Octavius Securities and Investments Pty Ltd v Zerbe
[2019] VCC 1752
•6 November 2019
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-18-02689
| OCTAVIUS SECURITIES & INVESTMENTS PTY LTD (ACN 138 228 243) | Plaintiff |
| V | |
| GARRY JOHN ZERBE | Defendant |
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JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 22 July 2019 | |
DATE OF RULING: | 6 November 2019 | |
CASE MAY BE CITED AS: | Octavius Securities & Investments Pty Ltd v Zerbe | |
MEDIUM NEUTRAL CITATION: | [2019] VCC 1752 | |
REASONS FOR RULING
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Subject: PRACTICE AND PROCEDURE – Charging Order
Catchwords: Review of a decision by a Judicial Registrar refusing a charging order – whether shares held in a trustee company by a beneficiary of a discretionary trust have any value and amenable to a charging order
Legislation Cited: County Court Civil Procedure Rules (2018) Vic, Order 73 and Rule 84.03
Cases Cited:Hewitt v Count Financial Limited [2017] VSCA 354; Galbally & O’Bryan v Easton [2016] NSWSC 77; Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; Craig v Federal Commissioner of Taxation (1945) 70 CLR 441; Wicks v Shanks (1892) 67 LT 609
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | J Ribbands | T F Grundy Lawyer |
| For the Defendant | R E Cook | S V Winter & Co |
HER HONOUR:
1 This is an application for review of a decision of a judicial registrar under r 84.03 of the County Court Civil Procedure Rules 2018 (Vic) (“the Rules”).
2 The plaintiff obtained judgment against the defendant in this Court on 12 March 2019 in the sum of $6,609,130.27 at an unopposed trial (“the judgment debt”). The judgment debt arose as a result of the defendant’s liability as guarantor of a loan between the plaintiff and two borrowing companies.
3 The plaintiff filed a charging summons on 5 April 2019 under r 73.05 of the Rules seeking to charge the defendant’s shares in Turguse Pty Ltd (ACN 005 083 107) (“Turguse”) with payment of the judgment debt.
4 Turguse is the trustee of the L.H. Zerbe Family Unit Trust (“the Trust”). The defendant holds nine of the 10 shares issued in Turguse. The remaining share is held by the defendant’s wife. The shares have a paid up capital value of $10. The amount claimed in the charging summons to satisfy the judgment debt had increased to $6,224,985.45, which included accrued interest and legal costs.
5 For the purpose of securing the payment of a judgment debt, the Court may, by order impose a charge on the beneficial interest of the judgment debtor in any securities: r 73.02. Securities are defined in r 73.01 to include stock of any registered corporation. Stock is also defined and includes shares. A charging order is treated as having the same effect and giving the judgment creditor the same remedies for enforcing it as if it were a valid charge effectively made by the judgment debtor: r 73.09. Under r 73.08(1), the Court has a discretion to make a charging order with respect to securities to which the summons relates.
6 Judicial Registrar Tran declined to make the charging order sought by the plaintiff and provided comprehensive reasons for doing so in her ruling dated 11 June 2019.[1] On 13 June 2019, the judicial registrar made orders dismissing the plaintiff’s summons and awarding costs in favour of the defendant.
[1]Octavius Securities & Investments Pty Ltd v Garry Zerbe [2019] VCC 794.
7 A notice seeking review of the orders was filed on 25 June 2019. The plaintiff seeks the following orders:
(i) the orders of the judicial registrar be set aside; and
(ii) a charging order be made against the whole of the interest in the shares held by the defendant in Turguse.
8 Two affidavits were filed on behalf of plaintiff sworn by the plaintiff’s solicitor, Sascha James Kenny, on 15 April and 28 May 2019 respectively. The defendant relied upon affidavits sworn by him on 17 and 18 April 2019 and a further affidavit sworn on 24 May 2019. This was the same material placed before the judicial registrar. Neither party sought to adduce any additional evidence at the hearing before me.[2]
[2]Under r 84.03(7)(b), a party can rely upon further evidence in an application for review, subject to leave of the Court
Grounds of review
9 The plaintiff seeks review of the orders on the following grounds:
(i) the judicial registrar erred in finding that the shares had little or no value; and
(ii) the judicial registrar erred in finding that the interest of the defendant in the shares was not such as to warrant the making of a charging order.
Applicable principles in respect of review
10 Under r 84.03(5), the review by a judicial registrar’s decision is conducted by way of a hearing de novo. The Court considers the matters afresh rather than examining the decision to determine if an error was made.[3]
[3]Hewitt v Count Financial Limited [2017] VSCA 354, [1] (per Tate and Kyrou JJA).
11 In conducting a review under r 84.03(6), a judge may:
(a) exercise all the powers and discretions of the Court with respect to the subject matter of the review; and
(b) confirm, set aside or vary the order of the Court constituted by the judicial registrar or make such further or other order as may be necessary, or as the case requires.
Background
12 On 9 November 1959, Leslie Herman Zerbe, Orchardist, and Gladys Ellen Zerbe, Married Woman, became the registered proprietors of a vineyard situated at Bittern (“the Vineyard”).[4] Leslie and Gladys Zerbe had two sons: Garry Zerbe (the defendant) and Ross Zerbe.
[4]Historical title search of Certificate of Title Volume 8067 Folio 322.
13 By a Deed of Settlement made 22 November 1974 (“the Trust Deed”), the Trust was created. The original trustee was L. H. Nominees Pty Ltd. The beneficiaries of the Trust were the descendants of Leslie Zerbe and the spouses of any such descendants who are alive. Clause 2 of the Trust Deed provided that:
“Subject to clause 7 hereof, the Trustee shall during the income period hold the Trust Fund UPON TRUST as follows:-
(a) To apply the whole or such part as the Trustee thinks fit of the income arising during the income period between the beneficiaries in such proportions (including the giving of all or none of such income to any of them) in all respects as the Trustee thinks fit as follows…”
14 Clause 6 of the Trust Deed also gave the Trustee power to make capital distributions to or for the benefit of any beneficiary or for a charitable purpose.
15 The expression “as the Trustee thinks fit” was given a special meaning in Clause 1(d) of the Trust Deed:
“the expression ‘as the Trustee thinks fit’ shall give the Trustee the widest and most absolute and unexaminable discretion permitted by the laws relating to trusts, including where appropriate the power to prefer one or more to the total exclusion of any other or others PROVIDED ALWAYS THAT whereas the Father has two sons GARRY JOHN ZERBE and ROSS LESLIE ZERBE, at all times the aggregate total of all distributions of the Trust Fund and/or of the income thereof (as the case may be) made to either son, his wife or widow, his descendants and his descendants’ spouses (including any widow or widower) shall be equal to the aggregate total of all distributions from the Trust Fund and/or the income thereof (as the case may be) made to the other son, his wife or widow, his descendants and his descendants’ spouses (including any widow or widower), and this equality shall relate to distributions from the Trust Fund and separately to distributions from the income thereof, and shall apply so long as both sons or any of the beneficiaries described in this sub-clause in relationship to both sons shall be living, and the expression “as the Trustee thinks fit” shall where the context permits be construed subject to this proviso.”
16 Clause 10 of the Trust Deed gave Leslie Zerbe (and after his death, his personal representative) a discretionary power to remove and replace the trustee.
17 By Deed of Appointment dated 14 December 1974, Leslie Zerbe removed L.H. Nominees Ltd and appointed Turguse as the trustee of the Trust. Turguse was registered on 3 December 1974.
18 On about 24 December 1974,[5] Turguse made a declaration of trust stating, among other things, that in its capacity as trustee of the Trust it intended to purchase the Vineyard from Leslie and Gladys Zerbe, and to borrow an amount equal to the purchase price, stamp duty and other ancillary expenses from Leslie and Gladys Zerbe.
[5]Declaration of Trust made 24 December 1974 and amended by Declaration of Trust made 18 August 1975.
19 Turguse became the registered proprietor of the Vineyard on 28 May 1975.
20 The original Day of Distribution in the Trust Deed was the 80th anniversary of the execution of the Trust Deed. The day of distribution was subsequently altered by a Deed of Nomination made 21 April 1992 to the date of death of the defendant.
21 The loan facility agreement, which was guaranteed by the defendant, was entered into in October 2009.[6]
[6]Paragraph 2 of the Statement of Claim filed 22 June 2018.
22 The defendant was formerly a director of Turguse until he resigned on 26 July 2018. His resignation occurred after a letter was sent to the defendant and his wife by the plaintiff’s solicitors dated 24 July 2018.[7] The plaintiff’s solicitors gave notice that legal action would be taken if the defendant sought to transfer his shares in Turguse.
[7]Exhibit “SK4” to the affidavit of Mr Kenny sworn 15 April 2019.
23 The defendant remains the secretary of Turguse and his wife is currently the sole director.
24 The defendant deposed that his shares in Turguse do not confer upon him any beneficial interest in the assets of the Trust.[8]
[8]Paragraph 5 of the defendant’s affidavit sworn 18 April 2019.
Plaintiff’s contentions
25 The plaintiff submitted it had a prima facie case to warrant the making of a charging order with a view to the pursuit of further proceedings to seek enforcement of the charge. The plaintiff noted that any application to enforce the charge must be done by way of a separate proceeding.[9]
[9]Galbally & O’Bryan v Easton [2016] NSWSC 77 at [67]-[68].
26 The case advanced by the plaintiff was that the defendant’s shares in Turguse amounted to property which was amenable to a charging order for the benefit of the plaintiff as judgment creditor. The mere fact that the assets sought to be charged were held in a discretionary trust did not put them beyond the control of the Court’s process.
27 The plaintiff relied upon the decision of French J (as he then was) in Australian Securities and Investments Commission v Carey (No 6).[10] This case concerned an application by ASIC for an order that a receiver be appointed to property held by a judgment debtor, in particular, shares held by debtor beneficially in a discretionary trust. His Honour was prepared to make the order sought by ASIC where he found in the circumstances of that case, the debtor was in effect the alter ego of the trust.
[10][2006] FCA 814 at [36]-[37].
28 The plaintiff said the circumstances of that case were analogous to this application. In support of its argument that assets held in a discretionary trust could be available to a judgment creditor, the plaintiff relied upon the following passage from the decision of French J:
“… where a discretionary trust is controlled by a trustee who is in truth the alter ego of a beneficiary, then at the very least a contingent interest may be identified because, to use the words of Nourse J, ‘it is as good as certain’ that the beneficiary will receive the benefits of distributions either of income or capital or both.
As discussed earlier, the beneficiary who effectively controls the trustee’s power of selection because he is the trustee or one of them and/or has the power to appoint a new trustee has something approaching a general power and the ownership of the trust property.”[11]
[11]Ibid [36]-[37].
29 The plaintiff argued the value of the shares is what it allows the majority shareholder to do. Despite resigning as a director after the commencement of this proceeding, the plaintiff submitted the defendant still retained clear control of Turguse as its majority shareholder – he held the “keys”. A 90 per cent shareholder can call a meeting and appoint a new director. As the defendant holds 90 per cent of the shares, he can control the decision making function of the trustee and dictate in what way the trustee should exercise its trust power. The value under consideration is the defendant’s power to exercise the discretion of the trustee to make distributions – the value is not to be measured by the value of the company. Therefore, so the argument went, this power was akin to the defendant’s property and not something measured in monetary terms.
30 The fact that the plaintiff could consider future steps showed there was a value to the shares. The plaintiff could determine later on what steps it might take, if any, relating to the enforcement of the charge. At this stage, it was premature to decide what those future steps might be and there was no reason why a charging order over the shares could not be made now.
Defendant’s contentions
31 The defendant questioned the actions of the plaintiff and suggested what the plaintiff was seeking to do was to improperly take over the Trust so as to enable payment to itself.
32 There was no expert evidence provided as to the value of the shares or any evidence led by the plaintiff to establish the shares were worth anything more than $9. The only asset of value held by the trustee on behalf of the Trust was the Vineyard. Nor was any evidence led about the possibility of other family members buying the defendant’s shares, a suggestion put by the plaintiff’s counsel, which was simply speculation on the part of the plaintiff.
33 The defendant submitted the reliance placed on the Carey decision by the plaintiff was misplaced having regard to the different nature of the application in that case. Carey concerned the ability of the Court to appoint receivers to property for the purpose of preserving assets pending further investigation by ASIC. It was said that this was a very different exercise to the nature of the exercise of a discretion to be made under r 73, which is whether a charge should be made for the purpose of securing payment of a judgment debt.
34 This Court should be extremely wary of making reference to the wording in other Acts when seeking to interpret provisions of a different statute. Reference was made to Craig v Federal Commissioner of Taxation,[12] where the High Court had said that decisions where certain more or less similar words in more or less similar Acts cannot be regarded as authorities when considering the provisions of another Act especially when the context is different.
[12](1945) 70 CLR 441, 456-7.
35 The defendant pointed to the following matters in support of his argument that the plaintiff’s submission the Carey case was applicable should be rejected, namely:
(a) the circumstance that this is a discretionary family trust of a traditional nature. Such trusts have been in common existence for over 50 years and yet the plaintiff could produce no judicial authority to the effect that a charging order could be made over the shares of a trustee company of a discretionary family trust in circumstances similar to the present;
(b) the present trust structure and purchase of the land to which the plaintiff seeks access for the purpose of executing its judgment was set up in 1974, well before the transaction the subject of the current dispute. The Trust was set up in a legitimate fashion to protect the family assets and is not the alter ego of the defendant;
(c) the defendant’s father having died, the position of the power of appointment of the trustee becomes a matter for consideration. The defendant’s father’s legal personal representative was granted these powers. As such, that person’s conduct is amenable to supervision of the Court, and such person, if acting improperly, could be removed pursuant to clause 10 of the Trust Deed. An appointee appointed under this clause acting as executor is required to act impartially and in the interest of the beneficiaries as a whole;
(d) the intervention of the plaintiff as a person controlling the trustee, which is clearly acting in its own interests rather than in the interests of any of the beneficiaries, is contrary to the principles of trust law;
(e) this case is different to the circumstances where there is one trustee and one beneficiary where it might easily be said that a general power exists. It is not the case that there is a power exercisable in favour of any person including the donee of the power: Carey at [19]. There is a class here to which the objects of the power are limited. It is a special power of appointment – not a general one, unlike Carey;
(f) The current director of Turguse is Ms Zerbe, the defendant’s wife. Even though the defendant is the majority shareholder, it is the director who holds the power. This is another difference from the Carey case. It cannot be said the defendant is the alter ego of the Turguse when his wife is the director.
36 The plaintiff is acting with an ulterior purpose, the object of which is for the plaintiff to put in a director to Turguse and make a distribution to the defendant to get money to pay the debt. The object of the Trust is to not to pay the plaintiff but to benefit the beneficiaries.
37 The defendant is not the sole appointor or in a position where he is the only beneficiary involved. The Trust was not subject to his effective control nor was it his alter ego. Clearly, the defendant’s brother and his family have equal rights to any distribution, as indeed do the defendant and his family.
38 The defendant only owns nine of the 10 shares in the Trust Deed. The other shareholder has rights that can be exercised in certain circumstances. Any trustee is under an obligation to consider the beneficiaries in the manner referred to in paragraph 37 when making distributions.
39 A charging order will not be made where the shares in question have no value. In Wicks v Shanks,[13] Lord Esher MR stated:
“The judge at chambers had a discretion to consider the facts, and he did consider the facts, and he came to the conclusion that these shares, with the charges which existed upon them, were clearly worth nothing beyond those charges. He thought, therefore, that a charging order, if made, would be made with all its attendant cost, and would be one which could not produce any fruit at all. The court ought, I think, to be very careful not to permit a charging order to be made for a useless purpose, and all the consequent costs to be incurred.”
[13](1892) 67 LT 609.
40 The defendant submitted a charging order over the shares would not produce any fruit and therefore, should not be made. Any future court would not permit the plaintiff to advantage itself in breach of trust law and at the expense of the beneficiaries.
41 Further, if the charging order is refused, it will avoid the defendant incurring additional costs which may be thrown away in order to defend subsequent enforcement proceedings.
Consideration
42 The shares held by the defendant in the Trust are worth $9. There is no evidence before the Court that the shares are worth more than their stated value. Turguse is not the beneficial owner of any significant assets. It has some limited assets such as plant and equipment, listed in the balance sheet.[14] The Vineyard is held on trust by Turguse for the Trust. There is no evidence about the value of the Vineyard although it can be inferred it is of some value, being an unencumbered property in Bittern.
[14]Exhibit “GJZ-6” of the defendant’s affidavit sworn 24 May 2019.
43 The plaintiff does not ascribe any monetary value to the shares over and above their paid up value. Instead the “value” ascribed by the plaintiff is intangible, namely, the defendant’s ability as the majority shareholder to exercise the way in which the trustee can make distributions. It was put by the plaintiff that this must be of some value. Pausing here, any trustee is required to act in accordance with the terms of the Trust Deed and for the benefit of all the beneficiaries. I am not persuaded by the plaintiff’s submission that the defendant’s so-called ability as majority shareholder to direct the trustee how to do its job has a sound basis as a matter of law. Nor, assuming the defendant could lawfully act in this way, am I satisfied this alleged “power” is capable of being ascribed a “value” for the purpose of making a charging order.
44 Even if the ability to direct the trustee how to make distributions has some intangible value, it begs the question should a charging order be made in those circumstances? As r 73.02 provides, the purpose of making a charging order is to secure the payment of a judgment debt (emphasis added). For example, a charging order could be made over shares and then a judgment creditor could make an application to compel the sale of those shares as a means of recovering the debt. Here, the plaintiff says a charging order could be made and then the plaintiff can decide at a later stage what steps it will take, if any, to seek payment pursuant to the charge. But there is no utility in making such an order where the plaintiff would be unable to enforce the charge in order to secure payment of the judgment debt by any legitimate means.
45 If the plaintiff, as chargee of the defendant’s shares, sought to direct the trustee to make a payment to the plaintiff, the trustee would be in breach of its fiduciary obligations if it did so. If the trustee made distributions to the defendant with a view to that sum becoming available for the plaintiff’s benefit at the expense of the other beneficiaries, again such action would be contrary to the trustee’s duties and be liable to challenge. The trustee of the Trust must act in the interests of all the beneficiaries, being the defendant and his brother, and their respective families.
46 The plaintiff’s counsel had previously posited some future steps that might be taken by his client once a charging order was made, namely:
(a) the charge would enable the plaintiff to appoint directors of Turguse who would exercise their discretion to make a significant payment to the defendant, which could then be taken by the plaintiff to satisfy the judgment debt; and
(b) the shares could be sold in circumstances where the defendant’s family members might attribute significant value to the shares.[15]
[15]See paragraph 2 of the plaintiff’s submission dated 3 June 2019 and paragraph 6 of the defendant’s submission dated 22 July 2019.
47 It is clear that the first mooted step would involve a breach of any trustee’s obligations to the beneficiaries of the Trust as a whole and would be unlawful. As for the second mooted step, I agree with the comments of the judicial registrar in paragraph 37 of her reasons that the Court must be astute not to allow its processes to be used to exert illegitimate pressure upon a debtor.
48 Additionally, I consider the circumstances in the Carey case are distinguishable. I am not satisfied the defendant is the alter ego of the Trust. He is no longer a director, albeit noting he resigned after receiving the correspondence from the plaintiff’s solicitors requesting him not to deal with his shares. The defendant is not the sole beneficiary of the Trust, nor is he the sole shareholder. The power of appointment under the Trust Deed is a special one as opposed to the general power found in Carey. Further, the issue in Carey was whether a receiver could be appointed to property held by the debtor in accordance with provisions of the Corporations Act relating to the preservation of assets pending further investigations by ASIC. The issue under consideration here is quite different, namely, whether a charging order should be made under the Rules for the purpose of securing payment of a judgment debt.
49 I accept the defendant’s submission that the plaintiff’s ultimate goal must be to take over control of the Trust with a view to applying trust funds to satisfy the plaintiff’s judgment debt. Such a goal is clearly impermissible and would be in breach of trust law. It is artificial for the plaintiff to argue that a charging order can be made in isolation without considering the purpose for making such an order and to do so, ignores the express wording of r 73.02. I am not satisfied that a charging order should be made in circumstances where the plaintiff has not established it would secure payment of a judgment debt. A charging order, if made in this case, would not bear fruit.
50 I also consider there is some force in the submission put by the defendant that he should not be put to the additional expense of opposing any subsequent enforcement proceedings by the plaintiff, particularly, when some of those costs may not be recoverable.
Conclusion
51 For the reasons given above, I am not persuaded a charging order over the shares held by the defendant in Turguse would serve any useful purpose and consequently, should not be made. The orders of the judicial registrar will be confirmed and the plaintiff’s application for review dismissed.
52 Subject to hearing from the parties, I will order the plaintiff pay the defendant’s costs of the application for review, such costs to be taxed on the standard basis in default of agreement.
Certificate
I certify that these 13 pages are a true copy of the reasons for decision of her Honour Judge A Ryan delivered on 6 November 2019.
Dated: 6 November 2019
Associate to her Honour Judge A Ryan
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