QB4 Capital Pty Limited v Guardian Securities Limited
[2022] FCA 262
•22 March 2022
FEDERAL COURT OF AUSTRALIA
QB4 Capital Pty Limited v Guardian Securities Limited [2022] FCA 262
File numbers: NSD 470 of 2020
NSD 99 of 2021Judgment of: LEE J Date of judgment: 22 March 2022 Catchwords: CORPORATIONS – registered managed investment scheme – dispute between responsible entity of registered investment scheme and investment manager – legitimacy of payments made from trust property – whether payments authorised under trust constitution – whether management fees and legal costs properly incurred – whether invoices should be paid from the trust property of the registered investment scheme – where receivers appointed – whether unit trusts ought to be wound up
PRACTICE AND PROCEDURE – where list of agreed issues for determination – application by applicant for leave to amend further amended originating application and fourth further amended statement of claim – where proposed amendments seek to bring new derivative claim – where application foreshadowed on final day of hearing –amendment unnecessary
EQUITY – breach of trust – equitable compensation –declaratory relief – hostile litigation concerning property held on trust – whether responsible entity breached trust – whether unitholders have standing to seek equitable compensation – whether unitholders beneficiaries of trust
EQUITY – cross-claim for declaratory relief – whether responsible entity entitled to rely on rights of indemnity – whether management fees and legal costs properly incurred
CONTRACT – payments made under deed of settlement – where Guardian defaulted under deed of settlement – where deed of settlement subsequently terminated – where Guardian sought repayment of money as a result of failure of consideration and mistake
RESTITUTION – recovery – whether total failure of consideration – whether partial performance either insubstantial or severable
COSTS – significant costs – where responsible entity intentionally defaulted under settlement deed – where settlement deed terminated – whether non-party personally liable for costs
Legislation: Australian Securities and Investments Act 2001 (Cth)
Corporations Act 2001 (Cth) Pts 5C.1, 5C.9, 7.9; ss 601FB, 601FC, 601FC(2), 601GA, 601GA(2), 601MA
Evidence Act 1995 (Cth) s 136
Federal Court of Australia Act 1976 (Cth) ss 21, 22, 37M, 37P(2), 53A, 54A
Federal Court Rules 2011 (Cth) r 9.21
Trustee Act 1925 (NSW) s 59(4)
Cases cited: Adsett v Berlouis (1992) 37 FCR 201
Aon Risk Services Australia Ltd v Australia National University [2009] HCA 27; (2009) 239 CLR 175
Australian Financial Services and Leasing Pty Limited v Hills Industries Limited [2014] HCA 14; (2014) 253 CLR 560
Australia and New Zealand Banking Group Ltd v Londish [2013] NSWSC 1423
AWB Limited v Honourable Terence Rhoderic Hudson Cole (No 6) [2006] FCA 1274; (2006) 235 ALR 307
Baltic Shipping Co v Dillon (1993) 176 CLR 344
Bruce & Anor v LM Investment Management Limited & Ors (No 2) [2013] QSC 347
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
DFCT v Hadidi (1994) 51 FCR 453
Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50; (2012) 200 FCR 154
EPU19 v Minister For Home Affairs [2020] FCA 541
FAI General Insurance Co Ltd v Ocean Marine Mutual Protection & Indemnity Association Ltd (1997) 41 NSWLR 559
Freeman, in the matter of Blue Oasis Holdings Pty Ltd (In Liquidation) (No 2) [2019] FCA 118
Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21
Knight v FP Special Assets Ltd (1992) 174 CLR 178
Larratt v Bankers & Traders Insurance Co Ltd (1941) 41 SR (NSW) 215
Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
Nolan v Collie Nominees Pty Ltd (in liq) [2003] VSCA 39; (2003) 7 VR 287
Park & Muller (liquidators of LM Investment Management Ltd) v Whyte No 3 [2017] QSC 230; [2018] 2 Qd R 475
Re Beddoe [1893] 1 Ch 547
Re Gunns Finance Limited (in liq) (recs & mgrs apptd); and Re Gunns Plantations Limited (in liq) (recs & mgrs apptd) (No 2) [2013] VSC 365
Roxborough v Rothmans of Pall Mall Australia Limited [2001] HCA 68; (2001) 208 CLR 516
Rubicon Asset Management Ltd (admin apptd) [2009] NSWSC 1068; (2009) 77 NSWLR 96
Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation) [2010] FCA 1080; (2010) 190 FCR 501
Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation) (No 2) [2011] FCA 958
Walker v Stones [2001] QB 902
Young v Murphy; Swinbank v Murphy [1996] 1 VR 279
Australian Corporation Law Principles & Practice (LexisNexis Australia, January 2022)
James Allsop, ‘The nature of the trustee’s right of indemnity and its implications for equitable principle’ (Society of Trust and Estate Practitioners, Sydney, 18 July 2012)
James Edelman, ‘The New Doctrine of Partial Failure of Consideration’ (1996) 15 Aust Bar Rev 229
Mason K, Carter J and Tolhurst G, Mason and Carter’s Restitution Law in Australia (4th ed, Butterworths, 2021)
Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 261 Date of last submissions: 22 September 2021 Date of hearing: 4–5 May; 21 June; 13, 17 August; 10 September 2021 Counsel for the Applicants: Mr F M Douglas QC with Mr J K Carter and Mr J B Douglas Solicitor for the Applicants: Law and Commerce Partners Counsel for the First to Fourth Respondent in NSD470/2020 and the First to Fourth Cross-Claimant in NSD99/2021: Mr L Livingston SC with Mr C S Rogers Solicitor for the First to Fourth Respondent in NSD470/2020 and the First to Fourth Cross-Claimant in NSD99/2021: Resolve Litigation Lawyers Counsel for the Receivers in NSD470/2020: Ms V Whittaker SC with Mr C Street Solicitor for the Receivers in NSD470/2020: Colin Biggers & Paisley Counsel for the First and Second Respondent in NSD99/2021: Mr G W Dietz Solicitor for the First and Second Respondent in NSD99/2021: K2 Law ORDERS
NSD 470 of 2020 BETWEEN: QB4 CAPITAL PTY LIMITED
First Applicant
ALEXANDER MIGUNOV AND ELENA MIGUNOVA
Second Applicant
QB4 CAPITAL ASSET MANAGEMENT PTY LTD (ACN 605 013 803) (and others named in the Schedule)
Third Applicant
AND: GUARDIAN SECURITIES LIMITED
First Respondent
VENTURECROWD HOLDINGS PTY LIMITED
Second Respondent
VENTURECROWD PROPERTY AUSTRALIA PTY LIMITED (and others named in the Schedule)
Third Respondent
AND BETWEEN: GUARDIAN SECURITIES LIMITED (ACN 106 187 731)
First Cross-Claimant
VENTURECROWD PROPERTY AUSTRALIA PTY LIMITED
Second Cross-Claimant
AND: QB4 CAPITAL PTY LIMITED
First Cross-Respondent
FUNDUS MANAGEMENT PTY LIMITED
Second Cross-RespondentSEAN WENGEL AND MICHAEL BRERETON IN THEIR CAPACITIES AS JOINT RECEIVERS AND MANAGERS OF FUNDUS MANAGEMENT PTY LIMITED AND TRUSTEES OF FUNDUS TRUST NO. 1 AND FUNDUS TRUST NO. 2
Third Cross-Respondent
ORDER MADE BY:
LEE J
DATE OF ORDER:
22 MARCH 2022
THE COURT ORDERS THAT:
1.Pursuant to s 53A of the Federal Court of Australia Act 1976 (Cth), the whole of the proceedings be referred to mediation to be conducted by a Registrar of the Court in person and, to the extent the mediator considers it desirable, without the presence of lawyers, with such mediation to take place within 28 days.
2.In the event other orders resolving the dispute cannot be agreed at the mediation, within seven days of the conclusion of the mediation, the parties file an agreed minute or competing minutes of order to reflect these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ORDERS
NSD 99 of 2021 BETWEEN: QB4 CAPITAL PTY LIMITED
First Applicant
ALEXANDER MIGUNOV AND ELENA MIGUNOVA
Second Applicant
AND: CE LITIGATION LAWYERS PTY LIMITED (ACN 639 090 609)
First Respondent
ALYCE ANNE CORBUTT
Second Respondent
GUARDIAN SECURITIES LIMITED (and others named in the Schedule)
Third Respondent
AND BETWEEN: CE LITIGATION LAWYERS PTY LIMITED (ACN 639 090 609) TRADING AS CE LAWYERS
First Cross-Claimant
AND: GUARDIAN SECURITIES LIMITED (ACN 106 187 731)
First Cross-Respondent
VENTURECROWD HOLDINGS PTY LTD (ACN 164 416 040)
Second Cross-Respondent
VENTURECROWD PROPERTY AUSTRALIA PTY LTD (ACN 159 744 386) (and others named in the Schedule)
Third Cross-Respondent
AND BETWEEN: GUARDIAN SECURITIES LIMITED
First Cross-Claimant
VENTURECROWD HOLDINGS PTY LTD
Second Cross-Claimant
VENTURECROWD PROPERTY AUSTRALIA PTY LTD (and others named in the Schedule)
Third Cross-Claimant
AND: FUNDUS MANAGEMENT PTY LTD
First Cross-Respondent
QB4 CAPITAL PTY LIMITED
Second Cross-Respondent
ALEXANDER MIGUNOV AND ELENA MIGUNOVA
Third Cross-Respondent
ORDER MADE BY:
LEE J
DATE OF ORDER:
22 MARCH 2022
THE COURT ORDERS THAT:
1.Pursuant to s 53A of the Federal Court of Australia Act 1976 (Cth), the whole of the proceedings be referred to mediation to be conducted by a Registrar of the Court in person and, to the extent the mediator considers it desirable, without the presence of lawyers, with such mediation to take place within 28 days.
2.In the event other orders resolving the dispute cannot be agreed at the mediation, within seven days of the conclusion of the mediation, the parties file an agreed minute or competing minutes of order to reflect these reasons.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
LEE J:
A INTRODUCTION
This is a complex matter concerning, in very broad terms, the propriety or otherwise of certain payments made from trust property under a registered managed investment scheme, The Guardian Investment Fund (TGIF). Although a dramatis personae would identify numerous actors, the underlying dispute revolves around two protagonists and their agents: Guardian Securities Ltd (Guardian), the responsible entity of the TGIF; and QB4 Capital Pty Ltd (QB4), the fund’s former investment manager.
The matter involves a long and almost impenetrable procedural history, attributable in no small part to the parties’ approach to litigation across numerous proceedings, which is difficult to reconcile with the overarching purpose of civil proceedings in this Court. The applicants, including QB4, seek equitable compensation and declaratory relief in relation to expenses charged to the trust by Guardian, along with orders appointing a replacement trustee. In addition to the applicants’ various claims, the respondents have filed a cross-claim in each proceeding seeking, among other things, the necessary relief which would permit them to be reimbursed from the trust funds for outstanding invoices and legal costs charged to the trust.
As will become clear, in the process of litigating these issues, considerable fees have been spent. One question that falls for the Court to decide is who ultimately is to settle the bill.
B BACKGROUND
Before turning to the relevant factual background, it is useful to detail at the outset the context surrounding the confined issues that now fall for determination. As I indicated above, the procedural history of this matter is byzantine. Although the only proceedings that remain are NSD470/2020 and NSD99/2021, the matter (to use that word in its Constitutional sense) has involved the following proceedings:
(1)proceeding NSD415/2020 (Pre-action Relief Application);
(2)proceeding NSD470/2020 (Principal Proceeding);
(3)proceeding QUD226/2020 (Judicial Advice Proceeding);
(4)proceeding QLD3617/2020 (Queensland District Court Proceeding); and
(5)proceeding NSD99/2021 (Legal Costs Proceeding).
Upon the commencement of the hearing on 4 May 2021, I raised with the parties the difficulties with the tsunami of issues that appeared to arise from the miscellany of pleadings and written submissions, the most obvious of which was that it was unclear to me, and perhaps also to the parties, what precisely it was that the Court was being asked to determine: T2.19–26. Accordingly, I directed the parties to identify each of the issues that remained relevant and to provide an agreed list of issues for determination. I made clear that this document would replace, or at least refine, the pleadings to the extent the pleadings identified the issues to be resolved. Apart from anything else, such a course was desirable because some issues raised in the pleadings plainly relate to positions that have long since been abandoned or neglected, including, for instance, that the applicants sued in a representative capacity under r 9.21 of the Federal Court Rules 2011 (Cth).
Although that initial list was provided on 5 May 2021, its relevance was fleeting. A series of procedural developments, to which I will return below, led to a significant reformation of the applicants’ case and, therefore, a new suite of issues for determination. Accordingly, it was not until 17 August 2021 that the parties provided a final agreed list of outstanding issues for determination, in respect of which the Court expressly noted, by consent, the following:
The balance of the issues in proceeding NSD 470/2020 and proceeding NSD 99/2021 are reflected in the agreed list of issues for determination dated 17 August 2021 and marked as MFI18 (Agreed Issues) and represent the entirety of the balance of the matters required to be determined in both proceedings.
(Emphasis in original).
Those issues are as follows:
Proceeding NSD 470/2020
1.Is Guardian Securities Limited (Guardian) liable to pay equitable compensation in respect of amounts alleged to have been paid or accrued in breach of trust?
1a.Do the QB4 Parties (and in particular the Migunovs) have standing to seek equitable compensation against Guardian for the pleaded breaches?
In that regard, who is / are the beneficiaries of FT1 and FT2?
1b.Did Guardian relevantly commit a breach or breaches of trust?
1c.If no to 1b, were the expenses properly incurred by Guardian as trustee?
In respect of that issue, a relevant implied issue is whether Guardian validly terminated the Investment Management Agreement, having accepted the termination of the Responsible Entity Agreement by QB4 Capital Pty Ltd (QB4 Capital) on 16 March 2020?
1d.If no to 1b and yes to 1c, are the expenses within the scope of Guardian’s right of indemnity from the PIF and ELF under cll 22, 23.7, 23.12 and/or 23.13 of the Constitution of TGIF, s 6 of the PDS of the PIF, s 7 of the PDS of the ELF and/or s 72 of the Trusts Act1973 (Qld)?
1e.If there was a breach or breaches of trust, is Guardian entitled to be relieved from liability under s 76 of the Trusts Act 1973 (Qld) or entitled to a just allowance for time, energy, work, skill and judgment?
2.Are the QB4 Parties entitled to declaratory relief in respect of amounts alleged to have been paid or accrued in breach of trust?
3.Is QB4 Capital liable to repay the amounts it received under cl 5.1 of the Settlement Deed?
3a.Is there a liability in contract to repay the amounts under cl 10.1 of the Settlement Deed?
3b.If no to 3a, is Guardian entitled to restitutionary relief?
3c.If repayment is required, to whom is payment to be made?
4. Is the remedy of set-off available to Guardian?
[5.Is QB4 Capital liable to Guardian for damages for breach of the provisions pleaded in the SCC at [17]?]
5a.Did QB4 Capital breach the provisions pleaded in the SCC at [17]?
5b. Is QB4 Capital liable to Guardian for damages for breach of any of the above provisions pleaded in the SCC at [17]?
If so, what damages?
6.To what extent is Guardian entitled to recover outstanding invoices from Fundus Trust No 1 and Fundus Trust No 2 for invoices issued before and after the appointment … of Receivers accrued in the accounts?
7.Is Fundus liable to make payment of $135,000 plus interest to VentureCrowd Property Australia Pty Ltd under the loan agreement dated 16 November 2020? If so, is Fundus precluded from having recourse to the assets of FT1 and FT2 to satisfy that liability?
8.What costs orders should be made in the proceedings generally, including the costs reserved in paragraph 6 of the orders of Lee J made on 13 August 2020? In the context of costs of the proceeding, given that Guardian has accepted as valid, the termination of the [RE Agreement] by QB4 Capital, was its termination of the [IM Agreement] valid? – refer also 1c above?
9.Should Mr Maarbani, as a non-party, be jointly and severally liable for the costs of QB4 from the event which led to the termination of the settlement deed?
10.What orders should be made in respect of the future of Fundus Trust No 1 and Fundus Trust No 2?
10a.Should QB4 Capital Asset Management Pty Ltd be appointed as replacement trustee of Fundus Trust No 1 in place of the Receivers and, if so, what consequential orders should be made?
10b.If not, what orders should be made? In particular, should orders be made to cause the receivers to realise the assets of Fundus Trust No 1 and distribute the net proceeds rateably to unitholders of the ELF?
10c.What form of order should be made in respect of Fundus Trust No 2?
10d.Should the Receivers be required to apply to pre-fix their remuneration for the purposes of any such orders with respect to ELF and PIF?
Proceeding NSD 99/2021
1.Is Guardian Securities Ltd entitled to the declaratory relief sought in the Second cross-claim?
2.What costs orders should be made in the proceedings?
It is worth noting again: the express agreement of the parties was that this list constituted the universe of issues the Court was required to resolve. Despite their length, the determination of the agreed issues can be relatively confined to the legitimacy or otherwise of certain payments, made from, or charged to, the trust property, along with various other payments and costs that have arisen. To provide context to these issues, however, it is necessary first to outline the background to this extensive dispute. This, itself, is no easy task.
The approach I propose to take in this segment of the judgment is to outline a condensed timeline of events and the uncontroversial facts relevant to the determination of the agreed issues. In doing so, I do not consider it necessary or desirable to wade into what I might describe as the deluge of allegations raised in the submissions as to the history leading up to this matter, the breakdown in the relationships between the parties (mainly, QB4 and Guardian), and the subsequent conduct of the parties; nor do I consider that the determination of the agreed issues requires such an approach. Rather, to the extent that any facts are disputed, it will be necessary to return to them only where relevant to the determination of the agreed issues.
B.1 The Guardian Investment Fund
The nature of a managed investment scheme was outlined by McKerracher J in Saker, in the matter of Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liquidation) [2010] FCA 1080; (2010) 190 FCR 501 (at 503 [5]):
Under [a managed investment scheme (MIS)] people contribute funds to have an ‘interest’ in the MIS. When money is pooled with other investors for the common enterprise, it is on the basis that a ‘responsible entity’ [(RE)] will operate the MIS. The investors leave the day to day operation of the scheme to the RE. For this arrangement to be functional, schemes must be registered with the Australian Securities and Investments Commission (ASIC) before they can operate. An RE under a scheme capable of being registered with ASIC must be a registered Australian public company and must hold an Australian financial services licence authorising it to operate the scheme. An MIS must have a constitution as defined by s 601GA of the Corporations Act 2001 (Cth) (the Act) which will be examined further below. It must also have a compliance plan as defined under the Act and a statement signed by the directors of the proposed RE that the scheme’s constitution complies with s 601GA and s 601GB and that the compliance plan complies with s 601HA. These documents are detailed but the resolution of the dispute arising as to the proper ownership of funds in an account conducted by the RE on retirement or removal of the RE is to be determined by application of the Scheme documents (and their predecessors) as well as consideration of statute and authority.
(Emphasis in original).
The TGIF is a managed investment scheme registered with the Australian Securities and Investments Commission in accordance with Part 5C.1 of the Corporations Act 2001 (Cth) (Corporations Act). Relevantly, the TGIF constitution was contained in a “Replacement Constitution” made on 27 April 2016, and subsequently amended on 22 May 2019 (TGIF Constitution).
Guardian is the trustee and responsible entity of the TGIF: see s 601FC(2) of the Corporations Act. As the trustee and the responsible entity of the TGIF, Guardian holds the assets of the scheme on trust for the members of the scheme (unitholders), subject to the standards applicable to the trust under the Corporations Act and the provisions of the TGIF Constitution itself.
There are several separate classes of units within the TGIF. Those presently relevant are the two classes of units known as the Enhanced Land Fund (ELF) and the Premium Income Fund (PIF). In accordance with Pt 7.9 of the Corporations Act, the TGIF discloses any offers in terms of a Product Disclosure Statement (PDS). The PDS of the ELF is dated 9 June 2017 and the PDS of the PIF is dated 29 August 2018.
The ELF was promoted as an investment in land sites suitable for property investment. The relevant projects related to the ELF include the Yamanto Property and the Lawnton Property. The PIF was promoted as a vehicle for investors to have exposure to property developments as an equity interest via preference shares. Funds were invested in special purpose vehicles that were responsible for the property development. The relevant projects related to the PIF include the Griffin Mews Project, the Wattlebird Project, and the Pimpama Project.
Until 2 December 2020, the assets of the ELF and PIF were held on trust, via a custodian, by Fundus Management Pty Ltd (Fundus). Specifically, the assets ultimately referable to the ELF are held in Fundus Trust No 1 (FT1) and the assets of the PIF are held in Fundus Trust No 2 (FT2). The ELF unit class within the TGIF is the only investor in FT1 and the PIF unit class is the only investor in FT2: see ELF PDS Part 2 at [7]; PIF PDS Part 2 at [15].
In respect of the above, it is important to foreshadow that there is some dispute concerning the identities of the proper beneficiaries of FT1 and FT2. The QB4 Parties submit, on various alternative bases, that the proper beneficiaries of FT1 and FT2 are, respectively, the unitholders of the ELF and PIF. In contrast, the Guardian Parties submit that Fundus in its capacity as trustee of FT1 and FT2 holds all of the assets within those two trusts solely for the benefit of Guardian in its capacity as the responsible entity and trustee of the TGIF. It will be necessary to return to this dispute below (at Section C).
The responsible entity
As stated above, Guardian is the trustee and responsible entity of the TGIF. As the responsible entity of the TGIF, Guardian was required to operate the TGIF as a managed investment scheme and perform the functions conferred upon it by the Constitution and the Corporations Act.
Mr Guy Hasenkam has been a director of Guardian since 2003. Mr Hasenkam was also formerly the sole director of Fundus until February 2020.
On 22 January 2020, VentureCrowd Holdings Pty Ltd (VentureCrowd) acquired a controlling interest in Guardian. On 24 January 2020, following VentureCrowd’s acquisition of Guardian, Mr Maarbani became the managing director of Guardian. Mr Maarbani is also the chief executive officer and director of the following companies:
(1)VentureCrowd;
(2)VentureCrowd Nominees Pty Limited (VCNA);
(3)VentureCrowd Property Australia Pty Limited (VCPA); and
(4)VentureCrowd Services Australia Pty Limited (VCSA),
(together, the VentureCrowd Group).
Guardian, VentureCrowd, VCPA, and VCNA are the first to fourth respondents in the Principal Proceeding (Guardian Parties).
Australian Executor Trustees Limited (AETL) was the custodian of the ELF and PIF. Pursuant to a Deed of Novation of Custodian Agreement dated 18 December 2019, AETL retired and was substituted as custodian by Sargon CT Pty Ltd, later operating as Certes CT Pty Ltd (Certes).
Relationship with QB4
In May 2017, QB4 was appointed by Guardian to the roles of investment manager and corporate authorised representative. Specifically, QB4 was the investment manager of the ELF and PIF until, supposedly, 13 March 2020.
Mr Rod Mackay is a director of QB4 and CODA Asset Management Pty Ltd (CODA). Ms Charlotte Wong is a director and the sole shareholder of QB4, as well as a director of QB4 Capital Asset Management Pty Ltd (QB4CAM) and Griffin Mews No. 8 Pty Ltd. Mr Michael Wong is also a director of QB4CAM. Mr Alexander Migunov and Ms Elena Migunova are unitholders of both the ELF and PIF (Migunovs).
QB4, the Migunovs, QB4CAM, and CODA are, respectively, the first to fourth applicants in the Principal Proceeding (QB4 Parties).
Cloud Capital Pty Ltd (Cloud Capital) is a consulting firm that provides services to QB4 with respect to the investment management of the ELF and PIF. Mr Paul Duncan is the director of Cloud Capital.
On or around 19 May 2017, Guardian and QB4 entered into two separate agreements: (1) the Investment Management Agreement (IM Agreement); and (2) the Responsible Entity Agreement (RE Agreement).
Pursuant to cl 1.1 of the IM Agreement, Guardian appointed QB4 as the investment manager of unit classes of the TGIF which were to be established by agreement between them. Those unit classes were ultimately the ELF and PIF. By cl 7.1 of the IM Agreement, QB4 was entitled to charge “management fees” to Guardian and was required to pay “access fees”. On or around 13 November 2018, Guardian appointed QB4 as its authorised representative pursuant to the terms of a Corporate Authorised Representative Agreement (CAR Agreement).
On 22 January 2020, VentureCrowd acquired a controlling interest in Guardian. Following this, the board of Guardian was reconstituted and VCPA and VCSA, under the instruction of Guardian, completed a full review of the operation and management of the TGIF, including an assessment of each of its classes of units. In 2020, Guardian issued a number of invoices to Fundus relating to work that was said to have been undertaken by VCSA, VCPA, and Mr Maarbani on behalf of Guardian in conducting this full review of the ELF and PIF. These invoices are the subject of significant dispute.
On 12 March 2020, Guardian sent a letter to QB4 requesting copies of the periodic reports regarding the ELF and PIF, which were required to be sent to Guardian by QB4 pursuant to the IM Agreement. On 16 March 2020, QB4 responded by sending a letter to Guardian, attaching a formal notice of termination of the RE Agreement. On 18 March 2020, Guardian responded in kind by sending a letter accepting QB4’s termination of the RE Agreement, and giving notice of the termination of the IM Agreement and the CAR Agreement. It is unnecessary to detail here the motivations behind this correspondence and the events that followed. It suffices to say that the termination of these agreements, along with other details, were contested, and proceedings were subsequently commenced.
B.2 The Principal Proceeding
QB4 initially commenced proceedings on 9 April 2020 by filing an urgent application before the start of a proceeding seeking freezing orders in relation to the TGIF bank accounts and orders for the appointment of an interim receiver (that is, the Pre-action Relief Application). On 15 April 2020, Farrell J, in her Honour’s capacity as Commercial and Corporations Duty Judge, made orders including that QB4 is to commence any proceeding by 22 April 2020. Those proceedings were commenced on 28 April 2020 by originating application (that is, the Principal Proceeding) and, subsequently, the Pre-action Relief Application was finalised on 5 May 2020.
When the matter first came before me as Duty Judge, the applicants claimed that Guardian had breached the TGIF Constitution and its duty to invest, including its obligation to manage assets and perform other obligations. A claim was also made that Guardian’s purported termination of the IM Agreement was, in effect, invalid and unlawful and that Guardian remained liable to pay management fees to QB4. The applicants also sought what one might describe as a smorgasbord of both interlocutory and final relief. The final relief included:
(1)declaratory relief as to various breaches by Guardian of the IM Agreement, RE Agreement, CAR Agreement, and the TGIF Constitution;
(2)damages for the breach of the IM Agreement;
(3)restitution of the fees paid or payable to Guardian under the RE Agreement during the relevant period;
(4)equitable compensation by repayment of unauthorised investments into the relevant trusts (or an account of profits);
(5)damages pursuant to s 12GF(1) of the Australian Securities and Investments Act 2001 (Cth) and/or s 601MA(1) of the Corporations Act for the loss and damage caused by the loss of the benefit of the opportunity of having the invested funds;
(6)equitable compensation or an account of profits for the unauthorised management fees paid to Guardian under the TGIF Constitution and for Guardian’s breaches of the TGIF Constitution;
(7)an order for specific performance of the RE Agreement; and
(8)a mandatory injunction directed to Guardian requiring it to make payment of amounts said to be due and owing under a contract related to the Griffin Mews Project.
The range of interlocutory relief sought, including orders appointing an interim receiver and manager plus injunctions, were eventually resolved, at least on a temporary basis prior to the hearing, by the provision of undertakings.
The settlement deed
On 13 August 2020, after the matter had been docketed to me and, following a series of lengthy case management hearings, I indicated to the parties that the matter was crying out for a commercial resolution and made orders referring the Principal Proceeding to mediation prior to the commencement of the hearing under s 53A of the Federal Court of Australia Act 1976 (Cth) (FCAA). Pursuant to those orders, the parties attended a mediation on 18 September 2020, at which a heads of agreement was signed by the parties’ solicitors and a formal settlement deed was subsequently executed on 1 October 2020 (with the exception of the Migunovs, who later executed a counterpart) (Settlement Deed). At the time, it was the intention of the parties that this would resolve the issues in dispute and bring the proceedings to an end. Alas, this agreed resolution miscarried.
Clause 5.1 of the Settlement Deed provided:
By 1 October 2020:
(a)the distributions presently owing and outstanding to unitholders in the PIF must be paid by cleared funds into the LACP Trust Account in the sum of $174,617.57;
(b)the following must be paid by cleared funds into the LACP Trust Account:
(i)payment of QB4’s outstanding management fees and invoices from Cloud Capital Group (as claimed in the Matter, (b)) for PIF in the sum of $488,744.89;
(ii)payment of outstanding costs and expenses incurred in relation to the Griffin Mews Project in the sum of $865,686.55 as set out in Schedule B to this Deed, by way of monies to be held as described in clause 5.2 of this Deed for the purpose of the further subscription for shares in Griffin Mews No 8.
On 1 October 2020, pursuant to cl 5.1, Guardian caused or permitted Fundus (via the custodian, Certes) to pay a series of amounts from the assets of FT2 to the trust account of the QB4’s solicitor, Legal and Commercial Partners, for the benefit of QB4. The parties agree that those payments included:
(1)$174,617.57 pursuant to cl 5.1(a) of the Settlement Deed for distributions to unitholders;
(2)$488,744.89 pursuant to cl 5.1(b)(i) of the Settlement Deed, for allegedly outstanding QB4 management fees and invoices from Cloud Capital; and
(3)$865,686.55 pursuant to cl 5.1(b)(ii) of the Settlement Deed, in respect of costs and expenses in relation to the Griffin Mews Project.
(together, the Settlement Payments).
Following Guardian’s payment of the Settlement Payments, the parties consented to orders to vacate the trial dates pursuant to cl 6.1 of the Settlement Deed, which provided:
6.Dismissal of proceedings
6.1Upon the execution of this Deed, and following the payment by 1 October 2020 of the monies due to be paid as set out in clause 5.1, the Parties will consent to orders to vacate the trial dates.
On 2 October 2020, I made self-executing orders dismissing the proceedings, with such orders to take effect on 18 January 2021, shortly after the final terms of the deed were scheduled to be performed. I also granted the parties liberty to relist the proceedings on notice to the Court prior to 17 January 2021.
Following this, a dispute arose as to Guardian’s supposed default of cl 6.3(b) of the Settlement Deed. Clause 6.3(b) provided as follows:
6.3 …
(b)if, and to the extent that, the Respondents (other than Certes CT), have paid any of their legal costs from any of the funds mentioned in clause 6.3(a), then the Respondents (other than Certes CT) must reimburse those amounts to the relevant fund(s) by 9 October 2020.
A lengthy series of correspondence details QB4’s demands as to remedying the default and Guardian’s attempts to extend the time with which to comply with cl 6.3(b). As of 13 November 2020, however, Guardian was still in default as to its obligation to reimburse the relevant funds, and the QB4 Parties wrote to the Guardian Parties terminating the Settlement Deed by reason of Guardian’s default. The letter of termination included the following:
In these circumstances:
1.QB4 Capital and the Migunovs (as defined in the Settlement Deed) hereby accept the Respondents’ (other than Certes CT) repudiation of the Settlement Deed;
2.The Settlement Deed has come to an end;
3.QB4 Capital and the Migunovs (as defined in the Settlement Deed) elect to continue with their rights as if the Settlement Deed had not existed.
The QB4 Parties provided an ex parte interlocutory application to my Associate for an urgent listing, seeking, among other things, to restrain Guardian, Fundus, and Certes from accessing the Fundus bank accounts, which I heard later that day. I considered that it was appropriate that I give the parties who would be affected by the proposed orders the opportunity to be heard in relation to it, and so I stood the application down until later that day. However, given those parties were not able to secure counsel for the urgent listing, I made orders vacating the self-executing orders made on 2 October 2020, adjourning the interlocutory hearing until 23 November 2020, and, to preserve the status quo in the meantime, restraining Guardian, Fundus, and Certes from making transfers or withdrawals from the Fundus bank accounts for administrative costs, management fees, responsible entity fees, and legal fees or legal costs.
To cover Fundus’ legal fees, on 16 November 2020, VCPA (as the lender) entered into a loan agreement with Fundus (as the borrower) for the amount of $135,000 to be transferred from its bank to the trust account of CE Lawyers at the direction and for the benefit of Fundus with a term of 30 days (Loan Agreement). On 17 November 2020, VCPA paid the amount of $135,000 to CE Lawyers, in accordance with the Loan Agreement. That amount has not been repaid by Fundus to VCPA and remains an issue of dispute.
The receivers’ reports
Following further interlocutory hearings, orders were made, eventually by consent, on 2 December 2020 appointing Messrs Sean Wengel and Michael Brereton as receivers and trustees of the property of Fundus, including the trust property of FT1 and FT2 (Receivers). Those orders expressly provided that the Receivers’ expenses and remuneration would be payable from the assets of the ELF and PIF.
The consent orders made on 2 December 2020 required the Receivers to do the following:
5. The Receivers must, within 60 days of the date of this Order, provide to the Court and the parties a report as to the receivership of Fundus Management, including:
(a)the identification of the assets and liabilities of Fundus Management;
(b)accurate profit and loss statements for the period 1 January 2020 to date;
(c)accurate balance sheets as at the date of the report;
(d)the costs and expenses (including but not limited to legal costs, disbursements and the payments identified at paragraph 272 of the Further Amended Statement of Claim) charged by, and paid to or at the direction of, the first to fifth respondents in relation to the ELF and the PIF during the period 1 April 2020 to the date of these Orders.
6.For the purpose of preparing the report identified at Order 5 above, and in particular that part of the report that addresses the matters identified at Order 5(d) above, the Receivers are at liberty to engage the assistance of experts in the field of managed investments schemes and/or legal costs consultants as they in their discretion see fit.
At that time, it was the consensus between the parties that the Receivers were appointed, as officers of the Court, not only to resolve the contentious issue of ongoing control, but also to make inquiries and report to the Court upon payments made by or from the trust property held by Fundus while it was under the control of Mr Maarbani. Furthermore, there was a consensus among those appearing that the appointment of the Receivers was likely to quell the dispute concerning the relevant costs and charges. As a consequence of this, the Receivers were not appointed as referees pursuant to s 54A of the FCAA to inquire into and report upon specific issues.
Consistently with the orders made by the Court, the Receivers retained Mr Scott MacKenzie, a director of William Buck (the Receivers’ firm), with extensive knowledge of managed investment schemes to assist their investigations. On 29 January 2021, the Receivers filed their first report (First Receivers’ Report). In the report, the Receivers indicated (at 3) that they had “serious concerns regarding the large quantum of fees and costs applied to Fundus Trust No. 1 and Fundus Trust No. 2 by the Responsible Entity”. It was further contended that the records provided to the Receivers to substantiate certain fees and charges were insufficient to explain properly all the tasks completed and charged to the trust. The Receivers’ reviews identified transactions, processed through the Fundus bank accounts and financial statements during the review period totalling almost $4.4 million which, according to the Receivers, required further analysis to determine who was responsible for bearing the cost. This included a costs assessment by a legal costs assessor, to determine precisely what each charge related to and whether it was reasonably incurred.
On 8 April 2021, orders were made requiring the Receivers to complete an analysis regarding the reasonableness and propriety of costs and expenses charged by and paid to or at the direction of, the Guardian Parties, in relation to the ELF and PIF during the period of 1 April 2020 to 2 December 2020. To assist the Receivers in the review of the costs, and for the purposes of engaging with experts, a formal request was sought to obtain information relating to costs incurred. The Receivers engaged Cowell Clarke Commercial Lawyers (Cowell Clarke) to assist them in determining whether certain costs incurred by the Guardian Parties were permissible with regard to relevant legislation and managed investments. Further, the Receivers engaged Global Billing Legal Costs Consultants (Global Billing) to conduct a costs assessment of the legal costs charged by the Guardian Parties’ solicitors, AG Edwards Solicitors (AG Edwards), during the relevant period and further sought advice from Mr MacKenzie.
On 16 April 2021, the Receives filed their second report (Second Receivers’ Report). Relevantly, the conclusions of the Second Receivers’ Report included the following (at 6–7):
(1)Guardian is entitled to be indemnified from the PIF and the ELF for the legal expenses incurred by AG Edwards, however, those costs should be reduced from $169,941.69 to $146,193.69.
(2)It was appropriate for Guardian to use funds from the PIF to satisfy the ELF costs in instances where the cost incurred were not specific to either fund, in accordance with the TGIF PDS.
(3)Guardian is entitled to charge management fees respectively to the PIF and the ELF which are calculated as a percentage of the Gross Asset Value of each fund. Guardian charged and/or was paid a total of $495,524.02 for management fees from 1 April 2020 to 2 December 2020.
(4)The basis of Guardian’s calculation of its management fees is flawed as it relies on improper calculations of the Gross Asset Value, thereby misstating the management fees charged. It is not feasible to recalculate an accurate Gross Asset Value on a daily or monthly basis as required by the relevant PDS so the Receivers have estimated a discount rate to be applied to historic calculations. In applying the discount rate and methodology detailed in this report, the Receivers determine Guardian is entitled to be indemnified $269,728.48 in respect to those costs.
(5)Guardian is entitled to be indemnified from the ELF and PIF for expenses incurred as the responsible entity, however, it must provide evidence to substantiate those expenses. Guardian charged the PIF for unbilled management fees and fund expenses totalling $149,384.57, of which fund expenses were charged as 1% of the Gross Asset Value of the fund (as calculated by Guardian). Guardian did not provide any evidence to substantiate that those expenses were properly incurred and therefore is unable to claim such expenses.
(6)Guardian is entitled to be indemnified for the costs incurred by PKF International Limited (PKF) in completing the audit of the TGIF, however, the apportionment of the liability between the sub-funds of the TGIF has been improperly calculated and therefore the amounts invoiced to each of the PIF and the ELF, being $3,855.39 and $2,514.48 respectively, are misstated. The misstatement is likely immaterial and because Guardian is entitled to be indemnified for those costs to some extent, the costs claimed may be allowed.
(7)Upon acquiring a controlling interest in Guardian in January 2020, VentureCrowd (under the instructions of Guardian) completed a review of the operations and management of the TGIF including an assessment of the investments of each fund to form a conclusion regarding their feasibility. Additionally, in response to the termination of the RE Agreement in March 2020, Guardian completed a review of the various constituent and investment documents to determine its legal obligations to the PIF and the ELF.
(8)The costs incurred by VentureCrowd and Guardian in completing these reviews totalled $626,134.22; while Guardian is entitled to be indemnified for these costs, due to the lack of detailed, itemised records for the work undertaken, the Receivers are unable to determine the reasonableness of the quantum of such costs.
On 29 March 2020, I made further orders which required the Receivers to complete an analysis concerning the reasonableness and propriety of the costs and expenses charged or incurred at the direction of QB4 and Cloud Capital in relation to the ELF and PIF. That further analysis was the subject of a third report dated 22 April 2021 (Third Receivers’ Report), in which the Receivers concluded:
(1)QB4 engaged the consultancy services of Cloud Capital to support investment management services, which it was entitled to do. Amounts paid to QB4 and Cloud Capital have been paid via Guardian in its role as the responsible entity.
(2)Only the responsible entity provides directions to the custodian of the bank accounts of FT1 and FT2 to make payments. It is incumbent upon the responsible entity to review the management fee calculations and expense claims submitted by the investment manager (QB4) for accuracy, reasonableness and relevance to the TGIF Constitution and the PDS.
(3)Insufficient documentation was provided by QB4 to Guardian to substantiate the reasonableness and relevance of the majority of fees and expenses claimed.
(4)Guardian has, by way of payment of invoiced amounts to QB4 or by way of entering the Settlement Deed, provided the invoices claimed by QB4 and Cloud Capital for payment.
(5)Guardian is required to satisfy itself that the management fees and expenses it approves and pays are reasonable and in accordance with the TGIF Constitution and the PDS in order to be reimbursed for these approved fees and expenses from the scheme assets.
(6)The Receivers have not been provided with sufficient supporting documentation to evidence that Guardian was sufficiently satisfied that all of the management fees and expenses paid to QB4 and Cloud Capital were reasonable and in accordance with the TGIF Constitution and the PDS.
(7)QB4 and Cloud Capital is entitled to issue invoices for management fees to Guardian, in accordance with the IM Agreement, which are to be calculated as a percentage of the Gross Asset Value of each fund.
(8)The basis of QB4 and Cloud Capital’s calculation of management fees is flawed as it relies on an improper calculation of the Gross Asset Value, thereby misstating the management fees charged.
(9)It is not feasible to recalculate an accurate Gross Asset Value on a daily or monthly basis as required by the relevant PDS, so the Receivers have estimated a management fee to be applied to historic calculations.
(10)QB4 and Cloud Capital are entitled to be reimbursed by Guardian for expenses incurred, however, it must provide evidence to substantiate those expenses.
(11)Insufficient evidence was produced to demonstrate that Guardian took steps to satisfy itself that some expenses were properly incurred and therefore is unable to claim reimbursement of such expenses from the scheme assets.
(12)The Receivers are not aware of any related party relationship between Guardian and QB4/Cloud Capital.
(13)The Receivers have determined that a portion of the management fees and expenses paid by Guardian to QB4 is unclaimable as against the assets of the PIF and the ELF, as follows:
Fund Total Assessed Outcome of Assessment Difference (unclaimable) ELF Total $75,727.52 $15,734.20 $59,993.32 PIF Total $488,744.89 $147,110.93 $341,633.96
It was by this very lengthy series of events, and the receipt of the three reports (together, the Receivers’ Reports) that one came to a conclusion of the process that had been commenced in December 2020, whereby the Receivers were to report on the total costs incurred across both the ELF and PIF.
It is worth pausing here to address the parties’ reception of the Receivers’ Reports. Given the consistent methodology applied across the three reports, it is fair to say that the Receivers’ conclusions produced something of a double-edged sword that has prevented either party from weaponising any favourable conclusions in the Receivers’ Reports without similarly reducing the quantum of their own claims. It is, perhaps, for this reason that an issue was raised as to the extent that the conclusions of the Receivers’ Reports ought to be accepted by the Court. In their written submissions, the Guardian Parties surprisingly contend that there has been no process for the parties to be heard as to the extent to which findings in the Receivers’ Reports should be accepted, as would be afforded in respect of the report of a referee. Accordingly, Guardian submits that it would be procedurally unfair for the Court to proceed on the basis that the views of the Receivers provide evidence or conclusive determinations.
Although I agree that the conclusions of the Receivers are not determinative as a matter of law, I reject the premise of these submissions. It is ahistorical and does not reflect what occurred. I recognise that the Receivers were not appointed as referees and I have set out above the reasons why this did not occur. However, the purpose of the appointment of the Receivers was initially identified by Mr Campbell QC for the Guardian Parties at the interlocutory hearing on 2 December 2020 (at T113.46–114.5):
[W]e think that isolating [the incurred costs] and reporting on them separately, as though the receiver was a referee, would be useful because the actual issues would be identified. Our concern is that the powers of the receiver at the moment are, really, to … identify assets and liabilities and to prepare a profit and loss statement, effectively. And we think that the receivers should be a little bit more detailed than that and for the purpose of determining a resolution between the parties.
Accordingly, when making the orders for the appointment of the Receivers, I indicated my views as to the role of the Receivers to the parties as follows (at T116.46–117.08):
[HIS HONOUR]: I think I am inclined for there to be … one report which deals exclusively with the issue of the expenses incurred by Guardian from a particular date. And in respect of that, [the Receivers] are directed by me to obtain such expert assistance they think is necessary or appropriate for the purposes of preparing that report, say, without notice to the parties. A bit like the power [a] referee has to make such enquiries as he regards as appropriate in order to provide a report to the Court. So I think I will just beef up the report order, in order to provide that …
In any event, the orders appointing the Receivers were made by the consent of the parties, with the whole point of this exercise being to ensure that the controversy that had been agitated concerning the ELF and PIF would be resolved. That included an analysis regarding the reasonableness and propriety of costs and expenses charged by and paid to or at the direction of, Guardian, in relation to the ELF and PIF during the period 1 April 2020 to 2 December 2020, which was produced in the Second Receivers’ Report. At the hearing on 5 May 2021, the Guardian Parties sought an order pursuant to s 136 of the Evidence Act 1995 (Cth) limiting the use of the Receivers’ Reports as evidence of the state of mind, findings and analysis of the Receivers. Although I made a s 136 limitation, I further clarified the position as to the Receivers’ Reports at follows (at T133.0–6):
HIS HONOUR: Well, unless there’s any evidence adduced to the contrary, though, aren’t I going to proceed on the basis that’s what’s stated in the receiver’s report as accurate?
MR LIVINGSTON: Not necessarily, your Honour. No. But only, obviously, in relation to matters that your Honour receives submissions about.
This issue was raised again at the hearing on 21 June 2021, this time by Mr Douglas QC when seeking leave to amend the QB4 Parties’ pleadings (at T243.43–244.15):
MR DOUGLAS: And I raised it, and your Honour said that could be easily dealt with. We will have a report as to whether those expenses are properly incurred.
HIS HONOUR: Yes.
MR F. DOUGLAS: Now, we have received a report from the – which goes part of the way, I think, towards outlining what was properly incurred and what was not properly incurred, but my recollection – and again, I’m just – there are just a few integers which have not clicked into place from the last hearing to this hearing, but the – is it for – our figures largely coincide with the figures the receivers have come to, except that we take a different view to how you determine a remuneration that they were entitled to because their report is based on their view about net assets, not gross assets, and is based upon an interpreted view as to what management fees -
HIS HONOUR: Yes, because I thought the parties had pragmatically agreed, effectively, to leave this to an independent person to come to assess on what was regarded as reasonable, and this is the problem because you’re seeking to have you cake and eat it, too, because I put in place that the receiver did the work, has now come back with the assessment of what is – including what is reasonable for the work, a subjective view, and now you’re seeking to revisit that issue again?
Having considered the way in which the Receivers’ Reports were received by the Court and their content, I am satisfied that, although not conclusive or determinative, nor without their own errors, unless disturbed by other evidence, the Receivers’ Reports are prima facie cogent and persuasive reflections of their analysis and opinion and, on the basis of this opinion evidence, ought to be accepted as highly relevant as to the propriety of the costs incurred (in the absence of countervailing evidence I accept). This is because the analysis of the Receivers appears generally to be persuasive. Consistently with the s 136 limitation made, I have not used the contents of the Receivers’ Reports as evidence of the underlying truth of factual assertions contained in the reports. Further, I should note that the parties have not been constrained from adducing any evidence to the contrary, and it is simply wrong to assert that any issue arises as to procedural fairness.
Further to the above, the Receivers’ costs were also hotly contested, particularly by the QB4 Parties. On 21 June 2021, I gave ex tempore reasons determining the issues raised as to the remuneration of the Receivers, in which I noted that it was ultimately the QB4 Parties that sought the appointment of the Receivers. One of the reasons why receivers are regarded by the Courts traditionally as a relatively drastic remedy is that there is always a chance, even with the best will in the world, that the costs undertaken during the course of a receivership will be significant and disproportionate to any amount in dispute. It suffices to say that, although the costs incurred by the external legal representatives of the Receivers and the Receivers’ own costs were much higher than, I think, the parties would have contemplated (and certainly much higher than I had contemplated at the time of making the orders), the extent of the costs was explained by Mr Wengel appropriately. I ordered that the Receivers’ outstanding remuneration and disbursements be indemnified out of the assets of the ELF and PIF in accordance with the orders made on 2 December 2020. My views on this issue, upon reflection, have been reaffirmed. The Receivers’ Reports have provided significant clarity to the extensive, and sometimes ill-defined, issues in this case and have been of great assistance.
The parties’ claims
When I gave my ex tempore reasons regarding the remuneration of the Receivers, I indicated to the parties that it was initially my intention to resolve all of the outstanding issues that day and bring this matter to an end. Unfortunately, this was not possible.
On 1 July 2021, the QB4 Parties filed their further amended originating application and fourth further amended statement of claim (4FASOC), in which they seek equitable compensation in respect of various invoices charged to the funds, declaratory relief that Guardian is not entitled to payment in respect of those sums (amongst others), orders for the appointment of QB4 as trustee of FT1 and CODA as trustee of FT2, and further orders as to the management of the ELF and PIF assets.
On 13 July 2021, Guardian and VCPA filed a cross-claim in the Principal Proceeding against QB4, Fundus, and the Receivers (First Cross-Claim). By way of a broad summary, Guardian and VCPA seek the following relief in the First Cross-Claim:
(1)an order that QB4 repay the Settlement Payments, with interest, to Guardian, Fundus, or the trustee of FT2;
(2)a declaration that Guardian is entitled in equity to set-off the amount of $1,529,049 against any amount otherwise payable by it in respect of the claims in the Principal Proceeding for breach of the RE Agreement, the IM Agreement, and/or the CAR Agreement;
(3)orders that the trustee of FT1 and FT2, or alternatively, Fundus, pay to Guardian the amounts specified in a series of outstanding invoices issued to Fundus for work Guardian claims it completed in connexion with the ELF and PIF or, alternatively, an amount representing reasonable remuneration for the services the subject of the outstanding invoices; and
(4)an order that Fundus pay to VCPA the amount of $135,000, pursuant to the Loan Agreement dated 16 November 2020, together with interest on the Loan calculated at the rate of 10% per annum pursuant to clause 4.2 of the Loan Agreement.
On 17 August 2021, as I have outlined above, the agreed outstanding issues for determination were amended to reflect the substantive changes to each party’s case. Ultimately, the hearing of these outstanding issues did not conclude until 10 September 2021.
On the afternoon of the final day of the hearing, however, the QB4 Parties responded to criticism of their claim for equitable compensation, and indicated their intention to seek leave to amend their further amended originating application and 4FASOC. In substance, of course, this amounted to an application to augment the agreed issues the Court was required to resolve. It will be necessary to return to this issue below.
B.3 The Legal Costs Proceeding
The Legal Costs Proceeding has its genesis in the Queensland District Court Proceeding commenced on 18 December 2020 by CE Lawyers, relevantly concerning its claim for amounts owing under a costs agreement it had with the Guardian Parties (and Fundus) and a deed of acknowledgment of debt.
This was an extraordinary state of affairs. On 22 December 2020, CE Lawyers served the originating application and statement of claim that it had filed in the Queensland District Court Proceeding on Fundus at its registered office. It is not clear why CE Lawyers did not serve these documents on the Receivers, despite being aware that the Receivers had been appointed in the Principal Proceeding. Nor is it clear why this proceeding was commenced in the District Court of Queensland, given that it involved costs that were the subject of the Principal Proceeding and sought against the trust which was subject to the control of the Receivers. It was only when the QB4 Parties noted the issue, sought the proceeding to be relisted, and drew it to my attention that remedial steps could be taken in order to resolve the issue. However, in the meantime, and upon becoming aware of the Queensland District Court Proceeding, the Receivers neglected to file a defence to the claim. For reasons that are unnecessary to canvass, default judgment was then entered.
The Queensland District Court Proceeding was later superseded by the Legal Costs Proceeding commenced by QB4 and the Migunovs, against CE Lawyers and the solicitor with carriage of the matter, Ms Alyce Corbutt. QB4 sought an array of declaratory relief that, in essence, sought to undo the effects of the Queensland District Court Proceeding. The Guardian Parties and Fundus were later joined to the Legal Costs Proceeding.
On 3 March 2021, CE Lawyers filed a cross-claim against the Guardian Parties and Fundus, seeking the relief that was initially claimed in the Queensland District Court Proceeding. This notice of cross-claim was subsequently amended on 6 April 2021, removing the claim regarding the deed of acknowledgment of debt. On 7 April 2021, the Guardian Parties filed a cross-claim (Second Cross-Claim) against CE Lawyers, QB4, and the Migunovs, seeking, by way of a broad summary, declaratory relief that it be entitled to be indemnified for “all past, current and future legal costs incurred by Guardian” in the various proceedings on a full indemnity basis.
On 21 June 2021, I made the following orders:
2. Judgment in favour of the cross-claimant (CE Litigation Lawyers) against the first cross respondent (Guardian Securities) in respect of the First Cross-claim filed on 6 April 2021 (First Cross-claim) in the amount of $32,614.68.
3. Judgment in favour of CE Litigation Lawyers against the first to fifth cross-respondents (Guardian Parties) in respect of the First Cross-claim in the amount of $151,390.46.
4.Orders 2 and 3 be stayed until determination of the Second Cross-claim, or further order of the Court, subject to the Guardian Parties providing security for the amount set out in orders 2 and 3, together with interest pursuant to the Federal Court of Australia Act 1976 (Cth) from the date of these orders, by providing to the solicitors for CE Litigation Lawyers, within 7 days of the date of these orders, a bank guarantee from an Australian trading bank in the amount of $190,000 (Bank Guarantee), where:
(a) the beneficiary of the Bank Guarantee is CE Litigation Lawyers; and
(b) the Bank Guarantee will not expire before 21 June 2022.
The effect of these orders was to order judgment in the favour of CE Lawyers, with that amount pending the resolution of the outstanding issues in the Second Cross-Claim, which fall for determination in this judgment.
C EQUITABLE COMPENSATION
I first turn to consider the QB4 Parties’ claim for equitable compensation for the amounts paid or accrued by Guardian from the trust, which are said to have been incurred in breach of trust. By way of an overview, those amounts fall into two categories:
(1)fees paid or accrued to Guardian in respect of invoices issued by it to Fundus in relation to the ELF and PIF (Guardian Invoices); and
(2)amounts comprising various legal fees paid from the assets of the ELF and PIF to AG Edwards and CE Lawyers (Legal Invoices).
The Guardian Invoices are itemised in the 4FASOC as follows (at [18]):
Invoice Date Amount (inc GST) (a) Paid Inv-0419 18/05/2020 $296,079.30 (b) Paid Inv-0699 15/05/2020 $177,279.30 (c) Paid Inv-0434 28/09/2020 $252,892.20 (d) Paid Inv-0735 01/10/2020 $132,069.30 (e) Paid Inv-0026 01/10/2020 $120,822.90 Total $548,971.50 (f) Accrued Inv-0451 01/12/2020 $77,162.72
One does not need a calculator to realise that there are issues with the total amount represented in this table. Guardian ultimately clarified, however, that a number of those invoices include disbursements from VCPA and VCSA for work said to have been performed on behalf of the trust as part of their review of the TGIF, as follows:
(1)invoice 0419 includes charges for work done by Mr Maarbani and a disbursement from VCPA (invoice 0699);
(2)invoice 0434 includes charges for disbursements from VCPA (invoice 0735) and VCSA (invoice 0026); and
(3)invoice 0451 includes a disbursement from VCPA (invoice 0777) and a charge in the amount of $65,786.60 for work said to have been completed by Mr Maarbani.
Relevantly, therefore, the Guardian Invoices include invoices 0419, 0434, and 0451. Invoices 0419 and 0434, which amount to $548,971.50 and have been paid, are the subject of the claim for equitable compensation, and all three invoices are the subject of the claim for declaratory relief, to which I will return below.
The Legal Invoices are comprised of various legal fees paid from the assets of the PIF to AG Edwards and CE Lawyers totalling $509,941.69. The relevant invoices issued by AG Edwards identified in the 4FASOC are as follows (at [21A]):
Invoice Date Amount
(inc GST)(a) Paid Invoice no. 1216 17/04/2020 $38,859.70 (b) Paid Invoice no. 1232 06/05/2020 $67,883.32 (c) Paid Invoice no. 1259 16/06/2020 $60,580.67 (d) Paid Invoice no. 1290 28/07/2020 $2,618.00 Total $169,941.69
The amounts paid to CE Lawyers are described in the 4FASOC (at [21B]):
CE Lawyers’ costs which total of $550,000 (incl GST) and that, by the Orders of Lee J dated 21 June 2021 in NSD99/2021, Guardian Securities is to pay and of which $190,000 is unpaid and is to be secured by way of bank guarantee provided by Guardian Securities.
Based on this, the AG Edwards legal costs ($169,941.69 (inc GST)) and the paid legal costs of CE Lawyers (said to total $340,000 (inc GST)) are the subject of the QB4 Parties’ claim for equitable compensation, and the total amount is the subject of the claim for declaratory relief.
The QB4 Parties submit Guardian is liable to pay to FT2 by way of equitable compensation, the amounts of these invoices, which are alleged to have been paid or accrued by Guardian in breach of trust for work that was not done “within the spirit of its powers as trustee.” This argument is developed by reference to the authority of Walker v Stones [2001] QB 902, in which Sir Christopher Slade stated (at 916):
It is true that the powers of investment and charging trust assets conferred by the trust deed are very wide. However, the mere fact that a trustee is acting within the letter of his powers does not necessarily absolve him from a charge of breach of trust. Subject to the operation of any exemption clause contained in the trust deed, his powers must be exercised reasonably and in good faith and for the purposes for which they were created; he must exercise them in a proper way for the legitimate purposes of the trust: Halsbury’s Laws of England, 4th ed, vol 48 (1995), pp 452–453.
(Emphasis added).
It is necessary to address two issues as to this claim immediately. The first is that the issues as agreed by the parties, although encompassing the issues in dispute, are somewhat misleading. Specifically, issues 1b and 1c are as follows:
1b. Did Guardian relevantly commit a breach or breaches of trust?
1c. If no to 1b, were the expenses properly incurred by Guardian as trustee?
(Emphasis added).
The issue with this drafting is that issues 1b and 1c are, in effect, the same issue: whether Guardian relevantly committed a breach or breaches of trust by improperly incurring expenses as alleged. This issue requires an analysis as to whether the specified costs fall within the scope of Guardian’s right of indemnity. Whether this issue is raised in relation to the rights of indemnity, or in relation to the somewhat vague submission as to the “spirit of the trust”, the resulting analysis is the same. This has always been my understanding as to the breach of trust case, which was not disputed on the final day of the hearing: see T453.40–454.43. What, at the end of the day, is being disputed is the propriety of the Guardian Invoices and the Legal Invoices. This was the subject of the Receivers’ Reports, much of the evidence, and central to the Principal Proceeding. This issue, which has generated so much controversy, must be resolved pragmatically.
The second issue is that the claim for equitable compensation has deficiencies, not the least of which is an issue as to whether the QB4 Parties have the necessary standing to bring the claim. Although the issue as to standing was raised promptly by the QB4 Parties, and expressly identified in the agreed issues for determination by the consent of the parties, the consequences of the standing issue were only confronted by the QB4 Parties on the final day of the hearing, after which the QB4 Parties’ sought to amend their pleadings by introducing an alternative derivative claim. Accordingly, as I understand it, I am left with three alternative bases upon which the QB4 Parties, specifically the Migunovs, are said to have standing to bring the claim for equitable compensation: (1) as beneficiaries of FT1 and FT2 (Beneficiary Case); (2) as beneficiaries of a co-extensive trust under s 601FC(2) of the Corporations Act (Statutory Trust Case); or (3) by means of a derivative claim, which is the subject of the application to amend (Alternative Beneficiary Case).
I will address each of these cases.
C.1 Beneficiary Case
As outlined above, Guardian submits that the QB4 Parties do not have standing to seek equitable compensation in respect of amounts alleged to have been paid or accrued in breach of FT1 and FT2, as they are not beneficiaries of any trust of which Fundus is a trustee.
The 4FASOC states (at [18]) that, on various dates, Guardian paid or accrued a series of sums, or caused them to be paid from the trust bank accounts. The QB4 Parties plead (at [20]) that those payments were:
(a)made in breach of trust;
(b)made in breach of undertakings to the Court;
(c)… not payments that Guardian Securities was authorised to pay under the product disclosure statements of ELF and PIF; and
(d)… made in breach of the fiduciary duty of the Guardian Securities owed to the unitholders because they were not reasonable in the circumstances.
However, the payments the subject of the claim for equitable compensation were made (or caused to be made) by Fundus as trustee of FT1 and FT2, not by Guardian. Since the unitholders of the ELF and PIF, including the Migunovs, are said not to be beneficiaries of any trust of which Fundus is the trustee, Guardian submits that they lack standing to bring a claim for equitable compensation against Guardian for the payments made by Fundus.
A trustee who has committed a breach of trust may be sued in respect of that breach either by a beneficiary (including someone representing his estate) or by a co-trustee or successor trustee: Young v Murphy; Swinbank v Murphy [1996] 1 VR 279 (at 281 per Brooking J). QB4 itself has no standing to bring an action to vindicate any relevant right given its relationship with the TGIF was purely contractual as the investment manager and corporate authorised representative in respect of the ELF and PIF. Any relationship it has with the ELF and PIF unitholders does not confer standing upon it to bring an action of this kind for their benefit. Therefore, the QB4 Parties’ claim for equitable compensation rests on the Migunovs having standing by reason of being beneficiaries of FT1 and/or FT2.
The FT1 and FT2 constitutions each provide a mechanism for the identification of the proper beneficiaries of the respective trust. Those constitutions are in relevantly identical terms and operate as follows:
(1)Recital A states: “This Constitution establishes the Trust for the benefit of all Members.”
(2)Clause 1.1 defines “Member” to mean “a person for the time being registered under the provisions of this Constitution as a holder of Units”.
(3)Clause 7.1 obliges the trustee to keep and maintain, or cause to be kept and maintained, an up-to-date register of members.
(4)Clause 7.3 states: “The Trustee is entitled to regard the Register as conclusive proof as to who is a Member at any given time. The Trustee is not required to recognise any beneficial interest held in any Unit.”
From this mechanism, it is clear that the proper beneficiaries of FT1 and FT2 are those persons identified in the register of members that the trustee is obligated to maintain. The trustees of FT1 and FT2, by reason of the orders I made on 2 December 2020, are the Receivers.
On 21 April 2021, the solicitors for the QB4 Parties emailed the Receivers, requesting copies of the register of members for each of FT1 and FT2. In response, on 22 April 2021, the Receivers sent the QB4 Parties’ solicitors the following email:
Please find attached unit registers for ELF and PIF which incorporate the discrepancies between the unit registers provided by QB4 and Guardian.
These have been compiled based on the information that we have been provided and we do not warrant the accuracy of same.
We also attach the unit registers provided by Guardian and QB4 for your reference.
Further, we note that these documents are confidential and request that they are not distributed to any party other than yourself and QB4.
Attached to the email were spreadsheets setting out the unitholders in the ELF and PIF. The QB4 Parties submit that this is “conclusive proof” that the unitholders in the ELF and PIF are the members of FT1 and FT2 and, therefore, the proper beneficiaries.
As is evident from the Receivers’ email dated 22 April 2021, there was an apparent misunderstanding between the Receivers and the solicitors for the QB4 Parties as to what was being requested. Despite the request for copies of the Register of Members for each of FT1 and FT2, the Receivers’ responded by sending an email attaching documents identified as the “unit registers for the ELF and PIF”. The attachments contain no reference to FT1 or FT2. Rather, the attachments reference the unitholders of the ELF and PIF, and contain unit holder reference numbers, all of which use a “TGIF code”. This indicates that the attached document records unit holdings in the TGIF, rather than unit holdings in FT1 or FT2. Mr Livingston, counsel for the Guardian Parties, provided the following explanation as to what occurred (at T445.17–30):
[MR LIVINGSTON: Y]our Honour will see that from the terms of the email from the receivers, which is properly quoted in paragraph 16 of my friend’s aide-memoire. What they attached were unit registers for ELF & PIF, and what those unit registers are on their face, clearly on their face, are the unit registers for 20 unit holdings in the TGIF, that is, the entire registered managed investment scheme, The Guardian Investment Fund.
…
And those registers make clear, which is common ground, that the ELF & PIF unit holders were unit holders in the TGIF, the registered managed investment scheme, and within that managed investment scheme, they held units within this subclass of that managed scheme, which is designated as ELF & PIF. That is, in a sense, the receiver has answered the wrong question.
It is clear the documents that the Receivers provided to the QB4 Parties are not copies of the register of members for each of FT1 and FT2 for the purposes of their respective constitutions. As Mr Livingston said, despite the QB4 Parties asking the right question, “the receiver has answered the wrong question”: T445.30.
The Guardian Parties claim that, as opposed to the ELF and PIF unitholders, Guardian is, in fact, the proper beneficiary of FT1 and FT2. In support of this submission, they rely on the evidence of Mr MacKenzie (which was relied upon in the Second Receivers’ Report) and the evidence of Mr Maarbani, who were both of the understanding that Guardian was the sole beneficiary of FT1 and FT2: see Mr Maarbani’s affidavit sworn 21 July 2021 (at [6]); First Receivers’ Report (at Annexure E). However, this evidence similarly does not support a finding as to the identity of the proper beneficiary of FT1 and FT2. The statements made in Mr Maarbani’s affidavit and the Receivers’ Reports are the subject of a s 136 limitation and are merely evidence as to their opinions as to the identity of the proper beneficiary.
Given the state of the evidence before me, I am not satisfied as to the identity of the proper beneficiary of FT1 and FT2. This conclusion, unfortunately, raises more questions than it answers. The first is whether there was a register of members for FT1 and FT2 that was kept and maintained for the purposes of the respective constitutions. The second question is: if those registers were kept and maintained, where are they now? The moving party bears the onus. At no stage have the QB4 Parties sought to obtain a copy of the relevant registers of members by way of subpoena or notice to produce, in order to tender the register, or to tender the process served (and called upon) as proof of the fact that the register does not exist. The evidence to which I was directed at the hearing is inconclusive on this point.
Despite the deficiencies as to this evidence, which were made clear on the final day of the hearing, if not earlier, the parties appeared content to proceed on the basis of it. There was no attempt to direct my attention to any further evidence as to the identity of the beneficiaries from within the mass of documents that I have been provided. Whatever else is unclear in this case, one thing is clear: these were highly complex commercial structures, and it is not to be assumed that all paperwork was accurate and complete. Therefore, although I have my suspicions, I am simply not in a position to be reasonably satisfied to the requisite standard, on the evidence to which I was taken, that the unitholders of the ELF and PIF are beneficiaries of any trust of which Fundus is the trustee; nor can I be satisfied that Guardian itself is a beneficiary of FT1 and FT2.
C.2 The Statutory Trust Case
In the alternative, the QB4 Parties propose that the Migunovs have standing to make a claim against Fundus because it was relevantly acting as an agent of Guardian under s 601FB(2) of the Corporations Act. This “Statutory Trust Case” first appeared in the QB4 Parties’ reply to the defence to the 4FASOC, which was filed on 6 August 2021 (Reply), and was detailed as follows (at [13(b)]):
(b)say further that the applicants [sic] have standing to bring claims for breaches of trust and other breach of duty in respect of the trust constituted by FT1 and FT2, and that the proper defendant to any such claim is Guardian, because:
(i) Guardian was, at all material times, and is the responsible entity of The Guardian Investment Fund (TGIF);
(ii) the PIF and the ELF are classes of units in the TGIF;
(iii)Guardian did and does, by s 601FC(2) of the Corporations Act 2001 (Cth) (Corporations Act), hold “scheme property” on trust for scheme members;
(iv) the unitholders in the ELF and the PIF are, within the definition of “member” in s 9 of the Corporations Act, persons who hold an interest in the scheme;
(v) the trust assets of FT1 and FT2 constituted “scheme property” within the meaning of that expression in s 9 of the Corporations Act because:
(i) the moneys held by Fundus Management (by its custodian Certes) were and are either:
(A) contributions of money to TGIF; or
(B)money raised by Guardian for the purposes of TGIF; or
(C) income derived, directly or indirectly, from such contributions or money raised;
(ii) the other property held by Fundus Management was and is either:
(A) property acquired, directly or indirectly, with, or with the proceeds of, such contributions or money raised;
(B) property derived, directly or indirectly, from such contributions or money raised or such property acquired;
(vi) in the premises, notwithstanding the trusts mentioned in paragraph 3(d) of the Defence, Guardian was, at all material times, trustee under a coextensive trust recognised by and under s 601FC(2) of the Corporations Act;
(vii) the coextensive trust recognised by and under s 601FC(2) of the Corporations Act continued during such time as Guardian is the responsible entity of TGIF;
(viii) the members of the TGIF, which include the unitholders of the ELF and the PIF, are included among the beneficiaries of the trust created and recognised by and under s 601FC(2) of the Corporations Act;
(ix) Mr Maarbani, who was the sole director of Fundus Management at all material times, caused Fundus Management to engage in the conduct alleged against it;
(x) Fundus Management, in engaging in such conduct, acted as the agent of Guardian as principal, insofar as such conduct was engaged in by Fundus Management (through Mr Maarbani) at the direction of Guardian for the purposes of the ELF and the PIF within the TGIF;
(xi) in the premises, Guardian is the proper defendant to claims of breach of trust or other breach of duty in respect of that coextensive trust that subsists with respect to the trust assets of FT1 and FT2 because such trust assets are also “scheme property” of which Guardian was and is itself a trustee.
As for the second issue, QB4 submits that the rights to the Settlement Payments are, in essence, severable and are therefore not “undone” by the Settlement Deed’s termination. Clause 6.1 made the QB4 Parties’ consent to the vacation of the then-pending trial dates subject to Guardian’s payment of the Settlement Payments. Upon Guardian’s payment of the Settlement Payments to QB4, the QB4 Parties proffered consent orders “to vacate the trial dates (and associated programming orders)”. Clauses 6.1 and 6.2 of the Settlement Deed draw a distinction between the vacation of the existing trial dates, and the dismissal of the entire proceeding. On this construction, those clauses are said to make clear that the Settlement Payments were in exchange for the vacation of the trial dates. Those promises are both wholly executed. Accordingly, QB4 claims that they are not to be undone by the termination given the Settlement Payments were expressly made the “price” for that consent.
The applicable principle is said to be that stated in Larratt v Bankers & Traders Insurance Co Ltd (1941) 41 SR (NSW) 215 (at 225–226 per Jordan CJ):
Where [a contract] is avoided by virtue of an express right of avoidance, the consequences which flow from an avoidance depend on the intention of the parties, actual or imputed, and, in the absence of some express or implied indication of an intention to the contrary, are governed by the ordinary law applicable to the avoidance of contracts for breaches of essential promises.
(Citation omitted).
This construction is unconvincing. Upon the proper construction, cll 6.1 and 6.2 are machinery clauses specifying the timing of events upon which the terms of the Settlement Deed were to be performed. Clause 6.1 is not expressed as being given in exchange for the payments under cl 5.1. The word “following” does not entail any quid pro quo. It is wrong to suggest that, because cl 6.1 requires the vacating of trial dates to follow the Settlement Payments, the Settlement Payments were therefore “expressly the price for that consent”. It would be odd to interpret the word “following” as indicating that the “price” for the parties consenting to vacate the hearing dates was that Guardian would make payments to QB4 in excess of $1.5 million. No such intention is apparent from the terms of the Settlement Deed.
The better view is that the Settlement Deed does not contain a mechanism that obligates QB4 to repay amounts to Guardian; that is, Guardian does not have a cause of action in contract that would give it the right to be repaid the Settlement Payments. The Settlement Deed does not contain a mechanism to restore the status quo ante that would give Guardian the right to be repaid the Settlement Payments. Rather, the default clause simply restores the parties’ rights as they were before the Settlement Deed was executed. No common law claim in contract exists and accordingly, it is necessary to consider Guardian’s alternative claim for restitutionary relief in relation to the Settlement Payments.
F2. Is Guardian entitled to restitutionary relief?
Guardian’s claim for restitutionary relief is premised on the notion that it would be contrary to conscience for QB4 to retain the payments it received under the Settlement Deed, either because there has been a total failure of consideration or because those payments were made under a mistake of fact or law, namely that the Settlement Deed would remain on foot for the benefit of Guardian.
It is convenient to outline briefly the applicable principles as to restitutionary relief and unjust enrichment. A two-stage analysis is to be applied: first, the identification of an unjust, qualifying or vitiating factor that causes enrichment such as mistake or failure of consideration; and secondly, consideration of the recipient’s entitlement to retain the enrichment (including whether any “defences” are available, such as change of position): Roxborough v Rothmans of Pall Mall Australia Limited [2001] HCA 68; (2001) 208 CLR 516 (at 527 [20] per Gleeson CJ, Gaudron and Hayne JJ).
In Australian Financial Services and Leasing Pty Limited v Hills Industries Limited [2014] HCA 14; (2014) 253 CLR 560, Hayne, Crennan, Kiefel, Bell and Keane JJ outlined (at 596–597 [78]) that the relevant enquiry “in Australia is directed to who should properly bear the loss and why” with that enquiry being “conducted by reference to equitable principles”. It is no objection to restitution on the ground of total failure of the agreed return that the contract was discharged for the plaintiff-payer’s breach: Mason K, Carter J and Tolhurst G, Mason and Carter’s Restitution Law in Australia (4th ed, Butterworths, 2021) (at [1125]). As Dixon J outlined in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 (at 478, with whom Rich J agreed at 467, and McTiernan J agreed at 486), it is “now beyond question that instalments already paid may be recovered by a defaulting purchaser when the vendor elects to discharge the contract”.
Failure of consideration
With regards to Guardian’s submission that there has been a “total” failure of consideration, QB4 advances a number of submissions across a wide front. For the reasons that follow, I am satisfied that there has been a failure of consideration.
First, it is contended that cl 6.1 of the Settlement Deed expressly nominated the QB4 Parties’ consent to the vacation of then-extant trial dates as the “agreed return” for the Settlement Payments. Baltic Shipping Co v Dillon (1993) 176 CLR 344 was relied upon to support this assertion, in which Mason CJ stated (at 351, with whom Brennan J agreed at 367, and Toohey J agreed at 383):
[T]he receipt and retention by the plaintiff of any part of the bargained-for benefit will preclude recovery, unless the contract otherwise provides or the circumstances give rise to a fresh contract.
One must approach the references to a “total” failure of consideration with some caution. Searching for some aspect of bargain, however minor, that might be said to be performed and then asserting that, as a consequence, there is no relevant vitiating factor is a common approach adopted by those resisting restitutionary claims. But as James Edelman (as his Honour then was) explained in ‘The New Doctrine of Partial Failure of Consideration’ (1996) 15 Aust Bar Rev 229 (at 233):
The traditional requirement in the doctrine of failure of consideration, considered above, was that the failure be total. That is, the defendant must completely fail to confer any of the “bargained for benefit” on the plaintiff. This requirement that a failure be total was based in the principle that it was against “natural justice and equity” for a defendant to retain a benefit conferred without conferring any counterperformance on the plaintiff. Some commentators in this area continue to refer to the doctrine as “total failure of consideration”. However, this phrase is misleading. A failure of consideration need not always be total; there are clearly recognised exceptions to this requirement and the movement of the law in the last 10 years is clearly toward recognition of a universal doctrine of partial failure of consideration. Hence, the doctrine is referred to as simply failure of consideration.
(Citations omitted).
The seminal cases as to this area of the law, along with their application, were canvassed in Rover International Ltd Cannon Film Ltd [1989] 3 All ER 423 (at 433–434 per Kerr LJ); cited with approval in Australia and New Zealand Banking Group Ltd v Londish [2013] NSWSC 1423 (at [25] per Hall J):
In Rowland v Divall [1923] 2 KB 500, [1923] All ER Rep 270 the plaintiff bought a car from the defendants. He had the use of it for several months but then discovered that the seller had no title, with the result that he had to surrender the car to the true owner. He sued for the return of the price on the ground that there had been a total failure of consideration. The defendant denied this, pointing out that the plaintiff had had the use of the car for a substantial time. This contention succeeded at first instance, leaving the plaintiff only with a claim for damages, but this court unanimously upheld the plaintiff's claim. The consideration for which he had bargained was lawful possession of the car and a good title to it, neither of which he got. Although the car had been delivered to him pursuant to the contract and he had had its use and enjoyment for a considerable time, there was a total failure of consideration because he had not got any part of what he had bargained for.
The decision of Finnemore J in Warman v Southern Counties Car Finance Corp Ltd (W J Ameris Car Sales, third party)[1949] 1 All ER 711, [1949] 2 KB 576 was to the same effect. The plaintiff was buying a car on hire purchase when he became aware that a third party was claiming to be the true owner of the car. But he nevertheless went on paying the remaining instalments and then the necessary nominal sum to exercise his option to purchase. When the true owner then claimed the car he surrendered it and sued the finance company for the return of everything he had paid. He succeeded on the ground that there had been a total failure of consideration. He had not bargained for having the use of the car without the option to purchase it.
The position of Rover in the present case is a fortiori to these cases. Admittedly, as the judge said, they had several films from the respondents. But the possession of the films was merely incidental to the performance of the contract in the sense that it enabled Rover/Monitor to render services in relation to the films by dubbing them, preparing them for release on the Italian market and releasing them. These were onerous incidents associated with the delivery of the films to them. And delivery and possession were not what Rover had bargained for. The relevant bargain, at any rate for present purposes, was the opportunity to earn a substantial share of the gross receipts pursuant to cl 6 of the schedule to the agreement, with the certainty of at least breaking even by recouping their advance. Due to the invalidity of the agreement Rover got nothing of what they had bargained for, and there was clearly a total failure of consideration.
This equally disposes of counsel for the respondents' ingenious attempt to convert his concession of a quantum meruit, in particular the element of reasonable remuneration, into consideration in any relevant sense. Rover did not bargain for a quantum meruit, but for the benefits which might flow from cl 6 of the schedule. That is the short answer to this point.
It follows that in my view Rover's claim for the repayment of the five instalments of the advance totalling $US312,500 succeeds on the basis of a total failure of consideration.
For the reasons stated above, the QB4 Parties’ consent cannot be seen as an “agreed return” for the Settlement Payments. Such consent was merely a machinery clause specifying the timing of events. Furthermore, such a clause was necessary to allow for the terms of the Settlement Deed to be performed without the proceedings progressing to a hearing which would have been rendered unnecessary upon the performance of those terms. The consent to vacate the hearing dates is, therefore, to be seen as the parties performing their obligations under s 37M of the FCAA. Any benefit that flowed from the QB4 Parties’ consent to the vacation of the hearing dates was purely incidental to the Settlement Deed, which was executed in order for the proceedings to be dismissed.
Secondly, in the alternative, QB4 submits that Guardian nonetheless had received and retained the benefit of that consideration, being the dismissal of the proceedings, by reason of the orders I made on 2 October 2020. Those orders are, relevantly, as follows:
2. The proceeding be dismissed.
3. Order 2 is not to take effect until 18 January 2021 and liberty is reserved to the parties to relist the proceeding on notice to the Associate to Justice Lee, provided such liberty is exercised prior to 17 January 2021.
Those orders were self-executing and, by reason of Order 3, did not take effect until 18 January 2021, being the date upon which it was estimated that the terms of the Settlement Deed were to be completed. To suggest that this provided any consideration for the Settlement Payments is unpersuasive.
Thirdly, QB4 relies on DFCT v Hadidi (1994) 51 FCR 453 for the proposition that consideration executed under a settlement agreement that had been discharged from the other party’s breach is not held on trust or in escrow to make it liable to be repaid to the defaulting party, citing Dixon J’s observations in McDonald v Dennys Lascelles Ltd (at 477):
Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. … [w]hen a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach.
However, these authorities are not apposite to the current circumstances. The Settlement Deed provides that the rights and obligations that have been performed are to be treated as if the Settlement Deed had not existed. This is unlike a contract that is not void or voidable at law, or liable to be set aside in equity, such that it is to be determined so far as it is executory only.
I am satisfied that a vitiating factor has been identified and it is, therefore, unnecessary to go on to consider Guardian’s submissions as to a mistake of law or fact.
Unjust retention
I will now move to consider QB4’s entitlement to retain the enrichment. QB4 submits that Guardian has sought to disregard the express terms of the Settlement Deed by seeking to circumvent the risk that was allocated to them by way of the obligation to make the Settlement Payments in exchange for the QB4 Parties’ consent to vacate the hearing dates. In this respect, it is said that it is impermissible for Guardian to seek now to depart from that bargain by recourse to restitution. I do not agree. To the extent that this is a repetition of QB4’s submission regarding the Settlement Payments being the “express price” for the QB4 Parties’ consent to vacate the hearing dates, it ought to be rejected for the reasons outlined above. In any event, the insertion of the default clause into the Settlement Deed negates any supposed intention that the parties were to bear the risks of their obligations.
Finally, QB4 advances a change of position “defence”. Once again, this was not raised in their pleadings, and only surfaced in the QB4 Parties’ written submissions towards the final days of the hearing. Understandably, counsel for the Guardian Parties raised issue with this, submitting that it would be procedurally unfair for the defence to be entertained: T458.25–26. The question of whether QB4 ought to be able to rely on a change of position defence was the subject of extensive dispute. Despite this, however, the submissions as to the defence itself are limited to the following two points (at [105]):
(a) QB4 Capital paid over the Settlement Payments to its contemplated recipients in good faith on the assumption that it was entitled to deal with them;
(b)QB4 Capital would be placed in a worse position if it was ordered to make restitution of the Settlement Payments than if it had not received the Settlement Payments at all.
Contrary to QB4’s submissions, the defendant bears the onus of pleading and establishing a change of position: see David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 (at 384 per Mason CJ, Deane, Toohey, Gaudron, McHugh JJ); Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd (at 622 [150] per Gageler J).
In Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd, Gageler J stated (at 625 [157]) that the “defence of change of position is established where a defendant proves the existence of two conditions.” The first is that (at 625 [157]):
[T]he defendant has acted (that is, done something the defendant would not otherwise have done) or refrained from acting (that is, not done something the defendant would otherwise have done) in good faith on the assumption that the defendant was entitled to deal with the payment which the defendant received.
The second is that (at 626 [157]):
… by reason of having so acted or refrained from acting, the defendant would be placed in a worse position if ordered to make restitution of the payment than if the defendant had not received the payment at all. … It must, in every case, be shown by the defendant to be substantial.
To support this claim, QB4 relied on the cross-examination of Mr Mackay (T371.14–25):
MR LIVINGSTON: Mr Mackay, when you terminated the settlement deed on 13 November 2020, you did so for the purpose of ensuring that QB4 could keep the $1.5 million that had been paid into the solicitors’ trust account without the need for QB4 to perform its obligations under the settlement deed?---Absolutely not. If we dissect those payments, a portion of it was to go to unit holders, which it did. A portion of it was for the payment of outstanding invoices that Guardian had refused to pay to GM8, and the other portion was outstanding invoices that Guardian refused under the new leadership to pay. So it wasn’t – and so, QB4 did not receive 1.5 million or whatever the number is you’ve chosen to pick out. Unit holders received some, a development that deliberately was stopped to function received, and some outstanding invoices were paid. There was no great payment to QB4, and it’s a disgrace to even suggest that, because you know better.
Even if I were to consider it appropriate to allow QB4 to rely on its change of position defence, the evidence does not indicate the amount of the Settlement Payments that was ultimately retained by QB4 or whether the payments were made following the termination of the Settlement Deed. Nor is it explained how the payment of such debts leaves QB4 in a position that is worse than if the Settlement Payments had never been received. This submission was made without the support of any documentation. Given that the defence was again raised so late, it is probably unsurprising that there is insufficient evidence to be satisfied that QB4 have done something they would not otherwise have done in good faith on the assumption that they were entitled to do so, or are placed in a worse position if ordered to make restitution of the Settlement Payments than if they had not received the Settlement Payments at all.
It is clear from the language of the Settlement Deed that, in the event a party sought to rely on the default clause, the Parties were to continue with their Rights as if the deed had not existed. Indeed, upon informing the Guardian Parties of their election to terminate the Settlement Deed, the QB4 Parties wrote a letter stating: “QB4 Capital and the Migunovs (as defined in the Settlement Deed) elect to continue with their rights as if the Settlement Deed had not existed.” Given the QB4 Parties elected to proceed on such a basis, it seems to me that it would be a most unsatisfactory outcome for them to seek to retain their benefit under the Settlement Deed when Guardian responded in kind. I am satisfied that Guardian is entitled to restitutionary relief.
G LOAN AGREEMENT
The final substantive issue concerns a simple debt claim by VCPA against Fundus. As stated above, on 16 November 2020, VCPA entered into a loan agreement with Fundus for the amount of $135,000 to be transferred from its bank to the trust account of CE Lawyers at the direction, and for the benefit, of Fundus with a term of 30 days. On 17 November 2020, VCPA paid the amount of $135,000 to CE Lawyers, in accordance with the Loan Agreement. That amount has not been repaid.
It is submitted that the loan was properly obtained by reason of Fundus’ role as trustee of FT1 and FT2 in order to discharge its financial obligations incurred in that capacity, namely the payment of legal fees associated with these proceedings to CE Lawyers. Accordingly, Fundus (now subject to the management of the Receivers, who are also trustees of FT1 and FT2) ought not to be precluded from having recourse to the assets of FT1 and FT2 to satisfy this liability.
The QB4 Parties accept that Fundus is liable to repay the moneys advanced to it under the Loan Agreement, but contend that Fundus is personally liable.
Ultimately, given my findings above, this issue falls away. VCPA accepts that, to the extent that Guardian (and/or VCPA) is successful in obtaining relief in the Second Cross-Claim to the effect that it is entitled to indemnity from the assets of the ELF and/or PIF in respect of the amounts paid to CE Lawyers for the underlying invoices, it would not press this contractual claim, insofar as it would result in a potential double recovery of those fees. As I have determined that Guardian is entitled to recover its legal fees by way of indemnity, although at a discounted rate, the loan is to be taken to be discharged.
H COSTS
It now falls to determine the question of costs. The substantive result is a very mixed bag. The Receivers were appointed and it was necessary for litigation to be commenced for this to occur and relief was obtained to reduce amounts paid away from the TGIF; but as can be seen from the above, the Guardian Parties have had some success. However, any victory by either party is pyrrhic: the parties have all incurred substantial costs and, more importantly, the assets of FT1 and FT2 have been significantly depleted by these proceedings and the conduct of the parties in bringing them. As I stated as far back as 13 August 2020, this matter was crying out for a commercial resolution. That solution was not achieved. I cannot ignore that, on the evidence, the Guardian Parties, particularly Mr Maarbani, is responsible for these proceedings continuing because of the “commercial decision” that was made not to comply with obligations under the Settlement Deed. One thing, however, that is equally plain is that these proceedings have been hampered by the inefficient way the QB4 Parties litigated this matter.
For these reasons, and again adopting a broad-brush approach consistent with what I perceive to be the interests of justice, Guardian should pay 50 per cent of the QB4 Parties’ legal costs in the Principal Proceeding. Further, Guardian is entitled to its costs to be paid on the ordinary basis by the QB4 Parties in respect of the application for leave to amend specified in the orders I made on 10 September 2021. It may be necessary for further consequential orders to be made to reflect this outcome given some legal costs of Guardian have already been paid. For completeness, I note that the costs in relation to the Pre-action Relief Application were ordered by Farrell J on 5 May 2020 to be costs in the Principal Proceeding, such that they do not arise for separate consideration from the Principal Proceeding. As for the Legal Costs Proceeding, each party is to bear its own costs.
Lastly, I do not find that the circumstances of this case warrant for Mr Maarbani, a non-party, to be personally liable for any costs in the proceedings. The relevant principles were comprehensively set out by the Full Court of the Federal Court in Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50; (2012) 200 FCR 154 (at 169–171 [82]–[85], [88]–[90] per Keane CJ, Lander And Foster JJ):
82.In Kebaro Pty Ltd v Saunders [2003] FCAFC 5 the Full Court said at [103], after referring to Bischof v Adams in support of a proposition that an order for security for costs against a non-party is extraordinary:
… the categories of case are not closed, although in order to warrant its exercise, a sufficiently close connection, or as Gobbo J expressed it, a “real and direct and ... material” connection with the principal litigation, must be demonstrated …
83.In FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340, Basten JA (with whom Beazley JA agreed) said at [210]:
[210]… What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria:
(a)the unsuccessful party to the proceedings was the moving party and not the defendant;
(b)the source of funds for the litigation was the non-party or its principal;
(c)the conduct of the litigation was unreasonable or improper;
(d)the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest; and
(e)the unsuccessful party was insolvent or could otherwise be described as a person of straw.
84.This Court has jurisdiction to award costs against a non-party, at least in the circumstances identified by Mason CJ and Deane J in Knight v FP Special Assets Ltd. …
85.Costs have been awarded against a director of an impecunious applicant company on the basis that the director was the “real party” to the litigation: Oz B and S Pty Ltd v Elders IXL Ltd (1993) 117 ALR 128; Re Talk Finance and Insurance Services Pty Ltd [1994] 1 Qd R 558; Yates Property Corporation Pty Ltd v Boland (No 2) (1997) 147 ALR 685.
…
88.The Court has power to make an order for costs against a non-party where the non-party is connected with the unsuccessful party to the proceeding, and has caused that party to start, continue or prosecute the proceeding in circumstances where the non-party’s conduct makes it just and equitable that the non-party be visited with an order for costs in favour of the successful party either in addition to such an order against the unsuccessful party or in substitution for such an order. As Gobbo J said in Bischof v Adams, a statement which the Full Court has approved, the categories of cases are not closed.
89We think that the only precondition to the exercise of power would have to be that the non-party has a sufficient connection with the unsuccessful party and the litigation to warrant the Court exercising its jurisdiction. The connection between the non-party and the unsuccessful party and the litigation must be material to the question of costs: Vestris v Cashman (1998) 72 SASR 449 at 467 per Lander J. In that case Lander J attempted to identify some of the matters to which the Court might have regard in the exercise of the Court’s discretion: at 468.
90An order for costs against a non-party is only made in exceptional circumstances: Vestris v Cashman. …
Although Mr Maarbani’s conduct in relation to the Settlement Deed was regrettable, having regard to Dunghutti Elders Council and the authorities cited therein, in my view, Mr Maarbani’s conduct does not warrant the exceptional response of an order for costs against a non-party, nor is such an order required in the interests of justice: see Knight v FP Special Assets Ltd (1992) 174 CLR 178 (at 192–193 per Mason CJ and Deane J).
I ORDERS AS TO THE TGIF
The final outstanding issue is what to do now with the ELF and PIF.
In relation to FT2, the parties accept that orders should be made for the Receivers to realise the assets of the PIF and to distribute them rateably to the unitholders of the PIF, upon completion of which the Receivers are to report to the Court and the parties.
Accordingly, the primary point of contention is whether the same approach ought to be adopted in respect of FT1 and the ELF. The QB4 Parties seek the appointment of QB4CAM as replacement trustee of FT1 in the place of the Receivers. Guardian submits that the assets of both the ELF and PIF ought to be realised by the Receivers and rateably distributed to the respective unitholders.
At the hearing, I indicated that it was appropriate to consider this issue from first principles. To my mind, those principles are encapsulated in the aphorism of Jack Lang: “In the race of life, always back self-interest; at least you know it’s trying.” It seems to me that the ultimate beneficiaries of FT1, being the ELF unitholders, motivated by self-interest, just want this to be resolved in the quickest, most efficient and cheapest way possible. Although the parties provided extensive submissions as to the appropriateness of QB4CAM as trustee of FT2, some of which were directed towards whether Mr Mackay was of a suitable character so as to justify the appointment (noting that Mr Mackay is not directly associated with QB4CAM), these are peripheral issues. At the end of the day, my primary concern is understanding which of those two present alternatives produces an outcome as quickly, inexpensively and efficiently as possible.
To my mind, given the hostility of the extensive disputes involving both FT1 and FT2, the significant costs incurred, and the financial burdens that the trust assets are likely to incur if I find otherwise, the appropriate resolution is to order the Receivers to take steps to realise the assets of both FT1 and FT2 (being assets ultimately attributable to the ELF and PIF) and to distribute the net proceeds rateably between the ELF and PIF unitholders respectively. The sale of all of the existing trust property would bring the trusts to an end as there will no longer be trust property. Accordingly, upon completion by the Receivers of the realisation and distribution, Guardian is to cancel all of the units of the ELF and PIF.
Part 5C.9 of the Corporations Act contains provisions relevant to the winding up of managed investment schemes. Section 601ND of the Corporations Act provides for the winding up of a scheme where the Court thinks it is “just and equitable to do so”. This manifests a legislative intent that, given the nature of managed investments schemes as a distinct sub-set of trusts which are regulated by the Act, schemes are liable to be wound up on the “just and equitable” ground. Although I do not consider it appropriate to wind up the TGIF, given that Guardian has expressed that it is no longer willing to have ongoing involvement in respect of the ELF and PIF, and I do not consider that appointing a replacement trustee is appropriate in the circumstances, it seems to me that it would be just and equitable that the ELF and PIF be dissolved by realisation and distribution: see Rubicon Asset Management Ltd (admin apptd) [2009] NSWSC 1068; (2009) 77 NSWLR 96 (at 100–101 [21]–[25] per McDougall J).
Lastly, having fulfilled their responsibility to the Court, the Receivers seek to be discharged and contend that they should retain control of trust assets until they have paid themselves from those assets pursuant to the orders of the Court dated 5 March 2021 and 21 June 2021. This seems appropriate. The only dispute in regards to this is whether the Receivers ought to be required to apply to pre-fix their remuneration for the purposes of any such order with respect to the ELF and PIF. QB4 contends that the Court should apply its power to cap the future remuneration of the Receivers by requiring them to apply to pre-fix their remuneration: see, e.g., Freeman, in the matter of Blue Oasis Holdings Pty Ltd (In Liquidation) (No 2) [2019] FCA 118. The Receivers, however, state that their preference would be to apply retrospectively for their remuneration and expenses to be approved, rather than adopting the speculative pre-fixed approach advanced by the QB4 Parties.
Despite the disputes over the Receivers’ costs in relation to the Receivers’ Reports, I found those costs to be appropriate given the tasks they were burdened with and the reports produced. Accordingly, I consider it appropriate that the Receivers apply retrospectively for their remuneration and expenses to be approved. But costs should be minimised.
J CONCLUSION & ORDERS
This long and sorry saga should be brought to an end. I propose to make an order referring the parties to mediation. It is unclear to me why this case, crying out for resolution, has not resolved. The parties should be apprised by a Registrar of the Court as to the mutually destructive nature of the ongoing disputation, which ends up resulting in unnecessary legal fees being incurred. If armed by these reasons the parties cannot belatedly resolve their differences sensibly, then the mediation process at least might serve to reduce the ambit of any dispute over the relief to reflect my findings and these reasons. Absent a commercial resolution, the parties are to file an agreed minute or competing minutes of order reflecting these reasons within seven days of the completion of the mediation.
I certify that the preceding two hundred and sixty-one (261) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Lee. Associate:
Dated: 22 March 2022
SCHEDULE OF PARTIES
NSD 470 of 2020 Applicants
Fourth Respondent:
CODA ASSET MANAGEMENT PTY LTD (ACN 143 291 678)
Respondents
Fourth Respondent:
VENTURECROWD NOMINEES PTY LIMITED
Fifth Respondent:
FUNDUS MANAGEMENT PTY LIMITED
Seventh Respondent:
SARGON CT PTY LIMITED
NSD 99 of 2021 Respondents
Fourth Respondent:
VENTURECROWD HOLDINGS PTY LIMITED
Fifth Respondent:
VENTURECROWD PROPERTY AUSTRALIA PTY LIMITED
Sixth Respondent:
VENTURECROWD NOMINEES PTY LIMITED
Seventh Respondent:
FUNDUS MANAGEMENT PTY LIMITED
Cross-Respondents
Fourth Cross-Respondent:
VENTURECROWD NOMINEES PTY LIMITED (ACN 166 599 140)
Fifth Cross-Respondent:
FUNDUS MANAGEMENT PTY LIMITED (ACN 619 573 456)
Second Cross-Claimants
Fourth Cross-Claimant:
VENTURECROWD NOMINEES PTY LIMITED
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