Roufeil v Lusby

[2003] NSWSC 1002

CITATION:	Roufeil v Lusby [2003] NSWSC 1002
HEARING DATE(S):	03/09/03
JUDGMENT DATE:	5 November 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Barrett J
DECISION:	Declaration that company is owner in equity
CATCHWORDS:	EQUITY - estoppel - acquisition by estoppel - father and son cause company to be represented as owner of property purchased by them with funds provided by father and mother - company conducts itself as owner and acknowledges debt to father and mother - father and son estopped from denying company's ownership
CASES CITED:	Dillwyn v Llewellyn (1862) 4 DeGD&J 517 Ramsden v Dyson (1866) LR 1 HL 129
PARTIES :	Mark Damian Charles Roufeil - First Plaintiff Lusby's Furniture Company Pty Limited (in liquidation) - Second Plaintiff Craig Steven Lusby - First Defendant Denis Raymond Lusby - Second Defendant
FILE NUMBER(S):	SC 1863/03
COUNSEL:	Mr S M Golledge, Solicitor - Plaintiffs Mr A J O'Brien - Defendants
SOLICITORS:	The Argyle Partnership - Plaintiffs King Cain - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

BARRETT J

WEDNESDAY, 5 NOVEMBER 2003

1863/03 – MARK DAMIAN CHARLES ROUFEIL & ANOR v CRAIG STEVEN LUSBY & ANOR

JUDGMENT

1 At issue in these proceedings is the ownership of a factory and certain plant and equipment within it. The rival claimants are, on the one hand, Lusby’s Furniture Company Pty Ltd (a company of which Mr Roufeil is liquidator pursuant to an order for winding up in insolvency made by this court on 28 April 2002) and, on the other, Craig Lusby and his father Dennis Lusby. It is necessary to review, in the first instance, the circumstances of the acquisition of the property in question.

2 In May 1996, Craig Lusby became aware that the assets of a furniture manufacturing business were available for purchase from a company which had gone into liquidation. Craig Lusby was the licensee of a hotel at Rockley, the town in which the furniture business operated. He and his father inspected the premises and plant and decided to submit an offer. The liquidator found the offer acceptable. In late June 1996 (or on 1 July of that year), Craig Lusby and Dennis Lusby went to see Mr Cain, a solicitor in Bathurst, to instruct him in relation to the purchase of the real estate. At about the same time (but after the visit to the solicitor), Craig Lusby alone went to see Mr Harris, an accountant in practice in Bathurst, to obtain advice about the structuring of the new business. Mr Harris advised that a company structure should be used. Craig Lusby gave evidence that in late June 1996, Dennis Lusby gave him two bank cheques, each for $25,000, and that he gave one to the liquidator of the company that operated the business “for the purchase of the plant and equipment” and the other to McDowall & Co “for arranging matters with the liquidator”. I infer that these cheques were handed over soon after Craig Lusby received them from Dennis Lusby in late June 1996.

3 Contracts for the purchase of the real property were exchanged on 4 July 1996, with Craig Lusby and Dennis Lusby as purchasers. The next day, 5 July 1996, a company was, at Mr Harris’ request, registered under the name “Lusby’s Furniture Company Pty Ltd” and Craig Lusby and Dennis Lusby became its shareholders and directors. On 11 September 1996, the purchase of the real property under the contract dated 4 July 1996 was completed. Craig Lusby and Dennis Lusby both testified that the whole of the deposit and balance of purchase moneys was provided by Dennis Lusby.

4 The company commenced to conduct the furniture manufacturing business. In doing so, it occupied the premises and used the plant and machinery acquired by Craig Lusby and Dennis Lusby.

5 In June 1997, Craig Lusby consulted Mr Harris about the preparation of financial statements and an income tax return of the company for the period ended 30 June 1997. Accounts of what transpired when they met differ. I shall come back to that matter. It is sufficient to record, at this point, that journal entries were on 30 June 1997 made in the books of the company recognising the land, buildings, plant and equipment and associated legal fees and stamp duty as an asset and also recognising a liability to D & S Lusby equal to the acquisition cost of those items. The financial statements and tax return of the company for the period to 30 June 1997 were prepared on the basis that the company owned the land, buildings, plant and equipment and that it owed the Messrs Lusby an amount equal to the acquisition cost. That same pattern was continued in the accounts and tax returns for all subsequent years. The tax returns included claims for deductions for depreciation of plant. Such deductions are available under taxation legislation only in respect of plant or articles “owned” by the relevant taxpayer and used by that taxpayer for the purpose of producing assessable income.

6 Following the making of the winding up order in respect of the company in April 2002, Craig Lusby, as a contributory, made an application to the court for an order terminating the winding up. In support of that application, he filed affidavits sworn by him on 30 August 2002 and 19 September 2002 and an affidavit of the accountant, Mr Harris, sworn on the former day. In his second affidavit, Craig Lusby swore that the sum of $133,447 was owed on loan account by the company to his parents, Dennis Lusby and Sylvia Lusby. He also swore that he was informed by his parents that they would enter into a deed of subordination in respect of their loan. Mr Harris annexed to his affidavit a trading account of the company for the period 1 July 2002 to 31 July 2002, a profit and loss account for that period and a balance sheet as at 31 July 2002. Also annexed were corresponding documents for the year ended 30 June 2002 and the company’s tax return for that year. Mr Harris said that, in preparing the documents annexed, he had relied upon information given by Craig Lusby, as well as primary records “such as tax invoices, accounts from creditors and the like”. The two balance sheets showed non-current asset items as follows:

Item	30 June 2002	31 July 2002
Freehold land – at cost	38,016	38,016
Buildings – at cost	43,228	43,228
Less accumulated depreciation	(21,215)	(21,306)
Structural improvements	7,554	7,554
Less accumulated depreciation	(1,266)	(1,294)
Plant & equipment – at cost	78,283	82,459
Less accumulated depreciation	(47,281)	(48,116)
Motor vehicles – at cost	42,308	42,308
Less accumulated depreciation	(21,954)	(22,462)

7 On the liabilities side of each balance sheet annexed to Mr Harris’ affidavit of 30 August 2002 was an item under the heading “Non-current liabilities” and sub-heading “Interest-bearing liabilities”:

“Unsecured – Loan – D & S Lusby 134,447”.

8 Mr Harris’ affidavit concluded:

“After extensive enquiries and analysis of all company reports and accounts supplied tome and given the agreement of the Australian Taxation Office, I am of the opinion that the company Lusby’s Furniture Company Pty Limited ACN 074 750 191 is solvent.”

9 The balance sheet of the company as at 30 June 1997 is in evidence. Consistent with the treatment in the 2002 balance sheets annexed to Mr Harris’ affidavit, this shows freehold land at a cost of $38,016, buildings at a cost of $43,228 and structural improvements at a cost of $7,554. Plant and equipment is there shown, however, at a cost of $21,686, as opposed to $78,283 in 2002, the difference being attributable to acquisitions of further plant and equipment in the intervening years. The 30 June 1997 balance sheet, like those of 2002, shows under non-current liabilities a loan from D & S Lusby, although the amount is slightly different ($134,509 in 1997 compared with $134,447 in 2002).

10 Mr Harris explained how the items in the 1997 balance sheet (carried through, year by year, to the 2002 balance sheet) had come about. He said that in about October or November 1997 Dennis Lusby had expressed a concern about “money that I have lent Craig” and that Craig Lusby had said, “I want a note of some sort that dad still owns the land”; to which Mr Harris replied “OK” and also said:

“In the company your father’s interest is maintained by noting it in the balance sheet. However, as the land is shown in the books we will have to show a liability to your father to that value.”

Mr Harris also said that, as a result of that conversation certain entries were made and posted to the accounts of the company. These entailed recognition of plant and equipment, land and buildings and acquisition costs as assets of the company, against a liability “D & S Lusby” of $121,080.01. Mr Harris testified that these entries were made in a ledger that his firm maintained and in which entries were made on the basis of information given by Craig Lusby.

11 Craig Lusby testified that Mr Harris said on the occasion in question Mr Dennis Lusby would be shown as the owner of the factory and plant but Mr Harris’s evidence was that he had no recollection of saying this and that such an approach was entirely at odds with the accounts and tax returns he then proceeded to prepare on an annual basis. Craig Lusby also testified:

“Later when I saw the financial statements for the year ended 30 June 1997 I said to Mr Harris words to the effect: 'Is that okay to show the land buildings and plant in these statements?' He said, 'this is how it is done. It does not mean anything as to who owns the land and equipment. Your father will still own the land and equipment. If we had to have a different tax return for everything you have got, we will be doing 20 or 30 tax returns’.”

12 Mr Harris said that he had no recollection of giving any such advice and that it is unlikely that he did so. He confirmed that depreciation could be claimed for tax purposes only by the person by whom plant is owned.

13 Mr Harris was extensively cross-examined about his 2002 affidavit prepared for the termination application. He was asked in particular, in relation to the balance sheet prepared for the purposes of that application:

“Q. As a result of your dealings with Mr Lusby, from 1997 through to 2002, when that balance sheet was prepared, do you have any doubt at all that he was aware that the annual tax returns and the financial statements showed the land and the plant and equipment as an asset of the company?”

His response was:

“No, I don’t have any doubt that he was aware.”

Mr Harris’s cross-examination concluded as follows:

“Q. Did Craig or Dennis Lusby do or say anything in your [scil. their] dealings with you that caused you to doubt the accuracy of those balance sheet entries and tax returns?
A. None at all. There was no discussions. They were signed basically as we prepared them.”

14 Dennis Lusby gave evidence of the circumstances in which the assets were bought, noting that, while it was intended that each of he and Craig Lusby would provide half of the necessary funds, Craig Lusby was unable to provide his half. Dennis Lusby then provided the full sum but soon afterwards became concerned that there was no adequate record of this, a circumstance that worried him because he feared that Craig Lusby’s estranged wife might make some claim. Dennis Lusby’s affidavit contains the following passage:

“After working with Craig for about 6 to 9 months without pay I was becoming increasing concerned at the way Craig was running the business. He was not closely supervising a number of staff that he had employed. I ceased assisting after 6 to 9 months and returned to St Marys in Sydney with my wife. Myself and my wife still visited on week-ends but did not do any further work in the business or otherwise take part in the business.
I was still concerned that Craig had not paid his half of the monies, particularly given that the land was in the joint names of myself and Craig. I said to Craig words to the effect on a number of occasions:
‘One thing that is really worrying me is your ex-wife’s still in the background. I don’t like it. Just my concern is that if something happens to you I don’t want your ex-wife making a claim for half of the land.’
I also said: ‘I want something on paper that if that happens, it is made clear that you have not paid your half of anything’.
Craig said: ‘Don’t worry about it’.
Later Craig said to me: ‘I’ve seen the accountant and everything is settled. It has been documented that I have not paid my half and everything is alright.’”

15 Dennis Lusby also testified that he had seen the company’s financial statements for the year ended 30 June 1997. He said in his affidavit that he “saw something in the accounts which showed that I had supplied all the money”. He also said that he was happy with this as it was something he could point to and say, “Look, I provided all of the money”. Dennis Lusby also said in his affidavit:

“I did not acquire the land and equipment on behalf of the company. Nor did I intend that the land and equipment be owned by the company. If I had thought that the recording of a loan of monies in this way might result in a change of ownership in the land and equipment I would not have agreed to such a recording in the books of the company.”

16 Dennis Lusby, however, was cross-examined about these matters:

“Q. So you looked through the financial statements to look for that?
A. Hmm, hmm.

Q. That's right, isn't it?
A. Yes, I suppose so.

Q. And you would have seen in that process the assets side of the balance sheet?
A. Yes.

Q. Because you were interested in the contents of the balance sheet, weren't you?
A. The way it, something had to be in black and white showing that it was owed to me.

Q. That's why you were interested in looking and examining what the balance sheet said; that's right?
A. Right.

Q. It wasn't a complicated balance sheet for this company, it doesn't run to many pages?
A. Well, there was only one sheet, I think.

Q. When you get to that one sheet, you have a look at the asset side of it and then you have a look at the liability side of it? Is that what happened?
A. Not really. I wasn't actually interested what asset we had. I just looked at my name, with anything associated with my name. That's all.

Q. I put it to you that you were interested in seeing what was actually in the financial statements and that you looked at both the assets and liabilities, to make sure you were shown as being owed this money?
A. Yes.

Q. And you were satisfied, on looking at the balance sheet, that there was a debt owed to you by this company?
A. Right.

Q. And that debt was owed to you for the purchase price of the assets?
A. Correct.

Q. And you were content or happy, I think your affidavit says, that that entry in the financial statements accurately recorded your position vis-a-vis the company?
A. Yes.

Q. And you were also happy, or content rather, that the reverse side of that transaction is that in the asset side of the balance sheet it shows the company as owning the land and the plant and equipment?
A. Hmm, hmm.”

17 This cross-examination causes me not to accept the second and third sentences of the extract from Dennis Lusby’s affidavit set out above.

18 The financial statements of the company for all years since the year ended 30 June 1997 are in evidence. The profit and loss accounts show an annual outgoing for “rates”, from which I infer that the company paid the council rates on the property.

19 On the basis of the whole of the evidence to which I have referred, I am satisfied that, from the time at which the journal entries were made on 30 June 1997, it was the intention of Craig Lusby that, as between himself and the company, the land, buildings, plant and equipment should be in the ownership of the company to the exclusion of himself and Dennis Lusby and that the company should be indebted to Dennis Lusby and Sylvia Lusby for the acquisition cost of those items. I am likewise satisfied that, at least from the time that he saw and approved the company’s balance sheet as at 30 June 1997, Dennis Lusby had the same intention as against the company. Both father and son allowed the company to prepare its financial statements on the footing that it was the owner of the relevant items and was indebted to Dennis Lusby and Sylvia Lusby for the purchase moneys. Each was content that the company should represent matters in that way and Mr Harris understood both of them to adhere to the position depicted. Craig Lusby played an active part in the company’s presenting its financial statements in the form in which they were presented. Dennis Lusby acquiesced in Craig Lusby’s actions. Craig Lusby, upon his oath, consciously and expressly embraced the ownership and debt position shown in the accounts in his pursuit of the application for termination of the winding up. The company, for its part, ordered its affairs on the footing that the land, buildings and plant belonged to it, including by representing itself to the taxation authorities as the owner of the plant in respect of which depreciation allowances were claimed and, of course, by exercising dominion over the land, buildings and plant for the purposes of carrying on its business. There was never any suggestion by the company that it was a lessee or licensee and should have been paying rent or other compensation for use and occupation. In fact, as I have said, it paid the council rates.

20 These facts lead inevitably, in my opinion, to the conclusion that both Craig Lusby and Dennis Lusby are estopped from denying the company’s ownership upon the basis summarised at paragraph 17-105 of the fourth edition (2002) of Meagher, Gummow and Lehane’s “Equity Doctrines and Remedies” as emerging from Dillwyn v Llewellyn (1862) 4 DeGD&J 517 and Ramsden v Dyson (1866) LR 1 HL 129 and the many subsequent cases in which the basic principles based on unconscionability have been developed and applied. As a result, the company is the equitable owner of the land, buildings and plant in question.

21 I make declarations and orders in terms of paragraphs 3, 4, 5, 6 and 7 in the originating process filed on 13 March 2003. I also order that the defendants pay the plaintiffs’ costs of the proceedings.

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Last Modified: 11/06/2003