to time;
(f)if the borrowings secured on a property held by the trustee of a Letten Trust fell below 65% of its value, the practice of LGHA was to arrange further borrowings by that trustee without regard to whether such borrowed money was required for the purposes of that Letten Trust;
(g)the proceeds of borrowings arranged as described in paragraph (f) were paid to LGHA and used for such purposes as it saw fit.
47Mr Lane assisted each of the plaintiffs in the breaches of trust alleged in paragraphs 15 to 38 above.
Particulars
The assistance consisted of this performance of the functions described in paragraph 13(c).
48Mr Lane assisted the plaintiffs as alleged n paragraph 47 with knowledge of the matters specified in paragraph 46 being circumstances that would indicate to an honest and reasonable person that the conduct of each of the plaintiffs alleged in paragraphs 15–38 constituted dishonest and fraudulent breaches of trust.
There is no plea of ‘knowledge and intention’ against Lane corresponding to that made against Letten in paragraphs 39 to 42. No particulars are provided in paragraph 46 of Lane’s knowledge. Instead, the plaintiffs seem to rely on the allegations of material fact in paragraph 13, in which they allege:
At all material times from 1997 until 25 February 2010, Mr Lane:
(a)was the General Manager of LGHA and LGHH;
(b)provided management consultancy services to the LGH Group;
(c)in the capacities referred to in paragraphs (a) and (b):
(i)from time to time was an interface with LGHA’s bankers, Westpac and was responsible for negotiating loan facilities with that bank;
(ii)was responsible for supervising the preparation and finalisation of the annual financial accounts of LGHA and each of the Letten Trusts;
(iii)from time to time communicated with beneficiaries of the Letten Trusts on behalf of LGHA about their existing or future investments;
(iv)from time to time held himself out as the “Finance Manager” of LGHA in communications with beneficiaries of the Letten Trusts;
(v)regularly communicated with Mr Letten about cashflow summaries, facility request, joint venture arrangements, financial reporting and other financial information about LGHA and the Letten Trusts;
(vi)executed joint venture agreements with investors in a Letten Trust on behalf of the trustee.
In paragraph 47, the plaintiffs allege that Lane assisted each of them in breach of trust alleged in paragraphs 15 to 38, such assistance consisting of his performance of functions described in paragraph 13(c). In paragraph 48, Lane is alleged to have assisted the plaintiffs with knowledge of the matters alleged in paragraph 46, being circumstances that would indicate to an honest and reasonable man that the conduct of each of the plaintiffs alleged in paragraphs 15 to 38 constituted dishonest and fraudulent breaches of trust. The plaintiffs do not allege that the breaches were procured by Lane. Accordingly, the case against him is different in structure to the case against Letten.
At the heart of the plaintiffs’ case against Lane is knowledge based upon his position and functions. The generality of the plea is unsatisfactory. For example, there are no allegations of Lane’s involvement in particular transactions. The particulars under paragraph 13 have been deleted. If certain conduct is to be relied upon by the plaintiffs, they must specify that conduct. It is not enough to refer to Lane as a person who was an ‘interface’ with bankers, or responsible for the preparation of annual accounts, or who, from time to time, ‘communicated’ with beneficiaries, or who held himself out as the Financial Manager, or who communicated with Letten about cash flow and other matters of financial management and who may have executed joint venture agreements. What is it about such conduct that implicates Lane as a person who knowingly assisted the plaintiffs in their dishonest and fraudulent design? The plaintiffs must allege, with more precision, the information available to Lane that would indicate to an honest and reasonable person that the conduct of each of the plaintiffs was dishonest and fraudulent. It is not alleged he knew what Letten knew, or of particular conduct by Letten.
The unsatisfactory foundation of the case against Lane is compounded by the allegation of assistance in paragraphs 47 and 48. There is a lack of definition to the functions described in paragraph 13(c), which go little further than alleging that Lane had some involvement in the management of the internal finance management entity. For a plea of knowing assistance, which necessarily involves knowledge of dishonesty and fraud, falling in one of the accepted categories, it is necessary to allege with precision the acts of the second defendant that made him a knowing participant in the breach of trust.
In order to establish knowing assistance, the plaintiffs must prove that the defendants’ conduct made a difference, in the sense that it advanced the primary breach in some way. There must be some causal significance to the conduct. The pleaded allegations and particulars must address that requirement. What was it about Lane’s involvement that made him an active participant in the dishonest and fraudulent design of the plaintiffs?
The plaintiffs have failed to make sufficiently precise allegations of conduct against Lane to establish the required knowledge and that he made a difference by his conduct.
Conclusion
Leave to file and serve the further amended statement of claim is refused.
S CI 2014 03756
SCHEDULE OF PARTIES
NICHOLSON STREET PTY LTD (ACN 069 104 089) First Plaintiff
(Receivers & Managers Appointed)
(In Liquidation)
THE GLEN CENTRE HAWTHORN PTY LTD (ACN 089 906 543) Second Plaintiff
(Receivers & Managers Appointed)
(In Liquidation)
TWINVIEW NOMINEES PTY LTD (ACN 097 307 278) Third Plaintiff
(Receivers & Managers Appointed)
(In Liquidation)
MARK RONALD LETTEN First Defendant
PAUL JAMES LANE Second Defendant
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