Oxer v Astec Paints Australia Pty Ltd (No 3) - [2007] SASC 146

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
OXER v ASTEC PAINTS AUSTRALIA PTY LTD (NO 3)
[2007] SASC 146
Reasons of Judge Lunn a Master of the Supreme Court
1 May 2007
PROCEDURE
Order made on action proceeding on affidavits in lieu of pleadings for final judgment when defendant did not attend at a directions hearing - held not a default judgment but a judgment on the merits - application under R 84.12 to set aside that judgment refused in part.

EQUITY - TRUSTS AND TRUSTEES
Defendant as trustee sold trust business on terms that its controller obtained employment with the purchaser - held this was breach of rule in Keech v Sandford that a trustee not profit from the trust - held in view of such breach an order that defendant be removed as trustee should not be set aside.

OXER v ASTEC PAINTS AUSTRALIA PTY LTD (NO 3)
[2007] SASC 146
Reasons on defendant’s application to set aside the Judgment of 22 December 2006.

JUDGE LUNN: The defendant is the trustee of the Ceramic Coatings Unit Trust (“the Trust”). It apparently has no other function. The Trust was set up by a deed made on 13 November 1989. As at early 2002, and since, the plaintiff’s family trust held 25% of the issued units in the Trust and 55% of the units were held by the M K Waters Family Trust which was controlled by Mark Waters (“Waters”). The plaintiff and Waters held the issued shares in the defendant in similar proportions to those in which their family trusts held the units in the Trust. The plaintiff and Waters were then the only directors of the defendant. The Trust owned and operated a substantial business which manufactured and sold Astec Paints. Both Waters and the plaintiff were employed in that business.
In about May 2002 the personal relationship between the plaintiff and Waters began to deteriorate and that deterioration thereafter escalated. In late 2003 the plaintiff ceased to be an employee of the business in circumstances which are the subject of dispute. In April 2004 Waters used his greater shareholding in the defendant to have the plaintiff removed as a director. Since then the only directors of the defendant have been Waters and his wife. The relationship between the plaintiff and Waters has been extremely acrimonious. Waters has not voluntarily supplied information to the plaintiff about the continuing business of the Trust.
On 11 March 2005 the plaintiff instituted this action seeking the appointment of an inspector for the Trust under s 84C of the Trustee Act. After a contested hearing I made an order on 30 May 2005 for the appointment of Brian Morris as an inspector ([2005] SASC 192). On 9 November 2005 Mr Morris reported to the Court on the affairs of the Trust. In brief, his report accepted a few of the allegations of the plaintiff about mismanagement of the Trust by the defendant but rejected the majority of them. The plaintiff contended that not all of the relevant documents had been supplied by the defendant to Mr Morris. In February 2006 the plaintiff amended his summons to seek an order for the removal of the defendant as the trustee of the Trust. He was unable to provide proper particularity of a number of the grounds on which he sought to pursue the defendant’s removal. On 4 July 2006 the plaintiff brought an application seeking orders that the defendant make discovery of all of the records of the Trust. On 7 September 2006 I dismissed that application ([2006] SASC 271). On 27 September 2006 the plaintiff appealed against my order, although for reasons which I do not know that appeal has never come on for hearing. On 3 October 2006 I adjourned the general Directions Hearing to 22 December 2006 to await the outcome of the appeal.
On 9 November 2006 the plaintiff’s solicitors wrote to the defendant’s solicitors enquiring whether the business of the Trust had been sold, and, if so, details of it. On 18 December 2006 the defendant sent a letter to its solicitor, the relevant parts of which are as follows:
We refer to the Sale and Purchase of Business Agreement dated 1 August 2006 by which the business of Astec Pains was sold to Astec Pains Australasia Pty Ltd.
We are currently considering the continuation of Astec Paints.
In the circumstances, please note:
…..
2In the absence of Mr & Mrs Waters’ financial support, Astec Pains is not in a position to continue to defend Mr Oxer’s actions or continue trading.
…..
6Notwithstanding the sale of Astec Paints business there remained a significant shortfall in funds to pay the ANZ Bank, which held security over Astec Paints and Mr and Mrs Waters residential premises. Pinn Street Investments Pty Ltd, a company associated with Mr and Mrs Waters, borrowed the sum of $308,000 to repay ANZ Bank and have taken security over the residual assets of Astec Paints. Pinn Street Investments will seek to take possession of all of the debts and seek to recover the debts in reduction of the amount due to it.
7The remaining assets of Astec paints Australia Pty Ltd include:
Astec Paints (NSW) $110,000
D Oxer$19,000
M K Waters$14,000
Tilebrite$3,000
$146,000
The debt due by Astec Paints (NSW) is a trade debt for unpaid goods supplied by Astec Paints and is the subject of legal proceedings in NSW. There is no certainty that the full amount will be recovered.
1The liabilities of Astec Paints Australia Pty Ltd significantly exceed $350,000.
2Astec Paints maintains that it has a set-off against the debt due to Mr Oxer, which is listed for trial in the Magistrates Court in January 2007.
3Based on the above figures there is a deficiency in assets in excess of $200,000 and potentially substantially more depending on the recoverability of the debts due to Astec Paints Australia Pty Ltd.
4Astec Pains and Mr and Mrs Waters took independent advice regarding the sale of the business.
You are instructed to:
1advise Mr Oxer’s solicitors and the Supreme Court of the above;
2advise Mr Oxer’s solicitors that should the Mr Oxer wish to continue with his application, Astec Pains is not in a position to oppose the appointment of a new trustee of the Ceramic Coatings Australia Unit Trust. There are no assets of the Ceramic Coatings Australia Unit Trust likely to be available to meet the costs of any new trustee on the Supreme Court action;
3We consent to you ceasing to act on behalf of Astec Paints in this matter.
On 19 December the defendant’s solicitors communicated the effect of that letter to the plaintiff’s solicitors.
Subsequent evidence disclosed that on 1 August 2006 the defendant had entered into an agreement to sell the Trust business on a “walk in and walk out basis” to Astec Paints Australasia Pty Ltd (“Astec A/asia”) and Astec Paints International Pty Ltd (“Astec International”) for $192,000. All of the issued shares in both the purchaser companies are held by Tina Germanos-Galanis and she and Waters are the only directors of those companies. Those companies have an agreement with Waters for him to act as their managing director for 3 years. The precise terms of that agreement were not disclosed, but it was not contested that it involved a significant payment of remuneration by those companies to Waters personally. On 10 August 2006 the accountants for the defendant furnished a written valuation of the Trust business, which was said to be the basis of the sale. That valuation valued the goodwill of the business at nothing. Since shortly after August 2006 the former business of the Trust has been carried on by Astec A/sia and Astec International under the management of Waters and apparently in a generally similar fashion to how it had been conducted by the defendant. Although the evidence on it was sparse, it appears that at the same time as the sale of the business Pinn Street Investments Pty Ltd, a company associated with Mr and Mrs Waters, paid out the indebtedness of the defendant to the ANZ Bank which had been guaranteed by Mr and Mrs Waters. (It is unclear whether it had also been guaranteed by the plaintiff). It appears that through some transaction which I do not fully understand the whole of the purchase price payable from the sale of the Trust business has been applied to extinguishing prior debts of the business. It now appears that the only assets of the Trust and the defendant are various debts owed to it, some of which are contested.
In the second paragraph 4 of the letter of 18 December 2006 it was stated Astec Paints and Mr and Mrs Waters had taken independent advice regarding the sale of the business. The evidence discloses that they took some legal advice from the firm which was representing them in this action. It is unclear whether they disclosed to their lawyers that Waters was to receive paid employment from the purchasers. They also took accounting advice. The Trust did not take any independent legal advice separately from any advice given to Waters.
At the directions hearing on 22 December an application was heard from the defendant’s solicitors to cease to act for the defendant. The supporting affidavit exhibited the letter of 18 December 2006. No-one from the defendant attended at the hearing, although the application had been served on it. I made an order that the solicitors cease to act.
At that hearing counsel for the plaintiff orally applied that I dispose of the summons by removing the defendant as the trustee of the Trust and ordering it to pay the costs of the proceedings. I thereupon made an order that the defendant be replaced as the trustee by an accountant, Nicholas Cooper, and that subject to previous cost orders the defendant pay to the plaintiff its costs of the action on an indemnity basis, including the costs of the inspection, and that the defendant be restrained until further order from indemnifying itself out of the assets of the Trust for payment of such costs. On 5 January 2007 the plaintiff took out an application that the costs ordered against the defendant also be ordered to be paid by Mr and Mrs Waters personally. That application has not as yet been heard.
On 20 February 2007 the defendant took out an application to set aside my orders of 22 December 2006. It was supported by an affidavit of Waters saying, inter alia, that if he had been aware of the possibility of a costs order being made against the defendant he would have attended on 22 December and opposed such orders. He also deposed to an alleged claim by the Trust against the plaintiff for misappropriation of the Trust assets. He said he wanted the defendant re-instated as the trustee so that it could pursue this claim against the plaintiff.
Waters was cross-examined on his affidavit. It is not necessary to go into many of the matters raised in the affidavit and dealt with in cross-examination. In broad terms, Waters had become exasperated and frustrated by the delays and expense of these proceedings and had believed that clandestinely denuding the Trust of its assets would force the plaintiff to desist from prosecuting this action. An interview which he gave to The Advertiser which was published in January 2007, gave a very different picture of the prosperity of the Astec Paint business compared with what Waters said was its position at the time of its sale and throws doubts on the bona fides of the sale of the Trust business.
I do not accept the submission of the defendant’s counsel that the judgment of 22 December 2006 was a judgment in default of the defendant’s attendance at that hearing. There was no power to enter such a default judgment. It was a judgment on the merits based on the evidence then before the Court. As it was an action proceeding on affidavits there was no requirement under the Rules for the action to be referred for trial before final judgment could be entered.
I consider that I was justified on 22 December 2006 in entering the judgment on the oral application of the plaintiff’s counsel without further delay for the following reasons:
AThe letter of 18 December 2006 expressly stated that the defendant was “not in a position to oppose the appointment of a new trustee”. While this was not a consent to such a judgment it was an informal admission that the defendant had no proper grounds to defend the application and never had had such grounds.
BIn deciding whether to remove a trustee and appoint a replacement the dominant consideration was the welfare of the beneficiaries of the Trust: Miller v Cameron (1936) 54 CLR 572; Benzija v Adriatic Fisheries Pty Ltd (1984) 37 SASR 546. I considered that the action of the defendant in clandestinely selling off the Trust business, and then asserting that there was no money left in the Trust to meet the costs of the new trustee, was not the type of honest and equitable conduct to be expected of a trustee and was indicative of the trustee not having acted in the interests of all of the beneficiaries.
Accordingly, the only basis pursued by the defendant for setting aside the judgment which could succeed was that under R 84.12, which provides:
84.12 The Court may vary or set aside a judgment or order at any time if the justice of the case so requires.
It is necessary to deal separately with the orders for the appointment of the new trustee and with the costs orders.
The further evidence adduced by the defendant in support of its application has only reinforced the conclusion that the defendant had not been acting in the interests of the beneficiaries of the Trust as a whole. In his affidavit and his cross-examination Waters claimed in the sale of the Trust business to be acting in the interests of its employees, clients and suppliers. Their positions all seem to have been protected. No substantial consideration seems to have been given to the interests of the plaintiff as a unit holder and he appears to have been potentially disadvantaged by the course adopted by the defendant.
The letter of 18 December 2006 was an implied admission by the defendant that it had no good grounds to oppose the appointment of the new trustee. The only reason put forward as to why the defendant should not be held to this admission was that the defendant did not appreciate that it would carry a consequence in costs orders.
It is a fundamental principle of Equity that a trustee is not to benefit personally by reason of his position as a trustee: the rule in Keech v Sandford set out in Jacobs Law of Trusts in Australia 7^th Edition paras 1607 and 1742; Gray v Ford [1896] AC 44. For this purpose no distinction is to be drawn between the defendant and Waters as its controller. By negotiating the sale of the Trust business on terms which gave him personally employment for 3 years Waters, and thereby the defendant, was profiting himself and breaching the defendant’s obligations as trustee of the Trust.
I can find no case in which a trustee has been removed as a result of a breach of the rule in Keech v Sandford. However, such a removal is consistent with what was said by the Full Court in Pope v Pope, 14 February 2001, [2001] SASC 26. Most of the cases involving breaches of the rule in Keech v Sandford are concerned with claims by a beneficiary against the trustee for the trustee to account for any profit he has made out of the transaction. The extent to which the trustee is obliged to account is not the issue here, and the case relied upon by the defendant’s counsel of Warman International Ltd v Dwyer (1995) 182 CLR 544 was confined to that point. However, in this situation where the onus is on the defendant to show that it is in the interests of justice that the order for the removal of a trustee should be set aside it is proper that the Court should not countenance a clear breach of the rule in Keech v Sandford by reinstating the trustee.
The main reason the defendant gave for it wanting to be reinstated as the trustee was that it wanted to pursue a claim against the plaintiff. The pursuit of that claim is not dependent upon it being the trustee. If the new trustee, as an independent and responsible trustee, considers there is merit in the claim, and he is provided with the necessary funds, there is no reason to suppose that he will not pursue that claim. Accordingly, I decline to set aside paragraph 1 of the order relating to the appointment of the new trustee.
I accept that there is a proper basis for the defendant to argue against the order for costs which was made on 22 December 2006. The question of costs generally is likely to be re-agitated by the plaintiff’s application of 5 January 2007 for the order that Mr and Mrs Waters also be liable for those costs. Provided that the defendant pays the costs of this application and those thrown away by its failure to attend on 22 December 2006, I accept that it is in the interests of justice that the order for costs should be set aside and the costs issues re-argued. However, in view of the evidence which suggests that the defendant might not be in a position to meet any order for costs I intend to make the payment of the costs a condition precedent to the setting aside that part of the order of 22 December 2006.
I also set aside paragraph 4 of the order of 22 December 2006 which prevents the defendant from indemnifying itself out of the Trust assets for the costs in question. That will need to be re-argued if the costs orders are remade against the defendant. However, there will be a similar restriction imposed on the costs ordered below.
I have today made the following orders:
1The defendant’s application to set aside paragraph 1 of the order of 22 December 2006 is refused.
2The defendant is to pay to the plaintiff immediately his costs as agreed or taxed, and as between solicitor and client, of the application of 20 February 2007 and this order and any costs thrown away by the setting aside of paragraphs 2 and 3 of the order of 22 December 2006.
3Application of 20 February 2007 certified fit for counsel.
4Conditionally upon payment of the costs ordered in paragraph 2 above paragraphs 2 and 3 of the order of 22 December 2006 are thereupon set aside.
5Adjourned to a Directions Hearing on 21 June 2007 at 11 am.