Siew Sen Choy v St Kilda Baths Pty Ltd

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION

Not Restricted

No. 7109 of 1998

SIEW SEN CHOY

Plaintiff

ST KILDA BATHS PTY LTD

Defendants

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JUDGE:	Chernov J.
WHERE HELD	Melbourne
DATE OF HEARING:	23 September 1998
DATE OF JUDGMENT:	23 September 1998
MEDIA NEUTRAL CITATION	[1998] VSC 89

INJUNCTION - Interlocutory injunction - Serious issue to be tried - Balance of

convenience.

EX PARTE APPLICATION - Appointment of receivers - Application to discharge or set

aside - Whether adequate notice - Duty to make proper inquiries - Full disclosure of

relevant matters - Discretion.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr J. Styring	Mallesons Stephen Jaques
For the Defendant	Mr W. Martin QC with	O’Donnell Frampton
Mr L. Watts	Salzano
For the Receivers	Mr E. Woodward	Minter Ellison

HIS HONOUR:

The plaintiff applied to the Court for an order that receivers be appointed to the property of the defendant. It did so by way of an originating motion and a summons on that motion of 7 September 1998. Its application was an ex parte application pursuant to which Beach J appointed Messrs Wallace-Smith and Yates receivers of the trust property held by the defendant. By summons 10 September 1998, the defendant has sought to set aside his Honour's order.
The plaintiff says that if the order of Beach J is discharged, an injunction
should be granted restraining the defendant from paying out money in breach of
trust, so as to leave at least $700,000 in the trust, which is her effective interest in
it. I will describe the trust in a moment. The defendant's application for discharge
of the appointment of the receivers is based, in part, on the ground that, effectively,
it was not given notice of the application for the appointment of the receivers and
that the plaintiff has failed to make full disclosure to the Court of all the relevant
matters, as it should have done on its ex parte application.

It is said by the defendant that the plaintiff had put material before Beach J,
that David John Grose (Grose), the sole director and manager of the defendant, is
an undischarged bankrupt, whereas the fact is that Grose was discharged from
bankruptcy in May 1995. The defendant says that this could and should have been
ascertained by the plaintiff through an appropriate search. It seems to me fairly
clear that in the circumstances of this case, the allegation that Grose was an
undischarged bankrupt would be a relevant factor to take into consideration in the
Court's exercise of discretion whether or not to grant the relief sought.

In those circumstances, the plaintiff was under a duty to have made proper inquiries as to the current relevant status of Grose and to put the results of those inquiries before the Court. If authority for that proposition is required, I refer to Thomas A. Edison Ltd v Bullock (1912) 15 CLR 679, at pp.681-682 and Digital Equipment Corporation v Darkcrest [1984] Ch 512, at p.524. A breach of such a duty often leads to a discharge of an ex parte order obtained in the context of such a breach.

I am not satisfied on the evidence, however, that the plaintiff failed to give
proper notice to the defendant of its intention to apply for such an order, or if that
occurred, that it was a deliberate failure. As to the plaintiff's claim that Grose was a
bankrupt, the plaintiff had explained to his Honour that its solicitors did not have
access to the current solvency status of Grose because, as I understand it, there
were computer problems in obtaining that information.

I am satisfied that the plaintiff, at the time it made its application to Beach J,
did not know that Grose had been discharged from bankruptcy and I am satisfied that had it known that fact, it would have made it known to his Honour. Hence, its default in that regard was not intentional and, relevantly, was not a product of its own making.

In any event, I have a discretion whether to embark upon the consideration
of the plaintiff's claim which is, in substance, for orders for the preservation of the
assets which constitute the trust. In the circumstances, I am of the view that I
should not discharge the order of Beach J merely because of the defaults
contended for by the defendant. I will, however, consider the matter pursuant to the
liberty which was reserved by Beach J.

Briefly, the relevant background facts are these: in about October 1997,
negotiations took place between the sister of the plaintiff, Jannie Tay, and Grose
about a possible investment by the plaintiff in the development of the St Kilda Sea
Baths (the project). It was proposed that the baths be acquired, renovated and
leased at a profit. As a result, a contract of purchase was entered into with a
vendor company, Zarawaters Pty Ltd. Later, the contract was terminated.
On or about 15 October 1997, the plaintiff, as trustee of the East-West Trinity
Unit Trust, and Castlepines Holdings Pty Ltd (Castlepines), as trustee of another trust, became participants in the project, effectively as joint venturers under the umbrella of the St Kilda Sea Baths Trust (the trust), pursuant to the St Kilda Sea Baths Trust Unitholders' Agreement (agreement), under which the plaintiff and Castlepines became the only unitholders in the trust, in equal shares. The trustee of the trust was the defendant.
Under the trust deed, the trust fund, as it is defined in the deed, and its
administration were vested in the defendant. The deed provided further that the unitholders were entitled to the fund as a whole, but no unitholder was entitled to any particular asset of it and that the trustee had an absolute and uncontrolled
discretion in the exercise of the authorities and powers vested in it and was not
answerable for any act done in conformity with or in pursuance, or purported
pursuance, of an effective or binding decision of the trustee.
The trust deed also provided that except in relation to a breach of trust
knowingly or willfully committed by the trustee, the trustee was entitled to an indemnity out of and to the extent of the trust fund. But the trustee's rights of indemnity against the unitholders were limited to the situation that I have described,
and in particular, the trustee had no right to be indemnified by any of the unitholders
against liability incurred by it under this deed.
The trustee was given wide powers under the deed. They included
employing and paying professional and other assistants as the trustee thought fit in
the discharge of its duties as trustee. It was also authorised to act in conjunction
with entities in which it may have had an interest. Further, it was given power to
determine all questions and matters of doubt which may arise in the course of the
management, administration, realisation, or the winding up of the trust fund. For
some reason it was also given the power to conduct farming activities.
So far as the removal of trustees is concerned, the unitholders were given
power to remove any trustee and to appoint new trustees, but this has not occurred
here.
So far as the agreement is concerned, that was also entered into on 15
October 1997, between the plaintiff, Castlepines, and the defendant. The agreement defined, amongst other things, who were to be the consultants and it defined the project in more detail, but broadly as I have indicated. It also provided for a project control group, to which I will refer in a moment. It dealt with the equity contributions by the unitholders and provided that the first $200,000 was to be provided by the plaintiff and all subsequent contributions were to be made equally. Upon the termination or the winding up of the trust, the plaintiff became entitled to receive the first $200,000 of any excess by way of return of equity contribution.
Clause 3 of the agreement dealt with the sharing of profits, which, as I
understand it, is not going to arise in this case. The clause provides that all profits
and losses derived or incurred by the trustee are to be shared or borne by the
unitholders equally. It also provides, in cl.3.3, which is relevant to this proceeding,
"Castlepines acknowledges that it shall be solely responsible for all debts and
liabilities, including any future account rendered in relation to works in progress,
owing or incurred by it in respect of the project up to 16 October 1997." Castlepines
then indemnified the plaintiff against actions in relation to those debts and liabilities.
Clause 7.1 provides that the unitholders were to establish a project control group to make all decisions relating to the project and that group was to meet from time to time for the proper administration of the project. Each of the unitholders

were entitled to appoint two representatives to this group and could appoint the
project manager. All decisions of the group were to be made by unanimous vote
(which was wishful thinking, having regard to what transpired), unless otherwise
agreed upon. The fact of the matter is that no such group was formed. There is a
dispute between the plaintiff and the defendant and the other unitholder as to who
was responsible for preventing the formation of this group, but that is not a matter
for resolution in this proceeding.

Clause 8 of the agreement requires the unitholders, within 30 days of the
purchase contract, to prepare, amongst other things, a project budget. It also
requires them to ensure that it be strictly adhered to and neither the unitholders nor
the trustee could incur any expense which was intended to be a shared expense
which was not provided for in the project budget, without prior written consent of
both unitholders. Again, although the aim was laudable, it was never in fact acted
upon.
During August 1997, interests associated with the plaintiff effectively
invested $700,000 for use by the defendant company as part of the deposit to be
paid under the contract of sale of 14 October 1997 for the purchase of the sea
baths. That contract was executed by the defendant and Zarawaters Pty Ltd and a
deposit of $1.2 million was paid by the defendant on 23 October 1997. In March
1998, Zarawaters Pty Ltd issued a proceeding in this court seeking various
declarations in relation to the contract of sale, but principally, that it be brought to
an end. For present purposes, there is no need to analyse that proceeding, other
than to say that on 4 September 1998, the proceeding was dismissed and the
deposit moneys of $1.2 million were ordered to be paid out in certain proportions,
with the result that $1.14 million or thereabouts, was to be paid to the defendant,
but it ended up with the receivers pursuant to the order of Beach J.
I should mention that although the agreement contemplated that each of the unitholders was entitled to appoint two directors to the board of the defendant company, in fact only Grose was appointed. As I understand the evidence, he was appointed upon the nomination of Castlepines.
As I have indicated, the project control group did not eventuate because, the plaintiff alleges, Castlepines refused to attend any meeting. As a result of that, notice of breach was given and it seems to have resulted in an irretrievable, or almost irretrievable, breakdown between the plaintiff and Castlepines and probably the defendant.
The plaintiff claims that the defendant has refused to provide it with relevant information in relation to the contract of sale and it is now concerned that the defendant will pay out the former deposit moneys in breach of trust, to entities which are not entitled to those moneys and some of which, it says, have an association with the defendant and/or Castlepines, with the result that if that were to occur, the plaintiff's investment of $700,000 will be lost.
The defendant, on the other hand, says that the money which it intends to pay out is in payment of expenses incurred in relation to the project. It is not only empowered to do it, but is under an obligation to make those payments under the trust and agreement.
It is common ground that the defendant does not have any assets in its own right and that just over $1.1 million is held by the receivers as the balance of the deposit moneys and that those funds are, subject to any order of the court, available to the defendant for use to discharge the claims it says that have been made upon it in relation to the project. The plaintiff claims that unless the receivers remain seized of the balance of the deposit money or the defendant is otherwise restrained, it will pay out those moneys and such payments will constitute a breach of trust essentially for the following three reasons:
(a)       Many or most of the claims made on the defendant are not referable to the project but are unassociated expenses. It points to the fact that many of those claims are not even in terms addressed to the defendant, but to others, who do not have a relevant relationship with the project. Moreover, claims are made by entities which appear to have a relationship with the defendant.
(b)       The second broad ground of objection is that the plaintiff has not approved those expenses in accordance with cl.7 and cl.8 of the agreement.
(c)         The third broad category of objection is that many of the claims are payable by Castlepines under cl.3.3 of the agreement, and not by the trust.
As to the first ground of complaints, I am satisfied on the evidence, that the claims are wholly or almost wholly referable to the project, even though some of them are not in terms addressed to the defendant. I will not go through all the claims, but I will mention some as illustrating the situation. In relation to the claim made by KPMG, which is exhibit FMQ 5 to the affidavit of Francis Matthew Quinlan (Quinlan), it is common ground that the claim is to be apportioned between the project and Castlepines. Quinlan, in his affidavit, makes that point. The plaintiff referred to a letter from KPMG of 9 September 1997, which is addressed to Mr David Grose, Castlepines Corporation Australia Ltd, care of Grose Property Holdings (Sydney) in relation to the KPMG retainer. The plaintiff says that the terms of that document do not support the proposition that that firm was engaged to do any work for the project. But if one looks at the invoices, it is plain that some of them are referable to the project. Thus, some of the claim is referable to the trust and an apportionment will have to be made in respect of it. This is acknowledged by the trustee.
Taking another contested claim by way of example, namely, exhibit FMQ 13 to the Quinlan affidavit, that is an invoice from Grace Consulting Pty Ltd which is addressed to Frank Quinlan and David Grose, St Kilda Baths Pty Ltd. It seems to me that that particular notification is intended to indicate that the invoice is to go to the defendant and the work which is identified in the invoice is also consistent with work having been done in relation to the project.
I refer also to exhibit FMQ 19 of the Quinlan affidavit. Mr Styring, who
appeared for the plaintiff, pointed out that there is, at least on the face of it, some
doubt as to how the moneys are claimed by Mathie Pell & Associates. The
question is whether it is claimed in relation to the project or for some other work.
The answer to the question requires an analysis of other exhibits, namely, exhibit
TAW 21 to Timothy Alexander White's (White) affidavit, item 16 of exhibit DG 5 to
Grose's affidavit, (as well as exhibit FMQ 9 to Quinlan's affidavit). Those
documents show that Mathie Pell & Associates has claims in relation to the Austlink
Corporate Park project (which is unrelated to the St Kilda Sea Baths project) and in
relation to the project in question. On a fair reading of the documents, however, the
claim for $35,000 relates to the project in question.
I am also satisfied that to the extent that any invoices contain charges for work performed outside the project, those charges have been separated out and are not sought to be paid by the trustee. So far as the claim by Retail Enterprise is
concerned, I am satisfied on the evidence that it did work in relation to the project. I refer in particular to exhibit FMQ 13 to Quinlan's affidavit, which shows that it was associated with the project. Similarly, in relation to items 1 and 2 of exhibit DG 5 to Grose's affidavit, if one looks at the correspondence which is exhibited to White's

affidavit, particularly TAW 22(a), it shows that GPH was also carrying out work as
part of the project.

It seems to me, that there is no evidence on which I could properly find that the trustee is seeking to pay accounts improperly. That is not to say, of course, that the trustee may not err in his judgment. But if a mistake is made, then it is a question of whether or not that mistake was made negligently. The trustee is on notice and so is Grose, the director of the trustee, as to its obligations. In fact, there is material before the court to the effect that Grose is well aware of his obligations and will be personally at risk if he determines negligently what items are to be paid.
In relation to the plaintiff's second category of complaints, namely, that the expenses have not been approved by the plaintiff as is required by cl.7.2 and cl.8.2, in my view, the affidavit material shows that the plaintiff was aware of them and intended that they be paid and at least as to some of them, she contemplated paying them herself. Moreover, she has not gone on affidavit to say that these expenses were incurred without her approval.
The third matter on which the plaintiff relies, namely, that the payments or
some of them should be made by Castlepines and not the defendant, is, I regret to
say, in the circumstances of this application impossible for me to resolve without
looking at some detail as to the construction of those words and each payment
individually. Even though there may be an argument available to the plaintiff on
that point, it is in my view not sufficiently strong to warrant the retaining of the
receivers or the granting of an injunction to restrain the defendant from paying the
accounts.
I am not satisfied that the plaintiff has made out a serious case in relation to the first two points. To the extent that it has made out the case of a serious issue to be tried in relation to the third point, in my view, the balance of convenience in relation to that and in any event, bearing in mind that third party creditors will be affected, lies in favour of discharging the order of Beach J and in refusing to grant an injunction to restrain the trustee from paying the debts of the project. Any loss the plaintiff may suffer as a result of negligent acts of Grose can be made the subject of a claim for damages against the defendant and Grose.
For those brief reasons, I will discharge the order of Beach J and I will refuse to grant the injunction sought.

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[1998] VSC 89

23 September 1998