Octavius Securities and Investments v Garry Zerbe

[2019] VCC 794

IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised
  Not Restricted
 Suitable for Publication

GENERAL LIST

Case No. CI-18-02689

Octavius Securities & Investments Pty Ltd	Plaintiff
v
Garry Zerbe	Defendant

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JUDGE:	Judicial Registrar Tran
WHERE HELD:	Melbourne
DATE OF HEARING:	29 May 2019
DATE OF RULING:	11 June 2019
CASE MAY BE CITED AS:	Octavius Securities & Investments v Garry Zerbe
MEDIUM NEUTRAL CITATION:	[2019] VCC 794

REASONS FOR RULING
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Subject:  Charging Order  

Catchwords:             Enforcement – Application for Charging Order – Whether should be granted over shares in trustee company – Discretionary trust

Legislation Cited:     Civil Procedure Act 2010 (Vic), s 9; Corporations Act 2001 (Cth),

s 1323(1); County Court Civil Procedure Rules 2018 (Vic), O 73

Cases Cited:Australian Securities and Investments Commission v Carey (No 6) [2006] FCA 814; Craig v Federal Commissioner of Taxation (1945) 70 CLR 441; Federal Commissioner of Taxation v Vegners (1989) 90 ALR; Linke v TT Builders Pty Ltd [2015] FCA 704; Wicks v Shanks (1892) 67 LT 609

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	J. Ribbands	TF Grundy
For the Defendant	R.E. Cook	SV Winter

JUDICIAL REGISTRAR:

1       Judgment was given in this proceeding against the Defendant on 12 March 2019, that the Defendant pay the Plaintiff the sum of $6,069,130.27 (plus interest and costs) (the Judgment debt).

2 The Plaintiff wishes to recover as much as possible of the Judgment debt from the Defendant. It has filed a charging summons under Order 73 of the County Court Civil Procedure Rules 2018 (Vic) (the Rules), seeking to charge the Defendant’s shares in Turguse Pty Ltd (Turguse) with payment of the Judgment debt. 

3 Under Rule 73.02 of the Rules, the Court has a discretion to impose a charge on the beneficial interest of the Defendant in any securities[1] for the purpose of securing payment of the Judgment debt.

[1]The definition of securities in Rule 73.01 of the Rules includes “any stock of any corporation registered or formed under any general Commonwealth Act”.

4       The Defendant owns 90% of the shares in Turguse. Turguse is the sole registered proprietor of an unencumbered property in Bittern (“the Vineyard”).  It is not in dispute for the purposes of this application that the Vineyard is held on trust by Turguse for the L.H. Zerbe Family Trust (“the Trust”). Turguse appears to have no other significant assets. The issue between the parties is whether I should exercise my discretion to grant a charge over the shares of Turguse in these circumstances.

Factual background[2]

[2]The parties agreed that this application should be determined on a summary basis, that is, on the basis of the filed affidavits.

5       The background to the Trust is as follows.

6       On 9 November 1959, Leslie Herman Zerbe, Orchardist, and Gladys Ellen Zerbe, Married Woman, became the registered proprietors of the Vineyard.[3] Leslie and Gladys Zerbe had two sons: Garry Zerbe (the Defendant) and Ross Zerbe.

[3]Historical title search of Certificate of Title Volume 8067 Folio 322.

7       By a Deed of Settlement made 22 November 1974 (the Trust Deed), the L.H. Zerbe Family Trust was created (“the Trust”). 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…”

8       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.

9       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.”

10      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.

11      By Deed of Appointment dated 14 December 1974, Leslie Zerbe removed L.H. Nominees Ltd and appointed Turguse as the trustee of the Trust.

12      On about 24 December 1974,[4] 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.

[4]Declaration of Trust made 24 December 1974 and amended by Declaration of Trust made 18 August 1975.

13      Turguse became the registered proprietor of the Vineyard on 28 May 1975 and has remained the registered proprietor since that date.

14      The original Day of Distribution in the Trust Deed was the eightieth anniversary of the execution of the Trust Deed. This was altered by a Deed of Nomination made 21 April 1992 to the date of death of the Defendant.

15      The facility agreement guaranteed by the Defendant, which lead to the Judgment debt, was entered into some 17 years later, in October 2009.[5]  

[5]Paragraph 2 of the Statement of Claim filed 22 June 2018.

Analysis

16      The Plaintiff submitted that it was just and equitable that the Court make the charging order. It relied upon the following statement by White J in ex tempore reasons delivered in Linke v TT Builders Pty Ltd:[6]

“It is in the public interest that the Court’s orders are respected and obeyed. Accordingly, it is appropriate for the Court to assist judgment creditors to enforce their entitlements. Respect for the law will be undermined if judgment debtors can readily frustrate enforcements of judgments against them. Spender J referred to these considerations in Guthrie v Robertson (1987) 13 FCR 336 at 337-8 when he said:

It is obviously crucial to the efficiency of the Court’s process that its orders be obeyed, and the Court should be astute to lend whatever assistance it can to enable its orders to be enforced.”

[6][2015] FCA 704 [11].

17      The Plaintiff submitted that the grant of a charge was only the first step to enforcement of the judgment. Separate proceedings would then be required to enforce the charge. Counsel appearing on behalf of the Plaintiff did not state with any specificity exactly what would be sought in any such enforcement proceedings, preferring to reserve the Plaintiff’s rights in that regard. However, the possibilities which were raised in the hearing before me included the seeking of an order for sale of the shares or for the appointment of replacement of the directors to Turguse.

18      The Plaintiff accepted, for the purposes of the application, that Turguse was not the beneficial owner of any significant assets. However, it relied upon the following passage in the decision of French J in Australian Securities and Investments Commission v Carey (No 6) (ASIC v Carey):[7]

“…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.” 

[7][2006] FCA 814 [36]-[37].

19      ASIC v Carey concerned an application under s 1323(1)(h) of the Corporations Act 2001 (Cth) (the Corporations Act) for the appointment of a receiver of the “property” or part of the “property” of a person. In broad terms, s 1323(1)(h) empowers a “Court”[8] to appoint a receiver of “property” of a person in relation to which there is an ASIC investigation, a prosecution or a civil proceeding under the Corporations Act for the purpose of protecting the interests of an “aggrieved person”. The term “property” is defined in s 9 of the Corporations Act to mean “any legal or equitable estate or interest (whether present or future and whether vested or contingent)”. This definition is further extended for the purposes of s 1323(1)(h) to “property that the person holds otherwise than as sole beneficial owner”.[9] Section 1323(1) thus provides a “Court” with broad powers to preserve assets, pending the resolution of an ASIC investigation, a prosecution or a civil proceeding under the Corporations Act.

[8]The County Court is not a “Court” for the purposes of this section.

[9]Section 1323(2A) of the Corporations Act 2001 (Cth).

20      The decision in ASIC v Carey turned on French J’s interpretation of the definition of “property” in s 9 of the Corporations Act and whether it was appropriate to make an asset preservation order under s 1323(1)(h) of the Corporations Act with respect to trust property, where the relevant person was a beneficiary but not technically the trustee. It is not directly relevant to the question of whether, in the exercise of my discretion, I should grant a charging order for the purpose of securing payment of a Judgment debt.

21      In any event, the decision in ASIC v Carey primarily focussed on the question of whether the Court had power to make the order in question, rather than whether it should make the order in the exercise of its discretion. The question I must determine is whether the Court should exercise its discretion to make a charging order in the circumstances of this case.  

22      An accepted basis for exercising the discretion to refuse to grant a charging order is that the shares have no value.[10] In Wicks v Shanks,[11] 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 costs, 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.”

[10]Wicks v Shanks (1892) 67 LT 609.

[11](1892) 67 LT 609.

23 This principle finds modern expression in s 9 of the Civil Procedure Act 2010 (Vic), which mandates consideration of questions of efficiency and proportionality.

24      On the facts before me, it would appear that these shares have little or no value, at least on an asset-backed valuation. This is a factor which weighs heavily in favour of refusing to grant the charge.

25      However, the effect of the Plaintiff’s submissions is that the combination of the Defendant’s position as beneficiary and his ownership of 90% of the shares provides the Defendant with “something approaching a general power and ownership of the property”[12] which favours the exercise of the discretion to grant a charging order.

[12]ASIC v Carey [2006] FCA 814 [37].

26      On this question, the detailed analysis of the authorities relating to discretionary trusts conducted by French J in ASIC v Carey is of assistance. At [19] French J referred with approval to the following extract from the reasons of Gummow J in Federal Commissioner of Taxation v Vegners (1989) 90 ALR 547 at 552:

“a power exercisable in favour of any person including the donee of the power would be a general power and thus would be tantamount to ownership of the property concerned, whilst the objects of a special power would be limited to some class…”

27      Justice French also referred with approval to the observations of Owen J in Craig v Federal Commissioner of Taxation:[13]

“A beneficiary of a trust of this type does not have a proprietary interest in any particular asset of the trust fund or in the Trust Fund as a whole…The Trust Deed confers on a trustee a mere power. It is a power of very wide import. The trustee can determine whether an individual beneficiary is to benefit at all, and if so, in what way, from the exercise of the power in his or her favour. In this sense, the beneficiary has nothing more than an expectancy. The trustee has a duty to administer the trust bona fide having regard to the purpose for which it was established.”

[13](1945) 70 CLR 441 [79].

28      This was developed by French J further in paragraph [29] where he distinguished the “ordinary case” of a beneficiary of a discretionary trust who does not have an equitable interest in the trust from “the case in which the beneficiary effectively controls the trustee’s power of selection.”

29      In the present case, having considered all of the evidence before me, I have formed the view that the interest of the Defendant is more properly categorised as the “ordinary case” of a beneficiary of a discretionary trust and the trust power held by Turguse as a “special” rather than “general” power, not one akin to beneficial ownership.

30      The Defendant is not currently a director of Turguse, although I am prepared to draw the inference that he resigned as a director as a direct result of these proceedings. I am also prepared to assume for the purposes of this application that as 90% shareholder he has a significant degree of control over the appointment of directors to Turguse.

31      However, the Defendant’s capacity to control the Trust is limited by the express terms of the Trust Deed. The express purpose of the Trust was to make provision for the descendants and the spouses of the descendants of Leslie Zerbe. The Defendant was neither the settlor nor the original appointer under the Trust Deed. The beneficiaries are limited to a particular class (descendants of Leslie Zerbe and their spouses). The Defendant is a beneficiary, but any distributions to him are entirely within the discretion of the trustee of the Trust, subject only to the proviso that his branch of the family must be treated equally with his brother’s branch of the family.

32      The Vineyard was a property which had been owned by Leslie Zerbe and his wife since 1959. Whilst Turguse is currently the trustee of the Trust, Leslie Zerbe, or (after his death) his legal personal representative, holds a discretionary power to remove the trustee and appoint another person as trustee in its place. There is no evidence that the Defendant now holds this power. If he does, it would be in his capacity as a legal personal representative of Leslie Zerbe rather than in a personal capacity.

33      As the Day of Distribution is defined as the date of the Defendant’s death, the Defendant has no right to the trust assets upon the vesting of the Trust. He may well have an acute, practical interest in the Trust, given any distributions are to be equal as between his branch of the family and his brother’s branch of the family, but this does not create a proprietary interest. The Defendant is a separate legal person to his wife, descendants and descendants’ spouses.

34      Turguse holds the Vineyard on trust. It has powers under the Trust, but those powers are subject to the fiduciary duties imposed upon a trustee and the express limits to its powers under the Trust Deed. They are also vulnerable to the power to replace the trustee given to Leslie Zerbe and his legal personal representatives.

35      There is no evidence that the Trust was a sham created to defeat creditors, or to protect the Defendant’s assets from the Plaintiff, or is the alter ego of the Defendant. To the contrary, the background set out above indicates that the Trust was created many years before the debt the subject of this proceeding to fulfil the Defendant’s father’s wishes to provide fairly for his two sons and their descendants. 

36      The public interest in the Court’s Orders being obeyed is powerful, however it must be balanced against other interests,[14] including those underlying the laws relating to trust and insolvency. Absent some circumstances in the particular facts of the case justifying a charging order, it is not appropriate that longstanding principles of trust law should be swept aside by a charging order made under rules of civil procedure.

[14]Linke v TT Builders Pty Ltd (No 3) [2015] FCA 1054 [36].

37      The Plaintiff also submitted that the shares have a value as other family members might pay for the shares. Against this, the Court must be astute not to allow its processes to be used to exert illegitimate pressure upon a debtor. For example, it would be unlikely to be appropriate to grant a charging order over a family heirloom, of little pecuniary but great sentimental value, in the hope that the threat of sale of that treasured trinket might prompt payment.

38      Having regard to all of the matters set out above, I do not consider it is appropriate in the exercise of my discretion to grant the charging order.

39      I will dismiss the summons.

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Certificate

I certify that these 9 pages are a true copy of the reasons for ruling of Judicial Registrar Tran, delivered on 11 June 2019.

Dated: 11 June 2019

Susan Thomas     

Associate to Judicial Registrar Tran