Re S&D International Pty Ltd (No 5) - [2011] VSC 30

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 LTD (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:	12 November 2010
DATE OF JUDGMENT:	14 February 2011
CASE MAY BE CITED AS:	Re S&D International Pty Ltd (No 5)
MEDIUM NEUTRAL CITATION:	[2011] VSC 30

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CORPORATIONS – application by liquidator of trustee company for directions as to priority of claims over trust assets held by the company in liquidation

COSTS – trustee bringing proceedings for benefit of the beneficiaries of the trust estate

WINDING UP – liquidator’s lien under principle in Universal Distributors (1933) 48 CLR 171 - costs incurred after realisation of property in preserving and protecting property - cost and expenses encompassed by lien

TRUSTEES – right of trustee to be indemnified for costs and expenses out the trust estate – costs incurred by trustee in pursuing action to benefit the beneficiaries – r 65 Supreme Court (General Civil Procedure) Act 2005 – nature of trustee’s lien – comparison with liquidator’s lien under Universal Distributors

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M J Galvin	Mills Oakley Lawyers
For the First Defendant	Mr M McInnes	Mason Black 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

TABLE OF CONTENTS

INTRODUCTION.............................................................................................................................. 1

ORDERS SOUGHT BY THE PLAINTIFFS.................................................................................. 1

ORDERS SOUGHT BY MR VELOS.............................................................................................. 5

ORDERS SOUGHT BY MR TIWARI............................................................................................ 6

POSITION OF MR MALHOTRA AND MIG............................................................................... 9

INTRODUCTORY FACTS.............................................................................................................. 9

COURT PROCEEDINGS............................................................................................................... 16

THE PLAINTIFFS’ CLAIMS.......................................................................................................... 18

RE S&D INTERNATIONAL PTY LTD (NO 1).......................................................................... 30

RE S&D INTERNATIONAL PTY LTD (NO 4).......................................................................... 34

COSTS AS BETWEEN THE PLAINTIFFS AND MR VELOS................................................ 34

THE COSTS AS BETWEEN THE PLAINTIFFS AND MR TIWARI..................................... 46

THE COSTS AS BETWEEN THE PLAINTIFFS AND MR MALHOTRA............................ 48

THE COSTS AS BETWEEN MR VELOS AND MR TIWARI................................................ 48

THE COSTS AS BETWEEN MR MALHOTRA AND MR VELOS....................................... 49

THE COSTS AS BETWEEN MR MALHOTRA AND MR TIWARI..................................... 49

THE COSTS AS BETWEEN THE PLAINTIFFS AND MIG.................................................... 49

MR MALHOTRA’S CLAIM TO THE MONEYS IN COURT................................................. 53

S&D’S CLAIM TO BE INDEMNIFIED....................................................................................... 54

THE LIQUIDATOR’S CLAIM TO A CHARGE OVER THE FUND..................................... 63

The plaintiffs proceedings against MIG and Mr Vartelas.................................................... 79

The plaintiffs claims against Mr Velos.................................................................................... 81

The plaintiffs’ claims against Mr Tiwari.................................................................................. 81

The plaintiffs’ claims against Mr Malhotra............................................................................. 83

Conclusion on liquidator’s claim to an equitable lien.......................................................... 84

THE ORDERS SOUGHT BY THE PLAINTIFFS....................................................................... 85

THE ORDERS SOUGHT BY MR MALHOTRA....................................................................... 85

THE ORDERS SOUGHT BY MR VELOS.................................................................................. 85

THE ORDERS SOUGHT BY MR TIWARI................................................................................ 86

DECLARATIONS OF PRIORITY................................................................................................ 86

FURTHER PROCEEDINGS.......................................................................................................... 87

CONCLUSION ON ORDERS....................................................................................................... 87

HIS HONOUR:

INTRODUCTION

On 10 September 2010, judgment was delivered on several issues in this proceeding.[1] I adjourned the further hearing of the matter so that the parties could bring in short minutes of proposed orders. The parties were unable to agree on the orders. I have heard submissions on the orders that should be made and received further written submissions on these issues. The plaintiffs, Mr Velos and Mr Tiwari have each submitted written versions of the orders they seek.
[1]Re S&D International Pty Ltd (No 4) [2010] VSC 388.

ORDERS SOUGHT BY THE PLAINTIFFS

The plaintiffs (the liquidator and S&D) seek the following orders:

THE COURT DECLARES THAT:
Declarations as to the parties’ interests in the funds in Court and any funds recovered from the first defendant
Malhotra
1.The third defendant is beneficially entitled to one half of:
(a) the funds paid in Court representing surplus proceeds of sale of the Footscray Property (including moneys recovered by the plaintiffs from the second defendant) and the Hillside Property, together with the interest accrued thereon;
(b) any funds recovered by the plaintiffs from the first defendant pursuant to the orders of the Court made on 5 October 2009;

(collectively, “the fund”).
S&D International
2.The second plaintiff, as trustee of the Footscray Property and the Hillside Property, is entitled to be indemnified out of the fund for its reasonable costs and expenses, including the reasonable remuneration, costs and expenses of the first plaintiff, occasioned by:
(a)     the sale of the Hillside property and the payment of the proceeds from that sale into Court;
(b)     the plaintiffs’ prosecution of claims against, and defence of claims by, the first and second defendants in this proceeding with respect to the fund;
(c)     the plaintiffs’ prosecution of claims against, and defence of claims by, the fourth and fifth defendants in this proceeding with respect to the fund;
(d)     the plaintiffs’ defence of the first defendant’s appeal in Court of Appeal proceeding no. 3800 of 2009; and
(e)     the plaintiffs’ recovery of any moneys from the first defendant pursuant to the orders of the Court made on 5 October 2009;

(collectively, “the second plaintiff’s costs as trustee”).
3.The fund is charged first, by way of equitable lien, with payment of the first plaintiff’s remuneration, costs and expenses occasioned by the litigation.

Velos
4.The charges granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of Velos & Davis on 8 October 2004 (“Velos & Davis Charges”) are valid and effective.
5.The fund is charged with payment of the amount or amounts secured to the fourth defendant under the Velos & Davis Charges.

Pradeep Tiwari
6.The unregistered real property mortgages granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of the Australian and New Zealand Banking Group Ltd on 29 July 2002 (“ANZ Mortgages”) are valid and effective.
7.The fund is charged with payment of the amount or amounts secured to the fifth defendant under the ANZ Mortgages.

Declarations as to priority
8.The fifth defendant’s interest in the fund, as declared in paragraph 7 above, is subject and subordinated to:
(a)     the interest of the third defendant as declared in paragraph 1 above;
(b)     the interest of the second plaintiff as declared in paragraph 3 above; and
(c)     the interest of the fourth defendant as declared in paragraph 5 above.
9.The fourth defendant’s interest in the fund, as declared in paragraph 5 above, is subject and subordinated to:
(a)     the interest of the third defendant as declared in paragraph 1 above; and
(b)     the interest of the second plaintiff as declared in paragraph 3 above.
10.The third defendant’s interest in the fund, as declared in paragraph 1 above, is subject and subordinated to the interest of the second plaintiff as declared in paragraph 3 above.

Further declarations as against Pradeep Tiwari
11.By giving the Velos & Davis Charges and incurring liability for Velos & Davis’ fees and expenses in connection with Sheela Tiwari’s and the second plaintiff’s defence of the action in proceeding no. 6869 of 2002 (“the Malhotra v Tiwari proceeding), the second plaintiff breached its duties as trustee of the Footscray Property and the Hillside Property.
12.The fifth defendant knowingly assisted the second plaintiff’s said breach of its duties as trustee of the Footscray Property and the Hillside Property.
13.The fifth defendant is liable as constructive trustee to compensate and indemnify the second plaintiff for any loss and damage suffered by it as a result of the said breaches of its duties as trustee of the Footscray Property and the Hillside Property.
14.By authorising and facilitating the second plaintiff’s giving of the Velos & Davis Charges and its incurring of liability for Velos & Davis’ fees and expenses in connection with the Malhotra v Tiwari proceeding, the fifth defendant contravened his duties as a director of the second plaintiff under sections 180, 181 and 182 of the Corporations Act 2001 (“Act”).
15.The fifth defendant is liable, as constructive trustee and pursuant to section 1317H of the Act, to compensate and indemnify the second plaintiff for any loss and damage it has suffered as a result of the said breaches of the fifth defendant’s duties as a director of the second plaintiff.

AND ORDERS AND DIRECTS THAT:
Assessment of quantum of claims
16.In default of agreement, the assessment of each of:
(a)     the amount of the first plaintiff’s remuneration, costs and expenses of this proceeding;
(b)     the amount of the second plaintiff’s costs as trustee;
(c)     the amount payable to the fourth defendant from the fund; and
(d)     the amount payable to the fifth defendant from the fund;
is referred to an Associate Judge.
17.The assessment of the quantum of the loss and damage suffered by the second plaintiff as a result of the breaches of the fifth defendant’s duties as a director of the second plaintiff is referred to an Associate Judge.

Orders as to costs
18.The plaintiffs’ costs of the proceeding as between the plaintiffs and the first defendant be taxed and paid by the first defendant.
19.The plaintiffs’ costs of the proceeding as between the plaintiffs and the fourth defendant be taxed and paid by the fourth defendant.
20.The plaintiffs’ costs of the proceeding as between the plaintiffs and the fifth defendant be taxed and paid by the fifth defendant.
21.The fourth defendant’s costs of the proceeding as between the fourth defendant and the fifth defendant be taxed and paid by the fifth defendant.

Further directions
22.The plaintiffs are directed to serve a copy of these orders on Sheela Tiwari.
23.Liberty is reserved to Sheela Tiwari to apply to vary these orders as she may be advised.
24.The proceeding is otherwise adjourned sine die.

ORDERS SOUGHT BY MR VELOS

Mr Velos seeks the following orders:

1.The amount secured by the Velos & Davis charges is $225,645.29 as at 12 November 2010 plus interest continuing to accrue at a rate of $27.17 per day thereafter.
2.The Plaintiffs pay the fourth defendant’s costs of the proceeding as between them, including reserved costs, on the following basis:
(a) up to and including 2 June 2009 (inclusive) and from 17 October 2009 (inclusive) onwards as between party and party;
(b) from 3 June 2009 to 16 October 2009 (inclusive) on an indemnity basis;
such costs to be taxed in default of agreement.

3The fifth defendant pay the fourth defendant’s costs of the proceeding as between them, including reserved costs, such costs to be taxed in default of agreement.
4There be no order as to costs of the proceeding as between the third and fourth defendants.

ORDERS SOUGHT BY MR TIWARI

Mr Tiwari seeks the following orders:

THE COURT DECLARES THAT:
1The unregistered real property mortgages granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of the Australian and New Zealand Banking Group Ltd on 29 July 2002 (“the ANZ Mortgages”) are valid and effective.
2The charges granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of Velos & Davis on 8 October 2004 (“the Velos & Davis Charges”) are valid and effective.
3The fifth defendant’s equitable proprietary interest in the Footscray Property and the Hillside Property under the ANZ Mortgages is subject and subordinated to the prior equitable proprietary interest of the fourth defendant in those properties under the Velos & Davis Charges.
4The fifth defendant’s equitable proprietary interest in the Footscray Property and the Hillside Property under the ANZ Mortgages is subject and subordinated to the prior equitable proprietary interest of the third defendant in those properties as declared by Balmford J in proceeding no. 6869 of 2002 (“the Malhotra v Tiwari proceeding).
5The fourth defendant’s equitable proprietary interest in the Footscray Property and the Hillside Property under the Velos & Davis Charges is subject and subordinated to the prior equitable proprietary interest of the third defendant in those properties as declared by Balmford J in proceeding no. 6869 of 2002.
6The funds in Court are charged first with payment of the first plaintiff’s reasonable remuneration, costs and expenses directed exclusively towards recovering them out of the hands of the first and second defendants and procuring their payment into Court.
7By giving the Velos & Davis Charges and incurring liability for Velos & Davis’s fees and expenses in connection with Sheela Tiwari’s and the second plaintiff’s defence of the action in the Malhotra v Tiwari proceeding, the second plaintiff breached its duties as trustee of the S&D International Unit Trust.
8The fifth defendant knowingly assisted the second plaintiff’s said breach of its duties as trustee of the S&D International Unit Trust.
9The fifth defendant is liable as constructive trustee to compensate and indemnify the second plaintiff for any loss and damage suffered by it as a result of the said breaches of its duties as trustee of the S&D International Unit Trust.
10By authorising and facilitating the second plaintiff’s giving of the Velos & Davis Charges and its incurring of liability for Velos & Davis’s fees and expenses in connection with the Malhotra v Tiwari proceeding, the fifth defendant contravened his duties as a director of the second plaintiff under sections 180, 181 and 182 of the Corporations Act 2001 (“Act”).
11The fifth defendant is liable pursuant to section 1317H of the Act to compensate the second plaintiff for any loss and damage it has suffered as a result of the said breaches of the fifth defendant’s duties as a director of the second plaintiff.
AND ORDERS AND DIRECT THAT:
12.The amount secured by the Velos & Davis Charges is $225,645.29 as at 12 November, 2010 plus interest continuing to accrue at a rate of $27.17 per day thereafter.
13.The amount secured by the ANZ Mortgages is $398,609.10 as at 12 November, 2010.
14.The assessment of the quantum of the first plaintiff’s remuneration, costs and expenses directed exclusively towards recovering them out of the hands of the first and second defendants in procuring their payment into court is referred to an Associate Judge.
15.The assessment of the amount of compensation and indemnity to be paid by the fifth defendant (if any) is referred to an Associate Judge.
16.The plaintiffs pay the fourth defendant’s costs of the proceeding as between them, including reserved costs, on the following basis:
(a) up to and including 2 June, 2009 (inclusive) and from 17 October, 2009 (inclusive) onwards as between party and party;
(b) from 3 June, 2009 to 16 October, 2009 (inclusive) on an indemnity basis:
such costs to be taxed in default of agreement.
17.The plaintiffs pay the fifth defendant’s costs of the claims made by the plaintiffs against the fifth defendant in respect of the ANZ Mortgages, including reserved costs.
18.The fifth defendant pay the plaintiffs’ costs of the claims made by the plaintiffs against the fifth defendant in respect of the Velos & Davis Charges, including reserved costs.
19.The plaintiffs pay the fifth defendant’s costs (as between party and party) of the claims made by the plaintiffs against the first and second defendants and incurred by the fifth defendant at the trial of this proceeding on 4, 5, 9, 10, 11 and 12 February, 2009.
20.The fifth defendant pay the fourth defendant’s costs of the question as between the fourth defendant and the fifth defendant of priority as between the ANZ Mortgages and the Velos & Davis Charges, including reserved costs.

POSITION OF MR MALHOTRA AND MIG

Mr Malhotra opposes the orders sought by the plaintiffs seeking to be indemnified for their costs out of the funds in court. MIG contends that it has been released from any claim for costs through a settlement reached between Mr Vartelas and the plaintiffs.

INTRODUCTORY FACTS[2]

[2]Many of these facts were recited in Re S&D International Pty Ltd [2009] VSC 235 and Re S&D International Pty Ltd (No 2) [2010] VSC 388.

In order to deal with the respective applications for costs and the other orders sought it is necessary to canvass the history of the proceedings and the nature of the issues resolved.

The first plaintiff is the liquidator of the second plaintiff, S&D International Pty Ltd (S&D). S&D acted as the trustee for the S&D International Unit Trust (the “Unit Trust”).

S&D was the registered proprietor of two properties: one at 580 Barkly Street Footscray and the other at 45 Boronia Drive, Hillside. The properties have both been sold. The first defendant, MIG Property Services Pty Ltd (MIG), was the first mortgagee of both properties. Prior to the commencement of these proceedings the Footscray property was sold by the second defendant, Mr Vartelas, as agent in possession for MIG. Mr Vartelas was also the receiver of the assets and undertaking of S&D. After the commencement of these proceedings on 13 August 2008, the balance of the proceeds then held by the agent in possession and receiver, Mr Vartelas, were ordered to be paid into Court.

As discussed below, the issues in these proceedings have been decided in stages. The first stage resolved issues between the plaintiffs and the first and second defendants over the disposition of the proceeds from the sale of the Footscray property and the delivery up of possession of the Hillside property to the plaintiffs.

After those proceedings were resolved on 9 June 2009, the Hillside property was delivered up to the plaintiffs. It has now been sold and the balance of the proceeds after the deduction of certain costs and expenses has been paid into Court.

Mr Malhotra the third defendant claims, inter alia, to be entitled to half the moneys paid into court as the proceeds of property of which he was an equal joint beneficial owner. The fifth defendant, Mr Pradeep Tiwari, claims to be entitled to those moneys pursuant to an unregistered mortgage the ANZ bank held over the properties that has been assigned to Mr Tiwari. The fourth defendant Mr Velos also lays claim to those moneys under unregistered charges over those properties granted to Velos & Davis by S&D to secure legal fees. In my judgment of 10 September 2010, I resolved these issues as between the plaintiffs and Mr Malhotra, Mr Velos and Mr Tiwari.

The sixth and seventh defendants also claim to be entitled to those moneys as the former liquidators of S&D. Their claims have yet to be resolved. Later in these reasons, it will be necessary to describe in greater detail the precise claims of the parties.

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 1993. 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 1995, Mr Malhotra married Renu Kapoor. In mid-1999, Ms Kapoor commenced divorce proceedings against Mr Malhotra and in September that year applied to the Family Court for a property settlement. Both parties filed affidavits concerning Mr Malhotra’s financial affairs. Ms Kapoor alleged that Mr Malhotra had a proprietary interest in the Footscray property and the business. Mr Malhotra denied that allegation and swore an affidavit to that effect.

In 1996, a unit trust was established under the name of the S&D International Unit Trust and S&D appointed the trustee. In 1996, S&D took over the conduct of 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.

One of the issues addressed in these proceedings has been whether or not Mr Malhotra was an equal joint beneficial owner of these properties or whether or not his interest, if any, in the properties arose as the properties were held as assets of the unit trust and he was the beneficial owner of half the issued units in the unit trust.

These properties were mortgaged by S&D to the Commonwealth Bank of Australia (“CBA”), and S&D granted to CBA a mortgage debenture over the assets and undertaking of S&D. Subsequently, these securities were assigned by the CBA to and held by MIG. In Re S&D International Pty Ltd (No 1)[3] it was found that those securities have been satisfied and discharged from the proceeds of the sale of the Footscray property.
[3][2009] VSC 225.

The two units on issue in the Unit Trust were held in the name of Sheela Tiwari. Dinesh Malhotra resigned as a director in 1999. He subsequently claimed in 2002 that at all times he was the beneficial owner of half the Footscray and Hillside properties, of half the business, of half the units in the Unit Trust and of 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 in which the business was conducted. 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 residence 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 claiming a 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, the business conducted by S&D and the units in the Unit Trust.

As mentioned above, in 2002, 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.[4] The trial of the Supreme Court proceeding commenced on 11 October 2004.
[4]Affidavit of Bill Velos of 16 October 2008, Court file 22 [7].

In July 2004, Pradeep Tiwari 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. Previously, in July 2002, the Tiwari Family Trust was established. Sheela Tiwari purportedly declared that she held on behalf of the trust the units she held in the Unit Trust. Subsequently, on 20 September 2004, Mr Tiwari borrowed $40,000 from S&D to assist at the settlement of the purchase of the Hoppers Crossing property.

As indicated above, Mr Bill Velos, solicitor, of the firm of Velos & Davis, is the fourth defendant. An issue raised by Mr Malhotra in the second hearing was 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.[5] 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.[6]
[5]Ibid [13].
[6]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, 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 of S&D and to remove Messrs Horne and Vince as liquidators. At first instance before Mandie J, Mr Malhotra 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 as liquidators of S&D. 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, Mr 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, the first defendant, 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.[7] 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.
[7]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,[8] 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.[9] On 19 October 2007, the estate agents accounted to MIG for the deposit. At settlement, withdrawals were provided for Mr Malhotra’s 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.
[8]Exhibit PV- 11, CB A 7, 2614.
[9]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. It retained the proceeds of sale and did not seek 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 mortgages over the Footscray and Hillside properties to Mr Tiwari.[10] 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 right, title and interest of the ANZ Bank in the ANZ Bank mortgages and the S&D debt.[11] He says that entitles him to the moneys in court next after MIG, whose mortgage has now been satisfied.
[10]Points of cross claim of the fifth defendant, 19 December 2008, Court file 33A [5].
[11]Tiwari’s points of claim refer only to the mortgage over the Footscray property (Court file 33A [1]). 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.

COURT PROCEEDINGS

In May 2008, Pradeep Tiwari instituted proceedings against MIG and Mr Vartelas seeking a declaration that, by operation of s 77(3) of the Transfer of Land Act 1958, the defendants were bound to pay to the ANZ Bank such moneys as were payable for moneys owing under or in respect of the second ranking ANZ mortgage from the sale of the Footscray property.[12] He also sought an order that the defendants pay out the ANZ mortgages. Pradeep Tiwari was a guarantor of the ANZ Bank loan to S&D that was used to buy the house for his mother. Soon, after commencing the proceeding, Pradeep Tiwari paid out the ANZ Bank and took an assignment of its securities. Pradeep Tiwari claims he is entitled to the moneys in Court next after MIG. On 10 September 2010, I upheld the validity of the ANZ mortgages and recognised his claim.
[12]Writ of summons dated 23 May 2008 in matter no 6325 of 2008.

On 13 August 2008, the plaintiffs issued an originating process seeking directions as to the respective rights, title and interest of S&D and each of the defendants to the proceeding in the proceeds of sale of the Footscray 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 will become apparent when I discuss the history of the plaintiffs’ originating process, the plaintiffs initially challenged the validity of the Velos and Davis charges (I also refer to them as Mr Velos’ charges). The plaintiffs then for a time ceased making any challenge to Mr Velos’ charges although Mr Malhotra sought to continue with the challenges initially raised by the plaintiffs. In April 2009, the plaintiffs informed the court that S&D as trustee of the properties would continue to challenge Mr Velos’ charges in the interests of the beneficiaries of the trust assets held by S&D.

The plaintiffs initially opposed Mr Malhotra’s claim to a proprietary interest in the properties and thus the moneys paid into court. In June 2009, the plaintiffs altered their stance and supported Mr Malhotra’s claim.

In the 2 September 2010 judgment, I held that Mr Malhotra has successfully established his proprietary right to half the moneys paid into court and successfully resisted Mr Velos’ and Mr Tiwari’s claims that Mr Malhotra had no claim to those funds, and if he did his claim stood behind their claims. The plaintiffs argue that as they supported Mr Malhotra’s claims as against Mr Velos and Mr Tiwari they should be treated as being successful against Mr Velos and Mr Tiwari on this issue.

To assess this claim, it is necessary to examine in greater detail the course of the proceedings and the position taken by the plaintiffs in regard to Mr Malhotra’s claim to the moneys paid into Court.

THE PLAINTIFFS’ CLAIMS

As mentioned above in proceeding number 6325 of 2008, Pradeep Tiwari makes claims against MIG and Mr Vartelas by writ of summons. The statement of claim alleges that the ANZ Bank is the subsequent mortgagee to MIG and seeks a declaration that the defendants are bound to pay to the ANZ Bank such moneys as are payable in payment of moneys owing under or in respect of the unregistered ANZ mortgages.

By an originating process dated 13 August 2008,[13] Mr Handberg and S&D sought directions as to the respective rights, title and interest of S&D and each of the defendants to the proceedings (MIG, Mr Vartelas, Mr Malhotra, Mr Velos, Mr Tiwari and Messrs Horne and Vince) in the proceeds of sale of the Footscray property. They also sought orders requiring MIG to pay the proceeds of sale into Court pending the final hearing and determination of the proceeding. In addition, they sought other orders against MIG, including removing Mr Vartelas as receiver and manager of the property of S&D.
[13]Number 7807 of 2008, Court file 1.

On 22 September 2008, the plaintiffs filed an outline of submissions expressed to be pursuant to orders of 29 August 2008.

On 26 September 2008, Judd J ordered that the balance of the proceeds of sale of the Footscray property be paid into Court. His Honour also gave the plaintiffs leave to amend their originating process. He further ordered that the parties file and exchange with each other written contentions of fact and law on or before 10 October 2008.

In accordance with the order of Judd J made 26 September 2008, the plaintiffs amended their originating process to seek, inter alia, directions as to the respective obligations, rights, title and interest of S&D and each of the defendants to the Hillside property.

On 10 October 2008, submissions on behalf of Mr Tiwari were filed. The plaintiffs, MIG and Mr Vartelas, Mr Malhotra, Mr Tiwari and Messrs Horne and Vince all filed statements of contentions of fact and law in accordance with the order of 26 September 2008.[14]
[14]Plaintiffs contentions of fact and law, 13 October 2008, Court file 19C; Contentions of the first and second defendants, 13 October 2008, Court file 19B; Third defendant’s contentions of fact and law, 21 January 2010, Court file 34A; Points of cross claim of the fifth defendant, 17 October 2008, Court file 33A; Statement of contentions (sixth and seventh defendants), 14 October 2008, Court file 19D.

On 17 October 2008, Judd J made orders, inter alia, giving directions as to discovery, including an order that Mr Tiwari give inspection of all documents in his custody, control or possession relevant to the quantification of amounts secured by the ANZ mortgage.

At a directions hearing on 28 November 2008,[15] Judd J was informed that the plaintiffs had foreshadowed further amendments to the claims they proposed to make which would expand the issues between the parties. In those circumstances, Judd J ordered that points of claim and cross-claim should be filed and served by 10 December 2008. He reserved the issue of whether points of defence should be filed and served. He adjourned the matters for further directions on 12 December 2008.
[15]Orders of Judd J, 28 November 2008, Court file 30.

Despite Judd J’s order of 28 November 2008 that the parties file and serve points of claim and cross-claim by 10 December 2008, on 11 December 2008, the plaintiffs filed a supplementary statement of contentions of fact and law which purported to be delivered pursuant to orders of Judd J made 28 November 2008 (as indicated, his Honour had in fact ordered the filing of points of claim).

The plaintiffs originally instituted the proceeding by an application for (inter alia) directions under s 479(3) of the Act. They now, following comments of Judd J on 17 October 2008, sought to amend their application to seek consequential orders in addition to directions. The plaintiffs’ supplementary contentions of fact and law of 11 December 2008 referred to and relied on the contentions previously filed by the plaintiffs on 13 October 2008.

The plaintiffs’ supplementary statement of contentions of 11 December 2008 made allegations that the equitable mortgage given in favour of the ANZ Bank and the charges obtained by Velos & Davis dated 8 October 2004 were unenforceable against S&D as trustee of the trust.

The plaintiffs’ supplementary contentions included a claim by S&D as trustee of the trust against Mr Tiwari.[16] The allegations were extensive and included the claim that the trustee (S&D) was entitled to seek the rescission ab initio of the ANZ securities.
[16]Court file 30A, [8]-[17].

The plaintiffs’ supplementary contentions also included a claim by S&D as trustee in relation to the Velos & Davis equitable charges.[17] The trustee claimed that insofar as the equitable charges executed on 8 October 2004 purported to secure the payment of Sheela Tiwari’s legal fees, they were voidable under s 588FE(6A) of the Act.
[17]Ibid [18]-[24].

On 12 December 2008, the matters came on for directions and directions for the trial were sought. I ordered that matter number 6325 of 2008 be heard with proceeding 7807 of 2008. Counsel for the plaintiffs indicated that despite the plaintiffs filing their supplementary statement of contentions on the previous day, the plaintiffs intended to file points of claim[18] and I ordered that the time for filing and serving points of claim and cross-claim (if any) be extended to 19 December 2008 except in the case of Mr Malhotra where I extended time to 19 January 2009.
[18]Transcript, 12 December 2008, 17.

On 15 December 2008, MIG and Mr Vartelas filed a cross-claim against the plaintiffs and other defendants. MIG and Mr Vartelas claimed, inter alia, that Mr Handberg, as trustee of the Footscray property and the Hillside property, was only entitled to the residue of the surplus proceeds after the payment of the liabilities S&D had to each of the other defendants.

MIG and Mr Vartelas also sought a declaration that MIG may proceed to pay Mr Tiwari such amount of moneys that were due and owing to him in accordance with s 77(3)(c) of the Transfer of Land Act 1958 and in priority to the claims of the plaintiffs and the third to seventh defendants.

On 22 December 2008, Messrs Horne and Vince filed their points of claim.[19] Under the heading of “Priorities”, they claimed:
[19]Court file 34.

(10) Subject to

(a) Handberg’s fees and disbursements reasonably incurred in connection with the realisation of the Footscray Property and, if applicable, the Hillside Property, and to

(b) secured interest namely:

(i) that of Pradeep Tiwari, save to the extent to which his claim ought be reduced by reason of any breaches of director’s duties connected with the ANZ securities (as defined in the plaintiff’s Supplementary Contentions of Fact and Law dated 11 December 2008) and with the charges granted by S&D dated 8 October 2004 in favour of Velos and Davis; and
(ii) the fourth defendant, Bill Velos, save to the extent that the charge he alleges secures fees incurred otherwise on behalf of S&D (for instance, fees incurred on behalf of Sheela Tiwari) and to the extent that those fees were not reasonably incurred, then
Horne and Vince fees and disbursements the subject of:
(c) their equitable liens; and then
(d) their statutory lien securing their administration fees and disbursements,
ought be paid from the Court fund in priority to the balance of Handberg’s fees and disbursements in the liquidation of S&D.

Messrs Horne and Vince adopted the plaintiffs’ supplementary contentions of fact and law dated 11 December 2008 in respect of the issues they pleaded under the heading of “priorities” (which at that stage constituted the contentions of the plaintiffs).

On 4 February 2009, the plaintiffs filed points of claim dated 22 December 2008.[20] Contrary to their supplementary contentions of fact and law of 11 December 2008, the plaintiffs made no claims against any other party other than MIG and Mr Vartelas. In particular, no allegations were made concerning the ANZ mortgages or the Velos & Davis charges despite the contentions made on 11 December 2008.
[20]Court file 41, expressed to be pursuant to order of 12 December 2008.

Mr Malhotra filed a statement of contentions of fact and law dated 21 January 2009.[21] Mr Malhotra challenged the validity of the ANZ mortgages.[22] These contentions went beyond those he alleged in his subsequent points of claim, which I refer to below. Mr Malhotra expressly adopted the supplementary contentions of fact and law of the plaintiffs of 11 December 2008 that the Court should refuse any payments to Mr Tiwari.
[21] Court file 34A. Expressed to be pursuant to the order of Judd J made on 28 November 2008. In fact, on 28 November Judd J had ordered that each party file and serve points of claim and any cross-claim by 10 December 2008 and the order for contentions of fact and law was made on 26 September 2008.
[22]Court file 34A, [44]-[70].

Mr Malhotra challenged the validity of the Velos & Davis charges[23] and adopted the contentions of the plaintiffs of 11 December 2008 where they submitted that the equitable charges were voidable.[24] As indicated above, at this stage the plaintiffs had amended their claims and were no longer challenging the validity of the ANZ mortgages and the Velos & Davis charges.
[23]Ibid [71]-[84].
[24]Ibid [83]; Court file 30A [23].

On 27 January 2009, Mr Malhotra filed his points of claim.[25] His claim states in relation to the ANZ mortgages:

“EFFORTS TO BRING COMPANY FUNDS BACK
40. In April/May 2007, in my efforts to reduce the company liabilities and bring back funds taken away from it by the directors, Pradeep Tiwari and Sheela Tiwari to pay for their own property at Point Cook, I fought with the ANZ Bank to apply the surplus of the proceeds of the sale of the house to meet the S&D debt which was created purely to assist the acquisition of the same property.
41. Appearing in Court on an application by the ANZ Bank (proceeding number 6550 of 2007, ANZ Bank v Dinesh Malhotra), I tried to seek a direction to the above effect. Counsel for the bank, Michael Galvin, told the Court that the Bank had been advised to use the surplus to pay the Pradeep Tiwari debt first and not the S&D debt. Upon submissions made by counsel for the Bank, his Honour Justice Cavanaugh told me that it was for the liquidators to come and fight for those funds.
42. The liquidators, who I have requested at least three times, responded well after the event to no avail.”

[25]Court file 35; (pursuant to the order of 12 December 2008, the document incorrectly refers to the order of 11 December 2008).

In those paragraphs, Mr Malhotra claims, in effect, that the proceeds from the sale of the Point Cook property should be used to meet the S&D debt which he alleges was created purely to assist the acquisition of the Point Cook property. The S&D debt is alleged to be funds taken away from S&D by the directors, Pradeep Tiwari and Sheela Tiwari.

Mr Malhotra subsequently alleged in his points of claim that the only interest that had priority to his caveats being filed over the Footscray and Hillside properties were those of CBA securities which were then held by MIG.

Mr Malhotra expressly alleged that the ANZ/Pradeep interest, if accepted, stood behind his interest.[26] He claimed a 50 percent interest in the funds in Court in priority to Pradeep Tiwari (as the assignee representing the ANZ Bank).
[26]Ibid [50].

As discussed below, on 23 April 2009, I ruled that Mr Malhotra had not withdrawn any of the contentions he made in his notice of 21 January 2008 by filing the points of claim in the form which he did some six days later.

On 29 January 2009, Mr Velos filed points of cross-claim.[27] Mr Velos sought orders, inter alia, under ss 423(1) and 425 of the Act fixing Mr Vartelas’ remuneration and expenses as receiver of the property of S&D and as agent for MIG.
[27]Court file 36, dated 28 January 2009.

On 2 February 2009, the plaintiffs filed a document entitled “Further Amended Originating Process.”[28] The amendments sought, inter alia, an order under s 425 of the Act fixing Mr Vartelas’ remuneration as receiver of the property of S&D; an enquiry pursuant to s 423(1) into Mr Vartelas’ remuneration and expenses as agent for MIG; a declaration that Mr Handberg’s costs, charges and expenses of the winding up of S&D are payable in the winding up in priority to the costs, charges and expenses of Mr Horne and Mr Vince; a declaration that by suffering S&D to give mortgage to the ANZ Bank over the Footscray property and Hillside property in July 2002, Mr Tiwari, as a director of S&D, contravened s 181 and s 182 of the Act; and a consequential order under section 1317H of the Act requiring Mr Tiwari to compensate S&D for any loss and damage it has suffered by reason of the said contraventions. No allegations or claims were made by the plaintiffs against Mr Velos or the charges he relied on.
[28]Court file 43.

On 4 February 2009, the plaintiffs filed their points of claim.[29] Nevertheless, at the directions hearing on 4 February 2009, Mr Galvin, counsel for the plaintiffs sought to amend the plaintiffs’ points of claim to raise claims in respect of the ANZ equitable mortgages and the Velos & Davis charges.
[29]Court file 41, dated 22 December 2008.

Mr Galvin alleged that equitable compensation might be payable by Mr Tiwari and that Mr Velos might be liable under the principles of Barnes v Addy.[30] He did not allege any defect in the ANZ mortgages or the Velos & Davis charges on the lines that the plaintiffs had previously alleged. He said:

“That means that we are making a positive allegation in response to his claim (Mr Tiwari) which will necessitate us amending our originating process to seek relief against him personally. Essentially what we say is that he can’t have the benefit of his mortgage because it was procured by his own breach of duty to the company. We expect the proposed draft amended originating process is virtually complete.
The other point, similar point in relation to Mr Velos, is that Mr Velos appears to have obtained, he claims an equitable charge over the proceeds in Court. We say about that, that the equitable charge was also procured by a director’s breach of duty to which he or in which he is a known participant in the Barnes v Addy sense.”[31]

[30](1874) LR 9 Ch App 244.

[31]Transcript, 4 February 2009, 3.

Later during the hearing, Mr Galvin indicated that the plaintiffs would not be pursuing the Barnes v Addy claim against Mr Velos. The plaintiffs did, however, seek to pursue the claims in respect of the ANZ mortgage which Mr Tiwari was seeking to enforce. The matter was adjourned to the next day so Mr Galvin could pursue the application to amend the plaintiffs’ claims.

On 5 February 2009, Mr Galvin formally sought leave to further amend the plaintiffs’ originating process.[32] I allowed the amendments where orders were sought as follows:

“12. A declaration that, by suffering [S&D] to give mortgages to the ANZ Bank over the Footscray property and the Hillside property in July 2002, [Mr Tiwari], as a director of [S&D], contravened ss 181 and 182 of the Act.
13. A consequential order under s 1317H of the Act requiring [Mr Tiwari] to compensate [S&D] for any loss and damage it has suffered by reason of the said contravention.”

[32]In the form of Exhibit SAL34.

I directed that the hearing and determination of these claims be adjourned to a date to be fixed.[33] Mr Galvin had informed me previously on 4 February that the plaintiffs would not be adducing any additional facts to make out the claim in respect of the ANZ mortgages.
[33]Exhibit SAL34, [12-13].

On 27 November 2008, Mr Malhotra had written to Mr Handberg challenging the validity of the ANZ mortgages and the Velos & Davis charges. The grounds were similar to those raised in Mr Malhotra’s contentions of fact and law dated 21 January 2009.[34]
[34]Affidavit of Mr Malhotra of 27 November 2008, Court file 27.

Save for the plaintiffs’ claim against Mr Tiwari relating his alleged breach of duty in causing the ANZ unregistered mortgages to be granted by S&D and the Velos equitable charges to be granted by S&D, the hearing of the claims raised in the plaintiffs’ proceeding and Mr Tiwari’s proceeding commenced on 4 April 2009. At that hearing all defendants were represented by counsel save Mr Malhotra who appeared in person.

Mr Handberg, the first plaintiff, Mr Mond the director of MIG, the first defendant and Mr Vartelas, the second defendant gave evidence. Mr Malhotra also gave evidence and was cross examined by Mr Galvin for the plaintiffs and Mr Hamlyn-Harris for Mr Velos.

On 21 April 2009, at the conclusion of the cross-examination of Mr Malhotra by counsel for Mr Velos, when Mr Tiwari’s counsel was entitled to cross examine Mr Malhotra, Mr Tiwari’s counsel submitted that no issue was presently before the Court as to the efficacy of the ANZ mortgage.[35] He said that as that was the case, he did not intend to cross examine Mr Malhotra. I then adjourned to rule on the validity of the submission.
[35]Transcript, 21 April 2009, 433.

On 23 April 2009, I ruled that Mr Malhotra was claiming in the proceeding that the ANZ mortgages and the Velos & Davis Charges were unenforceable as against S&D or the assets held by S&D and he was therefore challenging the efficacy of the ANZ mortgages contrary to Mr Tiwari’s submission.

In my ruling of 23 April 2009, I also dealt with the difficulty Mr Malhotra faced as a litigant in person and the role of S&D as trustee to protect the trust estate. [36]
[36]In my ruling I referred to the observations of Bell J in Tomasevic v Travaglini where [2007] VSC 337, [139]-[142] on the duty on a trial judge to ensure a self represented litigant receives a fair trial.

I observed that Mr Malhotra’s interests depended to an extent on the ability of the trustee to preserve and protect the trust assets. I referred to the trustee’s position and in particular where the trustee was managed by the liquidator who was an officer of the Court.

I observed that it was the duty of the trustee to preserve and protect the trust estate. I said that the plaintiffs in making claims for compensation against Mr Tiwari in relation to S&D’s granting of the ANZ mortgages and in challenging the Velos & Davis charges were carrying out the trustee’s duty to preserve and protect the trust estate.

I said that in view of the fact that those or similar issues were currently before the court, I should not have deferred the hearing of the plaintiffs claims against Mr Tiwari. I said that they should have been heard along with the issues raised by Mr Malhotra concerning the efficacy of the ANZ mortgages and the Velos & Davis charges.

I noted that at the direction hearing on 4 February 2009, S&D as trustee raised the possibility of bringing a claim against Mr Velos under the principles of Barnes v Addy. I observed that normally, a beneficiary is not entitled to bring claims that should be made by the trustee. I noted that initially, in its statement of facts and contentions filed,[37] S&D as the trustee had sought to protect the trust assets by seeking to invalidate the securities which seek to attach to the trust assets. I observed that such a process was proper for the trustee to adopt.
[37]Court file 30A.

I further opined that it may be preferable, if the trustee considered it reasonable to do so, for it to pursue the claims challenging the validity of the securities over the trust assets.

After I delivered my ruling on 23 April 2009, the plaintiffs indicated that the trustee would take up claims the trustee had against Mr Velos and Mr Tiwari concerning their securities over the trust assets.[38] Mr Galvin as counsel for the plaintiffs said as follows:[39]
[38]Transcript 23 April 2009, 478.
[39]Ibid 478 – 482.

MR GALVIN: I have some instructions Your Honour. Your Honour I'm instructed the trustee company, the plaintiff and the liquidator will take up the claims again against Mr Velos and against Mr Tiwari. I should say to Your Honour though, without explaining to Your Honour as Your Honour doesn't need to hear of course, why these matters were not pursued in the way they might have been.
Your Honour will recall that Mr Handberg was appointed in replacement of Mr Horne and Mr Vince some time ago, by the court. Since his appointment he has had access to very limited funds. Indeed the reason we're all here partly is because funds had to be extracted from - we say, against the party holding them and deposited into court.
Even still Mr Handberg does not have resources with which to conduct the sort of due diligence, if you like or investigation, that one would ordinarily expect from a liquidator before he or she embarked upon the sort of litigation that Your Honour has made rulings about. I mean beyond priorities.
I only say that Your Honour because he is a court officer. I'm instructed to advance an explanation as to why he might not have pursued these matters in the way they might ordinarily have been pursued. We will however, pursue them. There is an anxiety about the potential for adverse costs orders. I don't expect Your Honour to make any ruling or comment on that now.
For example, if the case against Mr Velos were to fail, Mr Velos was to seek costs against the company or Mr Handberg personally, those are issues which might arise, which we're anxious about.
We have a degree of knowledge about the Velos charges, but not a full detail - there are 18 boxes, I'm instructed, of documents relating to that litigation, or 16 whatever it is. But, we consider that there is a basis for bringing the claim and on that basis we will prosecute it Your Honour.
What I proposed Your Honour is that I know there have been several rounds of pleadings and statements of facts and contention. We will have a further attempt at, with Your Honour's leave, a single document which will bind together all of the claims we make against all of the parties, including these claims.
With Your Honour's leave we’d filed that document within perhaps three weeks I would seek Your Honour. The intention would be to give Mr Donald and my learned friend Mr Hamlyn-Harris all of the particulars they would need to understand and meet the claim, the claims against their clients.

HIS HONOUR: Well, I think I should make a comment. First of all my ruling should not be taken to contain any criticism of the conduct of the litigator.
MR GALVIN: I've not take that way Your Honour.
HIS HONOUR: I really mention it because as all parties had been urging on me, other than Mr Malhotra, they'd been urging on me that his interest is really as a beneficiary of a trust. When one stands back and thinks about it then as I said in my ruling, without referring to any cases, it's pretty fundamental that the primary duty to look after the trust as is falls on the trustee, in effect, the court may not permit a beneficiary to interfere.
But, on occasion where the trustee can’t act because it’s got no funds or refuses to act, then a beneficiary might be given leave to bring the proceedings. Mr Malhotra hasn't defined all this and the proceedings would be brought on behalf of the trust. That's different as arise here because the litigant personally doesn't understand those subtleties.
MR GALVIN: I know.
HIS HONOUR: That's why in an ideal world that any claims would be made by the trustee, but as you say the trustees got limited resources.
MR GALVIN: Your Honour, notwithstanding the absence of resources or their current state in two places primarily the courts coffers and a vacant piece of land at Hillside. The liquidator will, in a sense relieve Your Honour of the obligation of having to deal with it through Mr Malhotra as a beneficiary. Your Honour will not then have the need to concern yourself with the litigant in person.
HIS HONOUR: The problem was, as you can see, that when you raised it, the issue, one can draw the inference there was reasonable grounds for the allegation. Whether you succeed I don't know.
MR GALVIN: Yes.
HIS HONOUR: Then you have a litigant in person there whose saying the money shouldn't go to these people and the trustee had already articulated the grounds.
MR GALVIN: Yes.
HIS HONOUR: I was left with that dilemma of how to deal with it.
MR GALVIN: I understand the dilemma Your Honour and hopefully if we proceed this way, Your Honour will find it more convenient.
HIS HONOUR: That would be a far more sensible way of dealing with it and I would probably encourage you to talk to Mr Malhotra on the basis that what you’re doing is in his interests.
MR GALVIN: In his interest.
HIS HONOUR: As the trustee. Of course he would want to know what you're up to and he may well then come back and say to me I adopt the arguments of the trustee.
MR GALVIN: He may have arguments of his own as well.
HIS HONOUR: He may have some others, but he may come back and say I'm satisfied.
MR GALVIN: That's right, yes, Your Honour.
HIS HONOUR: Thank you. Now, Mr Malhotra, in my ruling I assumed you were adopting the arguments that the trustee had initially put forward attacking the securities.
MR MALHOTRA: Yes, Your Honour.
HIS HONOUR: Yes, now you've heard Mr Galvin say that the trustee is now prepared to reinstate those allegations and continue with them, which in part attacked the efficacy of both the Velos charges and the ANZ securities and also - yes, and to do that, Mr Galvin agrees that the case should be adjourned so that those claims can be particularised. Mr Donald wants, so far as the ANZ - so far as Tiwari is concerned, wants them particularised.
MR MALHOTRA: Yes, Your Honour.
HIS HONOUR: Mr Donald has said they've got a good defence. They say that there was moneys owing to Sheela Tiwari and that the money was borrowed to repay the loan, and he wants time to put documents in to establish that defence.
So the application by Mr Donald for an adjournment is supported by Mr Galvin. Do you have anything to say about it?
MR MALHOTRA: No, Your Honour, I'm in your hands.

As will be seen below, the claims that S&D took up and pursued were claims by S&D as trustee against Mr Tiwari and Mr Velos. S&D did not seek to make claims on behalf of Mr Malhotra, although he would be a beneficiary of those claims if successful. The plaintiffs also changed their position on Mr Malhotra’s claims to the moneys in court and thereafter supported his claims to priority over Mr Velos and Mr Tiwari which were resisted by Mr Velos and Mr Tiwari.

RE S&D INTERNATIONAL PTY LTD (NO 1)

Before the hearing of evidence continued, Mr Robertson suggested that costs may be saved if the hearing of the proceedings could be broken up so that discreet issues could be dealt with one by one.[40] He suggested that it would be convenient to continue to hear and determine the claims involving MIG and Mr Vartelas and that the claims between the plaintiffs and Mr Malhotra on the one hand and Mr Tiwari and Mr Velos on the other could be heard on another day. Further, he suggested, the claims of the sixth and seventh defendants could be heard separately again.
[40]Transcript 23 April 2009, 486-488.

The fourth, fifth, sixth and seventh defendants agreed to that course and the hearing involving MIG and Mr Vartelas continued and was heard on 28, 29 and 30 April 2009. Only counsel for the plaintiffs and MIG and Mr Vartelas participated on those days.

On 9 June 2009, I delivered my judgment on the issues as between the plaintiffs and MIG and Mr Vartelas.[41] It is convenient to set out generally the issues between the parties and my decision.
[41]Re S&D International Pty Ltd (No 1) [2001] VSC 225.

The matters raised between the plaintiffs of the one part and MIG and Mr Vartelas of the other also concerned the other parties. They were content, however, to allow them to be argued between the plaintiffs, MIG and Mr Vartelas.

There were two basic issues. The liquidator sought an order that he had first priority to the moneys in court as against the other parties, save the secured debt of MIG, on the basis that he had a lien over them arising out of his efforts to preserve and protect them from misuse by MIG and Mr Vartelas.

Secondly, the plaintiffs contended that MIG’s mortgage was satisfied in full on the sale of the Footscray property on 18 October 2007, or at the latest on 19 October 2007, when MIG or its agents received the balance of the sale moneys.

The plaintiffs also claimed that MIG and Mr Vartelas were obliged to and should have accounted to the plaintiffs and the other subsequent encumbrancers for the moneys that they retained from the sale as at 19 October 2007; and as and from 19 October 2007, MIG and Mr Vartelas held the surplus moneys on trust for the subsequent interest holders. Further, the plaintiffs contended that given the circumstances of the case, MIG and Mr Vartelas were obliged to pay the surplus moneys immediately into Court after settlement on 19 October 2007.

The plaintiffs contended that as the debt due to MIG was satisfied in full on 19 October 2007, the receivership over the assets and undertaking of S&D should have been terminated that day or shortly thereafter. Further, the plaintiffs contended that MIG and Mr Vartelas were not entitled to any interest, costs, fees or expenses after 19 October 2007. The plaintiffs contended that MIG and Mr Vartelas should compensate S&D and/or the other subsequent encumbrancers in interest for failing to pay the moneys into Court as requested by S&D and the subsequent encumbrancers. The plaintiffs sought relief under ss 434(1)(b), 434B(1), 434B(5) and 1321 of the Act in respect of MIG’s and Mr Vartelas’ conduct.[42]
[42]Points of Claim of 22 December 2008, CBB, 5. Further relief is sought in the plaintiffs’ written submissions and in oral address under sections 423(1), 424 and 425.

The plaintiffs contended that MIG was not entitled to include in the sum secured by the mortgage; expenses incurred in having Colonel Malhotra exercise powers as the registered mortgagee and to effect the transfer of the mortgage to MIG; and fees charged by Mr Mond, the controller of MIG, for his personal services purportedly provided to MIG.

MIG and Mr Vartelas disputed the claims of the liquidator and S&D, save that they admitted that they should have given an account, but only when they had fully satisfied MIG’s mortgage debt, fees and expenses, including those of Mr Vartelas, which they claimed had not been done.

MIG and Mr Vartelas contended that MIG’s mortgage debt was not satisfied on 19 October 2007 and it was still not satisfied. They claimed that they were entitled to retain the whole of the sale moneys while they made and continued to make investigations and inquiries into the merits of the subsequent interest holders.

MIG and Mr Vartelas contended that they were bound by s 77(3)(c) of the Transfer of Land Act 1958 to hold the proceeds of sale until they had determined for themselves the respective interests and priorities of the “subsequent mortgages and charges.” They contended that they were entitled to seek the directions of the Court in determining those issues if they so wished. MIG and Mr Vartelas contended that they should not have been ordered to pay into Court the moneys that they still retained.

MIG and Mr Vartelas contended that s 77(3)(c) includes unregistered mortgages and charges. The plaintiffs disputed that construction and said that the ANZ Bank’s equitable mortgage and the other equitable charges under its mortgage debenture were not to be satisfied by MIG under paragraph (c); but rather that paragraph (d) applied which required the surplus proceeds to be paid to the mortgagor or into Court.

MIG and Mr Vartelas contended that they were not obliged to account to the subsequent interest holders on 19 October 2007 or any date thereafter until they had completed their duties under s 77(3)(c) of the Transfer of Land Act 1958 as set out above. They contended that once they have carried out their duties under s 77(3)(c ), and not until then, would they finally account to the subsequent interest holders.

MIG and Mr Vartelas contended that as the mortgage debt has not been satisfied, the receivership should not be terminated and should not have been terminated on 19 October 2007 or any date thereafter.

MIG and Mr Vartelas contended that the Court should not adjudicate on the issue of the appropriateness of MIG reimbursing itself from the sale proceeds for the proceedings against Colonel Malhotra or Mr Mond’s fees. They contended that this issue should be left for the taking of accounts in the traditional way, if its accounting is ultimately disputed by any of those entitled to dispute it.

In my judgment of 9 June 2009, I held on a preliminary basis that the liquidator was entitled to priority for the costs he incurred in preserving the fund by having it paid into Court.

I held that the MIG and Mr Vartelas should have discharged the mortgage debt on 19 October 2007 and forthwith paid the surplus moneys into Court. I found that on 19 October 2007 they should have accounted for the allocation of the sale proceeds to the subsequent interest holders including S&D. I found that, as against S&D as mortgagor, MIG and Mr Vartelas were not entitled to any interest, costs, charges or expenses beyond 19 October 2007. I found that MIG and Mr Vartelas were not entitled to apply the sale proceeds to meet the costs of MIG incurred in relation to Colonel Malhotra and the charges claimed by MIG for Mr Mond’s personal services in dealing with the mortgage.

I found that Mr Vartelas’ appointment as receiver of S&D should have ceased on 19 October 2007. I found that Mr Vartelas was not entitled to any cost, charges or expenses as receiver beyond 19 October 2007. I found that MIG and Mr Vartelas were obliged to pay interest on the surplus moneys retained by them. I found that on 19 October 2007 Mr Vartelas should have delivered up to S&D the Hillside property. I found that it was appropriate to make orders under the Corporations Act 2001 to give effect to these findings.

Counsel for the plaintiffs have informed me that MIG and Mr Vartelas appealed against my decision of 9 June 2009. I am told that the plaintiffs have compromised the appeal of Mr Vartelas but that the appeal of MIG is still on foot though stayed through a failure by MIG to put up security for costs.

RE S&D INTERNATIONAL PTY LTD (NO 4)[43]

[43][2010] VSC 388.

The hearing of the claims between the plaintiffs, the third defendant, Mr Malhotra, the fourth defendant, Mr Velos and the fifth defendant Mr Pradeep Tiwari were fixed for hearing to begin on 5 October 2009. On that day, the plaintiffs asked for an adjournment and leave to amend the claims they made against Mr Velos and Mr Tiwari. The matter was adjourned and the plaintiffs’ claims against Mr Velos and Mr Tiwari were amended.

The hearing of the claims did not recommence until 8 February 2010. The hearings continued off and on until they were completed on 20 August 2010. I delivered judgment on 2 September 2010. As indicated earlier, the issue currently before me are the orders I should make following that judgment. These issues include orders as to the costs of the proceedings, orders on the respective claims made by the parties and the rights of S&D over the trust assets to meet its costs of the proceedings. It will be convenient to deal with the issue of costs first.

COSTS AS BETWEEN THE PLAINTIFFS AND MR VELOS

The plaintiffs seek an order that the plaintiffs’ costs of the proceeding as between the plaintiffs and Mr Velos be taxed and paid by Mr Velos. Mr Velos for his part seeks to divide the costs of these proceedings into three categories. The first is for the period to 2 June 2009, the second is the period from 3 June 2009 to 16 October 2009 and the third is for the period from 16 October 2009 to the conclusion of the hearing.

In order to assess these claims I need to examine the issues between the plaintiffs and Mr Velos and the history of those claims.

First, I deal with the pleadings as between the plaintiffs and Mr Velos.

By its originating process of 13 August 2008, the plaintiffs in substance sought under ss 479(3), 432(1) 1321 and 434B of the Act directions and any necessary declarations or orders as to the respective rights of the parties to the funds paid into court by Mr Vartelas (being proceeds of the sale of the Footscray property) and consequential directions or orders as to payment out and disbursement of that fund.[44] The plaintiffs named as defendants, inter alia, MIG, Mr Vartelas, Mr Malhotra, Mr Velos and Mr Tiwari. Mr Velos had laid claim to the moneys for some time under his equitable charges. The plaintiffs made no claims against Mr Velos.
[44]Court file 1, [2].

On 26 September 2008, Mr Velos entered an appearance.

By order of Judd J made 26 September 2008, the plaintiffs were given leave to file and serve an amended originating process and each party was ordered to file and exchange written contentions of fact and law by 10 October 2008.[45]
[45]Court file 17.

The plaintiffs’ amended originating process of 26 September 2008 made no claims against Mr Velos.[46]
[46]Court file 18.

The plaintiffs’ contentions of fact and law dated 13 October 2008 made no claim against Mr Velos. The plaintiffs, however, referred to the administrators’ statement of 7 June 2005 which expressed the view that Mr Velos’ claim for legal fees against S&D was “unlikely to succeed.” The plaintiffs also referred to the observations by Mandie J in Malhotra v Tiwari[47] that possibly Mr Velos may not have a claim against S&D. The plaintiffs said that they did not have any information concerning the charge and “wish to reserve their right to make submissions with respect to it after they have had an opportunity to consider the evidence tendered in support of it.”[48]
[47][2005] VSC 496 at [236].
[48]Court file 19C, [31].

The plaintiffs claimed that Mr Malhotra had no beneficial interest in the Footscray property and “therefore has no proprietary right to any part of the proceeds of its sale.”[49]
[49]Ibid [28].

Mr Velos filed a statement of contentions dated 14 October 2009[50] and on 16 October 2010, Mr Velos swore and filed an affidavit setting out the circumstances surrounding his taking the charge and asserting that he was entitled “as a matter of priority” to the fees owed by S&D ($190,708.52 plus costs and interest).[51]
[50]Court file 26A (missing from file).
[51]Court file 22.

On 28 November 2008, Judd J ordered that the parties file and serve any points of claim and any points of cross claim on or before 10 December 2008.[52]
[52]Court file 30.

Despite this order for pleadings, the plaintiffs filed a supplementary contention of fact and law dated 11 December 2008, that for the first time made a claim against Mr Velos. They contended that the charging of the Footscray Property and the Hillside Property to secure the payment of Sheela Tiwari’s legal fees, costs and disbursements was an unreasonable director related transaction under s 588FDA of the Act and consequently voidable under sub-s 588FE(6A) of the Act. They claimed that consequently, Mr Velos was not entitled to claim the moneys owed to him from the funds paid into court.[53]
[53]Court file 30A.

In accordance with the order of Judd J made on 28 November 2008, the plaintiffs filed points of claim dated 22 December 2008.[54] These, however, did not repeat the s 588FDA claim that had been made on 11 December 2008 against Mr Velos and made no other claims against Mr Velos.
[54]Court file 41.

Mr Velos filed points of cross claim dated 28 January 2008.[55] Mr Velos pleaded the equitable charges and sought orders that his charge was a subsequent charge for the purposes of s 77(3) of the Transfer of Land Act 1958 and that he had priority over all others save for the payments made to Mr Vartelas pursuant to ss 423(1) and 425 of the Act. He also sought an order that $210,596.09 be paid out of the monies in court to him.
[55]Court file 36.

On 2 February 2009, the plaintiffs filed a further amended originating process.[56] As in the points of claim filed on 22 December 2008, it did not raise any claims against Mr Velos.
[56]Court file 43.

The plaintiffs filed a combined response dated 5 February 2009 to the defendants’ points of claim and cross-claims.[57] In the plaintiffs’ response to the cross-claim of Mr Velos of 28 January 2008, they alleged that the surplus sale proceeds of the Footscray property and any from the sale of the Hillside property be applied in accordance with s 556 of the Act in the following order:
[57]Court file 47B.

(a) first, in payment of Mr Handberg’s salvage costs;

(b) secondly, in payment of the amount (if any) due to Mr Tiwari under the Tiwari mortgage after deductions of any amount due from Mr Tiwari to S&D;

(c) thirdly in payment to Velos of the amount (if any) validly secured under his equitable mortgage;

and then on further costs of the liquidation.

This response left open the issue of whether any amount was due and whether those moneys were validly secured under the equitable mortgages. In the response to Mr Malhotra’s claims, they denied that Mr Malhotra had any interest in the Footscray property or the Hillside property and, by inference, in the moneys in court.

The response to Mr Tiwari’s cross-claim, claimed, inter alia, that Mr Tiwari was liable to pay compensation to S&D in a sum equal to the amount he claimed under the Tiwari/ANZ mortgage.

Subsequent to the plaintiffs’ announcement to the court on 23 April 2009, that they would challenge Mr Velos’ charge for the trust estate’s benefit, on 2 June 2009 the plaintiffs filed an amended response and cross-claim to Mr Velos’ points of claim.[58]
[58]Court file 54.

The cross-claim raised a Barnes v Addy claim against Mr Velos. It alleged that S&D retained Mr Velos to act for it and Sheela Tiwari and undertook to pay Mr Velos’ fees and disbursements in defending and asserting on behalf of Sheela Tiwari a claim to sole beneficial ownership of the property in the unit trust including the Footscray and Hillside properties to the exclusion of Mr Malhotra. The plaintiffs alleged that the giving of the Velos & Davis charges was in breach of S&D’s fiduciary obligations and that Mr Velos had actual knowledge of these matters. Alternatively, they pleaded that if Mr Velos did not have actual knowledge he deliberately shut his eyes or abstained from making inquiries that an honest and reasonable person would make. In the premises, they claimed, that the charges were liable to be set aside.

The plaintiffs’ claims against Mr Tiwari

Mr Tiwari contends that in the second trial, the plaintiffs sought orders that Mr Velos charge took priority after Mr Malhotra and sought damages and compensation from Mr Tiwari for the benefit of S&D as trustee.

Mr Tiwari contends that none of these matters were relevant to preservation of the fund in Court, being the property over which the liquidator now claims his lien. Legal action claiming declaratory relief and orders for the payment of further money after preservation of the money comprising the fund in Court is not legal action for the preservation of that fund. Mr Tiwari says that the prosecution of claims by the liquidator seeking declarations as to the validity of securities and orders for the payment of money was not legal action for the care, realisation or preservation of the fund in Court. I accept that submission.

Mr Tiwari asserts that the claims against MIG, Vartelis and Tiwari stood independently of the existence of the fund in Court and would have been made regardless of whether the fund in Court existed. For example, the statutory and general law claim against Mr Tiwari for compensation/damages for breach of his duties as a director would have been made regardless of whether Tiwari made a claim on the fund in exercise of his rights as assignee of the ANZ mortgages.

Mr Tiwari contends that it follows that the proceeding was not commenced and conducted by the liquidator for the sole purpose of getting the fund into Court or preserving that fund. Mr Tiwari submits that nor was it conducted for the sole purpose of protecting Mr Malhotra’s interest in the fund against the claims of MIG, Vartelis, Tiwari and Velos.

Mr Tiwari says that at best Mr Malhotra was entitled to half the proceeds of the fund in Court. He asks, for whose benefit was the case prosecuted in respect of the other half? He asks, whose interest in the fund in Court was being protected by the legal action of the liquidator? He says Not MIG, Vartelis, Tiwari or Velos as security holders. The liquidator did his best to attack and defeat their claims.

Mr Tiwari contends that, for the reasons set out above, the sole purpose of the proceeding was not to enable the liquidator to defend the fund in Court from attacks by the security holders.

Mr Tiwari says that in any event, the validity and enforceability of the MIG mortgage was not in issue, money having been deducted from the MIG mortgage before payment into Court. The money claims by the liquidator against Mond and Vartelis were for costs, expenses and the like as a form of misappropriation based on their unlawful conduct.

He says that the securities held by Mr Tiwari and Mr Velos were held to be valid and enforceable. Mr Tiwari contends that this case was brought by the liquidator not only as a shield but also as a sword and a major purpose was to seek orders for the payment of money by MIG, Mr Vartelis, and Mr Tiwari to be received in addition to the fund in Court.

He argues that for these reasons, the “salvage costs” ought to be limited to the costs of “preserving” the fund in Court. The Court ought not order that the liquidator (or S&D) have a lien over that fund in respect of any further or other costs, expenses, remuneration or the like.

In this instance, the plaintiffs were seeking to resist Mr Tiwari’s claims to defeat the interest of the beneficiaries and to advance Mr Tiwari’s interest as a subsequent equitable interest holder. The plaintiffs were also seeking to recover damages or property akin to a chose in action for the beneficial owners of those damages to compensate the trust for the diminution in the value of the trust properties.

In my opinion the applicable costs, expenses and remuneration of the liquidator were not incurred exclusively for the purpose of caring for, preserving or realising the funds in court. The costs in part were incurred in seeking to recover damages. The liquidator may have a lien over those funds if recovered. That is not a matter in issue before me in this matter. The trustee may have a trustee’s lien as well over these moneys if recovered. That also is not a matter in issue before me. The costs in part were also incurred in determining the priority of Mr Malhotra and Mr Tiwari to the moneys in court. Those costs were not incurred in caring for, preserving or realising the fund.

Accordingly, in my opinion, the liquidator is not entitled to an equitable Universal lien in relation to the costs, expenses and remuneration incurred in relation to the proceedings between the plaintiffs and the fifth defendant.

The plaintiffs’ claims against Mr Malhotra

As indicated above, the plaintiffs initially denied and opposed Mr Malhotra’s claim. The plaintiffs did not support his claim until 3 June 2009. On and after 3 June 2009, the plaintiffs supported Mr Malhotra’s claim to priority to the moneys in court save as to the question of the plaintiffs’ claim to be indemnified for its costs of the proceedings out of the moneys in court.

The plaintiffs did not support Mr Malhotra’s contentions that he held an equal joint beneficial interest in the moneys in court flowing from his equal joint beneficial interest in the properties. Rather, the plaintiffs argued that Mr Malhotra’s equal joint beneficial interest in the units in the unit trust gave him a proprietary interest in the moneys in court.

As discussed above, on and after 2 June 2009, S&D as trustee sought to make claims for the benefit of Mr Malhotra as a beneficiary of the trust estate held by S&D and on his right to the moneys in court.

The plaintiffs’ proceedings whereby they sought directions as to the priority of the respective claimants to the fund were not exclusively undertaken to preserve, protect or realise the fund. Rather the proceedings were taken to determine the priority of various claimants to the fund.

As to the amended proceedings, where the plaintiffs supported Mr Malhotra’s claims as against Mr Velos and Mr Tiwari, those costs, expenses and remuneration related to the claims against Mr Velos and Mr Tiwari which I have dealt with above. These costs were not incurred exclusively to preserve, protect or realise the fund in court.

Conclusion on liquidator’s claim to an equitable lien

Accordingly, I propose to declare that the fund is charged first, by way of equitable lien in favour of the first plaintiff, with payment of the first plaintiff’s reasonable remuneration, costs and expenses occasioned by the litigation involving the first and second defendants.

THE ORDERS SOUGHT BY THE PLAINTIFFS

I have already dealt with the issues of costs and liens. I deal with priorities below. As to the declarations concerning the conduct of Mr Tiwari, I will make the orders sought by the plaintiffs in paragraphs 11-15 of their suggested orders as they give effect to my findings in paragraphs 60-69 of my judgment of 2 September 2011.

THE ORDERS SOUGHT BY MR MALHOTRA

What moneys is Mr Malhotra entitled to? There is no issue that he is entitled to half the proceeds from the sale of the Footscray and Hillside properties (after expenses of sale).

He is also entitled to half of the balance to be paid by MIG.

Mr Tiwari has been ordered to compensate S&D for amounts paid to Velos & Davis and the amount S&D is liable to pay Velos & Davis in relation to the litigation between Mr Malhotra and Sheela Tiwari. The orders of Balmford J provide that Mr Malhotra is the joint beneficial owner of the business conducted by S&D. Mr Malhotra had a half interest in the moneys paid to Velos & Davis by S&D in relation to the litigation.

The plaintiffs have not included these moneys in what they define as the fund. It may be appropriate that the compensation relating to the litigation should be added to the fund to which Mr Malhotra is entitled to a half share (subject to any liquidator’s or trustee’s lien as referred to above in paragraph 285). As to the moneys which are to be paid to Mr Velos for outstanding fees, the effect of the orders is that these payments will not come out of Mr Malhotra’s share of the fund and accordingly any compensation therefore should not form part of the fund to which he is entitled to a half share.

THE ORDERS SOUGHT BY MR VELOS

Mr Velos seeks a declaration that the amount secured by the Velos & Davis charge is $225,645.29 as at 12 November 2010 plus interest continuing to accrue at a rate of $27.17 per day thereafter.

I am prepared to make this order. In his initial points of claim, Mr Velos sought an order that the amount then owing ($210,596.09) be paid to Mr Velos out of the monies held in Court.[148]
[148]Fourth defendant’s points of cross claim dated 28 January 2009, Court file 36.

I have already dealt with the cost applications sought by Mr Velos.

THE ORDERS SOUGHT BY MR TIWARI

Mr Tiwari seeks an order that the amount secured by the ANZ mortgages is $398,609.12 as at 12 November 2010.

Mr Tiwari’s points of claim of 19 December 2008, sought an order that the moneys in court be paid out in payment of moneys owing or payable under the ANZ mortgage. No sum was pleaded as being owed.[149] The outline of argument of Mr Tiwari dated 7 February 2009 did not refer to any amount as being secured.[150]
[149]Court file 33A.
[150]Court file 51C.

In his affidavit of 11 February 2009 Mr Tiwari deposes to paying the ANZ $353,402.73 together with legal costs of $2,677.83 making a total of $356,080.56 and that upon payment obtaining an assignment of the ANZ mortgage. He calculates the interest since 10 July 2008 to 11 February 2009 as $20,286.28.[151] His closing submissions concludes by submitting the claims by the plaintiffs and Mr Malhotra ought to be dismissed and Mr Tiwari’s equity ought to have priority over the Velos equity.
[151]Court file 52A.

There was no challenge to the evidence of Mr Tiwari as to the amount he paid to the ANZ for the assignment of the ANZ mortgage.

I therefore propose to make the order sought by Mr Tiwari on quantum.

DECLARATIONS OF PRIORITY

As discussed above, the liquidator’s lien under the Universal Distributor’s principle gives right to a lien that has priority over prior securities. The trustee’s lien in support of the trustee’s right of indemnity does not have priority over prior securities. On the other hand the lien constitutes a first charge as against the beneficiaries. Accordingly, the liquidator’s lien will have priority against the prior securities of Mr Velos and Mr Tiwari. The liquidator’s lien will also in effect constitute a first charge as against the trust fund before the beneficiaries interests are met. In this case, therefore, the liquidator’s lien will have priority over the interest of the beneficiaries and the secured claims of Mr Velos and Mr Tiwari.

The trustee’s lien in support of its right of indemnity is subject to the prior securities of Mr Velos and Mr Tiwari. Mr Malhotra’s half should bear its proportionate share of the trustee’s lien. The trustee’s right of indemnity is therefore to be met from the balance of the fund calculated as follows. The fund as a whole should meet the liquidator’s lien. The balance of the fund should be divided into two. The securities of Mr Velos and Mr Tiwari should be deducted from the half not going to Mr Malhotra. The trustee’s indemnity (that has not otherwise been recovered under the liquidator’s lien or orders for costs) should be then thrown equally against Mr Malhotra’s portion and the portion outstanding after payment of the securities of Mr Velos and Mr Tiwari.

If the trustee’s indemnity is not fully satisfied by the application of this method, then I propose to order that the trustee may seek further directions if it is so minded.

I shall order accordingly.

FURTHER PROCEEDINGS

The application of the sixth and seventh defendants is still to be heard. Also orders for the disposition of the moneys in court have yet to be made. These may have to wait until the position of Mrs Tiwari is known, any appeals are resolved and the application of the sixth and seventh defendants is resolved. Accordingly, I propose to adjourn the further hearing of the proceedings to a date to be fixed.

CONCLUSION ON ORDERS

For the above reasons, I declare that:

1 (a) The funds paid in Court representing surplus proceeds of sale of the Footscray Property (including moneys recovered by the plaintiffs from Mr Vartelas) and the Hillside Property, together with the interest accrued thereon;

(b) any funds recovered by the plaintiffs from MIG pursuant to the orders of the Court made on 5 October 2009;

(collectively, “the fund”), is charged by way of equitable lien with payment of the first plaintiff’s reasonable remuneration, costs and expenses occasioned by the first plaintiff in the litigation against the first and second defendants including the first plaintiff’s defence of the first defendant’s appeal in Court of Appeal proceeding no. 3800 of 2009.

2 The second plaintiff, as trustee of the Footscray Property and the Hillside Property, is entitled to be indemnified out of the fund for its reasonable costs and expenses, including the reasonable remuneration, costs and expenses of the first plaintiff, occasioned by:

(a)      the sale of the Hillside property and the payment of the proceeds from that sale into Court;
(b)     the plaintiffs’ prosecution of claims against, and defence of claims by, the first and second defendants in this proceeding with respect to the fund;
(c)      the plaintiffs’ prosecution of claims against, and defence of claims by, the fourth and fifth defendants in this proceeding with respect to the fund;
(d)     the plaintiffs’ defence of the first defendant’s appeal in Court of Appeal proceeding no. 3800 of 2009; and
(e)      the plaintiffs’ recovery of any moneys from the first defendant pursuant to the orders of the Court made on 5 October 2009;

3 The fund is charged by way of equitable lien with payment of the second plaintiffs’ right of indemnity as trustee.

4. Subject to the declarations of priority in paragraph 13 below, the third defendant is beneficially entitled to one half of the fund.

Velos

5 The charges granted by the second plaintiff over the Footscray Property and the Hillside Property in favour of Velos & Davis on 8 October 2004 are valid and effective.

6 The fund is charged with payment of the amount or amounts secured to the fourth defendant under the Velos & Davis charges. The amount secured by the Velos & Davis charge is $225,645.29 as at 12 November 2010 plus interest continuing to accrue at a rate of $27.17 per day thereafter.

Pradeep Tiwari

7 The unregistered real property mortgages granted by the second defendant over the Footscray Property and the Hillside Property in favour of the Australian and New Zealand Banking Group Ltd on 29 July 2002 (“ANZ Mortgages”) are valid and effective.

8 The fund is charged with payment of the amount or amounts secured to the fifth defendant under the ANZ Mortgages. The amount secured by the ANZ mortgages is $398,609.12 as at 12 November 2010.

Declarations as to priority

9 The first plaintiff’s interest in the fund as declared by paragraph 1 has priority over the interests of the second plaintiff and the third, fourth and fifth defendants.

10 The second plaintiff’s interest in the fund as declared by paragraph 2 is subject and subordinated to:

(a) the equitable proprietary interest of the fifth defendant as declared in paragraph 8 above;

(b) the equitable proprietary interest of the fourth defendant as declared in paragraph 6 above.

(c) the equitable proprietary interest of the first plaintiff as declared in paragraph 1 above.

11 The third defendant’s equitable proprietary interest in the fund, as declared in paragraph 4 above, is subject and subordinated to the interest of the first plaintiff declared in paragraph 1 above and half the interest of the second plaintiff declared in paragraph 3 above.

12 The fourth defendant’s interest in the fund, as declared in paragraph 6 above, is subject and subordinated to:

(a) the equitable proprietary interest of the third defendant as declared in paragraph 4 above; and

(b) the equitable proprietary interest of the first plaintiff as declared in paragraph 1 above.

13 The fifth defendant’s interest in the fund, as declared in paragraph 8 above, is subject and subordinated to:

(a) the equitable proprietary interest of the third defendant as declared in paragraph 4 above;

(b) the equitable proprietary interest of the first plaintiff as declared in paragraph 1 above; and

(c) the equitable proprietary interest of the fourth defendant as declared in paragraph 6 above.

Further declarations as against Pradeep Tiwari

14 By giving the Velos & Davis charges and incurring liability for Velos & Davis’s fees and expenses in connection with Sheela Tiwari’s and the second plaintiff’s defence of the action in proceeding no. 6869 of 2002 (“the Malhotra v Tiwari proceeding), the second plaintiff breached its duties as trustee of the Footscray Property and the Hillside Property.

15 The fifth defendant knowingly assisted the second plaintiff’s said breach of its duties as trustee of the Footscray Property and the Hillside Property.

16 The fifth defendant is liable as constructive trustee to compensate and indemnify the second plaintiff for any loss and damage suffered by it as a result of the said breaches of its duties as trustee of the Footscray Property and the Hillside Property.

17 By authorising and facilitating the second plaintiff’s giving of the Velos & Davis charges and its incurring of liability for Velos & Davis’s fees and expenses in connection with the Malhotra v Tiwari proceeding, the fifth defendant contravened his duties as a director of the second plaintiff under sections 180, 181 and 182 of the Act.

18 The fifth defendant is liable, as constructive trustee and pursuant to section 1317H of the Act, to compensate and indemnify the second plaintiff for any loss and damage it has suffered as a result of the said breaches of the fifth defendant’s duties as a director of the second plaintiff.

AND ORDERS AND DIRECTS THAT:
Assessment of quantum of claims
19 In default of agreement, the assessment of each of:
(a)the amount of the first plaintiff’s remuneration, costs and expenses of this proceeding;
(b)the amount of the second plaintiff’s costs as trustee;

is referred to an Associate Judge for hearing and determination.

20 The assessment of the quantum of the loss and damage suffered by the second plaintiff as a result of the breaches of the fifth defendant’s duties as a director of the second plaintiff is referred to an Associate Judge for hearing and determination.

Orders as to costs

21 The plaintiffs’ costs of the proceeding as between the plaintiffs and the first defendant, including any reserved costs, be taxed and paid by the first defendant.

22 The fourth defendant’s costs thrown away by reason of the amendment of the plaintiffs’ claim ordered on 16 October 2009, including any reserved costs, be taxed and be paid by the plaintiffs. The fourth defendant’s costs thrown away by reason of the adjournment on 5 and 16 October 2009, including any reserved costs, be taxed and be paid by the plaintiffs.

23 The plaintiffs’ costs of the proceeding on and after 17 October 2009 as between the plaintiffs and the fourth defendant, including any reserved costs, be taxed and paid by the fourth defendant.

24 There be no order as to costs in relation to the proceeding as between the plaintiffs and the fifth defendant.

25 The fourth defendant’s costs of the proceeding as between the fourth defendant and the fifth defendant relating to the issue of priority as between the ANZ mortgage and the Velos & Davis charges, including any reserved costs, be taxed and paid by the fifth defendant.

26 The third defendant’s costs of the proceedings until 3 June 2009 as between the third defendant and the plaintiffs, including any reserved costs, be taxed and be paid by the plaintiffs. There be no other order as to costs as between the plaintiffs and Mr Malhotra.

27 The third defendant’s costs of the proceedings as between the third defendant and the fourth defendant, including any reserved costs, be taxed and be paid by the fourth defendant.

28 The third defendant’s costs of the proceedings as between the third defendant and the fifth defendant, including any reserved costs, be taxed and be paid by the fifth defendant.

Further directions

29 The plaintiffs are directed to serve a copy of these orders on Sheela Tiwari.

30 Liberty is reserved to Sheela Tiwari to apply within 30 days hereof to vary these orders as she may be advised.

31 Should the second plaintiff’s reasonable costs and expenses as set out in paragraph 2 above not be met through the application of these orders, liberty is reserved for the second plaintiff to apply for further directions in relation to their costs.

34 The further hearing of the proceedings is to be adjourned to a date to be fixed.

---

CERTIFICATE

I certify that this and the 92 preceding pages are a true copy of the reasons for Judgment of Robson J of the Supreme Court of Victoria delivered on 14 February 2011.
DATED this fourteenth day of February 2011.

Associate