Re S&D International Pty Ltd (No 4)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT
CORPORATIONS LIST

No. 7807 of 2008

IN THE MATTER OF S&D INTERNATIONAL PTY LD (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) ACN 075 030 447

BETWEEN

GEOFFREY NEILS HANDBERG (IN HIS CAPACITY AS LIQUIDATOR OF S&D INTERNATIONAL PTY LTD (RECEIVER AND MANAGER APPOINTED)
(IN LIQUIDATION) ACN 075 030 447

AND

S&D INTERNATIONAL PTY LTD (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION)
ACN 075 030 447

AND

MIG PROPERTY SERVICES PTY LTD
ACN 006 657 174

AND

PAUL VARTELAS (IN HIS CAPACITY AS RECEIVER AND MANAGER OF S&D INTERNATIONAL PTY LTD)(RECEIVER AND MANAGER APPOINTED)

AND

DINESH MALHOTRA

AND

BILL VELOS

AND

PRADEEP TIWARI

AND

STIRLING HORNE

AND

PETER VINCE

First Plaintiff

Second Plaintiff

First Defendant

Second Defendant

Third Defendant

Fourth Defendant

Fifth Defendant

Sixth Defendant

Seventh Defendant

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	8, 9, 10 and 11 February, 15, 16, 17, 18, 19, 22 March and 20 August 2010
DATE OF JUDGMENT:	2 September 2010
CASE MAY BE CITED AS:	Re S&D International Pty Ltd (No 4)
MEDIUM NEUTRAL CITATION:	[2010] VSC 388

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PRACTICE AND PROCEDURE – effect of orders and declarations as to ownership of real property – dispute as to basis of order – whether interest in trust property held through unit trust or independently of unit trust – order applied by its terms

CORPORATIONS – whether director breached duties under ss 180, 181 and 182 of the Corporations Act 2001 – company a trustee of a unit trust – extended family dispute as to beneficial ownership of two properties held by company as trustee of unit trust - properties mortgaged to raise finance for director’s mother to buy a house – company’s assets used to finance costs of litigation over beneficial ownership of assets held by the company as trustee - whether company in breach of trust – whether director in breach of duties - breaches found

TRUSTS - whether director liable as a constructive trustee for breaches of trust by trustee company – liability found

RELEASE - whether release in previous proceedings applied to proceeding against director by the plaintiffs – contra preferentem rule – release applied

TORRENS SYSTEM - failure to lodge a caveat by prior equitable interest holder – whether priority lost in prior equitable interest in favour of subsequent interest holder – priority deferred

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M J Galvin	Mills Oakley Lawyers
For the Third Defendant	In person	-
For the Fourth Defendant	Mr A F Hamlyn-Harris	Velos Lawyers
For the Fifth Defendant	Mr A M Donald	Eggleston Whelan

Cases cited

Abigail v Lapin [1934] AC 491

Adsett v Berlouis (1992) 37 FCR 201

ASIC v Gallagher (1993) 11 WAR 105

ASIC v Maxwell(2006) 59 ACSR 373

ASIC v Macdonald(No 11) (2009) 230 FLR 1

ASIC v Sydney Investment House Equities (2008) 69 ACSR 1

Barnes v Addy(1874) LR 9 Ch App 244

Beale v Government Insurance Office of NSW (1997) 48 NSWLR 430

Re Beddoe [1893] 1 Ch 547

The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1

Briginshaw v Briginshaw (1938) 60 CLR 336

Brisbane City Council v Attorney-General for Queensland [1979] AC 411

Charles v Federal Commissioner of Taxation (1954) 90 CLR 598

Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226

Cornwell v The Queen (2007) 231 CLR 260

Costa and Duppe Properties Pty Ltd v Duppe [1986] VR 90

Cowan v Scargill [1985] Ch 270

CPT Custodian Pty Ltd v Commissioner of State Revenue (2005) 224 CLR 98

CPT Manager v Chief Commissioner of State Revenue (2006) 64 ATR 654

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89

Glenn v Federal Commissioner of Land Tax (1915) 20 CLR 490

Halloran v Minister Administering National Parks and Wildlife Act 1974 (2007) 229 CLR 545

Hamilton v Whitehead (1988) 166 CLR 121

Heid v Reliance Finance Corporation Pty Ltd (1983) 154 CLR 326

Highwater Nominees Pty Ltd v Mead [2006] WASC 17

Housing Commission of New South Wales v Tatmar Pastoral Co Pty Ltd [1983] 3 NSWLR 378

Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821

ING Life Ltd v Commissioner of State Revenue [2008] QSC 248

J. & H. Just (Holdings) Pty. Ltd. v. Bank of N.S.W (1971) 125 CLR 546

Kimberly-Clark Australia Pty Ltd v Arico Trading International Pty Ltd (2001) 207 CLR 1

Kuru v New South Wales [2008] 236 CLR 1

Jacobs v Platt Nominees Pty Ltd [1990] VR 146

Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq) 113 CLR 265

Lend Lease Funds Management Ltd v Commissioner of State Revenue [2009] VSC 360

Lockwood Security Products Pty Ltd v Doric Products Pty Ltd (2004) 217 CLR 274

Malhotra v Tiwari [2005] VSC 496

Marchesi v Barnes [1970] VR 434

Moffett v Dillon [1999] VSCA 32

R v Byrnes and Hopwood (1995) 183 CLR 501

Redman v Permanent Trustee Co of NSW

Re S&D International Pty Ltd (No 1) [2009] VSC 225

S&D International Pty Ltd (in liq) v Malhotra [2006] VSC 280

Saunders v Vautier (1841) 49 ER 282

Shropshire Union Railways and Canal Company v The Queen (1875) LR 7 HL 496

Tatmar Pastoral Co Pty Ltd v Housing Commission of New South Wales (1984) 54 ALR 155

Tesco Supermarkets Ltd v Nattrass [1972] AC 153

Vines v ASIC (2007) 62 ACSR 1

Vrisakis v ASIC (1993) 11 ACSR 162

HIS HONOUR:

INTRODUCTION

This judgment is the second given in this proceeding. Many of the background facts are set out in the earlier judgment.[1] Each of the plaintiffs and the defendants to this proceeding claim an interest over moneys paid into court. The moneys are the net proceeds from the sale of real property previously registered in the name of S&D International Pty Ltd (in liquidation) (S&D), the second plaintiff, as trustee. To minimise costs and for ease of determination, the various claims have been dealt with in separate hearings. I have already heard and determined claims in this proceeding concerning securities held by the first defendant, MIG Property Services Pty Ltd (MIG).[2] This current judgment deals with claims between the plaintiffs, the third defendant, Mr Malhotra, the fourth defendant, Mr Bill Velos, and the fifth defendant, Mr Pradeep Tiwari.
[1]Re S&D International Pty Ltd (in liquidation) (receivers and managers appointed) [2009] VSC 225 (“Re S&D International Pty Ltd (No 1)”).
[2]Ibid.

INTRODUCTORY FACTS

The introductory facts are essentially drawn from my reasons in the previous judgment,[3] but due to new evidence I make some necessary changes. S&D acted as the trustee for the S&D International Unit Trust (the “Unit Trust”). An issue in the current hearing is the true effect and meaning of the order of Balmford J in Malhotra v Tiwari.[4] This issue did not arise for consideration in Re S&D International Pty Ltd (No 1).[5] Accordingly, some statements made in the introduction in Re S&D International Pty Ltd (No 1) have been amended here to recognise the issue to be resolved in this hearing.
[3]Ibid.
[4][2005] VSC 25
[5]Ibid.

The property held by S&D as trustee included a property at 580 Barkly Street, Footscray which has now been sold by the first mortgagee, MIG Property Services Pty Ltd (MIG) (the first defendant), and another property at 45 Boronia Drive, Hillside which has now been sold by the liquidator of S&D (the first plaintiff).

Previously, the Hillside property had been in the possession of the second defendant Mr Vartelas, who was appointed by the registered first mortgagee and mortgage debenture holder, MIG, as agent in possession. Following the decision in Re S&D International Pty Ltd (No 1), the property was delivered up to the liquidator of S&D and recently sold by him.

Prior to S&D’s liquidation, it carried on an Indian wholesale grocery business at the Footscray property known as Bharat Traders International. The business was initially established as a partnership in 1991 by Dinesh Malhotra, the third defendant, his brother, Vinod Malhotra, and Markandey Tiwari, the then husband of Sheela Tiwari. In 1992, Markandey Tiwari divorced his wife Sheela Tiwari. Sheela then married Dinesh Malhotra in January 2003. They separated in January 1994 and divorced on 5 June 1995. In 1992, Markandey and Vinod left the partnership and Dinesh Malhotra was registered as sole proprietor of the business name. The business was thereafter built up and conducted by Sheela Tiwari and Dinesh Malhotra. In July 2005, Mr Malhotra married Renu Kapoor. In mid-1999, Kapoor commenced divorce proceedings against Mr Malhotra and in September that year applied to the Family Court for a property settlement, in which proceeding both parties filed affidavits concerning Mr Malhotra’s financial affairs. Kapoor alleged that Mr Malhotra had a share in the Footscray property and the business. Mr Malhotra denied that allegation.

In 1996, the Unit Trust was established and S&D appointed the trustee. In 1996, S&D took over the business. Also in 1996, the Footscray property was acquired and registered in S&D’s name. Subsequently, in 2000, the Hillside property was acquired and registered in S&D’s name. These properties were mortgaged to the Commonwealth Bank of Australia (“CBA”), along with a mortgage debenture over the assets and undertaking of S&D. Subsequently, these securities were assigned to and held by MIG. As mentioned above, in Re S&D International Pty Ltd (No 1) it was found that those securities have been satisfied and discharged from the proceeds of the sale of the Footscray property.

The two units in the Unit Trust were held in the name of Sheela Tiwari. Dinesh Malhotra resigned as a director in 1999; although he subsequently claimed in 2002 that at all times he was the beneficial owner of half the Footscray and Hillside properties, half the business, half the units in the Unit Trust and half the shares in the trustee (S&D). In April 2002, Dinesh Malhotra and Sheela Tiwari fell out. On 26 April 2002, Dinesh Malhotra was locked out of the Footscray property by Sheela Tiwari where they had both resided behind the shop. Prior to this, on 18 April 2002, Mr Malhotra had lodged caveats over the Footscray and Hillside properties claiming to hold a 50 per cent share of the property - an estate in fee simple. About this time, Sheela Tiwari consulted Velos & Davis solicitors and retained them to remove the caveats. On 8 April 2002, Pradeep Tiwari was appointed (having turned 18) a director of S&D along with his parents Sheela Tiwari and Markandey Tiwari.

After Mr Malhotra was locked out of the Footscray property, in July 2002 Sheela Tiwari and her son Pradeep Tiwari caused S&D to grant unregistered mortgages to the ANZ Bank over the Footscray and Hillside properties and a registered mortgage debenture over the assets and undertaking of S&D as security for a $200,000 business loan from ANZ Bank to S&D. Those moneys and further moneys of S&D were used, along with a home loan from the ANZ Bank to Sheela Tiwari, to enable Sheela Tiwari to buy a home at Point Cook. The ANZ Bank did not register the second mortgages or lodge a caveat giving notice of its unregistered second mortgages over the Footscray and Hillside properties until 2005 when it lodged caveats, but at no stage did it seek to register the mortgages. It registered with ASIC the mortgage debenture which gave a fixed charge over the properties.

On 19 August 2002, Dinesh Malhotra instituted against Sheela Tiwari and S&D legal proceedings in the Supreme Court of Victoria to establish his half interest in the Footscray and Hillside properties, the units in the Unit Trust, and the shares in the trusts and the business. Soon thereafter on 25 September 2002, he delivered his statement of claim. On about 10 October 2002, Velos & Davis received a company search of S&D which disclosed that the ANZ Bank had a taken a mortgage debenture on 11 July 2002 over the assets and undertaking of S&D to secure S&D’s indebtedness to the ANZ Bank.

Thus began a long series of court cases which have led to the current proceedings. Suffice to say, Dinesh Malhotra succeeded in his initial proceedings before Balmford J in establishing, inter alia, that he was an equal joint beneficial owner in the Footscray property, the Hillside property and the units in the Unit Trust.

Sheela Tiwari retained the firm of Velos & Davis to act for her and S&D in the proceedings instituted by Mr Malhotra in the Supreme Court of Victoria. On 28 September 2004, Velos & Davis received from Sheila Tiwari’s accountant, David Mond, accounts of S&D disclosing that S&D owed moneys to the CBA and $200,000 to the ANZ Bank. The assets disclosed were the two properties and stock on hand. On 8 October 2004, Sheela Tiwari and Pradeep Tiwari caused S&D to give an equitable charge over the Footscray property and the Hillside property to Velos & Davis to secure legal fees and disbursements incurred on Sheela and S&D’s behalf in the Supreme Court proceedings.[6] The trial of the Supreme Court proceeding commenced on 11 October 2004.
[6]Affidavit of Bill Velos of 16 October 2008, court file (20) [7].

In July 2004, Pradeep Tiwari had contracted to buy a property at Hoppers Crossing. To assist with this purchase he received $39,500 from S&D, purportedly a distribution of profits from the Unit Trust on 22 July 2004. When the Tiwari Family Trust was established in July 2002, it had assigned to it the units in the Unit Trust. Subsequently, on 20 September 2004, Mr Tiwari borrowed $40,000 from S&D to assist at settlement of the Hoppers Crossing property purchase.

Mr Bill Velos, solicitor, of the firm of Velos & Davis, is the fourth defendant. An issue raised by Mr Malhotra in this hearing is whether S&D also retained Velos & Davis and incurred any liability for legal fees and disbursements to Velos & Davis and whether, if it did, those fees were secured by the equitable charges Velos & Davis took over the Footscray and Hillside properties. On 6 August 2007, Mr Velos and his partner, Peter Davis (Velos & Davis), obtained judgment in the County Court before Judge Daly against Sheela Tiwari for $190,708.52 plus costs in respect of fees and charges incurred in acting for her (and allegedly S&D) in the Supreme Court proceedings.[7] This debt has not been paid and Mr Velos claims to be entitled to the moneys in court as a matter of priority by virtue of the equitable charges to meet the fees and disbursements incurred by Sheela Tiwari and allegedly S&D.[8]
[7]Ibid [13].
[8]Ibid [16].

Sheela Tiwari appealed the decision of Balmford J and, while the matter was pending in the Court of Appeal, Sheela Tiwari and Dinesh Malhotra agreed to appoint an administrator to run the business until their dispute could be resolved. They appointed Stirling Horne and Peter Vince, the sixth and seventh defendants, as administrators. Dinesh Malhotra alleges that despite the business being previously profitable, they, with the connivance of Sheela Tiwari and her son Pradeep Tiwari, recommended that S&D be wound up. At that stage S&D owed the CBA as a secured creditor approximately $240,000 and the ANZ Bank as a secured creditor the business loan of $200,000 and interest thereon. In June 2005, the creditors of S&D, including Mrs Tiwari, but over the protests of Mr Malhotra, resolved to wind up the company and appointed Messrs Horne and Vince as liquidators.

Subsequently, Dinesh Malhotra instituted further proceedings in the Supreme Court to terminate the winding up and to remove Messrs Horne and Vince as liquidators. At first instance before Mandie J, he failed to have the winding up terminated and Messrs Horne and Vince removed as liquidators. He successfully appealed the decision of Mandie J not to remove Messrs Horne and Vince but unsuccessfully against the decision not to terminate the winding up. In June 2007, Mr Handberg, the first plaintiff, was appointed as the liquidator of S&D instead of Messrs Horne and Vince. In November 2004, Messrs Horne and Vince lodged a caveat against the properties notifying their claim to a lien over the assets for their unpaid fees and expenses. Messrs Horne and Vince had previously sought to have Mr Malhotra’s caveats removed. In July 2006, Gillard J of Supreme Court of Victoria refused their application.

As mentioned above, the CBA bank held securities over S&D and the properties and at about the time S&D was placed in administration, the CBA Bank called up its loan to S&D. In June 2005, Dinesh Malhotra was able to arrange for the CBA to be paid out by Colonel Naresh Malhotra, who took over the securities but assigned them to MIG on 11 September 2006. MIG was controlled by Mr Mond, an accountant, who acted as a financial adviser and accountant to Sheela Tiwari. On 25 October 2006, Mr Vartelas was appointed by MIG receiver and manager of the assets and undertaking of S&D under the mortgage debenture held by MIG.[9] In August 2007, Mr Vartelas was appointed the agent of MIG and entered into possession of the two properties. At that time, the principal debt secured by the CBA mortgages was $242,540.38.
[9]Exhibit PV-1, Court Book (“CB”) A 7, 2507 (hereafter Court Book references will follow the format: CB, letter designating Court Book series, volume number, page number. Court Books B and C are one volume each only so have no volume number).

On or about 19 September 2007, MIG, through its agent Mr Vartelas, sold to Tiwari Enterprises Pty Ltd,[10] a company associated with Sheela Tiwari, the Footscray property at public auction for the total sum of $1,360,000. Settlement of the sale occurred on 18 October 2007.[11] On 19 October 2007, the estate agents accounted to MIG for the deposit. At settlement, withdrawals were provided for the Dinesh Malhotra caveat, the ANZ Bank caveat and the Horne and Vince caveat. Mr Dinesh Malhotra agreed with MIG to provide a withdrawal of his caveat on the basis that MIG would pay the surplus (if any) into court. MIG did not pay the surplus into court nor had it done so by the time this proceeding commenced.
[10]Exhibit PV- 11, CB A 7, 2614.
[11]Affidavit of Paul Vartelas of 3 February 2009, CB A 7, 2474 [19].

At or after settlement, MIG did not account to the mortgagor or the subsequent interest holders for the moneys it was retaining in satisfaction of its secured debt. It did not treat its mortgage and other securities as satisfied in full. On the contrary, it retained the proceeds of sale and failed to calculate what it was owed. MIG alleged that at all times it acted properly in accordance with its rights and obligations.

In May 2007, the ANZ Bank sold the Point Cook property as mortgagee in possession to another member of the Tiwari family, Prathibha Tiwari. The sale proceeds were not applied to discharge the ANZ Bank mortgages over the Footscray and Hillside properties, but were used to repay other debts of the Tiwari family. By a deed of assignment of 9 July 2008, the ANZ Bank assigned absolutely its right title and interest in the ANZ Bank mortgage over the Footscray and Hillside properties to Mr Tiwari.[12] Mr Tiwari claims that as at the date of the assignment the S&D debt stood at $356,080.85. He claims that under the assignment he assumed absolutely the title, right and interest of the ANZ Bank in the ANZ Bank mortgages and the S&D debt.[13] He says that entitles him to the moneys in court next after MIG, whose mortgage has now been satisfied.
[12]Tiwari Cross-Claim.
[13]Tiwari’s points of claim refer only to the mortgage over the Footscray property (CB B 50). Since these were delivered the Hillside property has been sold and the proceeds paid into court. I have assumed that Tiwari makes a similar claim in respect of the ANZ Bank mortgage over the Hillside property.

In September 2008, on the application of the liquidator of S&D, MIG and Mr Vartelas were ordered to pay into court the balance of the moneys which they still retained from the sale of the Footscray property and the receivership of S&D.

As mentioned above, in Re S&D International Pty Ltd (No 1), the issues between the plaintiffs and MIG and Mr Vartelas were decided. This part of the proceedings seeks to resolve issues between the plaintiffs, Mr Malhotra, Mr Velos and Mr Pradeep Tiwari concerning their respective entitlements to the moneys in court. Essentially, Mr Malhotra claims to be the beneficial equal owner of half the moneys in court less the amounts allowed to Mr Handberg as his costs and disbursements, and that neither Mr Velos or Mr Pradeep Tiwari have any right to those moneys with priority over Mr Malhotra. Mr Velos claims the charges in favour of Velos & Davis are valid as against the whole of the moneys in court in priority to the rights of Mr Tiwari (if any) and any rights Mr Malhotra may have to half of the moneys. Mr Tiwari claims his equitable securities are valid as against the whole of the moneys in court in priority to the rights of Velos & Davis (if any) and any rights Mr Malhotra may have to half of the moneys. The plaintiffs make claims to the benefit of Mr Malhotra, effectively challenging the securities of Mr Velos and Mr Tiwari over the moneys in court or alternatively, the half due to Mr Malhotra.

The moneys in court, being the proceeds from the sale of the Footscray and Hillside properties, will remain the property of S&D as trustee of the Unit Trust unless any of the claims of Mr Malhotra, Mr Velos (for Velos & Davis) and Mr Tiwari to those moneys can be made good and will be subject to any claims the sixth and seventh defendants and Mrs Tiwari may have.

SUMMARY OF CLAIMS[14]

[14]The pleadings and other documents setting out the parties claims are as follows:

S&D/Handberg (plaintiffs)

·Plaintiffs’ further amended originating process, filed 2 February 2009, court file (43)

·Plaintiffs’ further amended points of response and cross-claim against Velos, 16 October 2009, court file (74) (“Plaintiffs Claim Against Velos”)

·Plaintiffs’ further amended points of response and cross-claim against Tiwari, 16 October 2009, court file (75) (“Plaintiffs Claim Against Tiwari”)

Malhotra (third defendant)

·Contention of facts and law, 21 January 2009, CB B 74 (“Malhotra Contentions”)

·Points of claim, 27 January 2009, CB B 26 (“Malhotra Points of Claim”)

·Third defendant submissions, 5 February 2009, court file (47A) (“Malhotra 5 February 2009 submissions”).

·Outline of argument, 4 February 2010, court file (78A)

Velos (fourth defendant)

·Points of cross-claim, 29 January 2009, CB B 40 )(“Velos Cross-Claim”)

·Reply and response, 13 November 2009, court file (77) (“Velos Reply”)

Pradeep Tiwari (fifth defendant)

·Points of cross-claim of the fifth defendant, 19 December 2008, CB B 50 (“Tiwari Cross-Claim”)

·Reply of the fifth defendant to the plaintiffs’ further amended points of response and cross-claim, 9 February 2010, court file (80) (“Tiwari Reply”)

Mr Malhotra claims that at all material times he was an equal half owner of all the assets of the business and the Footscray and Hillside properties.[15] He relies on the declarations of Balmford J. He says that her Honour found and declared that he was an equal joint beneficial owner of the Footscray and Hillside properties. He says that the only interest that has priority to his interest is the CBA mortgage which has been discharged. He claims 50 per cent of the funds in court less the amounts allowed to Mr Handberg as his costs and disbursements.[16] He alleges his interests were created before those, if any, of the ANZ Bank and Velos & Davis and that those stand behind his interests.[17]
[15] As indicated in the foot note above, Mr Malhotra’s claims are made in four documents. The first in time being The Malhotra Contentions. These were filed pursuant to the order of Justice Judd made on 28 November 2008 (CB, B, 74-101). The second is in the Malhotra Points of Claim (filed pursuant to an order I made 11 December 2008 - CB, B, 26-39). The Malhotra Points of Claim refer to and rely on the contentions of law and fact, in particular to various allegations. In his Malhotra 5 February submissions, Mr Malhotra relies on both the Malhotra Points of Claim and notice of contentions of fact and law.
[16]Malhotra Points of Claim [50]; see also Malhotra Contentions [125].
[17]Malhotra Points of Claim [51].

Mr Velos claims that Mr Malhotra did not hold a proprietary interest in the properties. He claims that he has rights only as a beneficial holder of a unit in the Unit Trust and this interest merely gives him rights as an unsecured creditor of S&D.[18] The plaintiffs also claim that Mr Malhotra only has an interest under the terms of the Unit Trust as a beneficial unit holder but that this interest does give him a proprietary interest in the Footscray and Hillside properties.[19] No issue has been raised by any of the parties arising out of Mr Malhotra’s interest being a joint interest.
[18]Velos Reply [4].
[19]Plaintiffs’ closing submissions against the fourth and fifth defendants, 27 April 2010 (“Plaintiffs April Submissions”).

Mr Tiwari claims that the ANZ Bank mortgages were valid and effective.[20] The plaintiffs claim that the ANZ Bank mortgages were not given for a proper purpose and were given in breach of trust.[21] The plaintiffs claim that in the premises the ANZ Bank mortgages were neither valid nor effective, or alternatively, were neither valid nor effective to charge or encumber the interest of Malhotra in the properties.[22]
[20]Tiwari Cross-Claim [1]-[7].
[21]Plaintiffs Claim Against Tiwari [15O].
[22]Ibid [15P].

Further or alternatively, the plaintiffs claim that by reason of Mr Malhotra’s caveats, the ANZ Bank took the mortgages and Mr Tiwari took the assignment with notice or constructive notice of Mr Malhotra’s interest in the properties.[23]
[23]Ibid [15Q].

The plaintiffs claim that if the mortgages were validly given, then the rights of the ANZ Bank are subject to and postponed by the interests and rights of Mr Malhotra and any interest or rights acquired by Mr Tiwari in the properties under the assignment from the ANZ Bank are subject and postponed to the interests and rights of Mr Malhotra in the properties.[24]
[24]Ibid [15R].

Mr Velos claims that Velos & Davis acquired a valid and effective equitable charge over the properties. The plaintiffs allege that the charges were not given for a proper purpose of the trust and were in breach of trust.[25] They allege that the equitable charges were not valid or effective, alternatively, were not valid or effective to charge or encumber the interest of Mr Malhotra in the properties [26]
[25]Ibid [23].
[26]Plaintiffs Claim Against Velos [28].

Further or alternatively, the plaintiffs claim that by reason of Mr Malhotra’s caveats and claims, Velos & Davis took the equitable charges with notice, or constructive notice, of Mr Malhotra’s interests in the properties.[27]
[27]Ibid [29].

The plaintiffs claim that if the equitable charges of Velos & Davis were valid, any consequent interest of Mr Velos in the properties is subject and postponed to the interests and rights of Mr Malhotra in the properties.[28] Mr Velos claims that by reason of Mr Malhotra’s conduct Mr Malhotra’s interests in the properties were postponed to the interests of Velos & Davis.[29]
[28]Ibid [30].
[29]Closing submissions of the fourth defendant, 26 April 2010, court file (102) (“Velos April Submissions”) [98]-[120].

Mr Velos claims that S&D retained Velos & Davis to act for it in the Supreme Court proceedings. The plaintiffs do not dispute this claim. Mr Malhotra claims that S&D did not retain Velos & Davis. Mr Velos claims that Mr Malhotra has no standing to make this claim.[30]
[30]Velos April Submissions [124]-[127].

Mr Velos claims that by the ANZ Bank’s conduct, and further or alternatively by its conduct and the further conduct of Mr Tiwari, ANZ Bank’s interests in the properties were postponed to the interests of Velos & Davis.

Mr Tiwari claims that Velos & Davis had knowledge and or notice of the ANZ Bank’s equitable mortgages over the properties prior to taking the equitable charges and accordingly took their interest subject thereto.[31]
[31]Closing Submissions of the Fifth Defendant, 16 April 2010, court file (100) (“Tiwari April Submissions”) [122].

Mr Tiwari claims that the benefit of the ANZ Bank mortgages were validly assigned to him and that moneys are now owing to him under the mortgages by S&D.

The plaintiffs allege that S&D breached its duties as a trustee in giving the ANZ Bank mortgages,[32] taking the business loan and making the Sheela advance.[33]
[32]Plaintiffs’ Claim Against Tiwari [38].
[33]Ibid [37].

The plaintiffs allege that by reason of S&D’s breaches, the trust has suffered loss and damage being the amounts secured by the ANZ Bank mortgages, the business loan and the Sheela advance.[34]
[34]Ibid [39].

The plaintiffs claim that Mr Tiwari knowingly assisted in the breaches of trust by S&D in giving the ANZ Bank mortgages,[35] taking the business loan and making the Sheela advance and is liable to compensate the trust for the said loss and damage flowing from the equitable frauds.[36]
[35]Ibid [38].
[36]Ibid [40]-[44].

The plaintiffs claim that Mr Tiwari breached his duties as a director under ss 180, 181 and 182 of the Corporations Act 2001 by authorizing, causing or suffering S&D to make the Sheela advance[37] and to give the ANZ Bank mortgages.[38]
[37]Ibid [48] and [49].
[38]Ibid [50].

The plaintiffs claim that by reason of the breaches, S&D has suffered the said loss and damage.[39]
[39]Ibid [51].

The plaintiffs claim that by reason of the operation of s 1317H of the Corporations Act 2001 Mr Tiwari is liable to compensate and indemnify S&D in respect of the said loss and damage and is entitled in equity and under s 553C of the Corporations Act 2001 to set-off the amount of that loss and damage against the amount Mr Tiwari is entitled to claim under the mortgages.[40]
[40]Ibid [52].

Mr Tiwari claims that he was released by the plaintiffs from all claims, liabilities and causes of action against him arising as a result of any alleged loans to Sheela Tiwari relating to the Point Cook property.[41]
[41]Tiwari Reply [53]-[62].

The plaintiffs allege that S&D breached it duties as trustee by entering into the retainer and undertaking responsibility for payment of the Velos & Davis fees and charges, and by giving the equitable charges to Velos & Davis.[42]
[42]Plaintiffs Claim Against Tiwari [35].

The plaintiffs allege that by reason of S&D’s breaches, the trust has suffered loss and damage being the amounts paid by S&D pursuant to the Velos & Davis retainer and S&D’s liability to pay any further amounts pursuant to that retainer; further or alternatively, the amounts secured by the equitable charges.[43]
[43]Ibid [39].

The plaintiffs claim that Mr Tiwari knowingly assisted in the breaches of trust by S&D by executing, authorising, causing or suffering the giving of the Velos & Davis retainer and the equitable charges[44] and is liable to compensate the trust for the said loss and damage flowing from the equitable frauds.[45]
[44]Ibid [41].
[45]Ibid [[40]-[44].

The plaintiffs claim that Mr Tiwari breached his duties as a director under ss 180, 181 and 182 of the Corporations Act 2001 by authorizing, causing or suffering S&D to enter into the Velos & Davis retainer[46] and to give the equitable charges.[47]
[46]Ibid [47].
[47]Ibid [48].

The plaintiffs claim that by reason of the breaches, S&D has suffered loss and damage the measure of which is the total of the amounts paid by S&D to Velos & Davis pursuant to the Velos & Davis retainer, S&D’s liability to pay any further amounts pursuant to that retainer; and further or alternatively, the amounts secured by the equitable charges.[48]
[48]Ibid [51].

The plaintiffs claim that by reason of the operation of s 1317H of the Corporations Act 2001 Mr Tiwari is liable to compensate and indemnify S&D in respect of the said loss and damage and is entitled in equity and under s 553 C of the Corporations Act 2001 to set-off the amount of that loss and damage against the amount Mr Tiwari is entitled to claim under the mortgages.[49]
[49]Ibid [52].

SUMMARY OF FINDINGS

For the reasons that follow I make the following findings.

I find that Balmford J held and declared that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties. I find that it is irrelevant whether or not she came to that conclusion on the basis that Mr Malhotra was beneficially entitled to a half interest in the units in the Unit Trust or that S&D otherwise held the properties on trust for the joint benefit of Mr Malhotra and Mrs Tiwari.

If I am wrong about the effect of the order of Balmford J and Mr Malhotra only acquired an interest in the Unit Trust through being beneficially entitled to units in the Unit Trust and if the orders of Balmford J should otherwise be ignored or read such that Balmford J only found and ordered that Mr Malhotra merely has a beneficial interest in a unit of the Unit Trust, I find that Mr Malhotra does not have a proprietary interest in the properties or their traceable product and that his interest is merely as an unsecured creditor of S&D.[50] Accordingly, in those circumstances he has no proprietary interest in the moneys in court.
[50]Velos April Submissions [17]-[66].

I find that the ANZ Bank mortgages were valid and effective to grant equitable mortgages in favour of the ANZ Bank.

I find that the ANZ Bank mortgages were second in time to Mr Malhotra’s proprietary interest. I find that on the grounds argued before me, Mr Malhotra has not lost his priority for his equitable proprietary interest over the ANZ Bank equitable mortgages.

I find that Velos & Davis acquired a valid and effective equitable charge over the Footscray and Hillside properties.[51]
[51]Ibid [67]-[71]; [72]-[94] and [95]-[97].

I find that the Velos & Davis’ equitable charges were second in time to Mr Malhotra’s proprietary interest. I reject Mr Velos’ claim that by reason of Mr Malhotra’s conduct he has lost his priority over Velos & Davis.[52]
[52]Ibid [98]-[120].

I find that S&D retained Velos & Davis to act for them in the Supreme Court proceedings. I find that Mr Malhotra does not have standing to challenge the retainer or the fees charged to S&D under it by Velos & Davis.[53]
[53]Ibid.

I find that the Velos & Davis equitable charges were second in time to the ANZ Bank mortgages.

I find that Velos & Davis did not have knowledge/notice of the ANZ Bank equitable mortgages.

I find that the ANZ Bank, by its conduct, lost what would otherwise have been its priority in the equitable mortgages over the properties it held as against the Velos & Davis equitable charges.[54]
[54]Ibid [130]-[132].

I find that Mr Tiwari is able to enforce the ANZ Bank mortgages but subject to Mr Malhotra’s interest (and the interest of Mrs Tiwari, if any) in the Footscray and Hillside properties and their proceeds and subject to the Velos & Davis equitable charges.

I find that S&D breached its duties as a trustee in giving the ANZ Bank mortgages, taking the business loan and making the Sheela advance.

I find that S&D suffered loss and damage by granting the ANZ Bank mortgages, taking the business loan and making the Sheela advance.

I find that Mr Tiwari has been released by the plaintiffs from any claims arising out of the loan of moneys to Sheela Tiwari in relation to the Point Cook property.

If I am wrong about the release, I find that Mr Tiwari is liable as a constructive trustee for the said loss and damage suffered by S&D.

If I am wrong about the release, I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating the grant of the ANZ Bank mortgages, taking the business loan and making the Sheela advance.

I find that S&D breached its duties as trustee in giving the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.

I find that S&D suffered loss and damage by the giving of the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.

I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating S&D giving the Velos & Davis charges, S&D paying fees to Velos & Davis and S&D incurring liabilities to Velos & Davis for fees and expenses.

I find that Mr Tiwari is liable as a constructive trustee for the said loss and damage suffered by S&D.

I propose to order under the Corporations Act 2001 that Mr Tiwari pay compensation to S&D for the said loss and damage and at law indemnify S&D for such loss and damage.

I now turn to giving my detailed reasons for these findings.

WHAT IS MR MALHOTRA’S INTEREST?

As indicated above, I find that Balmford J found and ordered that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties. This decision legally determined the property interest of Mr Malhotra and bound Mrs Tiwari and S&D (as trustee of the Unit Trust). Accordingly Mr Malhotra is entitled to a half interest to the moneys in court subject to the issue of costs.

I find it is unnecessary to resolve whether or not Balmford J came to that conclusion on the basis that Mr Malhotra was an equal joint beneficial owner of the units in the Unit Trust or otherwise was entitled to an interest in the properties. I do so for the following reasons.

Mr Malhotra claims that S&D held an equal joint beneficial interest in each of the Footscray and Hillside properties on an express trust for Mr Malhotra, independent of the terms of the Unit Trust, and that Balmford J held as such. He says that S&D was a party to that decision and is bound by it.[55]
[55]Closing submissions of Mr Malhotra,14 June 2010 [57]-[60].

On the other hand, S&D, Mr Tiwari and Mr Velos all contend that Balmford J only found that Mr Malhotra had a beneficial half interest in the Unit Trust and that apart from the rights he has under the trust he has no other interest in the Footscray and Hillside properties. Mr Velos contends that Balmford J’s judgment does not stand as authority that Mr Malhotra has any entitlement to the Footscray or Hillside properties outside the Unit Trust of which he is now the 50 per cent owner.[56]
[56]Transcript 15 March 2010, 42.

Mr Velos raises a preliminary point that Mr Malhotra is not entitled to make a claim for the proceeds in court other than through his claim to be beneficially entitled to units in the Unit Trust. In particular, Mr Malhotra is not entitled to claim that S&D held an equal joint beneficial interest in each of the Footscray and Hillside properties on an express trust for Mr Malhotra. Mr Velos argues that the formal claims made by Mr Malhotra in these proceedings do not include a claim other than through the Unit Trust.[57]
[57]Transcript 15 March 2010, 5.

Mr Velos refers to Mr Malhotra’s contentions of fact and law dated 27 November 2008. He says that the only basis in his contentions for him to hold any entitlement to the proceeds is through the Unit Trust because it is the Unit Trust which actually owns those two properties. I do not accept this submission. Mr Malhotra relies on and sets out the orders of Balmford J pronounced on 4 March 2005 and quotes orders 2(a) and (b).[58] Mr Malhotra asserts his claim is based on half ownership in both properties.[59] Mr Velos submits that that assertion must be read in the context of the contentions of fact and law and the wider litigation and that as such can only be made through the Unit Trust. Mr Velos relies on the fact that Mr Malhotra accepts that his claim to the proceeds is subject to the claims under the CBA securities and therefore his claim will involve issues of priority. Both Mr Malhotra and Mrs Tiwari agreed to give securities to the CBA. I do not accept that such a concession by him is inconsistent with his claims under the orders of Balmford J.
[58]Malhotra’s Contentions, CB B, 76 [9].
[59]Ibid, 98 [130].

In my opinion, Mr Malhotra has raised his claim to a proprietary interest in the properties on the basis of the findings and orders of Balmford J. It is not necessary, therefore, to consider whether or not he should have served amended points of claim to raise the issue.

In my opinion, Balmford J found and declared that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties. In that case the claims of the subsequent equitable interest holders, Mr Velos and Mr Tiwari, fall to be determined by well established equitable principles. I turn now to examine Balmford J’s reasons, findings and orders.

FINDINGS AND REASONS OF BALMFORD J DECISION[60]

[60][2005] VSC 25.

By a writ dated 19 August 2002, Malhotra took proceedings against Sheela Tiwari and S&D.[61] The General Endorsement attached to the writ alleged inter alia that:

at all material times, it was the clear and mutual intention of [Malhotra] and [Tiwari] that all property acquired by [S&D] would be beneficially owned in equal shares by Tiwari and Malhotra.

[61]CB A 4, 1449.

The General Endorsement also alleged that Sheela Tiwari signed a document which acknowledged:

…all assets, shares and other interests held and managed by the company or the trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per each, between me and Mr Dinesh Malhotra….

Further, the General Endorsement alleged that Mrs Tiwari and S&D, in breach of the trust referred to, have neglected or refused to account to Malhotra for the share to which he is entitled to.

A statement of claim was delivered on 25 September 2002.[62] It alleged four representations and alleged three agreements described as the marital agreement, the Footscray agreement and the Hillside agreement.
[62]CB A 4, 1455.

The first representation and marital agreement was as follows:

In or about January 1993 and following the Plaintiff’s marriage to the first Defendant, the Plaintiff and first Defendant:
(a) represented to each other (“the first representation”); and
(b) agreed
that they would commence to operate the business as partners and that they would become joint owners of the business in equal shares (“the Marital Agreement”). [63]

[63]Ibid, 1457 [6].

The second representation was alleged as follows:

[I]n or about June 1995, the first Defendant represented to the Plaintiff that there was no need for either party to seek any property settlement following their divorce because each of the parties would continue to operate the business for their joint benefit (“the second representation”).[64]

[64]Ibid, 1458.

The third representation was pleaded as follows along with the Footscray agreements:

In or about July 1996:-
(a) the Plaintiff and the first Defendant agreed to incorporate the business by setting up the second Defendant and creating the Trust; and
(b) the Plaintiff and the first Defendant agreed that they would acquire the Footscray property through the second Defendant with the intention of:
(i) becoming the joint beneficial owners of the Footscray property; and
(ii) continuing to operate the business from the Footscray property as joint beneficial owners; and further,
(“the Footscray agreements”)
(c) the first Defendant represented to the Plaintiff that:
(i) she would hold one of her shares in the second Defendant on trust for the Plaintiff;
(ii) she would hold half of the issued units in the Trust on trust for the Plaintiff.
(“the third representations”)[65]

[65]Ibid, 1458 - 1459 [11].

The fourth representation was alleged to be in a document dated 16 October 2000 entitled “Statement of Assets and Liabilities” as follows.[66]

[O]n 16 October 2000, the first Defendant on her own behalf and on behalf of the second Defendant duly declared, acknowledged and represented to the Plaintiff that, inter alia:
“….all assets, shares and other interests held and managed by the company or the trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per cent each, between myself and Mr Dinesh Malhotra ….”
(“the fourth representation”).[67]

[66]CB A 4, 1463.

[67]Ibid.

Other claims were made by Mr Malhotra under the Fair Trading Act 1999, the Trade Practices Act 1974 and Part IX of the Property Law Act 1958, but these were treated by Balmford J as being abandoned.[68]
[68][2005] VSC 25, [4].

In the prayer for relief Mr Malhotra claimed against each defendant, inter alia:[69]

A    A declaration that the Plaintiff is a joint beneficial owner of the Footscray property, Hillside property and the business.
B     A declaration that the first Defendant and/or the second Defendant hold one half of the business, Footscray property and Hillside property on an express, implied, resulting and/or constructive trust on behalf of the Plaintiff.
C    Alternatively, a declaration that the interest held by the first Defendant in the second Defendant and the Trust is held by her on an implied, resulting or constructive trust for and on behalf of the Plaintiff and the first Defendant equally.

[69]CB A 4, 1473.

Balmford J began her reasons for judgement by saying:

In this proceeding, initiated by writ on 19 August 2002, the plaintiff ("Dinesh Malhotra" or "Dinesh") seeks a declaration that he is a joint beneficial owner of three items of property (together referred to as "the properties"), namely;
An Indian grocery store business conducted at 580 Barkly Street West Footscray under the name "Bharat Traders International" ("the business");
The shop and dwelling at 580 Barkly Street, West Footscray ("580 Barkly Street") in which the business is conducted; and
A vacant block of residential land at 45 Boronia Drive, Hillside, in the Shire of Melton ("the Hillside property").[70]

[70][2005] VSC 25, [1].

Balmford J referred to Mr Malhotra’s claim of an express trust as the main claim. She said:

The principal relief sought by [Malhotra] is a declaration that he is a joint beneficial owner of the properties, on the ground that the defendants hold one half of each of the properties on an express trust for him.[71]

She said that in final addresses Mr Selimi (counsel for Malhotra) also relied on the principle of promissory estoppel and of constructive trusts (my emphasis).[72] Balmford J said that:

It is common ground that, subject only to two submissions of the defendant, if the Court is satisfied as to the making of certain representations by the defendant on all of which the plaintiff relies, the effect of those actions will be to entitle the plaintiff to the relief which he seeks.[73]

[71][2005] VSC 25, [4].

[72]Ibid.

[73]Ibid [11].

Balmford J accepted the evidence of Mr Malhotra as set out in her judgment as to the making of the representations on which he relied.[74] It is necessary to set out the evidence on which he relied as accepted by Balmford J on representations 3 and 4 as they were made at the same time as and after the company was introduced. It is then necessary to compare it to the representations pleaded.
[74]Ibid [202].

Balmford J describes the third representation as:

in or about July 1996 Sheela Tiwari represented to Dinesh Malhotra that she would hold one of her two shares in the company and half of the issued units on trust for him.[75]

As can be seen, she did not include the alleged “Footscray agreement” as part of the representation.

[75]Ibid [40].

The evidence Mr Malhotra relied on was found by Balmford J to be:

Dinesh Malhotra said Sheela Tiwari had asked him whether the setting up of the company and the unit trust would mean that they would still be joint and equal owners in the unit trust and the company, and he had said to her that there was no need to change and that would be the continuing arrangement. He was asked why he did not become a director of the company, and said that it would have been belittling to the relationship if he had said that now that they were buying real estate he did not trust her.[76]

[76]Ibid [106].

Balmford J accepted this evidence. It does not, however, support Mr Malhotra’s contention that S&D held the Footscray property on an express trust for him independent of the terms of the Unit Trust.

As to the fourth representation, Balmford J said the document headed “Statement of Assets and Liabilities” is essentially a statement that all assets of the company are owned equally by herself and Dinesh Malhotra.

The statement is as follows:

S&D International Unit Trust (the Trust) T/tee for
S&D International Pty Ltd (the company)
(ABN 59 903 547 433)
Statement of Assets and Liabilities
I, Sheela Tiwari, of 580 Barkly Street, West Footscray VICTORIA – 3012, Australia do solemnly state that:
1.    The Company/Trust documents show that I am the only shareholder of S&D International Unit Trust (the Trust) trustee for S&D International Pty Ltd (the Company)
2.    The documents also show that I am the sole director and secretary of the Company.
3    The Company owns and holds properties, businesses and other interests.
4.    The properties of the Trust and/or Company include along with commercial interests and properties, residential properties and chattels as well.
5.   Despite what the documents show and contrary to the very obvious, the fact is that all assets, shares and other interests held and managed by the Company or the Trust and everything I have personally acquired and own, are owned equally (and jointly), fifty per cent each, between myself and Mr Dinesh Malhotra who currently lives with me at the above address and has been associated with the company in various capacities and with myself and business even before the company was formed.
6.    Unless explicitly documented otherwise, any future acquisitions of the Company and/or the Trust and anything I acquire personally or for my children (or household) with finances used from the Trust or the Company directly or indirectly, will be held and owned as equal (and joint) owners as stated in clause 5.
7.    There is no other claim or claimant to the above assets. In case of a claim being waged, of any sort, by my children or my own family members (brother(s) or anyone) or my first husband Mr Markandey Tiwari, the litigation will involve and confine only my share of the assets.
8.    I will continue to hold in trust anything and everything Mr Dinesh Malhotra entrusts me with, from time to time.
9.    The fact of his association with the company implicit, explicit (as part time manager or director) or otherwise and/or even no association at all, does not and never will compromise his right of ownership as stated above.
Signed and executed
(Sheela Tiwari, Sole Director/Secretary)[77]

[77]Exhibit BV 25 to the affidavit of Mr Velos of 22 September 2009, court file (70B).

Mrs Tiwari signed and the company seal was affixed. A person also signed as a witness.

The representation in the statement is by both Sheela Tiwari personally and as the sole director and secretary of S&D. S&D signed the document and expressly acknowledged that it holds the assets on trust for both Mr Malhotra and Mrs Tiwari. The representations by Mrs Tiwari and S&D are expressed to be made “despite what the documents show.” S&D through its sole director does expressly acknowledge that the assets held by S&D or the Unit Trust are owned equally (and jointly) fifty per cent each between Mrs Tiwari and Mr Malhotra. This evidence supports Mr Malhotra’s contention that S&D held the Footscray property on an express trust for him independent of the terms of the Unit Trust. It is also consistent with Mr Malhotra, Mrs Tiwari and S&D proceeding on the basis that ownership of units in the Unit Trust gives the unit holder ownership of the assets of the trust.

As to the Hillside property, Balmford J accepted Mr Malhotra’s evidence that Sheela Tiwari and Mr Malhotra were looking for a block of land on which to build a house later on. She said;

They selected the block and it was bought in the name of the company, on the advice of Mr Yacoub. …. He and Sheela guaranteed the bank loan of $90,000. He said he did this because he owned half of the company which had bought the land.[78]

[78][2005] VSC 25, [111].

Mr Yacoub was the accountant to Mr Malhotra and Sheela Tiwari. He set up the Unit Trust. Balmford J accepted Mr Yacoub’s evidence that when the purchase of the Hillside property was discussed he suggested to Mr Malhotra that it should be bought in the name of the Unit Trust.[79]
[79]Ibid [178].

Balmford J said that her acceptance of the evidence as to the making of the four representations meant the requirements for the creation of an “express trust” were established.[80] Mr Velos contends that the express trust she referred to is of the units held by Mrs Tiwari in the Unit Trust and is not by S&D of the properties independently of the Unit Trust.
[80]Ibid [208].

Mr Malhotra contends that Balmford J found under representation three that there was an agreement between Mr Malhotra and Mrs Tiwari whereby they agreed to incorporate the business by setting up S&D and creating the Unit Trust; and that they agreed that they would acquire the Footscray property through S&D with the intention of becoming joint beneficial owners of the Footscray property and continuing to operate the business from the Footscray property as joint beneficial owners. These claims were made by Mr Malhotra in his plea of the Footscray agreement. It does not appear that Balmford J made any findings on this alleged agreement. Rather, as discussed above, her description of the third representation was limited to the representation pleaded after the Footscray agreement was pleaded in paragraph 11 of the statement of claim.

Mr Malhotra relies on the fourth representation made by Sheela Tiwari in the Statement of Assets and Liabilities, that confirms and acknowledges that all assets (which includes the Footscray and Hillside properties) were “held and managed” by S&D or the Unit Trust and were owned equally by Mr Malhotra and Mrs Tiwari.

Immediately after referring to Mr Malhotra’s claim of an express trust as his principal relief at the beginning of her reasons for judgment,[81] Balmford J dealt with the creation of an express trust and referred to Lord Wilberforce’s judgment for the Privy Council in Brisbane City Council v Attorney-General for Queensland[82] where it was said that to create a trust no formal words are required once the intention is clear. It is not clear what express trust she is referring to. Mr Malhotra contends it was a trust independently of the Unit Trust. Mr Velos argues that it was referring to an express trust in relation to the units of the Unit Trust. Mr Malhotra refers to the head note summary of the case which states: “whether express trust exists based on representations made.” Again that could refer to an express trust of the units in the Unit Trust.
[81]Ibid [4].
[82][1979] AC 411 at 421.

When one examines the evidence given by Mr Malhotra and accepted by Balmford J about the representations and her conclusion that she accepts that evidence as to the making of the representations on which he relies, it is not clear whether she reaches her conclusion that Mr Malhotra was an equal joint beneficial owner of the Footscray and Hillside properties on the ground that Mrs Tiwari held half the units in the Unit Trust on an express trust for Mr Tiwari or on the ground that S&D held the properties on an express trust for Mr Malhotra and Mrs Tiwari. Her acceptance of the fourth representation by Mrs Tiwari and S&D tends to support the latter.

In deciding there should be judgment for Malhotra Balmford J made a declaration to the effect that Mr Malhotra was an equal joint beneficial owner of:

(a) the Footscray and Hillside properties;

(b) the business;

(c) the issued shares in S&D; and

(d) the issued units in the Unit Trust.[83]

[83]Exhibit 4D-5, CB B, 109-111.

These declarations were binding as between the parties, Mr Malhotra, Mrs Tiwari and S&D.[84] Declarations may be used to establish title to land.[85] There are several further observations that may be made about her decision. Firstly, she does not expressly make findings on the three agreements alleged as pleaded: the marital agreement, the Footscray agreements or the Hillside agreement. The Footscray and Hillside agreements are alleged to have included the term that S&D would hold the Footscray and Hillside properties for Malhotra and Tiwari as joint beneficial owners. As to the Hillside property, no representation was alleged save the fourth contained in the Statement of Assets and Liabilities.
[84]Order 23.05; See generally discussion of the equitable remedy of declaration in Meagher, Gummow and Lehane, Equity: Doctrines and Remedies, 4^th edition, ch 19.
[85]Bridges v Mees [1975] Ch D 475.

Balmford J does refer to the purchase of the Hillside property where she says that it was bought in the name of the company on the advice of Mr Yacoub.[86] The inference can be drawn that the parties agreed that it would be bought in the name of the company.
[86][2005] VSC 25, [111].

Balmford J said the fourth representation was the most significant of the representations.[87] As indicated above that representation stated expressly that the assets held by the company were owned equally and jointly, fifty per cent each by Mrs Tiwari and Mr Malhotra. That representation is consistent with there being no trust outside of the Unit Trust but rather an understanding of the consequences of the units in the Unit Trust being held beneficially equally and jointly, fifty per cent each by Sheela Tiwari and Mr Malhotra.
[87]Ibid [203].

This view is supported by several factors. As mentioned, Balmford J made no reference to an express trust of the company’s assets independent of the Unit Trust. Further, Balmford J accepted and set out the evidence of Mr Yacoub, the accountant for the business since it was established, as follows:

[174] Jack Yacoub is Lebanese and it was not suggested that he was related to either of the parties. He is a Certified Practising Accountant and has been the accountant for the business since its inception. He said that Dinesh Malhotra was always the controlling partner. He owned the business for one year after the original three-member partnership and then in 1993 instructed Mr Yacoub that it was to be transferred to Sheela Tiwari, and this was done. However, Mr Yacoub's understanding from then on was that it was a partnership between them. After 1993 Dinesh Malhotra consulted him on many issues, including investment issues and how to improve the business. He never understood Dinesh Malhotra to be an employee of Sheela Tiwari; from 1993 onwards he was always a partner. He never gave the impression of being an employee and always said that he was part owner of the business.
[175] He said that in 1994-5 he advised Dinesh Malhotra to establish a corporate body for taxation reasons and to minimise personal liability. When the purchase of 580 Barkly Street was proposed, he advised that it should be purchased by the company. They agreed to establish a company as trustee for a unit trust. The initial meeting was with Dinesh Malhotra, and later he and Sheela Tiwari attended in Mr Yacoub's office to discuss the matter. They discussed in his presence calling the company S&D International, for the initials of Sheela and Dinesh. He spoke to both of them in English. Sheela Tiwari's English was "reasonably understandable". It was Dinesh Malhotra who was liaising and instructing him.
[176] He said that Dinesh Malhotra decided that the units in the unit trust should be in the name of Sheela Tiwari because the business was in her name, and she should be the sole director of the company. He advised Dinesh Malhotra that he should be an equal shareholder, but Dinesh said that he trusted Sheela and she would not do anything to hurt him. He observed a level of very good and solid trust between them. He continued to believe that they were really partners, and that they were the actual owners of 580 Barkly Street. He had prepared taxation returns for each of them since 1991 and continued to do so and to prepare returns for the company and the unit trust until 2001.

[177] He said that in 2002 Sheela Tiwari came to see him and wanted him to transfer all of the units in the unit trust to Dinesh Malhotra, because she was upset that he was going overseas to be married. She was crying, and explained that there was a relationship between them, which Mr Yacoub had not known before. He said to her that he acted for both of them, and could not transfer 100 per cent of the units, because she was entitled to 50per cent. It was left that they would meet again when Dinesh Malhotra returned from overseas. As a result of this discussion he prepared a transfer of one share in the company to Dinesh, minutes of a directors' meeting appointing him a director and a document intended to transfer 50 per cent of the units in the unit trust to him, and forwarded those documents to Sheela Tiwari.
[178] He said that when the purchase of the Hillside property was discussed he suggested to Dinesh Malhotra that it should be bought in the name of the unit trust.
[179] I have no reason not to accept the evidence of Mr Yacoub.

That evidence supports the view that Mr Malhotra and Mrs Tiwari were proceeding on the basis that the under the Unit Trust they remained the joint beneficial owners of the properties held by S&D.

Mr Velos contends that the submissions made to Balmford J by Mrs Tiwari and S&D’s counsel, Mr Jonathon Evans, establish that the claim for an express trust by Mr Malhotra was understood and dealt with by Mrs Tiwari on the basis that it did not extend to anything outside the Unit Trust.[88] Mr Velos relies on an affidavit by Mr Evans[89] which refers to the written submissions dated 22 December 2004 signed by Mr Evans and made to Balmford J.[90] Mr Evans deposed that his recollection was that in the proceedings it was never suggested by Mr Malhotra or his legal advisers that S&D held the assets of which it was the legal proprietor as trustee of any trust other than the Unit Trust, and in particular that it was never suggested that there was a separate trust of which S&D was trustee, on which S&D held assets on trust for Mr Malhotra, independently of the Unit Trust.[91] Mr Evans deposes that the fact such a suggestion was never put by Mr Malhotra in the proceeding before Balmford J is borne out by the pleadings and the reasons for judgment.
[88]Transcript 15 March 2010, 18.
[89]Court file (81B).
[90]Exhibit BV 22, to the affidavit of Mr Velos of 22 September 2009, court file (70B).
[91]Affidavit of Jonathan Evans of 12 March 2010, court file (81B) [2].

This evidence of Mr Evans further supports the view that the parties proceeded on the basis that the Unit Trust gave them a beneficial property interest in the properties held by the Unit Trust.

This conclusion is also supported by Mr Evans’ submissions which do not analyse in any detail the precise nature of the claims made by Mr Malhotra but only briefly refer to them by saying that Mr Malhotra’s primary relief is to seek declarations that he is entitled to a one-half interest in the assets of the Unit Trust. There is no argument in Mr Evans’ submissions on behalf of Mrs Tiwari and S&D that even if Mrs Tiwari did hold half of the units in the Unit Trust on an express trust for Mr Malhotra, Mr Malhotra was not an equal joint beneficial owner of the properties and the business.

As indicated above, Balmford J started her reasons for judgment by setting out Mr Malhotra’s claims including that he was a joint beneficial owner of three items of property. She identified the principal relief sought as a declaration that he is a joint beneficial owner of the properties, on the ground that the defendants (that is Mrs Tiwari and S&D) hold one half of each of the properties on an express trust for him.[92] Her Honour noted that it was common ground that, subject only to two submissions of the defendant, if the court is satisfied as to the making of certain representations by the defendant on all of which the plaintiff relies, the effect of those actions will be to entitle the plaintiff to the relief which he seeks.[93]
[92][2005] VSC 25, [4].
[93]Ibid [11].

Mr Velos contends that Balmford J only considered Mr Malhotra’s claims in the context of the Unit Trust.[94] It may be the case that Balmford J considered Mr Malhotra’s claim in the context of the Unit Trust but that does not affect one way or the other her finding that S&D held the beneficial interest in the (otherwise trust) properties on behalf of Mrs Tiwari and Mr Malhotra equally and jointly.
[94]Transcript 15 March 2010, 32-38.

I accept that Balmford J made her findings without any detailed consideration of the terms of the Unit Trust but rather on the basis of the representations made by S&D and Mrs Tiwari. I agree that it is not clear from the judgment whether Balmford J reached her conclusions on the basis that the units in the Unit Trust were held on an express trust for Mr Malhotra or rather that S&D held the assets on an express trust for Mr Malhotra or a combination of both. In my opinion, the resolution of this issue is not necessary for me to decide. What is clear is that Balmford J found on the basis of the evidence, including the Statement of Assets and Liabilities, that as between Mr Malhotra, Mrs Tiwari and S&D as trustee of the Unit Trust, Mr Malhotra and Mrs Tiwari were the joint beneficial owners of the properties held by S&D. That was the claim of Mr Malhotra and he succeeded on that claim. She also found he was an equal joint beneficial owner of the business; the issued shares in S&D; and the issued units in the Unit Trust.[95]
[95]Exhibit 4D-5; CB B, 109-111.

Mr Velos sought to attack the orders themselves. Mr Velos contended at one stage that the orders were made in the absence of anybody representing Mrs Tiwari or S&D.[96] That submission was withdrawn as he subsequently acknowledged that Mr Lowenstein of counsel appeared on the making of the orders. Even then Mr Velos argues that Mr Lowenstein would not have had the benefit of the knowledge of what happened or the file or the brief. I do not agree with these submissions. S&D and Mrs Tiwari were represented and further the order has not been successfully appealed by either S&D or Mrs Tiwari.
[96]Transcript 8 February 2010, 143 and 190.

On 12 July 2005, Mr Malhotra filed an originating process in the Supreme Court of Victoria seeking an order terminating the winding up of S&D (this process had commenced on the basis that S&D was insolvent). Mr Malhotra also sought orders disallowing the liquidators’ remuneration on the ground that they had misconducted themselves.[97] Mandie J refused the application. In the course of his reasons, his Honour said of Balmford J’s findings and declarations:[98]

By judgment of the Court dated 4 March 2005 the plaintiff was granted declarations that he was the “equal joint beneficial owner” of the Footscray property, the Hillside property, the business, the issued shares in the Company and the issued units in the Trust. It was common ground in the present proceeding that the true effect of those declarations was that the plaintiff was an equal unit holder in the Trust and in the Trust assets (subject, of course, to any liabilities of the Trust). That is to say, the plaintiff was an equal unit holder in the Trust, with Sheela (or his successors and transferees) being entitled to the other half of the units thereof. Thus, the plaintiff was not entitled, other than under the Trust, to any beneficial or equitable interest in the Footscray property, the Hillside property or the business. His entitlement arose under the Trust, as a beneficial holder of one-half of the units thereof.

He noted that although the judgment of Balmford J referred to Malhotra’s entitlements as being “joint” (probably because of the terminology used in the Statement of Assets and Liabilities), Malhotra had become registered as a several holder on one-half of the units in the Unit Trust. [99]

[97]Re S&D International Pty Ltd (No 1); Malhotra v Tiwari [2005] VSC 496 (“Mandie J judgment”), [5]; CB A 3, 1144.

[98]Mandie J judgment [27].

[99]Ibid, endnote 6; CB A 3, 1151.

Mr Malhotra, S&D and Sheela Tiwari were all parties to those proceedings. Mr Malhotra was represented by Mr Salimi of counsel who also acted for him before Balmford J. Mr Velos contends that Mr Salimi’s concession was on instructions from Mr Malhotra.[100] In my opinion, Mr Malhotra’s concession, if it be that, can have no bearing on the proper construction of Balmford J’s orders nor on her reasons for judgment.
[100]Transcript 15 March 2010, 39.

Mandie J is well recognised and respected as a very experienced and learned judge. He now sits on the Court of Appeal. I would be loath to disagree with any matter he expressed a considered view on. Nevertheless, Mandie J made those observations on the basis that Balmford J found that Mr Malhotra acquired his interest in the properties solely through his beneficial interest in the units in the Unit Trust. In my view, the issues between the parties included the issue of whether Mr Malhotra was an equal beneficial owner of the Footscray and Hillside properties. Even if Balmford J did reach the conclusion that Mr Malhotra was an equal beneficial owner of the Footscray and Hillside properties on the basis of him being an equal beneficial owner of the units in the Unit Trust, that was the claim that was made by Mr Malhotra and in issue and Balmford J so found and ordered. The orders she made are determinative of that issue between the parties and are binding on them.

The decision can only be overturned on appeal. The fact that the parties may have agreed in other proceedings that the order was to a different effect, does not alter the decision or its actual effect. In my opinion, the observations of Mandie J are difficult to reconcile with Balmford J’s finding and orders that Mr Malhotra was in law the equal beneficial owner of the Footscray and Hillside properties. In my view, the concession or common ground made before his Honour was incorrect and inconsistent with the clear findings and orders of Balmford J and are of no effect.

In 2006, Horne and Vince applied to remove Mr Malhotra’s caveats.[101] Gillard J did not doubt that Mr Malhotra had caveatable interests in the land,[102] but found that the grounds of claim were not correctly stated.[103] Accordingly, he refused the application and granted leave to Mr Malhotra to amend the grounds in the caveats to “a half interest as a beneficial owner of 50 units in a Unit Trust established by Deed on 29 July 1996”. His Honour said of the law supporting his conclusions:

The law is clear. A holder of a unit in a unit trust has an equitable interest in all the property of the trust, subject, of course, to the terms of the trust deed. See Read v Commonwealth, and Costa and Duppe Properties Pty Ltd v Duppe. There is no doubt that a unit holder has a proprietary interest in the assets of the trust fund, and the two pieces of land in question form the trust fund. Those general principles, of course, are subject to the particular provisions of the trust deed. Counsel for the respective parties agreed that in the light of the well established principles and the terms of the trust deed, Mr Malhotra had at least a half interest in each of the properties and accordingly, he had, on the evidence, a caveatable interest.[104]

[101]Under s 90(3) of the Transfer of Land Act 1958.

[102]S&D International Pty Ltd (in liq) v Malhotra [2006] VSC 280 (“Gillard J judgment”), [17].

[103]Ibid [14].

[104]Ibid [22].

Like Mandie J, Gillard J was a highly respected and learned judge. He did not, however, make any express reference to Balmford J’s orders. Rather, he proceeded on the basis that all Balmford J had found and ordered was that Mr Malhotra was an equal beneficial owner of the units in the Unit Trust. The observations of Gillard J do not alter my view.

Accordingly, I find that it has been held and decided as between S&D as trustee of the Unit Trust, Sheela Tiwari and Mr Malhotra, that Mr Malhotra is as an equal joint beneficial owner of the Footscray and Hillside properties.

THE INTEREST OF MRS TIWARI

It is implicit in the decision and orders of Balmford J that Sheela Tiwari is also an equal joint beneficial owner of the Footscray and Hillside properties. Sheela Tiwari is not a party to the current proceeding. Her son Pradeep Tiwari did give evidence that his mother was aware of these proceedings. She has not sought to be joined as a party. I do not believe I am able to make any orders which might affect her interests, if any, without her being joined as a party and I shall proceed accordingly.

MR MALHOTRA’S INTEREST AS A UNIT HOLDER

If I am wrong and Mr Malhotra interest is solely as an equal joint beneficial owner of the units in the Unit Trust, then I find that Mr Malhotra does not hold a proprietary interest in the properties or their proceeds and that his interest is merely as an unsecured creditor of S&D.[105]
[105]Velos April Submissions [17]-[66].

The plaintiffs submit that under the Unit Trust the holders of a unit in the trust are beneficial owners of the trust property and in particular the Footscray and Hillside property.[106] They submit that depending on the terms of the relevant trust deed, a unit in a unit trust typically confers on its holder a proportionate proprietary interest in all the property which for the time being is subject to the trust. The plaintiffs contend that this is the case in respect of the Unit Trust. They say the content of those rights may vary from case to case, depending on the terms of the relevant trust deed, but at the very least, it comprises a right to compel the due administration of the trust.[107]
[106]Plaintiffs April Submissions [73].
[107]Ibid.

According to Mr Velos (Mr Tiwari supports these contentions)[108] under the terms of the Unit Trust, Mr Malhotra has an interest in the trust fund as a whole but does not have any interest in individual assets, including the Footscray and Hillside properties, and that on the basis of the S&D trust deed (the “Trust Deed”), equitable ownership of the two properties always remained with the trustee, S&D. Mr Velos submits that accordingly that for the purpose of s 73 of the Transfer of Land Act Mr Malhotra is effectively an unsecured creditor of the Unit Trust. Mr Velos submits that Mr Malhotra has no proprietary entitlement to any of the monies in court.[109] Mr Velos concedes that Mr Malhotra has rights protected by equity and agrees with the plaintiffs that Mr Malhotra has the enforceable right to proper administration of the Unit Trust but says that right exists whether or not he has any beneficial interest in the individual Unit Trust assets.[110] I now turn to the relevant authorities.
[108]Tiwari April Submissions [117]-[120].
[109]Velos April Submissions [64]-[65].
[110]Ibid [66].

In Charles v Federal Commissioner of Taxation[111] the High Court of Australia held that a unit in the trust deed before them conferred a proprietary interest in all the property which for the time being is subject to the trust of the deed. Mr Velos accepts that this decision was regarded for some time as seminal authority for the proposition now put by the Plaintiffs, but is now no longer. In Costa & Duppe Properties v Duppe[112] Brooking J of the Supreme Court of Victoria recognised that a unit holder in a unit trust does have a proprietary interest in the trust assets. Brooking J was dealing with a dispute between a trustee and a unit holder, where the unit holder had lodged caveats claiming an equitable interest in three parcels of land held by the trustee. Brooking J held that the unit holder had a proprietary interest in all the property and therefore in each asset of the trust, and upheld the caveats. Mr Velos concedes that the facts of this case do have similarities to the present case. He contends, however, that even in that case Brooking J specifically noted that a unit holder does not always have a proprietary interest in trust assets, saying:

Things are not always what they seem. A unit is an undivided part or share in the trust fund, but it does not necessarily follow from this definition that the holder of a unit has a proprietary interest in any of the assets making up the trust fund… By cl. 7(a) of the deed the beneficial interest in the trust fund shall be vested in the unit-holders, but “beneficial interest” does not always mean an interest that is proprietary; moreover the effect of an instrument in relation to the creation of proprietary interest depends, not simply on any express provision it may contain in that regard, but on what effect the law will give to the instrument considered as a whole in the light of applicable principles.”[113]

[111](1954) 90 CLR 598 at 609.

[112][1986] VR 90.

[113]Ibid [93].

Mr Velos contends that Brooking J then made it clear that he was primarily relying on Charles as authority for his argument that the unit holder in this case had a proprietary interest in the trust asset and that accordingly, if Charles is no longer good law on the question of the general proprietary interest of a unit holder, then Costa falls with it.

Mr Velos argues that in 1998, in Commissioner of Stamp Duties (NSW) v Buckle, [114] the High Court of Australia recognised that the entitlement of beneficiaries in respect of the assets held by the trustee which constitutes the “property” to which the beneficiaries are entitled in equity is to be distinguished from the assets themselves.He contends that the High Court recognised that a “trust fund” is not necessarily the same as the individual trust assets held by the fund and that a beneficiaries’ entitlement to the fund, as against a trust asset, may differ.
[114](1998) 192 CLR 226 at 246, [48].

Mr Velos submits that in CPT Custodian Pty Ltd v Commissioner of State Revenue[115] (CPT’s case). The High Court has reconsidered the nature of the interest a unit holder has in particular trust fund assets and declined to follow Charles or Costa. In CPT’s case the High Court was considering whether a unit holder was an “owner” for the purposes of land tax. There were specific provisions dealing with the definition of “owner.” The plaintiffs submit that the High Court did not deal with the broader question of the nature of a unit holder’s interest in property of a unit trust.[116] However, as I see it, the High Court did in fact deal with the issue at general law in response to a submission by the Commissioner that as a matter of general law, because the trust deeds conferred upon each unit holder fixed and ascertainable rights, in relation to the distribution of income and capital, and not depending upon the exercise of discretion, the trust deeds conferred upon each unit holder an equitable estate or interest in each asset from time to time comprising the trust fund; (ii) no other person or class had any such rights or interests; and (iii) these equitable estates or interests answered the statutory requirement in the definition of "owner" of entitlement to land for any estate of freehold in possession.[117]
[115](2005) 224 CLR 98.
[116]Plaintiffs April Submissions [72].
[117](2005) 224 CLR 98, 111 [22].

The High Court rejected these propositions, accepting that a trust deed could be so framed that a trustee held both the legal and equitable proprietary interests in the trust assets and that the unit holders did not have an equitable interest in specific trust assets. The High Court referred with approval to the decision of Griffith CJ in Glenn v Federal Commissioner of Land Tax,[118] in which his Honour, referring to an argument for the “Revenue” in that case, said it was:

based on the assumption that whenever the legal estate in land is vested in a trustee there must be some person other than the trustee entitled to it in equity for an estate of freehold in possession, so that the only question to be answered is who is the owner of that equitable estate. In my opinion, there is a prior inquiry, namely whether there is such a person. If there is not, the trustee is entitled to the whole estate in possession, both legal and equitable.

In defence of the plaintiffs’ claims against him, Mr Tiwari relies on the release granted to him in the deed of settlement executed by the plaintiffs on 15 February 2008 (the “Deed of Settlement”).[294] The deed came about as follows. In a statement of claim filed in the Federal Court of Australia on or about 31 January 2008, the plaintiffs alleged that S&D contributed $79,500 towards Mr Tiwari’s purchase of the Hoppers Crossing property made up of two payments in July and September 2004. The plaintiffs allege that by reason of these contributions, Mr Tiwari holds the Hoppers Crossing property on a resulting or alternatively, an implied trust for S&D. Alternatively, the plaintiffs allege that $79,500 was loaned to Mr Tiwari and remains outstanding to S&D. Alternatively to these claims, the plaintiffs allege that the two payments to or for the benefit of Mr Tiwari were unreasonable director-related transactions within the meaning of s 588FDA of the Corporations Act 2001 and are voidable under the Act. The plaintiffs further allege against Sheela Tiwari that S&D advanced to Sheela Tiwari a total sum of $303,660.77, including $226,358.60 lent on 12 July 2002 to fund the purchase of the Point Cook property which Mrs Tiwari has not repaid.[295]
[294]Exhibit PT-11 to Pradeep Tiwari’s affidavit of 8 February 2010 (not in CB). See Tiwari’s Reply [53-63].
[295]Exhibit PT-10 to Mr Tiwari’s affidavit of 8 February 2010 (not in CB) [16] and Schedule 1.

Finally, the plaintiffs allege that each of Mr Tiwari and Sheela Tiwari owed duties as directors of S&D under ss 180, 181 and 182 of the Corporations Act 2001. The plaintiffs allege that if any of the advances made to Mr Tiwari or Sheela Tiwari (that is the $79,500 in relation to the purchase of the Hoppers Crossing property and the $313,620.77 advance to or for the benefit of Sheela Tiwari) were loans, then Mr Tiwari and Sheela Tiwari breached their duties as directors and S&D has suffered loss and damage. The plaintiffs claim the relief set out in the application.

Sheela was not a party to the Deed of Settlement. Recital D of the deed provided:

In order to avoid the uncertainty, cost, inconvenience, delay and expense of litigation, and without any admission as to liability the parties have agreed to settle the disputes between them the subject of the Proceeding on the terms contained herein.

In clause 7.1 of the Deed of Settlement, the plaintiffs agreed to the following:

Conditional upon and subject to receipt of the Settlement Sum and any other sums owing pursuant to this to Deed, the Applicants release and forever discharge Pradeep from all claims, liabilities and causes of action which but for this Deed they had, now have or at any time in the future may have against Pradeep arising as a result of:
(a) the First Payment; and
(b) the Second Payment;
(c) the allegations referred to in Recital B.

The “First Payment” was a reference to a payment of $39,500 which had been paid by S&D on behalf of Mr Tiwari as a deposit on the purchase of the Hoppers Crossing property.[296] The “Second Payment” was a reference to a loan of $40,000 made by the company to Mr Tiwari in September 2004.[297] These transactions are not presently relevant. Relevantly, the “allegations referred to in Recital B” include allegations, “amongst other things”, that Mr Tiwari:
[296]See Recital B(iv) in the Deed of Settlement.
[297]See Recital B(v) in the Deed of Settlement.

(a) was a director of S&D at all material times;

(b) entered into a contract to purchase the property at 25 Richards Road, Hoppers Crossing in July 2004;

(c) became the registered proprietor of the Hoppers Crossing property on or about 9 October 2004;

(d) received the benefit of the “First Payment”;

(e) held part of his interest in the Hoppers Crossing property on a resulting or implied trust for S&D;

(f) received the benefit of the “Second Payment”;

(g) alternatively, received the benefit of the First Payment and the Second Payment as unreasonable director-related transactions;

(h) alternatively, breached his duties under sections 180, 181 and 182 of the Corporations At 2001 by authorizing the First Payment and the Second Payment.

Recital C provided:

Pradeep
(i)asserts that the Company was the trustee for the S&D International Unit Trust;
(ii)asserts that, as trustee for the Tiwari Family Trust, he is the holder of 50 per cent of the units in the S&D International Unit Trust;
(iii)asserts that the First Payment was a distribution of income to him as trustee for the Tiwari Family Trust;
(iv)admits that the second payment was a loan to him by the Company;
(v)otherwise denies the allegations and the claims referred to in Recital B above.

Mr Tiwari contends that by reason of the words “amongst other things” in the opening words of Recital B, the release is wide enough to include claims against him for breaches of his duties as a director of S&D insofar as he permitted the advancing of $226,358.60 to assist his mother’s purchase of the Point Cook property, even though there is no specific reference to that claim in Recital B.[298]Insofar as there is any ambiguity in the terms of the release, he relies on the contra preferentem rule of construction.
[298]The plaintiffs presume that the reference to “ss 181, 182 and 183” in paragraph 60 of Mr Tiwari’s Reply is intended to be a reference to ss 180, 181 and 182.

The plaintiffs submit that the allegation made in paragraph 16 of the Federal Court statement of claim (as to the advancing of $226,358.60 in 1992 to fund the purchase of Point Cook) was an allegation against Sheela, not Mr Tiwari. They say that the object of the settlement deed was to release Mr Tiwari from the claims made against him “arising as a result of” the allegations referred to in Recital B. The plaintiffs contend that all of the allegations listed in Recital B are allegations against Mr Tiwari relating to his acquisition of the Hoppers Crossing property in 2004.

The plaintiffs contend that the words “amongst other things” should be construed accordingly as a reference to allegations made in the Federal Court proceeding against Mr Tiwari. They contend that insofar as the release relates to breaches of Mr Tiwari’s statutory duties as a director, it is concerned with the “First Payment” and the “Second Payment” made in 2004, not with the advancing of money to Sheela in 2002.

As indicated above, there are separate claims against Mr Tiwari in relation to the “First Payment” and the “Second Payment”, and against Sheela Tiwari in relation to the $303, 620.77. On the other hand, the alleged breaches of duty against Mr Tiwari include the assertion that Mr Tiwari was appointed a director on 8 April 2002, that is before the advances to Sheela Tiwari commenced. Further, the statement of claim alleges that Mr Tiwari breached his duties in relation to “the sums, referred to in paragraphs 8 to 16 inclusive.” Paragraph 16 deals with the advances to or for the benefit of Sheela Tiwari.

I acknowledge that Recital B only expressly sets out the allegations relating to the “First Payment” and “Second Payment”. On the other hand, Recital D expressly states that the purpose of the settlement is “to settle the disputes between them the subject of the Proceeding on the terms contained herein.” These disputes include the allegation that Pradeep Tiwari had breached his duties as a director in relation to the advances made to his mother and by reason thereof S&D had suffered loss and damage.

The plaintiffs contend that the relevant allegation in the present proceeding is not that S&D advanced $226,358.60 to Sheela, but that Mr Tiwari permitted S&D to mortgage the Footscray and Hillside properties. As discussed above, I have assumed from the breaches alleged that S&D do allege that Mr Tiwari is liable for his breaches of director’s duties for the Sheela advance and the plaintiffs expressly make that allegation under the Barnes v Addy claim.

In my opinion, “amongst other things” must be read in context. The context here includes the purpose of the release referred to in Recital D. The context also includes a claim against Mr Tiwari that relates to the advance of moneys to Sheela Tiwari to purchase the Point Cook property. The release contemplates causes of action that have not as yet been formulated. It provides that the “Applicants release and forever discharge Pradeep from all claims, liabilities and causes of action which but for this Deed they had, now have or at any time in the future may have against Pradeep arising as a result of” the allegations against him in the statement of claim. I agree that the express claims, and Pradeep’s defence thereto relating to the “First Payment” and “Second Payment” are set out in detail. But I find that the intention of the parties as expressed in the document was to release him from all claims by S&D arising out of all the payments pleaded including the payment of $226,000 for the purchase of the Point Cook property.

WHAT EFFECT DOES THE RELEASE HAVE?

In my view, the release releases Mr Tiwari for any liability arising out of S&D’s advance to Sheela Tiwari of $226,000 which she used to purchase the Point Cook property. The mortgages by themselves do not cause any loss to S&D. Rather, it is the debts secured by them that causes the loss. The debts secured include the moneys advanced to Sheela Tiwari. Accordingly, I find that Mr Tiwari has been released from the claims made against him by the plaintiffs under the Corporations Act 2001 and Barnes v Addy.

DID S&D BREACH ITS DUTIES AS A TRUSTEE?: THE VELOS CHARGES

For the following reasons, I find that S&D breached its duties as trustee in giving the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.

In about April 2002, after around the time Mr Malhotra had lodged his caveats, Velos & Davis were retained by Sheela to have the caveats removed.[299] Mr Velos alleges that his firm was also retained by S&D. As a result of the steps taken by Velos & Davis to have the caveats removed, on 19 August 2002, Mr Malhotra began his Supreme Court proceedings against Sheela and S&D. He filed his statement of claim on 25 September 2002. In October 2002, Sheela’s counsel discovered affidavits which Malhotra had filed in Kapoor’s Family Court proceedings against him, in which he had disavowed any interest in the properties or the Unit Trust. Velos & Davis acted for Sheela and S&D throughout the proceeding until its conclusion marked by Balmford J’s judgment which was delivered on 16 February 2005.
[299]Mr Tiwari alleges that Velos & Davis advised him that he should be appointed a director of S&D. This allegedly took place on 8 April 2002.

By October 2004, Velos & Davis were owed fees of $41,236.58 for work done on Mr Malhotra’s proceeding. Velos & Davis were pressing for payment and for provision to be made for the trial which was about to start. On 6 October 2004, David Mond, the Tiwari’s accountant, telephoned Mr Velos to discuss the funding of the defence of the Malhotra proceeding.[300] Later the same day, Mr Tiwari telephoned Mr Velos and made a proposal, which Mr Velos rejected.[301] In a letter addressed to “Mrs Sheela Tiwari, Mr Markandy Tiwari & Pradeep Tiwari” dated 7 October 2004, Velos & Davis proposed that they make certain payments on account of outstanding charges and otherwise “agree to us lodging an equitable charge over all your properties in order to secure our fees and that of the barrister”.[302] The Tiwaris agreed to this.[303] Although the proposal made no specific mention of the Footscray property, the Hillside property or other property of S&D, on 8 October 2004, Sheela and Mr Tiwari executed two documents purporting to charge the Footscray and the Hillside properties with payment of Velos & Davis’ costs for Mr Malhotra’s proceeding.[304] Mr Tiwari said that the documents were presented to him as a fait accompli without any advice in relation to the giving of charges over the Unit Trust’s properties.[305] He said he did not know what security over assets meant at the time.[306] He claimed that he never turned his mind to the effect of the charges should Malhotra’s claims succeed, because he was told that there was no possibility that his mother and S&D would lose the case.[307] As at 8 February 2010, the amount claimed by Velos as being secured by the equitable charges was $218,550, including interest of $71,627.29.[308]
[300]CB A 4,1441 [17].
[301]CB A 4, 1442 [19-21].
[302]CB A 4, 1442 [19-21].
[303]CB A 4, 1443 [23].
[304]CB A 3, 992 and 993.
[305]Transcript 16 March 2010, 185 [18-25].
[306]Ibid.
[307]Transcript 16 March 2010, 185 [31], 186 [7].
[308]Exhibit D4-2; Transcript 9 February 2010, 261 [21] – 262 [11].

Obviously, Velos & Davis were fully aware of Mr Malhotra’s caveats. They were central to the case they were conducting for the Tiwaris. S&D was a defendant to the proceeding. The plaintiffs claim that S&D was joined only as a matter of form to bind it. The plaintiffs say that in substance the only dispute at issue was between Mr Malhotra and Sheela. Mr Malhotra claimed that by reason of representations and agreements Sheela had made to and with him that he was entitled to, inter alia, a declaration that he was a joint beneficial owner of the Footscray property, the Hillside property and the business.

Mr Velos claims that the orders sought by Malhotra in the Malhotra proceeding had the “potential to impose financial penalties on the company and also to deal with and dilute the trusts assets, which the company, as trustee, had a duty to protect and preserve”.[309] Accordingly, he argues that it was “necessary for [S&D] to be defended and to be legally represented in the proceeding to protect its interests.”[310] Similarly, Mr Tiwari contends that because the proceeding had been commenced against it, S&D had “a duty/obligation to defend itself if it was advised that the claims made against it in the proceeding were without merit.”[311]
[309]Velos Reply [17(a)].
[310]Ibid [17(b)].
[311]Tiwari Reply [20(b)].

I find that S&D’s own interests were not in issue. The matters in dispute went entirely to the beneficial ownership of the assets it held on trust. The competing beneficiaries were Sheela Tiwari and Mr Malhotra. Of course, a trustee usually has the duty to preserve and protect the trust assets. In this case the trust assets were not at risk. S&D’s right to hold the legal title on trust was not at issue. There was no threat to the assets by a third party. Rather, there was only a fight between a former husband and wife as to who were the ultimate beneficiaries of the assets that S&D held on trust. If Mr Malhotra succeeded, then he did seek orders for the sale of the assets, but that was only as a consequence of a finding as to his beneficial ownership.

There are strict limits on a trustee seeking access to trust assets to indemnify the trustee for legal expenses it has incurred. Where a trustee has brought or defended legal proceedings, its personal obligation to meet those costs is a distinct issue from whether or not it is entitled to be indemnified out of the trust assets. In Adsett v Berlouis it was held:

The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee’s entitlement to recoupment out of the bankrupt’s estate: Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate.[312]

[312] Adsett v Berlouis (1992) 37 FCR 201, 210.

A trustee is only entitled to be indemnified if the legal expenses have been “properly” incurred. In fact, the trustee cannot justify the improper incurring of legal expenses merely because it has acted on legal advice. In Re Beddoe,[313] Bowen LJ said:

The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust – a proposition in which the word ‘properly’ means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of the trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that the trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him.[314]

[313][1893] 1 Ch 547, 562.

[314]Ibid 560 per Bowen LJ, quoted with approval by the Full Court in Adsett v Berlouis (1992) 37 FCR 201, 211.

S&D, under the control of Sheela Tiwari, was fully aware that the sole issue in the dispute was whether Sheela Tiwari was the sole beneficiary of the assets it held on trust or whether Sheela Tiwari and Mr Malhotra each held an equal interest in the trust assets. The trust assets were not at risk. There was no justification for S&D securing the very trust assets that Malhotra claimed an interest in to meet the costs incurred by Sheela Tiwari in resisting the claim. The orders that Mr Malhotra sought were all sought as a beneficiary and only as between himself and Sheela Tiwari.

Insofar as Malhotra sought as against S&D (as well as Sheela Malhotra):

(a) compensatory damages and/or equitable compensation[315];
[315]CB A 4, 1474 [G].

(b) damages pursuant to the Fair Trading Act 1999 and section 82 of the Trade Practices Act 1974[316];
[316]CB A 4, 1474 [H].

(c) exemplary damages[317];

(d) interest pursuant to statute and costs[318]

the plaintiffs submit that such claims were based on the premise that S&D, in denying Mr Malhotra’s beneficial rights, had acted in breach of its obligations as trustee. They contend that such orders, had they been made, would need to be satisfied by S&D (to the extent they were not satisfied by Sheela) out of its own resources. They contend that S&D would not be permitted to draw on trust property to satisfy orders directed at remedying its breaches of trust. Nor was it entitled to fund its defence of such claims out of trust property. I accept these submissions.

[317]CB A 4, 1474 [L].

[318]CB A 4,1474 [M] and [N].

I find that S&D improperly exercised its powers as trustee and in breach of trust in giving equitable charges over the Footscray and Hillside properties to secure Velos & Davis’ costs in defending the proceeding. By so encumbering the properties, S&D failed to act honestly and in the best interests of the beneficiaries. In particular, it failed to act impartially and consistently with the interests of all of the beneficiaries of the trust funds. In my view, a trustee acting reasonably and honestly in the face of a dispute between two persons claiming to be the true beneficiaries, who had both been involved in the acquisition of the assets, would not pledge the very assets in dispute in support of one of the parties to the dispute. Its proper function was to abide by the decision of the court on the identity of the beneficiaries and the extent of their interests.

DID TIWARI KNOWINGLY ASSIST IN S&D’S BREACH OF DUTY?

For the following reasons, I find that Mr Tiwari is liable as a constructive trustee for the breach of fiduciary duty of S&D in giving in giving the equitable charge to Velos & Davis to secure all the legal costs of Sheela and S&D (whether indemnifiable by the trust or not).

The breach was a dishonest breach as it involved benefiting Sheela at the expense of the trust. In my view, Mr Tiwari should be taken as having the requisite knowledge of the breach as a reasonable and honest person knowing what Mr Tiwari did would have known of the breach.

DID S&D SUFFER ANY AND WHAT LOSS?: VELOS CHARGES

I find that S&D suffered loss and damage by the giving of the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.

DID MR TIWARI BREACH DIRECTOR’S DUTIES?: THE VELOS CHARGES

For the following reasons, I find that Mr Tiwari contravened his duties as a director of S&D under ss 180, 181 and 182 of the Corporations Act 2001 by authorising and facilitating the giving of the Velos & Davis charges, paying fees to Velos & Davis and incurring liabilities to Velos & Davis for fees and expenses.

I have already discussed these sections and the relevant tests. By the time S&D was asked to give security to Velos & Davis, Mr Tiwari had been advised by Velos & Davis, and three members of counsel, that Mr Malhotra’s claims were hopeless. On the other hand, Mr Tiwari was aware that the dispute was one between his mother and Mr Malhotra. Mr Tiwari claims that he was advised Velos & Davis to give the security.[319]
[319]Transcript 184, line 14.

In his evidence, Mr Tiwari sought to justify his actions on the basis that there were claims made against S&D. After carefully observing him in the witness box, I did not find him a reliable witness. His evidence struck me as being a reconstruction to support a possible defence to the claims made against S&D and himself. I am not satisfied that the existence of the claims made against S&D in Mr Malhotra’s claims played any material part in his decision to authorise and facilitate S&D granting the securities. I do not accept that he considered the interests of S&D independently or as a trustee that was obliged to act honestly and for the benefit of the beneficiaries. He gave no evidence of having taken advice on whether or not to authorise the granting of the securities. Velos & Davis do not appear to have given any advice on the matter, and would have had a hopeless conflict of duty and interest had they done so. They were plainly motivated to recover outstanding fees and to secure payment in advance of costs for the trial. The interests of S&D were not advanced by granting the securities to meet all the costs of the proceedings. I do not accept Mr Tiwari’s evidence that Velos & Davis advised Mr Tiwari that S&D should give the securities. S&D as trustee was duty bound to act honestly and in the best interests of the beneficiaries. The identity of the beneficiaries and the extent of their interests was to be decided by the court. Any honest and prudent trustee would not have elected to finance the costs of one beneficiary in such litigation.

Although the test for whether a director has acted honestly and bona fide is to be ascertained subjectively by asking whether the director acted bona fide in what he or she believed to be the best interests of the company as a whole, the court is able to assess the actions of the director objectively in deciding whether or not to accept his or her protestations that he or she did so. In doing so, the court is entitled to take into account whether a reasonable and honest director could have formed that belief. In my view, no reasonable director of S&D as trustee, knowing what Mr Tiwari knew, could have reasonably considered it was in the best interests of the trust to finance the costs of one claimant to the trust fund over another claimant, particularly in the circumstances of this case where both claimants, who were parties to the proceeding, had together built up the assets of the trust and the true entitlements of each was the very matter being decided in the case to financed. His actions purely benefited one person, being his mother. They were of no material benefit to S&D.

Even if S&D could have incurred some legal costs to ascertain its interests and be properly indemnified out of the trust funds to ascertain its position, there was no justification for pledging the main assets of the trust funds to meet Sheela Tiwari’s costs. In any event, for reasons previously given, the proceedings presented no risk to the trust assets. Any risk to S&D was a matter for its own moneys.

I therefore find that Mr Tiwari contravened ss 180, 181 and 182 of the Corporations Act 2001 and I will make an appropriate declaration. Before considering the question of compensation, I will consider the Barnes v Addy claim against Mr Tiwari.

BARNES v ADDY: VELOS LIABILITIES

As determined above, S&D breached its duties as a trustee in financing Mrs Tiwari’s legal costs. Mr Tiwari was a party to the decision to agree to do so and signed the equitable charges to secure those costs. He did so knowing that the dispute was between Mr Malhotra and his mother over the beneficial ownership of the assets held by S&D as trustee. He was a knowing participant to the breach of duty. He was well aware that the proceedings presented no risk to the interests of S&D itself. For the reasons set out above, I find that Mr Tiwari was liable as a constructive trustee for S&D paying and agreeing to pay Mrs Tiwari’s legal costs to Velos & Davis.

DID S&D SUFFER ANY LOSS AND, IF SO, WHAT LOSS?

S&D agreed to accept joint and several liability for all the fees incurred on behalf of Sheela as well as itself. The loss is the amount paid by S&D to Velos and Davis and the amount S&D is liable to pay Velos & Davis in relation to the litigation between Mr Malhotra and Sheela Tiwari.

SHOULD MR TIWARI PAY OR INDEMNIFY S&D FOR ANY LOSS AND, IF SO, WHAT LOSS?

I propose to make orders that under the Corporations Act 2001 and otherwise as a constructive trustee Mr Tiwari shall pay compensation to S&D for the said loss and damage and I will make appropriate orders, if necessary, for the ascertainment of that sum.

CONCLUSION

I will hear the parties on the orders that should be made and on costs.

[2010] VSC 388

2 September 2010