Ninety-First Lieutenant Pty Ltd v Gateway Concepts Pty Ltd
[2014] VSC 85
•11 March 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2011 6645
| NINETY-FIRST LIEUTENANT PTY LTD (ACN 006 469 496) | Plaintiff | ||
| v | |||
| GATEWAY CONCEPTS PTY LTD (ACN 007 448 517) & OTHERS (as per attached Schedule) | Defendants | ||
JUDGE: | RANDALL AsJ | ||
WHERE HELD: | Melbourne | ||
DATE OF HEARING: | 3 October 2013 | ||
DATE OF JUDGMENT: | 11 March 2014 | ||
CASE MAY BE CITED AS: | Ninety-First Lieutenant Pty Ltd v Gateway Concepts Pty Ltd & Ors | ||
MEDIUM NEUTRAL CITATION: | [2014] VSC 85 | ||
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PRACTICE AND PROCEDURE — Civil Procedure Act 2010 (Vic) ss 63 and 64 — Summary judgment — Whether directors of trustee company owe a duty to beneficiaries — Young v Murphy principles —Particulars do not have the function of defining the claim — Claims against directors and valuers struck out — Plaintiff entitled to re-plead claims against directors and valuers — Plaintiff’s claim has more than a fanciful chance of success.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C E Shaw | Norton Gledhill Commercial Lawyers |
| For the Second to Fifth Defendants | Mr D G Guidolin | Maddocks |
| For the Sixth to Seventh Defendants | Mr S R Senathirajah | Wotton & Kearney |
HIS HONOUR:
There are two summonses, each dated 4 September 2013, before the Court.
The summons filed on behalf of the second to fifth defendants (‘directors’) applied for Orders:
(a)Pursuant to s 63 of the Civil Procedure Act 2010 (Vic) or r 23.01 summarily dismissing the plaintiff’s case against them; or
(b)Alternatively, that pursuant to r 23.02, paragraphs 31 to 38 of the amended statement of claim filed 9 September 2013 (‘Amended Statement of Claim’) be struck out (Statement of Claim filed 6 June 2013; summonses filed 4 September 2013).
The summons filed on behalf of the sixth and seventh defendants (‘valuers’) applied to dismiss or strike out or obtain a judgment in respect of the paragraphs of the Amended Statement of Claim relating to them, on the basis that such paragraphs did not disclose a cause of action against the valuers. They relied upon s 63 of the Civil Procedure Act and r 23.01(1).
The directors contend that the alleged chose in action is not trust property and cannot be enforced by the plaintiff because the alleged breach of duties does not give rise to any injury to the trust property. The only entity that can enforce this right of action against the directors is Gateway itself or its shareholders, if they obtain leave to commence a derivative proceeding.
The valuers contend that the claim for breach of duty of care alleged against them is not maintainable by a beneficiary as it is not a claim with respect to trust property.
Background
The plaintiff (‘NFL’) was a unitholder in the Yan Yean Road Unit Trust (‘Trust’). The first defendant (‘Gateway’) was trustee of the trust. The directors were directors of Gateway, which was deregistered on 10 November 2010. Gateway, as trustee of the trust, held significant parcels of land in Yan Yean. Gateway entered into a joint venture with Landano Pty Ltd (‘Landano’) as trustee of the Laurimar Trust. Landano also held significant parcels of land in Yan Yean. It was agreed by Gateway and Landano that they would jointly develop and sell the land. Pursuant to an agreement made 17 February 1997, Gateway and Landano engaged Briaroaks Pty Ltd (‘Briaroaks’) to be the manager of the joint venture.
Not all of the Yan Yean land held by Gateway was utilised by the joint venture. On completion of the joint venture, a parcel of land was sold by Gateway separately, and as alleged by NFL:
(a)without allowing the appointed manager of the land, Briaroaks, to manage the trust fund with full and complete powers of management;
(b)by allowing unitholders to vote at the meeting of unitholders where the decision was made to sell the land in circumstances where such unitholders and their associates may have benefited from the sale of land other than in their capacity as unitholders;
(c)failing to provide adequate notice of a summary of information relating to the matters and resolutions to be put at the meeting that were relevant to the decision of any unitholder as to how to vote at the meeting before the meeting, to decide whether or not to sell the land;
(d)failing to obtain the best reasonably available price for the land when it was sold.
The scheme of the claim against the directors
The trust was constituted by a Consolidated Trust Deed (‘Trust Deed’) dated 12 February 2003. The terms of the Trust Deed included:
Each of Gateway and Briaroaks covenants that it will ensure that any notice of meeting convening a meeting of unitholders shall contain adequate notice of:
…
(iv)a summary of information relating to those matters and resolutions that is relevant to the decision of the unitholder on how to vote at the meeting;
….
cl.23.1.1Gateway covenants that it will exercise all due diligence and vigilance in
carrying out its functions and duties and protecting the rights and interests
of unitholders;…
cl.29.2:at any meeting of unitholders convened for the purpose of approving the
sale or disposal of the main undertaking of the trust fund, any person who
may benefit (in the capacity as other than as a unitholder) from such sale or
disposal and any person associated with the person shall not vote on the
resolution;…
Gateway gave notice to the unitholders of the special purpose general meeting of unitholders of the trust to consider whether to approve the sale of the balance of land.
Subsequently, on 9 December 2005, Gateway and Landano sold the balance of the land they held in the joint venture, including the subject land, to D.L.L. Laurimar Park Pty Ltd (‘Laurimar Park’) for a consideration of $61 million.
On 20 December 2005, the special purpose general meeting of unitholders of the trust took place. Gateway recorded that the resolution to approve the sale of the balance of the joint venture land was approved.
NFL alleges that Gateway acted in breach of the Trust Deed and therefore in breach of trust and in breach of fiduciary duties it owed to the unitholders, including NFL. Those breaches are particularised in the particular sub-joined to paragraph 21 of the Amended Statement of Claim.
Paragraph 22 of the Amended Statement of Claim sets out that as a result of Gateway’s breach of trust and breach of fiduciary duties, which were defined as the ‘sale breaches’, each of the unitholders, including NFL, suffered loss and damage.
The Amended Statement of Claim then sets out that there was a further breach of trust by failing to obtain the best possible price.
Thereafter, it is pleaded that the directors’ duties to Gateway were breached on sale of the land in question.
Paragraph 26 of the Amended Statement of Claim sets out that Gateway will not bring the proceeding against the directors and therefore it is an ‘exceptional circumstance’ permitting the beneficiary to bring the proceedings.
There are then set out a number of breaches of directors’ duties and, by paragraph 31, sets out a duty to take reasonable care in undertaking the task of managing the affairs of Gateway.
Paragraph 33 pleads that ‘[i]n breach of their respective duties of care…the [d]irectors and each of them caused Gateway to engage in the Sale Breaches’.
Paragraph 34 sets out that by reason of the matters pleaded:
the [d]irectors and each of them:
(a)breached the duty of care that they owed to Gateway;
(b)have committed contraventions of ss 180(1) and 181(1) of the Corporations Act;
(c)are liable to be subject to a declaration pursuant to s. 1317E of the Corporations Act in respect of each contravention; and
(d)breached the equitable duties they owed as [d]irectors of Gateway.
Paragraph 35 pleads that ‘Gateway has suffered loss and damage by reason of the said contraventions’.
There is then the same pleading set out in respect of the failure to obtain the best possible price.
The scheme of the claim against the valuers
The pleading against the valuers commences at paragraph 39, which sets out:
On or about 22 July 2005 [the valuers] on the instructions of Laurimar Park … (who [the valuers] understood to be an associate entity to both Gateway and Landano) performed a valuation…of the remaining Joint Venture :Land and valued that remaining joint venture land at $60,500,000 as at 22 July 2005.
Paragraph 40 sets out:
In the premises at all material times [the valuers] and each of them knew or ought to have known that Gateway and the unitholders of the trust including NFL relied on them to prepare the Valuation with reasonable care, skill and competence to prevent loss to Gateway and the unitholders of the Trust including NFL and that Gateway and the unitholders of the trust including NFL would rely on the valuation in determining what it would do in relation to the Land.
Paragraph 41 pleads vulnerability on the part of Gateway.
Paragraph 43 pleads foreseeability in that ‘the unitholders of the Trust including NFL would suffer loss and damage’.
Paragraph 44 pleads that the valuers owed Gateway and the unitholders ‘a duty to take reasonable care in preparing the Valuation’.
Paragraph 45 sets out negligence.
Paragraph 46 sets out that as a result of the negligence of the valuers, the unitholders of the trust, including NFL, suffered loss and damage.
Paragraph 48 pleads exceptional circumstances to enable the unitholders to bring suit.
Paragraph 49 sets out negligence in relation to the valuation.
Paragraph 50 pleads that ‘[a]s the result of the negligence of [the valuers], Gateway has suffered loss and damage’.
It is common ground that Gateway only acted as the corporate trustee of the Trust.
Submissions
The directors relied upon Young v Murphy.[1] Paragraph 18 of their submissions sets out:
In that case, a new trustee alleged, amongst many other things, that the directors of the former trustee, a company known as BPTC, were liable to BPTC for breaches of directors’ duties (at law, equity and under statute) owed by the directors to BPTC, and that the new trustee was entitled to sue as successor to that right of action in BPTC. JD Phillips J (with whom Brooking and Batt JJ agreed) disagreed. His Honour held, at 300 to 303, that the directors’ duties were duties owed to the company, irrespective of what or in which capacity the company acted. According to His Honour, it followed that if there was a breach by the directors of the “directors’ duties” they owed to BPTC, BPTC may have a right of action against the directors and that such a right of action vested in the company, but was not a chose in action that was trust property and therefore enforceable by the new trustees (and therefore by extension beneficiaries). This was, according to his Honour, because the directors did not owe their obligations to the trust of which BPTC was trustee; rather the existence of the trust was but the context in which their duties to BPTC fell to be discharged. Thus, the directors of BPTC did not owe the beneficiaries or the trust any obligations. BPTC owed those obligations.
[1][1996] 1 VR 279 (‘Young v Murphy’).
In Young v Murphy, J D Phillips J at 302–3 stated:
The right of action held by the former trustee cannot be shown to have been trust property; there is no basis upon which to conclude that it was. Unlike the valuer whom I have used for illustration, the directors cannot be said on the pleading in this case to have owed their duties to the company only in relation to some particular trust or trusts; nor were those duties imposed upon them in relation to some particular item or items of trust property as such. Rather the existence of both the trusts and the trust property was but the context in which the duties fell to be discharged by those who owed duties to the company generally as its officers. There is no basis, then, for supposing that the right of action was trust property in the hands of BPTC or for supposing that the right of action passed to the new trustees, upon their appointment as such.
On that basis, it follows that any right of action against the former directors for breaches of duties said to have been owed to BPTC remains with that company. That company is now in liquidation and so it is a matter for the liquidator whether to pursue the directors for those alleged breaches of duty. Whether he could be persuaded to bring such proceedings (perhaps, if indemnified as to costs) is a matter which does not fall for decision. But the benefit of such proceedings would belong to the creditors generally, in the liquidation, consistently with my view that the directors owed their duties to BPTC and not to BPTC in a particular capacity. It is, I think, misleading to suggest that the duties were owed to BPTC "personally", because that may be mistaken to mean that those who are beneficiaries under the trusts have no concern with the pursuit of the directors. That is not so because, in so far as BPTC may now be called upon to recompense the beneficiaries (through the new trustees) for loss to the trust property, thus far those beneficiaries may well be interested in the former trustee's pursuing its directors for breaches of their duties. It is important that the plaintiffs do not allege in this portion of the pleading that the directors owed any duties to the beneficiaries; the only duties relied upon are those said to be owed by the directors to BPTC, the former trustee.
The valuers also relied on Young v Murphy.
At 302 in Young v Murphy, when contrasting the position of the directors, J D Phillips J stated:
In this, such duties may be contrasted with some specific contractual obligation undertaken by a third party to the company and undertaken to the company when acting in some particular capacity. Thus a valuer may contract with an individual who is in fact acting as executor of an estate; or he may contract with a company which is in fact acting as trustee of a trading trust. In such cases, the benefit of the contractual obligation may well be held by the executor or by the trustee for and on behalf of the deceased estate or the trust, as the case may be; but no sufficient basis is made here for any such conclusion in relation to the directors' duties which arose simply in virtue of the office.
At 291, Brooking J stated:
A contract was held in trust by the former trustee if it was made in the course of administering the trust. A contract made by a trustee because he is administering a trust is not necessarily made in the course of the administration. It may be made for his private purposes as trustee as opposed to being made in the management of the trust estate. Elaboration on the distinction is unnecessary, since in the present case the contracts were beyond question made in the course of administering the trust.
In Young v Murphy, those contracts were retainers of the auditors to act as auditors of each of the trusts pursuant to the obligation of the trustee. At 291, Brooking J said:
A right of action in tort or contract held by a trustee as such is capable of passing to and so becoming enforceable by his successor…There is, it is true, a dictum of North J to the effect that new trustees could not sue solicitors employed by the former trustees for negligence in the course of that employment (Plaskitt v Eddis (1898) 79 LT 136 at 138); but, with respect, this rests upon a misunderstanding or misapplication of what was decided in Rae v Meek (1889) 14 App Cas 558 and Mara v Browne [1896] 1 Ch 199. Those cases decided two points: that solicitors employed to advise trustees owed no duty to the beneficiaries and that solicitors were not to be made constructive trustees merely because they acted for the express trustees in transactions within their legal powers. The cases were in no way concerned with whether a former trustee's right of action against the solicitors to the trust can be enforced by a new trustee.
The distinction drawn by Counsel for the valuers is that the valuers provided a service to those who engaged them. In this case, it is pleaded that Laurimar Park engaged them or, arguably, Gateway. The tort was not in respect of trust property, although the subject of the service provided was the land. The valuers relied upon the distinction made by Brooking J referred to in the previous paragraph.
NFL’s position
NFL seeks to distinguish Young v Murphy on the basis that it was not a case about exceptional circumstances. Relying on Chahwan v Euphoric,[2] NFL contends that Young v Murphy dealt with whether the old trustee’s right of action vested in the newly appointed trustee in paragraph 20 of their outline of submissions:
That is quite a different circumstance from the exceptional circumstances exception. Under the exceptional circumstances, the exception, the beneficiary (here, NFL) can bring no more and no less than the action that the trustee would and could have brought against the third party.
[2](2009) 73 ACSR 252.
NFL’s counsel, at paragraph 22, set out:
J D Phillips J goes on to say that the right of action held by the former trustee cannot be shown to be trust property. Even if that were so in this case (and for the reasons set out in the next section, it is submitted that it is not) that does not mean that the claim cannot be brought through the exceptional circumstances exemption. That exception does not depend on the claim comprising trust property. The exception applies “to protect their beneficial interest in the trust property”,[3] “in any claim involving rights or property of the trust”,[4] “for injury to the trust property”,[5] “to protect the trust property,’[6] “to protect the trust estate or protect the interests of the beneficiary in the trust estate”,[7] or “for injury to trust property”.[8] There is no requirement that the claim itself be trust property.[9]
[3]Ramage v Warclaw (1988) 12 NSWLR 84, 91.
[4]Lamru v Kation (1988) 44 NSWLR 432, 436.
[5]Lamru at 437.
[6]Chalwan v Euphoric (2009) 73 ACSR 252, 259.
[7]Chalwan at 259.
[8]Nolan v Nolan [2003] 10 VR 626, 644.
[9]Citations in original included.
NFL sought to further distinguish Young v Murphy on the basis that in that case, the trustee acted in the capacity of trustee of more than one trust. Reliance was placed upon the passage set out by J D Phillips J that:
the duties which were owed are nonetheless general duties and are not owed to the company in some specific role or character — or at least they are not owed to the company in some specific role or character when the duties are alleged to have arisen only in virtue of the office which is held.[10]
[10]Young v Murphy 302.
NFL submits that Gateway’s sole role was to be the trustee of the trust and thus, is a significant distinguishing feature from Young v Murphy. The benefit of the claims against the directors must have been held by Gateway for and on behalf of the trust. True, the claims arose by virtue of the office that the directors held, but in the circumstances where, as here, all Gateway did was act as a trustee of the trust, the benefit of the claims against the directors must be held on behalf of the trust.
NFL referred to HR v JAPT:
The reasoning [in Young v Murphy] is thus seen to depend not upon any binding authority but in part on a particular form of pleading in that case and in part on particular facts; it could not be said that the directors owed their duties “only in relation to some particular trusts or trust”. In the case before me, however, the Former Corporate Trustee had no assets of its own and was trustee of only one trust; it never has had any business but the conduct of that one trust and no assets in its charge but the assets of that trust and the directors were as such concerned only in the administration of the one trust. Moreover, there is in my case no general body of creditors; it has no creditors outside the Scheme. I am thus not confident that the reasoning in Young cannot be distinguished, if not on the pleadings alone then on the facts.[11]
[11][1997] EWHC Ch 371, [67] (Lindsay J) (‘HR v JAPT’).
Further, after the decision in Young v Murphy, the plaintiffs in that proceeding amended the Statement of Claim. The challenge to that amended statement of claim was heard in the Supreme Court by Smith J, who said:
In my view, the cause of action now pleaded in tort, even if the source of the duty be confined to the fact that the defendants were directors, is pleaded as a tort with respect to trust property. It is as much “with respect to trust property” as the alleged tort committed by Priestly & Morris (compare, for example, the conversion of trust property in Barber v Furlong [1891] 2 Ch. 172). It must be remembered that the creation of the duty is an aspect of the cause of action but that other elements must be proved. What is now pleaded is a failure to exercise due care in the course of administering the trusts and in relation to particular trust property. I remain of the view that it is very difficult to distinguish the common law claim pleaded against the directors from that made against Priestly and Morris.[12]
[12]Murphy v Lew (Unreported Decision, Supreme Court of Victoria, Smith J, 14 February 1995, No. 12377 of 1991), 10.
Analysis as against the directors
The crucial part of Young v Murphy was, in essence, that a successor trustee of a trust could not bring an action against the directors of the former corporate trustee for breach of their duties as directors of the former corporate trustee. This was because the directors did not owe those duties to the trust, but rather to the company.
J D Phillips J held that the duties owed to the company were of a general nature, not owed to the company in some specific role or character. As such, any cause of action arising out of a breach of directors’ duties owed to the former corporate trustee was not trust property, and therefore the later trustees had no right to bring an action on the basis of a breach of those duties.
The Court of Appeal distinguished this from a situation where the directors of the former trustee had participated in and procured the breaches of trust by the former trustee. In such cases, the beneficiaries would be able to sue on the basis of the second limb of Barnes v Addy.[13] Where the pleadings allege participation and procurement, Young v Murphy will not stand in the way of the proceedings.
[13](1874) LR 9 Ch App 244.
Lindsay J, in HR v JAPT, distinguished Young v Murphy on the basis that the case before him concerned a corporation whose sole purpose was to act as trustee for the relevant trust. The corporate trustee had no assets of its own, and was only concerned with the administration of the one trust. Therefore, his Honour was not satisfied that the duties owed by the director were of the same general nature as in Young v Murphy. The plaintiff’s case was not unarguable.
HR v JAPT was discussed in later decisions in England. In Gregson v HAETrustees Limited,[14] a claim was made against the directors of a trustee company (HAE) by the beneficiary of the family settlement. HAE was trustee of a number of family settlements. A substantial amount of the trust property was lost when a family company, originally owned by the settlor, went into administration. The beneficiary claimed that the directors of HAE were in breach of their duty of care to HAE, and that those claims were trust property of the settlement.
[14][2008] EWHC 1006 (Ch).
Mr Robert Miles QC, sitting as a deputy judge of the High Court, made the observation about the application of HR v JAPT:
In this wreckage, Mr. Le Poidevin clings to the plank of HR v JAPT. But that was a very different case from the present one. In the present case, HAE was the trustee of a number of family trusts and it had outside creditors. Nor was it set up for the purpose of acting as trustee of the Settlement, as it was already the trustee of two family trusts before it became trustee of the Settlement. When the claim was first pleaded it was advanced as the pendant of HR v JAPT. The claimant alleged that HAE acted as trustee of no trust other than the Settlement and that it has and had no creditors other than the claimant. These allegations had to be withdrawn in the light of the evidence showing that neither point was correct.
Lindsay J. did not, of course, say that in HR v JAPT that the reasoning in Young v Murphy was wrong. Rather, he concluded that he was not convinced that it would not be possible to distinguish the case on the facts. By contrast, I do not see any relevant distinction between the present case and Young v Murphy, the reasoning of which, as I have said, I find persuasive.
…
Accepting, as he had to, that this was not a case, like HR v JAPT of a single-trustee company, Mr. Le Poidevin said that there were two features of the present case which still justified the dog leg claim, first, that HAE's only function was acting as a trustee (albeit of several trusts), and, secondly, that under its constitution it was not allowed to make a profit from its activities. I do not think that either feature justifies the imposition or implication of a trust. The first feature has been addressed earlier in this judgment, where I have explained why, generally, the fact that a company acts as a trustee does not justify the imposition of a dog leg trust, and I do think the reasoning is affected one way or other by the fact that the company may have no other business. Moreover, this feature, it appears, arose in Young v Murphy where, on convincing grounds, the claim was dismissed. It would also apply to a great many trust companies, including some which administer thousands of trusts. If this feature justified the dog leg claim in the present case I find it hard to see why it would not apply generally. The second feature does not to my mind add anything significant. If the dog leg argument is a good one it would apply whether or not the trustee company was constituted to make profits.
I conclude that the dog leg claim has no real prospect of success and that there are no reasonable grounds for asserting it. The claim against the director defendants must therefore be struck out. [15]
[15]At [65]–[69].
It should also be noted that, despite the fact that he distinguished the case, Mr Miles QC had real doubts with the approach in HR v JAPT:
The dog leg claim, if valid, would, for all practical purposes, circumvent the clear and established principle that no direct duty is owed by the directors to the beneficiaries. The refusal of the law to accept that directors of a trustee company owe a direct duty to safeguard the assets of a trust of which it is trustee is, I consider, a powerful reason to doubt that directors may be liable to the beneficiaries of the trust by the indirect, dog leg, route now proposed.[16]
[16]Ibid, [46].
Nevertheless, Mr Miles QC thought the critical features of the trustee company in HR v JAPT was that it had been set up only to administer one trust, and that it had no other purposes. This is what NFL alleges in its submission, but it is not reflected in the pleading.
Smith J, in Murphy v Lew, held that the revised pleadings differed from the pleadings considered in Young v Murphy in two respects. First, it did not just rely on the office of the director, but on his acts and omissions made while carrying out the role. Second, the pleadings accepted that the duty was owed to the company, but put facts to enable the case to be made out that the loss was not personal to the corporate trustee, and that the right of action held by it was property of the trust. In addition, Smith J held that the revised pleadings were acceptable as they made allegations on the basis of negligence in relation to the management of trust property.
Analysis as against the valuers
The claim against the valuers is made on the basis of negligence. The pleadings allege that the valuers knew that the unitholders would suffer damage if they did not prepare the valuation with reasonable care.
The issue is whether this cause of action in negligence against the valuers is held by Gateway as trustee or in personam. Brooking J, in Young v Murphy, drew a distinction between contracts made in the course of administering the trust and those made by a trustee who is administering a trust:
A contract was held in trust by the former trustee if it was made in the course of administering the trust. A contract made by a trustee because he is administering a trust is not necessarily made in the course of the administration. It may be made for his private purposes as trustee as opposed to being made in the management of the trust estate. Elaboration on the distinction is unnecessary, since in the present case the contracts were beyond question made in the course of administering the trust.[17]
[17]At [291].
Accordingly, close scrutiny is required to determine the purpose of the arrangement between the trustee and the valuer to determine whether it was made ‘in the course of administering the trust’. If this is the case, then the contract is held in trust and is therefore trust property. A claim for breach of retainer would be a claim in respect of trust property. On the face of it, it would seem that the agreement by which the valuers valued the land was taken solely for the purposes of selling trust property, and therefore was made in the course of administering the trust.
Brooking J, in Young v Murphy, explained the general principle as follows:
The rule that in general it is the trustee, and (except as regards breaches of trust) the trustee alone, who can sue for torts with respect to the trust estate and enforce contracts made in the administration of the trust and indeed take any appropriate proceedings to protect the estate and enforce rights belonging to it, is reflected by the long line of cases of which Lee v Sankey … is an example: in general the trustee alone may sue for breach of duty an agent employed by him unless the agent has made himself liable as a trustee, in which case the trustee and the beneficiary each have standing.[18]
[18]Ibid.
In Mara v Browne,[19] a solicitor had given his clients, who were trustees, bad advice as to how to invest the trust funds. The Court of Appeal found that while the solicitor may have been negligent, he was not liable directly to the beneficiaries as constructive trustee. Smith LJ explained that the circumstances where a solicitor or other agent of the trustee may owe a duty directly to the beneficiary, are confined to a situation where that agent has, through their actions, become a constructive trustee:
… It was said that he made himself a constructive trustee, which, so far as I know, is the same thing as a trustee de son tort. Now, what constitutes a trustee de son tort? It appears to me if one, not being a trustee and not having authority from a trustee, takes upon himself to intermeddle with trust matters or do acts characteristic of the office of trustee, he may thereby make himself what is called in law a trustee of his own wrong – ie, a trustee de son tort, or, as it is also termed, a constructive trustee. Lord Selborne LC dealt with the question in Barnes v Addy. He said:
That responsibility [ie, of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of the trustees in transactions within their legal powers, transactions, perhaps of which a Court of Equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustee.
And James LJ added:
I most cordially concur in the general principles with which the Lord Chancellor began his judgment. I have long thought, and more than once expressed my opinion from this seat, that this Court has in some cases gone to the very verge of justice in making good to the cestui trust the consequences of the breaches of trust of their trustees at the expense of persons perfectly honest, but who have been, in some more or less degree, injudicious. I do not think it is for the good of cestui trust, or the good of the world, that those cases should be extended.
In this, if I may respectfully say so, I entirely agree.[20]
[19][1896] 1 Ch 199, referred to by Brooking J.
[20][1896] 1 CH 199 at 209-210.
Hershell LJ was clear that while the advice given was poor, the solicitor was not liable as he was always acting on instructions — he only put the money to the investments as he was required by the trustees. The correct suit would have been one in tort.
J D Phillips J, in Young v Murphy, drew a distinction between the duties owed by directors to their company, which were general in nature and therefore unable to be enforced by beneficiaries, and specific contractual obligations undertaken by a third party to the company when acting in a particular capacity. In such cases, it may be possible for the beneficiaries to bring an action in the name of the trustee in order to exercise the right to seek redress for negligence. He explained:
Thus a valuer may contract with an individual who is in fact acting as executor of an estate; or he may contract with a company which is in fact acting as trustee of a trading trust. In such cases, the benefit of the contractual obligation may well be held by the executor or by the trustee for and on behalf of the deceased estate or the trust, as the case may be; but no sufficient basis is made here for any such conclusion in relation to the directors' duties which arose simply in virtue of the office.[21]
[21]At 302.
It will, therefore, depend on the nature of the relationship between the valuers and the trust. NFL would have to show more than just the valuers acting on instructions; they would have to be somehow more involved in the breach of trust to be directly liable. Nevertheless, the exceptional circumstances exception may assist in providing the beneficiaries with a remedy if the cause of action is held on trust and the trustee fails to sue.
Exceptional circumstances exception
The exceptional circumstances exception allows a beneficiary, in certain circumstances, to bring an action to compel the trustee to protect the beneficiaries’ interest in the trust. The plaintiff has submitted in this case that it does not depend on the claim comprising of trust property. This argument does not appear to be supported by the cases referred to by the plaintiff.
Ramage v Warclaw identified two critical elements of the exception.[22] First, that the normal remedy of the beneficiary commencing action to compel the trustee to protect the interests of the trust was not sufficient; and secondly, that the exceptional circumstances justified the beneficiary commencing an action in his or her own name to protect the trust property. Powell J set out a number of examples of ‘exceptional circumstances’ permitting the beneficiaries to commence an action in the name of the trustee.
[22](1998) 12 NSWLR 84, 91.
The property in question was a piece of land that had been transferred prior to the testator’s death while she was suffering senile dementia, and the public trustee had decided not to commence an action to recover it. While it was not stated explicitly, all the examples referred to by Powell J were cases where the beneficiaries were seeking to recover an asset of the trust. What was being sought by the beneficiary was ‘trust property’. I note that it is not clear that a right of action to sue the directors of Gateway, and any potential damages gained from such an action, could be considered trust property or trust rights. Rather, the right to sue the directors for breach of duty belong to the company.
In Lamru v Kation,[23] Cohen J discussed who could bring a claim involving the ‘rights and property of the trust’. Referring to Rammage v Warclaw, Cohen J described the exception as:
[W]here a trustee refuses to institute proceedings the beneficiary may wish to institute them himself, either in his own name or in the name of the trustee. It was said that the rule is that a beneficiary may sue in his own name only where the relief sought is in the equitable jurisdiction of the Court and even then only where the circumstances are exceptional. If they are not exceptional or if the proposed action is to be commenced in the common law jurisdiction, the beneficiary’s only remedy is to sue the trustee for the execution of the trust. Where proceedings are brought by the beneficiary in the circumstances referred to, the trustee and other beneficiaries should be added as defendants.[24]
[23][1998] 44 NSWLR 432.
[24]Lamru, [437].
Again, it is unclear whether this decision is authority that NFL does not have to show that the right of action is ‘trust property’ in order to fall under the exceptional circumstances exception. Cohen J only contemplated the situation where rights and property at issue belonged to the trust.
In Chalwan v Euphoric, Brereton J explained the exceptional circumstances exception:
In this jurisdiction, equity will permit a beneficiary who can establish exceptional circumstances to sue on a cause of action against a third party which belongs to the trustee, if the trustee fails to sue to protect the trust property.[25]
[25]At 259.
Brereton J considered a situation where the cause of action belonged to the trustee; that is, the cause of action was trust property. He further explained:
Although the cases referred to “exceptional circumstances”, the relevant exceptional circumstance seems to involve no more than a failure by the trustee — excusable or inexcusable — to sue on a cause of action against a third party in performance of the duties owed by the trustee to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.
As Finn J explained in Lidden v Composite Buyers Ltd…under the judicature system it is no longer the case that this doctrine applies only to proceedings in the exclusive jurisdiction of equity; it is now available in respect of all causes of action which a trustee may have against third parties. However, it must always be borne in mind the action brought by a beneficiary in such a case is no more and no less than the action that the trustee would and could have brought against the third party. It is a claim brought, albeit by a beneficiary, in the right of the trustee.[26]
[26]Chalwan at 259.
Brereton J held that the only action the beneficiary can bring is one that the trustee could have brought against a third party. His Honour held that in cases where a company was trustee of many trusts, any action by the company against its directors for breach of directors’ duties would not be brought as trustee of a particular trust but rather by the company in its own right. As such, the cases referred to by NFL are not authority that a beneficiary can stand in the shoes of the company in any case against a third party. They are only authority for the principle that beneficiaries may stand in the shoes of the company where the company could bring an action as trustee of the trust. Therefore, once again, this case is consistent with the defendants’ submission with the cause of action must be trust property.
The Pleading
Although it seemed to be common ground that Gateway only acted as trustee of the trust, paragraph 2 of the Amended Statement of Claim does not actually set that out. Given the observations in Young v Murphy, Smith J’s observations in Murphy v Lew and Lindsay J’s observations in HR v JAPT, the limit to the range of the trustee’s governance is a material pleading which influenced each of the latter two judges to depart from Young v Murphy.
Paragraph 21 pleads a breach of trust by Gateway. Paragraph 22 pleads that as a result of Gateway’s breach of trust and breach of fiduciary duties, the unitholders (the trust) suffered loss and damage.
The same pleading is set out in paragraph 24 with respect to the failure to obtain the best possible price.
In contrast, the claim against the directors after setting out the various breaches culminates in paragraph 35 with the pleading: ‘Gateway has suffered loss and damage by reason of the said contraventions’. The particulars subjoined to paragraph 35 do, however, set out that the trust would have been better off by a specified amount.
The pleading against the directors with respect to the failure to obtain the best possible price is couched in the same way.
In contrast, the claim as against the valuers at paragraph 46 is: ‘As the result of the negligence of [the valuers], the unitholders of the trust including NFL have suffered loss and damage’. However, the exceptional circumstances claim against the valuers commencing at paragraph 48 also culminates in the pleading at paragraph 50: ‘As the result of the negligence of [the valuers], Gateway has suffered loss and damage’. In this instance the particulars subjoined to paragraph 50 are not so clear that it is the trust rather than Gateway which has suffered the loss.
On behalf of the directors, it was put that:
The plaintiff intends to allege that the directors owed Gateway a duty to act with all due skill and care so as to avoid Gateway sustaining economic loss. The directors contend that if that is the alleged duty, then it ought to be pleaded.
The directors also point to paragraph 33 in the pleading where there is reference to the directors causing Gateway to engage in sale breaches. On behalf of the directors, it is submitted that there is no pleading (including particulars) of any material facts precisely identifying what is said that each of the each director’s negligently did or failed to do that ‘caused’ Gateway to engage in the sale breaches. Thus, the directors do not know what it is said that they did or did not do in breach of their duties alleged in paragraphs 31 and 32.
In response, NFL submitted that paragraph 31 is claiming ‘common law negligence against the directors’. NFL submits that it is difficult to see how that could be pleaded any more clearly. It is plain that the directors owe a duty of care at common law and can be sued for negligence. Paragraph 25 pleads that the directors were directors of Gateway, and paragraphs 27 to 29 plead reliance, vulnerability and control or power, which the High Court has held are requisite elements of a duty of care in claims for pure economic loss.
There are also breaches alleged in paragraphs 33 and 34, and the loss and damages alleged in paragraph 35, described as follows in paragraph 38 of the plaintiff’s outline of submissions: ‘The claim is an orthodox claim in negligence in circumstances where such a claim is plainly available’. A similar submission is made in relation to the breach of the statutory duties.
I determine that the pleading is insufficient as against the directors and, to a degree, is deficient with respect to the valuers.
The pleading does not set out that Gateway’s only function is to be the trustee of the trust. The pleading at paragraphs 35, 38 and 50 clearly sets out that Gateway suffered the loss rather than the unitholders (the trust). The pleading as against the valuers does not draw a distinction between their engagement for Gateway itself or for the purposes of Gateway administering the trust. Having said that, the natural inference which may be derived from setting out the knowledge of reliance upon the valuation by the unitholders, is that the engagement was for the purposes of administering the trust.
There is merit in the argument put on behalf of the directors that the allegations against the directors have not been set out. It is not the function of the particulars to define the claim. As noted in Williams’ Civil Procedure:
It is not the function of particulars to fill gaps in a statement of claim from which a material statement has been omitted… Thus, where there has been an infringement of the rule as to stating material facts and not merely a failure to give sufficient particulars of facts already pleaded, the preferable course is to strike out the pleading, with liberty to amend, rather than to order particulars…[27]
[27]LexisNexis Butterworths, Civil Procedure: Victoria, vol 1 (at service 251) [13.10.10].
Accordingly, the loss to the trust should be specifically pleaded and not referred to in the particulars.
Although what I have stated may be borderline pedantry, the point is particularly important given the observations of Mr Miles QC, which doubt the reasoning in HR v JAPT and adhere to Young v Murphy.
In any event, as against the directors, a scattergun approach has been adopted in relation to the particulars subjoined to the various subparagraphs of paragraph 21. For instance, in the particulars subjoined to subparagraph (c) various failures are set out. The particular at subparagraph (m) says this:
further, the solicitors for Landano, Mouldens, by letter dated 28 August 2003 advised Landano and its representatives on the Management Committee constituted by the Joint Venture Agreement that Briaroaks may have the sole power to sell the joint venture land to the exclusion of the joint venturers and that selling the joint venture land without obtaining the agreement of Briaroaks might constitute a breach of the Management Agreement, and such legal advice was not disclosed to the unitholders in the YYRU Trust or the Laurimer Trust.
Given that the gravamen of the pleading was not that the land was sold but that it was sold for less than its value, I cannot ascertain how the directors would understand such a particular would bear on the issue or how such a particular, if it were phrased as a pleading, could be dealt with. The plaintiff ought to turn its mind to exactly what it is said that the directors did or did not do that bears on the issue.
Notwithstanding my criticism of the pleading, given the common ground that Gateway only acted for the one trust, I determine that there is sufficient basis for the proceeding as against the directors and the valuers to go forward.
In Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd,[28] the applicable principles regarding the operations of ss 63 and 64 of the Civil Procedure Act 2010 (Vic) were set out. Warren CJ and Nettle JA held that the test for summary judgments under these sections was:
Were the respondent to the application…has a ‘real’ as opposed to a ‘fanciful’ chance of success.[29]
Their Honours emphasised that this test is ‘to be applied by reference to its own language’, and not through a comparison with the old common law test requiring a case to be ‘hopeless’ or ‘bound to fail’.[30] This means that the statutory test is ‘to some degree a more liberal test’, permitting the possibility ‘that there might be cases, yet to be identified, in which it appears that, although the respondent’s case is not hopeless or bound to fail, it does not have a real prospect of success’.[31] Nevertheless, Warren CJ and Nettle JA sounded a note of caution, holding that the power to summarily dismiss proceedings should not be exercised unless it is clear that there is no question to be tried.
[28][2013] VSCA 158.
[29]Ibid, [35] (Warren CJ and Nettle JA).
[30]Ibid.
[31]Ibid.
Given the observations of Lindsay J in HR v JAPT, and given the decision of Smith J in Murphy v Lew, I cannot say that the plaintiff’s claim has only a fanciful chance of success.
Accordingly, I order that the claims against each of the directors and the valuers be struck out. The plaintiff is entitled to re-plead the same. The plaintiff will pay the defendants’ costs of and incidental to each summons. I decline to apportion the costs as, albeit that I have not summarily dismissed each claim, the argument in relation to whether claim was efficacious was necessary, informative and provided a context to the pleading.
Given my reasons and the order to be made, I expect the parties to provide the Court with a timetable for dealing with the amendments and the defences thereto.
SCHEDULE OF PARTIES
S CI 2011 6645
BETWEEN:
| NINETY-FIRST LIEUTENANT PTY LTD (ACN 006 469 496) | Plaintiff |
| v | |
| GATEWAY CONCEPTS PTY LTD JOSEPH PIZZANO And CHRISTOPHER JOHN COE DAVID HENRY SHAW LAURENCE GEORGE BODY URBIS VALUATIONS PTY LTD (ACN 105 273 523) BRIAN DUDAKOV COMMONWEALTH OF AUSTRALIA AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | First Defendant Second Defendant Third Defendant Fourth Defendant Fifth Defendant Sixth Defendant Seventh Defendant Eighth Defendant Ninth Defendant |
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