Staatz v Berry, in the matter of Wollumbin Horizons Pty Ltd (in liq) (No 3)
[2019] FCA 924
•20 June 2019
FEDERAL COURT OF AUSTRALIA
Staatz v Berry, in the matter of Wollumbin Horizons Pty Ltd (in liq) (No 3) [2019] FCA 924
File number: QUD 32 of 2018 Judge: DERRINGTON J Date of judgment: 20 June 2019 Catchwords: CORPORATIONS – liquidation – court orders or directions in winding up as to manner in which trust property is to be applied – company holding land on constructive trust
TRUSTS – constructive trusts – company promoted scheme to establish commune – subscribers to have beneficial interest in land by unit in unit trust – unit trust fails and commune fails – directions as to beneficial interest in land – more subscribers in value than value in land
CORPORATIONS – winding up – costs expenses and remuneration of liquidator of corporate trustee where trust not sole activity of company – where limited right of indemnity
Legislation: Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
Trustee Act 1925 (NSW)
Federal Court Rules 2011 (Cth)
Cases cited: 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377
Australian Securities and Investments Commissionv Letten (No 17) (2011) 286 ALR 346
Bannister v Bannister [1948] 2 All ER 133
Bathurst City Council v PWC Properties Pty Ltd (1998) 195 CLR 566
Baumgartner v Baumgartner (1987) 164 CLR 137
Bennett v Horgan (unreported, Supreme Court of New South Wales, Bryson J, 4056 of 1991, 3 June 1994)
Bishopsgate Investment Management Ltd v Homan [1995] Ch 211
Black Uhlans Incorporated v Crime Commission [2002] NSWSC 1060
Bloch v Bloch (1981) 180 CLR 390
Boyce v Boyce (1849) 16 Sim 476
Brown v Heffer (1967) 116 CLR 344
Bryson v Bryant (1992) 29 NSWLR 188
Burgess v Rawnsley [1975] Ch 429
Calverley v Green (1984) 155 CLR 242
Carson v Wood (1994) 34 NSWLR 9
Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20
Central Trust and Safe Deposit Co v Snider [1916] 1 AC 266
CGU Insurance Limited v One.Tel Limited (In Liquidation) (2010) 242 CLR 174
Dean v Aylward [2017] NSWSC 972
Drake v Whipp [1996] 1 FLR 826
Dyer v Dyer (1788) 30 ER 42 (Ch)
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Foskett v McKeown [1998] Ch 265
Foskett v McKeown [2001] 1 AC 102
Giumelli v Giumelli (1999) 196 CLR 101
Goodfriend v Goodfriend [1972] SCR 640
Halloran v Minister Administering National Parks and Wildlife Act 1974 (2006) 229 CLR 545
Helou v Nguyen [2014] NSWSC 22
Howard v Miller [1915] AC 318
Imam Ali Islamic Centre v Imam Ali Islamic Centre [2018] VSC 413
John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1
Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 354 ALR 436
Jones v Kernott [2010] 1 WLR 2401
Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62
Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425
Lane (trustee), in the matter of Lee (bankrupt) v Deputy Commissioner of Taxation [2017] 253 FCR 46
Legal Services Board v Gillespie-Jones (2013) 249 CLR 493
Lucas v Lucas [2018] NSWSC 962
Macedonian Orthodox Community Church v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese (2008) 237 CLR 66
Munro v Munro [2018] VSC 747
Muschinski v Dodds (1985) 160 CLR 583
Oughtred v Inland Revenue Commissioners [1960] AC 206; [1958] Ch 383
Papas v Co [2018] NSWSC 1404
Re Amerind Pty Ltd; Commonwealth v Byrnes and Hewitt (2018) 54 VR 230
Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32
Re Hallett’s Estate; Knatchbull v Hallett (1879) 13 Ch D 696
Re Mackie Group Pty Ltd (in liq) (2017) 122 ACSR 537
Re Universal Distributing Co (in liq) (1933) 48 CLR 171
RWG Management Ltd v Commissioner for Corporate Affairs (Vic) [1984] VR 385
Scott v Scott (1963) 109 CLR 649
Shalson v Russo [2005] Ch 281
Silvia (Trustee) v Williams, in the matter of Williams (Bankrupt) [2018] FCA 189
Sivritas v Sivritas [2008] VSC 374
Smith, in the matter of Buddy Management Pty Ltd (in liq) v Buddy Management Pty Ltd (in liq) [2019] FCA 566
Stack v Dowden [2007] 2 AC 432
Stavrianakos v Western Australia [2016] WASC 64
Widmer v Imagination Enterprises Pty Ltd (unreported, Supreme Court of Western Australia, Bredmeyer M, CIV 1126 of 1999, 9 April 1999)
Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484
Date of hearing: 3 December 2018, 4 December 2018, 5 December 2018 and 25 February 2019 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 225 Counsel for the Plaintiff: Mr C Jennings Solicitor for the Plaintiff: Patane Lawyers Counsel for the First Defendant: The first defendant appeared in person Counsel for the Second Defendant: The second defendant did not appear Counsel for the Third, Fourth, Fifth and Sixth Defendants: Mr JM Manner Solicitor for the Third, Fourth, Fifth and Sixth Defendants: Mark Swivel Legal Counsel for the Seventh Defendant: The seventh defendant appeared in person Counsel for the Eighth Defendant: The eighth defendant appeared in person Counsel for the Ninth Defendant: The ninth defendant appeared in person ORDERS
QUD 32 of 2018 IN THE MATTER OF WOLLUMBIN HORIZONS PTY LTD (IN LIQUIDATION) ACN 606 581 364
BETWEEN: STEVEN NEVILLE STAATZ AS LIQUIDATOR OF WOLLUMBIN HORIZONS PTY LTD (IN LIQUIDATION) ACN 606 581 364
Plaintiff
AND: RON BERRY
First Defendant
GILLIAN NORMAN
Second Defendant
EMANUELE AGUS (and others named in the Schedule)
Third Defendant
JUDGE:
DERRINGTON J
DATE OF ORDER:
20 JUNE 2019
THE COURT ORDERS THAT:
1.The plaintiff is justified in treating the deed of trust dated 23 June 2015 between Peter Hetherington, as settlor, and Wollumbin Horizons Pty Ltd (the Company), as trustee, as ineffective and the trust purportedly established thereby as invalid.
2.The plaintiff is justified in treating real property situated at 3222 Kyogle Road, Mount Burrell in New South Wales, being Lot 20 in Deposited Plan 755714A and 755714B and Lot 2 in Deposited Plan 1148316 (being all the land in folio identifiers 20/755714A, 20/755714B and 2/1148316) (the Property) as being held by the Company, as bare trustee, subject to any charge or lien that the Company has over the Property to secure payment of any debts properly incurred by the Company as trustee, pursuant to a constructive trust (the Trust) for those parties who subscribed money for the purposes of becoming members of the Bhula Bhula Community.
3.The plaintiff is justified in treating the beneficiaries of the Trust as those persons whom the plaintiff identifies as having subscribed to become members of the Bhula Bhula Community where the funds so subscribed were or were intended to be used by the subscriber in relation to the costs of acquisition of the Property, the purchase price of the Property, the discharge of the mortgage over the Property, or for the maintenance or improvement of the Property, in proportions calculated rateably to the amount of money they each contributed to the total funds subscribed for those purposes.
4.The plaintiff is justified in proceeding to market for sale and selling the Property in the way he considers appropriate.
5.The plaintiff is appointed receiver, without security, over the Property, pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth).
6.The plaintiff be so appointed with the powers provided by s 420 of the Corporations Act 2001 (Cth) as if the reference therein to “the corporation” were to “the Trust” together with the powers that a liquidator has in respect of property of a company (in its role as legal owner and trustee) pursuant to s 477 of that Act.
7.The need for the plaintiff, as receiver, to file a guarantee under rr 14.21 and 14.22 of the Federal Court Rules 2011 (Cth) is dispensed with.
8.Pursuant to s 74MA of the Real Property Act 1900 (NSW), Melissa Hirsch, within 14 days of the date of this order, withdraw the caveat (dealing number AM352133M) from the title of the Property.
9.It is declared that the Company has a right of indemnity from the assets of the Trust for Trust debts, being those debts properly incurred as trustee of a constructive trust.
10.The plaintiff is justified in calling for proofs of Trust debts of the Company, being those debts properly incurred as a trustee of a constructive trust, and to have recourse to the assets of the Trust to satisfy those claims, as accepted.
11.The plaintiff is justified in recovering the costs and expenses incurred by the Company and the plaintiff in realising the assets of the Trust, and otherwise dealing with the Trust, from the assets of the Trust.
12.The plaintiff, in his capacity as administrator and liquidator of the Company and as receiver of the Property, is entitled to be paid from the proceeds of the sale of the Property:
(a)his costs, expenses and remuneration to the extent to which they relate to work undertaken by the plaintiff in relation to the administration of the Trust including the work undertaken to render the Company’s right of exoneration available to meet the claims of the Company’s creditors whose debts were incurred in the administration of the trust;
(b)an amount in respect of his costs, expenses and remuneration relating to general insolvency matters, to the extent the costs, expenses and remuneration concern the administration of the Trust.
13.It is declared that the plaintiff is entitled to a lien over the assets of the Trust in respect of his fees, expenses, and outlays incurred in his capacity as administrator and, subsequently, as liquidator of the Company to the extent allowed by the Court.
14.The plaintiff’s costs of the proceeding (including reserved costs), calculated on a full indemnity basis, be paid out of the assets of the Trust and, to the extent not satisfied from the assets of the Trust, be costs in the liquidation.
15.It is declared that the plaintiff has a lien over the assets of the Trust for his costs of these proceedings.
16.The third, fourth, fifth and sixth defendants’ costs of the proceeding (including reserved costs), calculated on a full indemnity basis, be paid out of the assets of the Trust.
17.Liberty to apply.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
DERRINGTON J:
Introduction
The liquidator of Wollumbin Horizons Pty Ltd (the Company), Mr Steven Staatz, seeks the Court’s guidance and certain orders in relation to the winding up of the Company and land which it holds in northern New South Wales, just south of the Queensland border.
The matter before the Court has numerous difficulties. First, the Company had very poor and limited record keeping and acted by or through solicitors with, apparently, equally poor attention to detail. The Company’s operations as a purported trustee were often legally misconceived and it engaged in activities in disregard or ignorance of the legal rights and obligations between it and others, including persons who depended on it. These create significant impediments to reconstructing the events relevant to these proceedings and giving sensible legal characterisation to the consequences of persistent random and casual conduct. Secondly, a number of the defendants were without legal representation. Whilst some of those respondents admirably tried their best to focus on the matters relevant to the issues to be decided, a number were distracted by extraneous concerns and were inclined to air their actual or perceived grievances against the promoters of the Company, the liquidator, and other defendants. Thirdly, and consequentially upon the lack of representation, much of the evidence sought to be advanced was inadmissible or irrelevant to the matters arising for determination. That said, the material presented by the liquidator was admitted without relevant objection and the evidential facts on which the matter rests were not greatly disputed.
In brief terms this case concerns the activities of Mr Mark Darwin and his associates who promoted a scheme for the establishment of a form of commune called the “Bhula Bhula Community” or the “Bhula Bhula Community Village” on land in northern New South Wales. All members were to contribute to the cost of its establishment, acquisition and operation. Apparently, this form of co-habitation on a single parcel of land is not uncommon in the north-eastern parts of that State. The persons intending to participate in the Community were told that, by reason of their financial contributions to the scheme, they would acquire an interest in the land on which it was to be situated, and that it was a place where they were each entitled to establish a residence. The initial subscribers were also told that the funds which they paid would be held on trust pending the purchase of the land and other related matters. A substantial amount of money was amassed by Mr Darwin, the Company was incorporated, and it purchased the land in its name. Some of the funds received from early subscribers were used to purchase the land. Borrowed funds were also used and a mortgage over the land was granted to the lender to secure repayment. Subsequently, additional persons were induced to become members of the Community by subscribing money on the faith of securing a right to reside in the commune and acquiring an interest in the land. Some of the funds advanced by those persons were used to discharge the mortgage. Following that, further persons were likewise induced to pay money for the right to be part of the Community and to acquire an interest in the land. By that time, however, the purchase price of the land and the mortgage debt had been fully discharged.
It is important to keep in mind that each person who became a Community member did so on the understanding that others who paid their subscriptions and who became members would also have an interest in the Community land. That was so regardless of whether they were initial subscribers whose money was used to pay the purchase price, or whose subscribed money was used to pay the mortgage, or whose money was received after the acquisition of the land and was intended to be used to maintain and improve the land. There was, in effect, a quasi-domestic, joint endeavour or enterprise pursuant to which the Community would be established, maintained and operated with each member having ownership of the land on which it was situated. Perhaps one characteristic which sets this case apart from others is that the membership of the joint endeavour expanded over time and all whom now claim an interest in the land on which the Community was established were not original members of the Community whose money was paid towards the acquisition of the land.
Mr Darwin, and others involved in the promotion of the Community, informed potential Community members they would have an interest in the land by way of a unit in a unit trust of which a company would be trustee. Although some steps were taken to establish the unit trust, which was to underpin the operations of the Community, no valid unit trust to which the land was subject was effected. The proposed commune failed, not in the least because the local town planning approvals required for multiple dwellings to be erected on the land had not been obtained. The Company incurred substantial debts and became insolvent. In the present proceedings, the liquidator seeks the Court’s guidance as to the manner in which the Company holds the title to the land and how, in respect of the land, the Company’s liquidation is to proceed.
The defendants to the proceedings are a number of the erstwhile Community members who claim to have a beneficial interest in the land on which the Community was sited. The basis of some of the claims is that the company holds the land on a resulting trust for those members who subscribed money for its purchase, as it was not intended that the Company itself have any beneficial interest in the land. Whilst it is possible to identify with some precision that money paid by some of the subscribers was used to meet the purchase price of the land, there was insufficient detail in the evidence available to permit identification of the precise entitlements of all parties. In other words, tracing the funds of all subscribers into the purchase price is a difficult, if not impossible, task. Additionally, whilst the land might also be said to be held on a constructive trust, the evidence does not permit the Court to ascertain the identity of all persons who might be beneficiaries under that trust.
It is therefore necessary to deliver these reasons which determine the legal and equitable rights of the various groups, and the liquidator should then be able to ascertain the individual entitlements. If there is uncertainty, the liquidator can approach the Court for additional directions.
The third, fourth, fifth and sixth defendants were represented by Mr Manner of Counsel. The other five defendants had no representation. Some of those raised a wide range of grievances, many of which were not relevant to the issues under consideration. In particular, the second defendant has persisted in raising irrelevant and scandalous matters. Prior to the hearing of final submissions in open court on 25 February 2019, she emailed a copy of her ‘Closing Statement’, however she did not file that document or attend the hearing. The document traverses many matters, none of which are of assistance to the Court in resolving the proceeding. In any event, she refers in that document to her “intention not to participate further” in the proceeding. The document reflects one of the many ways her actions have increased the costs of the liquidation and this litigation, and thereby reduced any potential return to her and the other subscribers and creditors. If such conduct continues, it will no doubt further erode funds to be realised by the sale of the land. That said, amongst the arguments advanced by the other litigants in person, some perspicacious observations were made.
Jurisdiction to decide the matter
The liquidator relies on the power of the Court under s 90-15 (or s 45-1) of Schedule 2 of the Corporations Act 2001 (Cth) or under ss 63 and 93 of the Trustee Act 1925 (NSW) for the making of orders or directions in relation to the trust, at least in so far as it concerns the winding up of the Company. He also seeks orders appointing him the receiver of the assets of the trust to facilitate his carrying out of the Court’s orders. The power of the Court to make such orders arises under s 57 of the Federal Court of Australia Act 1976 (Cth) and r 14.21 of the Federal Court Rules 2011 (Cth).
The power under the Corporations Act can be utilised where a company is under external administration: s 90-15(1); and a company is taken to be under external administration when, inter alia, a liquidator has been appointed: s 5-15. Section 90-15 confers broad powers on the Court to make “such orders as it thinks fit in relation to the external administration of a company”. The examples given in s 90-15(3) include determining any question arising in the external administration of the company. In Krejci (liquidator), in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425, Gleeson J observed in relation to the scope of the power:
46The principles applicable to the exercise of the Court’s power under s 90-15 of the Insolvency Practice Schedule are, in effect, the same as those that applied to the exercise of the Court’s power under ss 479(3) and 511 of the Act: Walley, in the matter of Poles & Underground Pty Ltd [2017] FCA 486 at [41]; Re Glengrant Civil Pty Ltd (in liq) [2017] NSWSC 843 at [11] and Re Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1556 (“Re Octaviar”) at [5].
47The relevant principles were recently set out by Black J in Re Octaviar, where his Honour observed as follows:
[7]I summarised the scope of the Court’s power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) (2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows:
Section 479(3) of the Corporations Act allows a liquidator to apply to the court for directions in relation to a matter arising under a winding up. The function of a liquidator’s application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114; Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [46]. The court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision: Sanderson v Classic Car Insurances Pty Ltd above at 117; Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674 at 686-7; 5 ACSR 673; 9 ACLC 1291; Re Ansett Australia Ltd above at [65]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83 at (32].
[8]I also referred to the scope of the Court’s powers under s 511 of the Corporations Act in that decision and observed (at (8)) that:
Section 511 of the Corporations Act provides an alternative source of power to give such a direction and the Liquidators also rely on that section. The principles applicable to an application under that section were recently reviewed by Ward J in Re Purchas [2011] NSWSC 91 ... Applications made under this section in a voluntary winding up are determined in a similar manner to applications in a court ordered winding up under s 479(3) of the Corporations Act notwithstanding that section does not expressly require that it be ‘just and beneficial’ to give the relevant direction. The court may give such a direction where it will be ‘of advantage in the liquidation’: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd (2010) 79 ACSR 373 at [7]. The effect of a determination under the section is to sanction a course of conduct on the part of the liquidator so that he or she may adopt that course free from the risk of personal liability for breach of duty: Handberg v MIG Property Services Pty Ltd at [7].
[9]I also recognise that the Court’s powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator’s functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83; Re One. Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [32]; Re Octaviar Ltd (in liq) and Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1005.
However, subsequently in Smith, in the matter of Buddy Management Pty Ltd (in liq) v Buddy Management Pty Ltd (in liq) [2019] FCA 566, her Honour also accepted that the power in s 90-15 was wider than that which exists under s 479(3) and s 511 of the Corporations Act. Her Honour said (at [40]):
40As Gleeson JA noted in In the matter of Hawden Property Group Pty Ltd (in liq) [2018] NSWSC 481; (2018) 125 ACSR 355 at [8], the power under s 90-15 is expressed in terms wider than the power under the former s 479(3) and accommodates the determination of substantive rights. Gleeson JA noted that the Court would not do so without affording potentially affected parties an opportunity to be heard, following the approach formerly taken in considering the exercise of s 479(3).
It was not suggested by any party that the powers in Sch 2 were not sufficient to empower the Court to determine the questions raised by the liquidator. The absence of any such suggestion was justified and the issues raised by the liquidator fall comfortably within the scope of s 90-15. It is just and beneficial or advantageous to the winding up to proceed under that section because the question raised is pivotal to the conduct of the winding up and because the question is largely one of law founded upon relatively uncontentious evidence. Whilst the courts expect liquidators to exercise their professional skill and judgment in relation to the appropriate steps to be taken in a liquidation here, where the liquidator is confronted with allegations made by several persons who have not received legal advice, the seeking of the protection afforded by the Court’s advice is warranted. Further, the procedure is a cost effective one in circumstances where the assets which are the subject of the dispute are relatively small.
The liquidator also relied upon the power of the court in s 63 of the Trustee Act, which permits a trustee to apply to the court for an opinion, advice or direction on any question concerning the management or administration of trust property. In Macedonian Orthodox Community Church v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese (2008) 237 CLR 66, [54]-[75] the High Court recognised that the power under that section is appropriately exercised for the resolution of legitimate doubts held by the trustee as to the proper course of action.
The liquidator has given notice to all persons who might be interested in the outcome of the litigation. That said, during the course of the hearing certain documents were produced pursuant to a subpoena. Those documents disclosed the existence of a number of persons who paid $500 each to Mr Darwin or at his direction. At best, those persons would be minor creditors of the Company and, to date, they have taken no interest in the liquidation. That is not a criticism but merely a reflection of the limited quantum of their potential claims. In addition, the actual identity of those persons is uncertain and it is likely that it would involve expenditure in an amount greater than their claim to ascertain their true identity and contact details. In the circumstances it is appropriate to proceed to determine the issues raised by the liquidator. Applications such as this may be brought ex parte and anyone who is prejudiced by the Court’s determination may bring an application to vary it or to set it aside: r 39.05(a) of the Federal Court Rules.
In the circumstances it is appropriate to proceed with the determination of the issues raised by the liquidator.
The facts
The main participants
In early 2014, Mr Darwin engaged in promoting a scheme for the establishment and operation of a commune referred to as the “Bhula Bhula Community”. He did so with his close associate, Mr Adrian Brennock, and they worked closely together on the project. As the facts below establish, Mr Darwin was the driving force and controller of the scheme and, for all relevant purposes, he controlled and directed the various corporate entities used. It is not necessary to reach any conclusion as to whether, in his promotion of the Community, Mr Darwin’s and his associates’ actions were fraudulent or reckless. Nevertheless, it cannot be denied that, although the subscribers were induced to pay money on the basis that it would be held on trust, it is clear that in dealing with that money neither Mr Darwin nor his associates were inclined to perform the obligations which a trustee owes to beneficiaries.
It is not unfair to say that those whom Mr Darwin induced to subscribe to the scheme were of a trusting nature or, perhaps, enthralled with the concept of living in a commune. Whatever be the case, they generally trusted Mr Darwin and, despite him not fulfilling numerous promises made to them, they neither seriously pressed him to perform nor sought to protect their own legal interests until it was too late.
It might also be fair to say that, although Mr Darwin had no formal qualifications on which he might rely to pursue this project, he had an element of charisma which, perhaps, caused others to join with him in the project without any significant questioning. A signature block at the foot of many of Mr Darwin’s emails read: “TRUTHOLOGY: A Beacon of Truth, in The Seas of Lies”. The “L” in the word “Truthology” was drawn as a stylised lighthouse, apparently as a representation of the alleged “Beacon of Truth”. It is unclear whether he utilised this format because he had a heightened sense of irony or because it may have appealed to the somewhat vulnerable persons whom he targeted for this project.
Mr Darwin had identified approximately 250 hectares of land in northern New South Wales as the appropriate site for his commune. It was situated at 3222 Kyogle Road, Mount Burrell in New South Wales, being Lot 20 in Deposited Plan 755714A and 755714B and Lot 2 in Deposited Plan 1148316 (being all the land in folio identifiers 20/755714A, 20/755714B and 2/1148316). It is referred to in these reasons as “the Property”.
The promotion of the Community
From 2014, Mr Darwin commenced promoting the Community through web based presences named “Truthology Foundation” and “Global Awakenings Foundation”, and at seminars called “Freedom Summits”. The Community, as promoted, was portrayed as being a self-sufficient, environmentally friendly collection of like-minded people, residing on 642 acres of land in the Tweed Valley. In general terms, it was represented as providing a halcyon, alternative communal lifestyle, operating free of the usual societal norms.
In his principal affidavit in support of the application, the liquidator attached material acquired in the course of the liquidation, including documents derived from the website identified as That website identified the proposal as an “intentional community”, although the meaning of that expression is not identified. Whilst the initial promotional material identified that the Community would consist of approximately 60 parties, later material indicated that the number would be around 30, with each party being an individual, couple or family group. Each party accepted into the Community was to contribute financially towards the project. The amount was to vary with the time of joining. The total funds raised would be approximately $2,300,000, with the price of the Property being $1,200,000. After stamp duty and project management fees, approximately $900,000 would be available for the improvement and maintenance of the land (capital works, roads and dams etc). Each of the Community members or parties would have the exclusive use of a designated parcel of land, referred to as a curtilage, and they would receive a unit or units in a unit trust in which the land was held so as to give them ownership. Initially, the proposed trustee of the unit trust was identified as being Wollumbin Dreamtime Pty Ltd. The promotional material also referred to a “Unit Holders Agreement” which was to provide a method of allocating Community members to particular sites on the Property. It does not appear that any such document was ever produced, although one later version of a unit trust deed contained clauses which purported to regulate the actions of the unit holders to some degree.
A significant feature of the promotional material was its indication that the Community members would be entitled to build a dwelling on their assigned curtilage. Indeed, the whole tenor of Mr Darwin’s promotion of the Community was that the members would be so entitled. In one of the brochures Mr Darwin produced there was a heading “The Building of Dwellings” under which it was identified that all dwellings had to be of a suitable safety standard but the design and layout of the structure would be up to the individual. It was said that the Community would be open to “‘alternative’ style dwellings such as Earthships, Shipping container Homes and so forth”. Preference was expressed for eco-friendly and green homes. The brochure added that it was the intention that most of the community members move onto their site as soon as possible, realistically between 12 and 24 months from the date of settlement. It was further envisaged that most plots would have a number of separate dwellings. These indicative statements were extremely aspirational as there was no existing town planning approval to use the land for multiple dwelling purposes and, indeed, no application for such approval had been made.
Mr Darwin produced or caused to be produced a brochure entitled “Community Land Project Expression of Interest”, which was given to persons who had expressed interest in being involved in the commune. It contained information similar to that which appeared on the website and also advised that any funds contributed by persons interested would be held on trust through the Global Awakenings Foundation. The brochure reiterated that the participants would be granted an interest in a unit trust, the trustee of which would be controlled by directors elected by the members of the Community. The prospective participants were also told that the relevant legal documents and applicable by-laws would be prepared by a lawyer.
An essential aspect of the Community which appealed to subscribers was that the Property would be a place they could live. Whilst Mr Darwin was aware of the local government requirements that prohibited multiple dwellings on the Property, and that some form of Council approval would be required, he downplayed that to potential members. Some evidence before the Court indicated that he produced videos on the internet in which he bragged about not needing council approval. Indeed, it is apparent that he encouraged Community members to commence habitation on the land shortly after it was purchased. They quickly did so. Unfortunately, the money expended by them to establish those dwellings was somewhat wasted because their actions contravened the local government by-laws and, eventually, the Council took action to restrain the unlawful use of the land. Although there was little evidence in the matter concerning the town planning issues, what was available suggests that the project was doomed to fail from the beginning. The Property is located in a river catchment area which, in all likelihood, would have prevented approval being given to allow it to be used for subdivision or multiple dwellings. At the very least a development application was required for the use of the Property for the proposed Community. That was apparently known by Mr Darwin although it is not clear why any application for the same was not lodged. Undeterred by its illegality, Mr Darwin and his associates pressed forward with the project. That said, it must be doubted that they held any honest belief that the Community which they promoted to the prospective members would ever be developed in the form which he espoused.
It appears that, in the initial stages and as part of the application process, persons who wished to participate in the Community were asked to complete a questionnaire which sought answers as to several personal matters. Apparently that was done to ascertain whether the applicant was “suitable” for the Community. The questionnaire indicated that a decision would be made on the acceptance of the applicant in March 2015. Consistently with other indications, the questionnaire indicated that funds received pursuant to the application would be held on trust by the Global Awakenings Foundation in its account. There seems to be little doubt that those who paid money into the account did so believing Mr Darwin’s advice about the trust arrangements.
In March and April 2015, Mr Darwin sent an email to various prospective community members which attached a number of documents, including a draft deed. Those documents informed the readers that the beneficial interest in the trust fund was to be vested in the unit holders (cll 6(a) and 7(a)) and that the trustee could, if authorised or directed by special resolution, issue additional units (cl 7(d)).
During the promotion of the scheme, the prospective members were informed by Mr Darwin that the legal matters relating to the Community would be handled by a Mr Wroth Wall, Solicitor, who conducted his practice under the name “Wall & Company Lawyers”. He was identified in the promotional material as being the solicitor who would handle the affairs of the Community. This was reiterated by Mr Darwin at various promotional meetings. It seems that a number of the prospective members of the community, or persons who became members of the Community, spoke directly to Mr Wall about the legal structure of the arrangements which were put or to be put in place. A number seemed to believe that he was their solicitor and that he acted in their interests. That belief may have been well founded. During the hearing a number of tacit allegations were made against Mr Wall as to the manner in which he handled Community members’ money which was in his trust account. It must be emphasised that Mr Wall was not a party to these proceedings and has not been afforded an opportunity to defend himself against those allegations. Any findings in these reasons are necessarily made without him being called upon, or indeed able, to explain his actions.
There was a commonality in the evidence of the defendants to the effect that they were all given the above information concerning the manner in which they would subscribe to the Community; how they would have an interest in the land; and the mechanism by which that was to occur. There is no reason to believe that any of the persons who subscribed to become members were not told the above and did not act in reliance on its accuracy. In general terms the subscribers paid their money on the basis that they would become members of the Community and the funds accumulated from the subscriptions would be used to acquire the Property and to improve and maintain it. Each member of the Community was to have an interest in the land of the same kind as the others, intended to be by reason of being issued a unit in a unit trust.
The expressions of interest
In reality, the identified processes and particulars for the establishment of the Community in the information provided by Mr Darwin proved to be more in the nature of general guidance than guaranteed covenants. A form of procedure was adopted for the collection of money from prospective community members although, as the liquidator correctly identifies, it was not always followed. On a number of occasions the prospective community member would complete an “expression of interest” form which was part of the documents referred to above. On some occasions, but by no means all, a questionnaire was completed by the prospective member. If the application for membership of the Community was accepted, the prospective member would be invited to submit an application to purchase a unit. The price for the unit varied over time, generally in line with the information provided in the promotional material. Initially the price for each unit was $40,000, which then increased to $80,000 and later $120,000 over 2014 and 2015. Towards the end of the process in 2016 it seems that the cost of a unit was $160,000 although the initial material did not indicate that units would be sold for that amount.
It should be noted that $500 was payable on the submission of an expression of interest. That was said to be refundable when membership was not approved (although it appears such a refund was not always provided). Several sets of bank records tendered in evidence show amounts of $500 being paid from time to time into accounts which appear to record receipt of the fee accompanying the expression of interest. There is nothing to suggest that the payment of that sum was intended by any of the parties to generate an interest in any land or was to be held on trust. That said, it appears that on some occasions the amount was allocated as part of the subscription on the acceptance of a person as a Community member. In those cases it is right to treat it as part of the subscription contribution.
The evidence shows that the first expression of interest payment for the project was received on 10 March 2014. It was paid into an account called “Global Awakenings Foundation – Westpac Community Solutions Cheque Account” (GAF Account). The liquidator was not able to locate any entity with the name “Global Awakenings Foundation” and it appears that it was no more than a trading name used by Mr Darwin and his then partner, Ms Stephanie Humble, each of whom had access to and control of that account. Mr Darwin’s evidence was to the effect that the account was used only to receive and hold funds paid by potential Community members or in connection with the Community. He said that he used money from the account for the purposes of setting up the Community or paying the deposit on the land to be acquired.
Various bank statements for the GAF Account were produced at trial by Westpac Banking Corporation, pursuant to a subpoena. They tend to disclose that Mr Darwin’s evidence about the use of the account was not entirely accurate, although the sources of the funds and the debits are not entirely clear. Nevertheless, the accounts do show substantial credits which the liquidator has identified as having been paid by persons seeking to become members of the Community.
Pre-Purchase Subscribers
The GAF Account
The liquidator’s evidence was that, based on the books and records available to him at the time of swearing his third affidavit (which did not include the GAF Account bank statements), a number of applicants seeking units in a trust made payments totalling $244,000 to the GAF Account. They were Tamati and Sarah Kirkwood, Craig Scott and Holli Kimlin, Phillip Morandini and Mette Pedersen, Mr and Mrs McSween, Emanuale Agus and Norma Porceddu, and Norma Mou. The liquidator referred to these as Pre-Incorporation Subscribers. That is a useful nomenclature, however, as will be seen in the following reasons, the division of interests as between Community members is, in some respects, potentially defined by whether they contributed money to the purchase price of the Property. As such, the subscribers listed here will be considered as part of that larger group of “Pre-Purchase Subscribers”, which includes some others.
The bank statements subsequently produced at trial by Westpac appear to reflect the transactions identified by the liquidator as comprising the $244,000, although there are differences in certain dates, and the contributions attributed to two couples appear to have been made in more than the one transaction identified by the liquidator for each couple. It is difficult to identify in the statements the $4,000 transaction identified by the liquidator as having occurred “about December 2014” (which may in fact refer to five payments between 31 March and 16 June 2014 comprising that amount). In addition, it appears that three significant transactions in the bank statements are not included in those identified by the liquidator:
(a)a deposit on 29 July 2014 of $39,500 (presumably linked to an earlier $500 expression of interest) without an identified transferor;
(b)a deposit on 4 March 2015 of $29,500 without an identified transferor, the purpose of which is unclear; and
(c)two deposits on 15 and 19 May 2015, each of $20,000, apparently by Richard Moate.
Whether (b) is a contribution in respect of an interest in the proposed Community is not immediately clear. In any event, the amount paid by subscribers into the GAF Account appears likely to be higher than originally identified by the liquidator, seemingly in the order of $320,000 to $350,000. In respect of (a) and (c), it is possible that one or both were later refunded, as did occur with a number of other transactions. This would reduce that amount.
The liquidator has then identified how funds from the GAF Account found their way to the trust account of Wall & Co. On 12 December 2014, an amount of $120,000 was transferred from the GAF Account to Stone Group Lawyers. On 21 January 2015, the same amount was received from Stone Group Lawyers into the Wall & Co trust account in the name of Mr Darwin. The liquidator has identified from trust account statements that approximately a further $100,000 was paid from the GAF Account to the Wall & Co trust account in the name of Mr Darwin.
The GAF Account bank statements confirm the above identified payments to the Wall & Co trust account, together comprising approximately $220,000, as:
(a)$120,000 on 12 December 2014 (transferred to Stone Group Lawyers, and later passed on to the Wall & Co trust account on 21 January 2015);
(b)$8,492.55 on 11 March 2015;
(c)$40,000 on 26 May 2015; and
(d)$50,000 on 1 June 2015.
The difference between the funds appearing to have been subscribed by payment into the GAF Account and those that eventually made their way to the Wall & Co trust account may prima facie suggest that a significant proportion of the funds subscribed into the GAF Account were not used for the purchase of the Property. However, as the liquidator has not been able to ascertain all sources and amounts of the funds used to pay the purchase price for the Property, it is possible that the contribution made from subscribers’ funds paid into the GAF Account exceeds the approximately $220,000 that made its way to the Wall & Co trust account. For example, a withdrawal of $40,000 recorded in the GAF Account bank statements on 1 April 2015 may represent an otherwise unaccounted for contribution to the deposit for the purchase of the Property. This would be consistent with the following facts:
(a)Mr Darwin’s evidence was that funds from the GAF Account were used to pay some of the deposit, and there is no other transaction in the statements that appears to do so.
(b)The only other known payment as part of the deposit was $40,000 paid on 10 February 2019 from the Wall & Co trust account in the name of Wollumbin Dreamtime (and later in the name of the Company). Given the purchase price of the property it seems likely that the deposit comprised more than the $40,000 paid on 10 February 2019.
(c)The actual deposit amount is unknown. The contract of sale indicates the deposit was to be $90,000. However, given that contract was only executed in late June 2015, well after the first part of any deposit was paid on 10 February 2015, and the fact that the sale process appears to have involved a number of ‘false starts’, it may be that the amount of the deposit actually held by the vendor’s agent in the early stages (prior to that contract’s execution) was variable.
(d)On 15 April 2015, the sum of $30,000 was paid into the GAF Account with the transaction description “EldersDepRefund”. Elders Real Estate Murwillumbah were the agents for the vendor.
(e)On 16 April 2015, the next day, the same amount was transferred out of the GAF Account with the description “Hajek Rtn”. This appears to be a reference to returning funds to Mr Michal Hajek, an associate of Mr Darwin’s who had some involvement in the promotion of the Community.
(f)On 7 April 2015, the week before what appears from the above to be a refund of a contribution made by Mr Hajek to secure a deposit on the land, Mr Hajek indicated in an email to members of the Community that he and his partner were withdrawing from the community. On 9 April 2015, the other $10,000 that had been contributed by Mr Hajek to the Wall & Co trust account, received earlier on 7 April 2015, was refunded to Mr Hajek.
It would be consistent with the above facts that the $40,000 paid from the GAF on 1 April 2015 constituted part of the deposit for the purchase of the Property, in that it appears that, in the subsequent two weeks, $30,000 was able to be refunded by the vendor’s agent. Alternatively, the $40,000 could have been a refund in relation to the subscription of $39,500 paid into the GAF Account on 29 July 2014, or to some similar effect. Relevantly, either of those possible constructions (or other alternative constructions) of the known transactions suggest that the difference between the subscribers’ funds paid into the GAF Account, and the contribution of funds from that account represented in the purchase price, is not as great as it may first seem.
The funds in the GAF Account (which, it can be accepted, in addition to subscribers’ funds, included other funds) appear at times to have been used for the purposes of establishing the Community, consistent with achieving the joint endeavour into which subscribers intended to enter. Withdrawal descriptions from the GAF Account include some appearing to relate to:
(a)hosting events at which the Community was promoted:
(i)$5,000 on 18 June 2014 described as “Venues”;
(ii)$10,000 on 7 October 2014 described as “Summits”;
(iii)$12,000 on 20 November 2014 described as “Venue”;
(iv)$2,216 on 21 November 2014 described as “Accommodation”;
(v)$3,000 on 21 November 2014 described as “Venue”;
(vi)$178 on 29 June 2015 described as “GoToMeetings”; and
(vii)$1,000 on 21 July 2015 described as “camp out goods”;
(b)legal and related expenses:
(i)$7,500 on 8 August 2014 described as “Trust Establishmen [sic]”;
(ii)$1,000 on 22 August 2014 described as “Stone Group Lawyer”;
(iii)$1,100 on 5 December 2014 described as “Company Reg”;
(iv)$2,000 on 3 February 2015 described as “Lawyers”;
(v)$3,000 on 6 February 2015 described as “Lawyer”;
(vi)$1,000 on 10 February 2015 described as “Lawyer”;
(vii)$3,000 on 19 February 2015 described as “Lawyers”;
(viii)$2,000 on 3 March 2015 described as “Lawyer”;
(ix)$3,000 on 5 March 2015 described as “Lawyer”;
(x)$3,000 on 4 May 2015 described as “Legal”;
(xi)$801.85 on 24 June 2015 described as “Company Est”; and
(xii)$1,500 on 3 July 2015 described as “Insurance”;
(c)general expenses:
(i)$1,000 on 10 October 2014 described as “Exp”;
(ii)$1,500 on 4 December 2014 described as “Exp”;
(iii)$1,000 on 19 December 2014 described as “Exp”;
(iv)$733 on 17 March 2015 described as “Exp”; and
(v)$1,000 on 19 March 2015 described as “Exp”;
(d)advertising and finding new subscribers:
(i)$3,238 on 12 November 2014 described as “Website Part 1”;
(ii)$500 on 15 December 2014 described as “Website”;
(iii)$900 on 10 February 2015 described as “Echo Ad”;
(iv)$1,000 on 24 February 2015 described as “Louis Video”;
(v)$900 on 24 February 2015 described as “Echo”;
(vi)$290 on 25 February 2015 described as “Ad design”;
(vii)$1,500 on 2 March 2015 described as “Web Changes”;
(viii)$500 on 12 March 2015 described as “Video editing”
(ix)$600 on 7 April 2015 described as “Echo”;
(x)$1,500 on 23 April 2015 described as “Web”;
(xi)$1,000 on 27 April 2015 described as “Web”; and
(xii)$1,000 on 27 April 2015 described as “Artwork Max”; and
(e)financing expenses:
(i)$3,300 on 23 June 2015 described as “Adelaide Finance”.
To what extent the descriptions recorded for the above transactions are accurate, or should be taken to reflect funds expended (solely) for the benefit of the Community, is not clear. However, it can be accepted that at least some of the funds contributed by subscribers that did not find their way into the purchase price of the Property were otherwise expended in the course of the joint endeavour of the Community, such as for the preliminaries required for establishing the Community, including preliminaries in relation to the acquisition of land.
On the other hand, it also appears that some funds in the GAF Account, although not necessarily those contributed by subscribers, may have been expended by Mr Darwin for his own purposes. There are, among other things, a number of substantial cash withdrawals, withdrawals for “project management”, at least one withdrawal described as a “loan”, an apparent payment of an energy bill (prior to the acquisition of any land), and a number of withdrawals described by the initials or parts of the name of Mr Darwin and his partner. However, as the subscribers’ funds were unquestionably trust funds, Mr Darwin can be presumed to have withdrawn and used his own funds for his other purposes so as not to deplete the trust in an unauthorised manner: Re Hallett’s Estate; Knatchbull v Hallett (1879) 13 Ch D 696. That presumption is consistent with Mr Darwin’s email of 12 January 2015 advising that the funds he was transferring from the GAF Account to Mr Wall’s trust account were the funds deposited by subscribers.
The Wall & Co funds
From December 2014, Wall & Co Lawyers were engaged to undertake a number of tasks in the establishment of the Community. Mr Wall established a number of files for this work under the names of Mr Darwin or Wollumbin Dreamtime Pty Ltd in relation to different aspects of the work. That company had been incorporated in late 2014 and Mr Darwin was appointed as its director on 5 December 2014. Mr Darwin was the sole shareholder of that company.
It also appears that another firm, Stone Group Lawyers, had at least previously been engaged in relation to the establishment of the Community. Further, Mr Michal Hajek, who was described in various emails as a lawyer, was also said to have been providing legal assistance. Whether he was entitled to act as a lawyer is unclear.
From around January 2015, subscribers to the Community were directed to pay their money directly to a trust account with Wall & Co which was recorded as “140193 Formation of Community – Mr Mark Darwin”. By this time the contribution required for a subscription to the Community had risen to $80,000.
It appears that an agreement to acquire the Property was entered into around 10 February 2015, when the sum of $40,000 was paid to the vendor’s agent as a deposit. (It appears that any such contract, which was not in evidence, would have been superseded by that agreed in June 2015). A trust account receipt identifies that the payment had been made by or on behalf of Wollumbin Dreamtime. Although the evidence available is somewhat scant, it can be reasonably inferred that any sum paid as a deposit was not returned to Wollumbin Dreamtime and was retained by the vendor and applied against the purchase price, even though a different company became the purchaser.
A brochure dated 25 February 2015 produced by Mr Darwin stated that parcels of land for up to five acres were available for $80,000 and that the purchaser would have the use and enjoyment of the community areas as well. Relevantly the brochure stated:
The entry price of a unit is $80,000. This is fully refundable if the project doesn’t settle in the land. The only parties who are at risk for the current expenses of the project are the Steering Committee.
Funds will be held in TRUST through the Lawyer Wroth Walls’ Trust Account …
The purchase
On 14 April 2015, Mr Darwin advised existing and prospective subscribers by email that he had secured a loan to use in the purchase of the Property if it were needed for settlement. He indicated that the loan would be discharged by the introduction of further parties as members once the land was acquired. The Pre-Purchase Subscribers were content to proceed on that basis. That is important as it evidences the common intention of the parties to the joint endeavour that the loan would be discharged by further members being admitted to the Community who would then have rights of the same kind as them, including an interest in the land. The email also identified the further understanding of the group that once the land was acquired a further ten parcels of land (or units in the unit trust) would be offered to further persons who would also become community members. Their money would be used for the purposes of completing infrastructure such as roads, the community centre, orchards, dams and the like.
Consequent upon the sending of the email it seems that a number of existing members of the proposed community agreed to pay $80,000 to acquire additional units in the trust so as to make up the funds necessary (in addition to the loan) to settle the purchase. Those persons entered into agreements with the Company which indicated that, on the purchase of the Property, the Company would sell those additional units in the trust for $120,000 from which those subscribers would be repaid with an additional $40,000. The agreements were with Mr Agus, Ms Plant and Mr Cantrell, Ms Hirsch, and Mr Morandini and Mr Scott.
By an email on 26 May 2015, Mr Darwin indicated that sufficient funds had been raised by way of existing subscribers taking up additional parcels in the Community. He also indicated that he had made an offer to purchase the land for $1,175,000, which had been accepted. That seems incongruous given that a deposit of $40,000 had been paid in February of that year.
By an email on 27 May 2015 to the subscribers, Mr Darwin advised that all remaining funds had to be received into the Wall & Co trust account within the next few days; that all parties were required to sign authorities to allow Wall & Co to apply their funds towards the purchase monies for the land; and that units in the trust would be issued “probably the day prior to settlement”. He also reiterated the legal structure of the proposed arrangement whereby Wollumbin Dreamtime would own the land as trustee and it, in turn, would be owned by a company controlled by the members of the Community. Later that day, in a further email, he indicated that only those who had paid money directly into the Wall & Co trust account were required to sign an authority to release the funds.
The records show that between January and 22 June 2015 (the day the Company was incorporated), a number of deposits were made into the Wall & Co trust account by several subscribers, including by Mr Newman, Ms Mou, Mr Berry, Ms Hirsch and Mr Morandini together with Mr Scott (also Pre-Purchase Subscribers). Further, between 22 June 2015 and 30 June 2015, it appears that Mr Agus, Mr Cantrell, and Mr Pascoe and Ms Barnes also made deposits into it. These latter subscribers are also referred to as “Pre-Purchase Subscribers” in these reasons although the manner in which their money was used in the purchase of the land, if at all, was not entirely clear.
At some time in late June 2015, the Company formally entered into a contract to purchase the Property for a price of $1,175,000. The Company was identified on the contract as “Wollumbin Horizons Pty Ltd t/as Bhula Community Village Trust”. The contract is dated 30 June 2015, although the completion date is said to be 25 June 2015.
The sale was completed on 30 June 2015 using the funds paid by the subscribers and funds from the loan secured over the Property. The liquidator has identified that funds for the purchase were derived from at least the following sources:
(a)$40,000 as a deposit from Wall & Co trust account 150025 (initially in the name of Wollumbin Dreamtime but subsequently in the name of the Company);
(b)$588,459.85, $4,563.80 and $50,135 (the latter figure for stamp duty) from the Wall & Co trust account in the name of Mr Darwin (which includes funds which were transferred from the GAF Account to the Wall & Co trust account); and
(c)a loan of $550,000 (although that figure includes pre-paid interest) to the Company from Adelaide Investments (Aust) Pty Ltd which was secured by a registered mortgage on the Property.
As discussed above, it is also possible that the $40,000 transfer from the GAF Account on 1 April 2019 represented a contribution to the purchase price.
It must be kept in mind that on the settlement of the purchase of the Property, it appears that an amount of approximately $283,000 remained in the Wall and Co trust account which was derived from the subscribers’ contributions. The evidence does not reveal the identity of the persons who were the source of those funds, although it may be surmised they originated from those subscribers who paid their funds into the trust account after 22 June 2015. That conclusion is supported by the fact that it does not appear that those persons provided to Mr Wall any authority to use their funds for the payment of the purchase price of the Property, with the possible exception of Mr Cantrell. It is not clear that they provided any authority to Mr Wall authorising him to use those funds at all, but that is not relevant for present purposes. Nevertheless, it appears that those funds were subsequently used for the purposes of establishing the Community or perhaps in the discharge of the mortgage over the land. These assumptions are somewhat arbitrary as the subscribers’ funds in Mr Wall’s trust accounts were inextricably mixed with the result that it is somewhat artificial to attempt to compartmentalise the numerous contributions without the assistance of any reliable ledgers.
During the course of the trial it became apparent that all of the members of the Community at the time of the Property’s purchase had the intention that it would ultimately be held unencumbered by the Company. It was also the apparent common understanding that the loan used to complete the purchase would be repaid using funds received from subsequent subscribers who became members of the Community. A useful example is Mr Agus’ evidence that he was aware that subsequent contributors would come in and acquire an interest in the Property “[a]t the beginning”. That appears to be the basis on which Mr Darwin indicated he would get in new members and that seemed to be accepted by the members.
Mortgage Subscribers
Subsequent to the purchase, Mr Darwin sold further subscriptions in the Community. The evidence shows that the following new subscriptions were made (in approximate terms):
(a)Dixon $60,000
(b)Sharron & Graham Simmons $30,000
(c)Dean Mooney $120,000
(d)Gillian Norman $120,000
Some of the subscribers at that stage were new to the scheme, and some were existing subscribers who contributed additional funds in return for an additional interest. All were told they would acquire an interest in the Community of the same kind as the existing subscribers by reason of their contributions.
In addition, on one view of the facts, the following persons who contributed their funds in the period between 22 June 2015 and 30 June 2015 might by also be taken to have contributed to the mortgage discharge in the following amounts:
(a)Dixon $20,000
(b)Cantrell and others $80,000
(c)Emanuele Agus $30,000
(d)Neil Pascoe and Nicole Barnes (aka Teleah Barnes) $80,000
As mentioned above, not all of the subscribers’ funds in the Wall & Co trust account were used in the settlement of the purchase of the Property and the trust account records suggest that the remaining funds had been contributed by the above persons in the above amounts. That is, if it is assumed that the trust funds had not been completely mixed. A significant portion of those remaining funds were transferred to a different account and used to discharge the mortgage. Nevertheless, these subscribers contributed funds to the scheme along with others for the purposes of discharging the purchase price of the land and it is not entirely possible to conclude their funds were not used as they intended. It follows that for the purposes of the following legal analysis these identified subscribers ought to be classified as Pre-Purchase Subscribers.
The subscribers who contributed funds after the purchase and prior to the discharge of the mortgage (including additional contributions by existing Pre-Purchase Subscribers, to the extent of their additional subscription) are referred to as the “Mortgage Subscribers”.
The accounts further show that a Mr and Mrs Fagan also paid $3,000 into the account from which funds were used to repay the loan. However, that payment appears to have been referable to the acquisition of an interest in a different scheme. Similarly, a sum of $500 was paid into the account by a Ms Cooper, but that sum appears to be referable to the expression of interest fee rather than for an interest in the Community.
On 25 September 2015, Mr Darwin informed the members that he had obtained sufficient funds to discharge the mortgage on the Property and that occurred on 30 October 2015, after payment of $551,005.10 to the lender on 21 October 2015. Subject to a caveat lodged by Ms Hirsch who claims “an equitable interest in the land pursuant to an interest of a beneficiary under a trust and/or an interest of a unit holder in a unit trust”, the Property is now unencumbered.
Post-Discharge Subscribers
In early 2017, despite the difficulties by then encountered (as discussed below), Mr Brennock and Mr Darwin sought to sell further interests in the Community to additional persons. Unfortunately, they were successful in doing so. Those new subscribers were induced to become members by the same representations as those made to the existing members and they paid their funds on that basis. Mr Alderman and Ms Dresdon paid $160,000 for a unit in the trust, most of which they paid into a Westpac account held by Wollumbin Dreamtime on 18 October 2016 and 23 January 2017. As the mortgage had been discharged, those funds were not used to acquire the land, although they were to be used in the operation of the Community. These subscribers are called the “Post-Discharge Subscribers”.
Mr Alderman and Ms Dresdon paid a further $20,000 in respect of the “The Mount Burrell Commercial Precinct” which was a project to be established on land adjacent to the Community land. Mr and Mrs Fagan also paid $120,000 in respect of that proposed development. However, it would appear that none of these funds were paid by the subscribers to become members of the Community.
It must be kept in mind that the introduction of new members to the Community after the acquisition of the Property was an integral part of the scheme from the beginning. It was the intention of the Pre-Purchase Subscribers at the time of the purchase that new subscribers would become members of the Community and that their subscribed funds would be used for the maintenance and improvement of the land. It was also the intention of the Mortgage Subscribers that new members would be introduced and their funds would be used for maintenance and improvement. In other words, those who became members had the common intention to engage in a joint endeavour with the other members to establish the Community and continue it, intending that the subscriptions of each member would be applied to the purchase, maintenance and improvement of the Property, and that each member would have an interest in the Property. That common intention continued to exist at each stage when new members were invited to join the Community.
As their affidavits disclose, Mr Alderman and Ms Dresdon were shown around the Property by Mr McSween, the director of the Company at the time, and his partner Kelly McSween. They were told that they were able to erect a worker’s hut or studio on the property and were offered an interest in the Property by way of a unit in the unit trust. They were informed that the payment for the unit which they made would be used for the benefit of the Community by way of discharging the expenses of infrastructure, town planners and surveyors. The money would also be used for paying fees to the Tweed Shire Council in respect of the development of a neighbouring commercial development associated with the Community. In reliance on the representations made they paid the sum of $160,000 to a Westpac account in the name of Wollumbin Dreamtime believing that, in return, they would acquire an interest in the Community by way of a unit in the unit trust. Mr Staatz has given evidence that it is not clear to him that the money so paid by Mr Alderman and Ms Dresdon was, in fact, used for the benefit of the Company or for the purposes of the trust. Then again, he does not identify how the money was used. From the relevant bank statements, it appears substantial amounts were expended on lawyers, council rates, surveying and similar. Some was withdrawn as cash. The actual use to which the funds were put is difficult to ascertain.
Although the members of the Community paid scant interest to the manner in which the trust which they believed existed operated or, if they did, they were not concerned enough to take action to enforce its performance, it is manifest that they were prepared to allow the Company and Mr Darwin to continue to promote the Community. One such activity which they permitted to occur was the Company’s encouragement of new members to join. Indeed, the evidence is that when potential new members were shown around the Community various existing members spoke highly of it to them. The evidence before the Court was that Mr Morandini and Mr Mooney each informed Mr Alderman and Mr Dresden of the benefits of the Community. This, it should be noted, was at a time after Mr McSween had identified the Community’s parlous financial situation and the existence of a number of inter-personal disputes. Whether the state of the Community was as Mr Morandini and Mr Mooney might have stated does not matter. It was apparent from the material provided to the members of the Community when they subscribed that, apart from the money which was used to acquire the land, the Company and Mr Darwin would seek additional persons to become Community members to provide additional funds. The Expression of Interest document identified that the purchase price of the Property was $1,200,000 but that units in the unit trust would be sold raising $2,300,000 and, after expenses, $900,000 would be available for work on the land such as the community centre, roads and dams. It was clear to all subscribers that persons whose money was not used to pay the cost of the acquisition of the land but to improve it would also have an interest in the Property.
Attempts to establish the unit trust
While the subscriptions were being received and the land purchased, there were steps taken toward the establishment of the envisaged unit trust.
On 24 March 2015, Mr Darwin emailed those who had subscribed or intended to subscribe, informing them that Mr Wall would issue them with an authority to sign and return to allow the funds to be withdrawn for the acquisition of a unit in the unit trust. It was represented that the funds received from them would be held in the trust account at Wall & Co for the subscribers. Annexed to that email was a diagram purporting to represent the legal structure of the Community. It identified that Wollumbin Dreamtime would hold the land on trust for the members as beneficiaries, and that company would be owned by a community association so as to be under the control of the members. The evidence before the Court shows that this was the structure which Mr Darwin regularly promoted to persons interested in joining the Community.
The liquidator has also ascertained that some work was undertaken to establish a unit trust with Wollumbin Dreamtime as the trustee. An unexecuted Deed of Trust between Mr Darwin and Wollumbin Dreamtime, dated 25 March 2015, has been located. It does not appear that the document was ever executed even though it was circulated amongst the existing potential members. It seems to be common ground that the draft trust deed was not proceeded with because it was anticipated that Wollumbin Dreamtime could not be the trustee of the trust. That was because it would not be able to obtain finance to purchase the Property, if that were needed. The reason for that inability was, apparently, the lack of creditworthiness of Mr Darwin, who was its sole shareholder and director.
On 14 April 2015, in Mr Darwin’s email advising that a loan had been secured, he also said it was intended that, shortly before the settlement of the purchase, a meeting would be held at which the units in the unit trust would be issued. This was, apparently, at the suggestion of Mr Wall. That allegation is credible, because Mr Wall would have been acutely aware of the inappropriateness of the subscribers parting with their funds without securing an interest in the trust on which the land was to be held.
On 4 June 2015, Mr Brennock, who was part of Mr Darwin’s business, Truthology, sent an email to those persons who had subscribed to become members of the Community. In it he asserted that he required certain documentation completed by them so that the sale could proceed. He referred to the subscribers as being “unit holders” and indicated that they were required to sign authorisations directed to Mr Wall who was described as being “our own lawyer”. Mr Brennock identified that one of the authorisations was directed to Mr Wall to permit the release of funds held in trust to pay for the property. That was clear evidence of his knowledge that the funds were held on trust for the particular subscribers. Another document which the subscribers were required to sign was an application for a unit in the unit trust. No trust had actually been established at that time.
Mr Brennock’s knowledge that the subscribers’ funds were held on trust continued when the Company, Wollumbin Horizons Pty Ltd, was incorporated on 22 June 2015. He was its sole and only shareholder. He has been a director of it in the periods from 22 June 2015 to 4 January 2016 and 19 April 2017 to date, although other persons have also acted as directors. The email of 4 June 2015 shows that Mr Brennock, and therefore the Company of which he was director, once incorporated, had sufficient knowledge that the subscribers’ funds were held on trust for them. That said, it was also not controversial (although Mr Darwin was not particularly open to the suggestion in the witness box) that the Company was used by and controlled by Mr Darwin, albeit not formally a director, as a vehicle for the acquisition of the Property. The Company was established with the purpose of concealing Mr Darwin’s involvement in its control, to avoid deterring lenders. He accepts that he was one of the scheme’s founders, and its promoter, and that his involvement in the purchase planning (on and after the day of incorporation) was “full-on”. Mr Darwin spoke on behalf of the Company (see, for example, his email of 23 June 2015, the day after its incorporation, where he attached a new trust deed in the name of the Company). He was involved in instructing its lawyer. His control of the Company was sufficient to warrant the conclusion that his knowledge was also that of the Company.
A trust deed is executed
The liquidator located a further trust deed which is dated 23 June 2015 and which purports to appoint the Company as the trustee of a trust known as “Bhula Bhula Community Village Trust”. The trust deed has been executed and was stamped on 6 July 2015. In his written submissions, the liquidator has accurately analysed the terms of the trust (which are not disputed) as follows:
(a) by clause 1.a)(4), “Trust Fund” was defined to mean “the said initial sum [$20 paid by the settlor] and all moneys paid to and accepted by the Trustee upon the issue of Units pursuant to clause 7 hereof, the accumulations of income hereinafter directed or empowered to be made, all accretions to the Trust Fund and the investments and property from time to time representing the said money and accumulations or any part or parts thereof respectively”;
(b) by clause 1.a)(9), “Unit” was defined to mean “an undivided part or share of the Trust Fund evidenced by a unit held by a Unit Holder in accordance with this Deed”;
(c) by clause 1.a)(10), “Unit Holder” was defined to mean “the person for the time being registered under the provisions of this Deed as the holder of a Unit and includes persons jointly so registered”;
(d) by clause 1.a)(12), “register” was defined to mean “the Register described in Clause 8 of this Deed”;
(e) by clause 5, the Trustee stood possessed of the “Trust Fund and the income thereof upon the trusts and with and subject to the powers and provisions” therein;
(f) by clause 6(a), the “beneficial interest in the Trust Fund as originally constituted and as existing from time to time shall be vested in the Unit Holders for the time being”;
(g) by clause 7(a), each “Unit shall entitle the registered holder thereof together with the registered holders of all other Units to a beneficial interest in the Trust Fund as an entirety … no Unit Holder shall be entitled to the transfer to him of any property comprised in the Trust Fund”:
(h) by clause 7(c), “All Units shall comprise one class and shall at any and all times have and equal [sic] equitable interest in the Trust Fund”;
(i) by clause 7(d), if “authorised or directed by a Special resolution [defined therein as a resolution passed by an 85% vote of those present and eligible to vote on the resolution], the Trustee shall issue additional Units at a subscription price as determined in the Special resolution”;
(j) by clause 8, the Company was to keep a register of Unit Holders and “the person from time to time entered in the register as the Unit Holder shall be the only person recognised by the trustee as entitled to the Units registered in his name”.
As was observed by the liquidator, the trust deed did not identify any base number of units to be issued and nor did it identify a subscription price. It does not appear that any register of units was established or maintained and nor does it appear that the Company passed any resolutions for the issuing of any units in the trust. That was confirmed by statements from its subsequent director, Mr McSween. The evidence before the Court shows that there was a failure to make any attempt to ensure that the persons who subscribed for membership of the Community received a unit in the identified unit trust at or around the time of the purchase of the Property. Although the events surrounding the establishment and administration of the trust are obscure, it can be ascertained that whilst the trust deed was executed, it was soon forgotten about. Whilst some subscribers were invited to apply for a unit, none were issued. Halfway through the following year Mr McSween, then the director of the Company, sought to resurrect it to provide benefits to others who were not entitled to them, but it is fair to say that, assuming the unit trust was initially valid, it was abandoned ab initio.
After the purported creation of the trust, it appears that a copy of the trust deed was sent to some of the prospective community members. In an email of 23 June 2015, Mr Darwin asked that the subscribers complete the application for a unit in the Bhula Bhula Community Village Trust. It would appear that these were returned to Mr Darwin or the Company although the liquidator has not been able to obtain a copy of each one. In that email, the subscribers were also asked to sign a new direction to Wall & Co in relation to the funds held on trust. The direction form read:
TO: Wall & Company Lawyers
43 Stuart Street
MULLUMBIMBY NSW 2482
I, …… hereby authorise and direct you to pay the sum of $80,000.00 paid by us into your trust account towards the purchase monies for the property at 3332 Kyogle Road, Mt Burrell. I/we acknowledge that the funds are to be paid on behalf of Wollumbin Horizons Pty Ltd as trustee of the Bhula Bhula Village Community trust and that the purchase price of the property is: $1,175,000.00.
I/we hereby confirm that the funds are being paid by me/us on the basis that an ordinary unit in the trust will be issued to us and that I/we have satisfied myself/ourselves concerning the terms of the trust deed constituting the trust, the membership of the trust and the status of the above land. In that regard we also confirm that I/we know the land does not have the benefit of a Development Consent from Tweed Shire Council for the purpose of a rural land sharing community.
Dated this 23rd day of June 2015
The liquidator gave evidence that he had been able to ascertain that authorisations in these forms were provided by, at least, Ms Mou, Ms Plant and Mr Cantrell (who provided an authority to Wollumbin Dreamtime), Mr Moate, Mr Newman, and Ms Stokes and Mr Maddren. It is far from clear that all persons who contributed money for the acquisition of the Community land executed an authorisation. That said it appears that Mr Brennock received copies of those which were returned.
Despite the applications for units in the unit trust being received by the Company, and Mr Darwin’s assurances that units would be issued prior to the land being acquired, no units were issued. The same was later true for the Mortgage Subscribers and Post-Discharge Subscribers.
At this point it is relevant to observe that the funds subscribed by the Community members or, more accurately, the persons who believed that they were Community members, were used, via a trust account in the name of Mr Darwin, to discharge the purchase price of the Property. However, it is pellucid from the circumstances that the discharge of the purchase price was only authorised on the basis that the Company which owned the Property was the trustee of a unit trust in which they held units. There can be little doubt that this would have been apparent to all concerned including Mr Darwin, Mr Brennock and the relevant solicitor at Wall & Co. There was no explanation as to why no units were issued to the members and that is unusual given that Mr Wall required the Community members’ authorisation to transfer funds to pay the purchase price, but he apparently failed to ensure that they received that which they were to acquire for their contribution.
Further, in the period from 23 June to 22 September 2015, some of the funds held in the name of Mr Darwin in the Wall & Co trust account (matter number 140193) were transferred out to the GAF Account and an account held by a so-called “Orion Foundation”. This was done at the direction of Mr Darwin. That was unusual in various respects. First, trust account receipts for the funds paid by subscribers into the account were apparently given to the individual subscribers, not Mr Darwin. Secondly, Mr Darwin’s emails revealed that he informed subscribers that Mr Wall was not able to disburse money without their signing authorities. Third, the authorities that were signed directed the funds to be applied towards the purchase price. Fourth, at least one of the relevant transfer receipts (on 20 July 2015) quotes a different matter number than the part of the solicitor’s trust account from which it appears to have been deducted. The omission from the liquidator’s evidence of one page of the relevant trust account statement covering that important period makes the task more difficult, however as far as can be ascertained on the evidence before the Court, some of the money in Mr Wall’s trust account was not paid towards the purchase price but transferred to accounts maintained by Mr Darwin. Whether there was a failure of Wall & Co to strictly comply with the beneficiaries’ directions and any consequences that follow are not matters which need to be considered in these reasons: cf Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484, 498 [32]-[33], 499 [35].
The failure of the commune
It follows that the imposition of a constructive trust may well be warranted as a result of the unconscionable conduct of the Company or the Pre-Purchase Subscribers seeking to exclude the Mortgage or Post-Discharge Subscribers. On one view the circumstances may fall within the principles identified by McMillan J in Imam Ali Islamic Centre.
Again, an alternative approach would be to consider the circumstances of the Community members at the point in time after the last persons joined. On the evidence it may be that the last members were Mr Alderman and Ms Dresdon although whether that is so or not is a matter for the liquidator to ascertain. In any event, at that point in time it can be recognised that all members had a common intention that they would each have a beneficial interest in the Property, that they had each acted upon that shared intention by making their subscription payment and, in some cases moving onto the land. As far as can be ascertained none had the intention of gifting any of their subscription to other members if the Community failed. In those circumstances it would be conduct amounting to an unconscientious denial of a member’s interest in the Property for it to be suggested that they either did not hold an interest in the land or that their interest was other than proportionate to their contribution. It might therefore be identified that a common intention constructive trust arose at that point in time.
One difficulty with this analysis is that the members of the Community joined on different occasions. As a result it is difficult to assert against a person who was not a member at the relevant time that they had a common intention with those who had previously subscribed that if they joined the Community and paid their subscription they would acquire an interest in the land. True enough, the latterly joining members might be taken to be aware when they subscribed that this was the basis on which other members had joined and on which they were participating. However, it must be doubtful that this would satisfy the underlying rationale of the common intention constructive trust, being the existence of detrimental reliance on a common intention which has similarities with equitable proprietary estoppel. On the other hand, it is apparent that when a new member joined the Community they did so knowing that all other members had joined with the same common intention as to the existence of their interest in the Property. In that way it is not entirely artificial to conclude that, by joining the Community, they were prepared to assume the obligations of membership which included acceptance of the rights of the existing members which arose as a consequence of the continuing common intention and the reliance by each member on it. On that basis they might be taken as having adopted as their own that continuing common intention as from the commencement of the Community. Again, this rationalisation of the legal relationships may involve some distortion of the accepted orthodoxy and necessitate the adoption of imputed, rather than actual, intentions.
A further difficulty with the analysis is that the common intention constructive trust is seen as institutional rather than remedial in that it takes effect “from the moment at which the conduct giving rise to its imposition occurs”: Imam Ali Islamic Centre [405]. That would suggest that the trust exists from that point in time when the party claiming an interest has acted to their detriment on the faith of the common intention as to the acquisition of a beneficial interest. That would seem to be inimical to the identification of an ambulatory constructive trust which expands with the joining of each new Community member.
These concerns render it difficult to identify the existence of the same common intention constructive trust in respect of the Property from the time of its acquisition.
It ought to be observed that whilst it may have been that one of the Pre-Purchase Subscribers claimed that they did not believe that further persons were to have any interest in the Property, such an assertion is contrary to the overwhelming evidence as to the basis on which the Community was established and that claim should be rejected. It was also contrary to the events which occurred of which there was not complaint. Mr Darwin made it clear from the beginning that he would seek funds from additional community members to ensure that the purchase price was paid and that money was available for capital improvements and maintenance.
A preference for the failed joint endeavour constructive trust analysis
Whilst some not unreasonable arguments exist in support of the conclusion that a common intention constructive trust existed in relation to the interests of the Community members from time to time, the circumstances do not sit comfortably with the underlying rationale for trusts of that nature. The circumstances of this matter, particularly at that point in time when the last member joined the Community, more accurately indicate the existence of that form of constructive trust which arises upon the failure of a joint endeavour.
No resulting trust
It follows that the submissions of the liquidator and some defendants to the effect that the Property was held on a resulting trust should be rejected. The correct interpretation is that it was held on a constructive trust by the Company for the subscribers who advanced money to become members of the Community. That trust arose on the failure of the joint endeavour, best identified at the date the Company entered administration.
The relevant direction
It follows that the relevant direction which ought to be given is:
The plaintiff is justified in treating real property situated at 3222 Kyogle Road, Mount Burrell in New South Wales, being Lot 20 in Deposited Plan 755714A and 755714B and Lot 2 in Deposited Plan 1148316 (being all the land in folio identifiers 20/755714A, 20/755714B and 2/1148316) (the Property) as being held by the Company, as bare trustee, subject to any charge or lien that the Company has over the Property to secure payment of any debts properly incurred by the Company as trustee, pursuant to a constructive trust (the Trust) for those parties who subscribed money for the purposes of becoming members of the Bhula Bhula Community.
What are the interests of the beneficiaries under the constructive trust?
Given the above, the next question is to identify the relative proportionate interests of the community members in the land.
It must be kept in mind that, in general terms, the imposition of a constructive trust is a remedial solution arising when a party seeks to use their legal right to defeat the substance of a transaction or the actual or presumed intention of a transaction: Muschinski v Dodds (1985) 160 CLR 583, 613-614; and its remedial character permits it to be moulded to reflect the equities and the circumstances of a particular case: Bryson v Bryant (1992) 29 NSWLR 188, 218. That is not a significant issue in the present case where the extent of the detriment suffered by subscribers was, at least, the amount of their monetary contribution. Whilst in constructive trust cases the court is entitled to take a broad brush approach to determining the respective shares of the competing parties: Drake v Whipp [1996] 1 FLR 826 per Peter Gibson LJ; Jones v Kernott [2010] 1 WLR 2401, 2405-2406 [10]-[11]; here, the apportioning of interests according to the respective financial contributions is the most appropriate. That is particularly so when the trust is imposed to prevent the enjoyment of the contributions of others to the venture. Such a conclusion logically coheres with the notion that each member subscribed to the joint endeavour a certain amount of money which they would not have done in the absence of the understanding that they would become entitled to an interest in the Property. In Baumgartner v Baumgartner, Mason CJ, Wilson and Deane JJ said at 147-148 in relation to the identification of the interest of beneficiaries of constructive trusts specified by Deane J in Muschinski v Dodds:
Deane J (with whom Mason J agreed) reached this result by applying the general equitable principle which restores to a party contributions which he or she has made to a joint endeavour which fails when the contributions have been made in circumstances in which it was not intended that the other party should enjoy them.
The apportionment of interests consistently with the respective financial contributions is also consistent with the assessment of detriment sustained by each of the Community members. Where the common intention is that each party makes a financial contribution to the Community in return for which they will obtain an interest in the land and those contributions are made in unequal amounts, the imposition of interests commensurate with the proportionate contribution is appropriate. In Sivritas v Sivritas [2008] VSC 374 at [132] Kyrou J identified the matters which ought to influence the assessment of the respective proprietary interests:
[132] In determining the scope of any Muschinski v Dodds constructive trust, a court can take into account direct financial contributions to the purchase price of the property and incidental costs such as stamp duty, registration fees, solicitors’ fees and bank fees. However, a court is not limited to such expenditure. It can also take into account the pooling of financial resources, other financial contributions even in the absence of pooling, contributions of labour, and non-financial contributions or contributions in kind such as homemaking and parenting contributions. Further, the inquiry into whether the assertion by a party of his or her legal rights would be unconscionable can encompass events that occurred after the property was initially acquired. Expenditure on repairs and renovations of the property by a person asserting a constructive trust in respect of the property, where the expenditure is accepted by the legal owner of the property in the knowledge that it would improve the home and add to its value, can be considered as a contribution in quantifying the first person’s equitable interest under the constructive trust.
These authorities should apply in the present matter such that the proceeds of the sale of the land, after the deductions referred to subsequently in these reasons, should be divided amongst those who subscribed money to become members of the Community and whose money was used or was intended to be used in relation to the purchase of the Property or its maintenance or improvement. That is, amongst those who joined in the joint endeavour. The division of those funds is to occur in proportion to the amount which each subscriber’s payment bears to the total of the funds paid by the members as subscriptions to become members of the Community. The result of this conclusion is that whilst the trust is constructive, it is resulting in effect.
In relation to the beneficial interests of the members the following direction should be given to the liquidator:
The plaintiff is justified in treating the beneficiaries of the Trust as those persons whom the plaintiff identifies as having subscribed to become members of the Bhula Bhula Community where the funds so subscribed were or were intended to be used by the subscriber in relation to the costs of acquisition of the Property, the purchase price of the Property, the discharge of the mortgage over the Property, or for the maintenance or improvement of the Property, in proportions calculated rateably to the amount of money they each contributed to the total funds subscribed for those purposes.
Money returned to members
In accordance with the shambolic manner in the Community was run it appears that some members were returned part of their subscriptions from time to time. That will, no doubt, affect the extent of the beneficial interest of a member who has received any of their funds back. That is something which the liquidator will need to take into account when ascertaining the proportionate beneficial interest of each member.
Conclusion on trust
It follows that the Company holds the Property on a constructive trust for the benefit of those who subscribed money for an interest in the Community by way of payment for a unit in the unit trust where the Community and unit trust have failed. Their beneficial interests are in the same proportion as the amount of their subscription bears to the total amount of subscriptions.
Resolution of the liquidator’s claim
The identification of the interests in the land and the trust on which the land is held is the first and most significant step in answering the liquidator’s questions. The next step is to identify the manner in which the Property is to be dealt with by the liquidator.
Sale of the Property
The liquidator seeks an order that he be entitled to sell the Property. There is no reason why that should not occur. The joint endeavour of the Community members failed and it cannot be lawfully pursued. Moreover, the entity which held the legal title to the land is insolvent and is being wound up. It is likely to have some claim to exoneration or reimbursement in relation to expenses of the trust. These are considered below. Further, some costs of the liquidation will necessarily need to be discharged from the trust assets given that resolution of issues surrounding the trust has been a significant part of the winding up.
It is to be recognised that one or two Community members asked the Court that the land be vested in a new trustee so that the original plan of a Community might be pursued. Apart from the present illegality that is not the purpose of the constructive trust which is to return the corpus of the trust to the beneficiaries. Given that not all Community members wished to have the original purpose pursued and no one was prepared to discharge the debts which need to be discharged from the trust, no valid reason existed for not ordering that the liquidator sell the Property.
The liquidator ought to be given a direction that:
The plaintiff is justified in proceeding to market for sale and selling the Property in the way he considers appropriate.
The appointment of the liquidator as receiver of the Property
The liquidator also seeks an order that he be appointed as the receiver of the property of the trust of which the company is trustee. Such an order is common in cases where the company being wound up is also the trustee of a trust and where the assets of the trust are subject to the rights of exoneration or recoupment of the company and the costs of the winding up.
The liquidator seeks his appointment as receiver because, as he submits, there is uncertainty in the authorities as to whether a liquidator of a corporate trustee had the power to sell trust assets to enforce its right of indemnity. He also submits the appointment of the liquidator as receiver will facilitate the expeditious sale of the trust assets and the winding up of the company. The necessity for the making of orders such as these was recognised by Allsop CJ in Killarnee (at [44] and [87]-[91]) where his Honour recognised that although a trustee is entitled to exercise its right of indemnity to enforce the right of exoneration or recoupment without a court order, where property is not required to be sold, the lien does not confer a power of sale and if such sale is necessary, “a court order or the appointment of a receiver to sell is required.”
In the present case, it would appear to be more than arguable that the liquidator is entitled, in the name of the Company, to exercise the power of sale with respect to the Property. However, it is appropriate to put the matter beyond all doubt and orders should be made to appoint the liquidator as the receiver of the assets of the trust with sufficient powers to effect a sale of the Property.
The following orders should be made in relation to the appointment of the liquidator as receiver:
The plaintiff is appointed receiver, without security, over the Property, pursuant to s 57 of the Federal Court of Australia Act 1976 (Cth).
The plaintiff be so appointed with the powers provided by s 420 of the Corporations Act 2001 (Cth) as if the reference therein to “the corporation” were to “the Trust” together with the powers that a liquidator has in respect of property of a company (in its role as legal owner and trustee) pursuant to s 477 of that Act.
The need for the plaintiff, as receiver, to file a guarantee under rr 14.21 and 14.22 of the Federal Court Rules2011 (Cth) is dispensed with.
Caveat removal
On 26 October 2016, Ms Melissa Hirsch lodged a caveat on the title to the Property. In that caveat she claimed an interest as being an “equitable interest in the land pursuant to an interest of a beneficiary under a trust and / or an interest of a unit holder in a unit trust”. In these proceedings Ms Hirsch’s claim has been vindicated to the extent that her interest in the land is recognised in the orders made herein. However, her interest is subject to the Company’s rights of exoneration and recoupment. It is also now subject to the entitlement of the liquidator to sell the property, discharge the relevant debts and impositions on the Property and its proceeds.
In the circumstances it is appropriate to order that Ms Hirsch remove the caveat so as to allow the sale of the Property to proceed and for the net proceeds to be distributed to those beneficially entitled, including her. The appropriate order is:
Pursuant to s 74MA of the Real Property Act 1900 (NSW), Melissa Hirsch, within 14 days of the date of this order, withdraw the caveat (dealing number AM352133M) from the title of the Property.
Distribution of the trust assets
The liquidator asserted that the real question on the application concerned the manner in which the assets of the constructive trust could be distributed. This necessarily followed from a determination as to the beneficial interests in the Property. He sought an order that that he would be justified in distributing the assets in accordance with the order of priority in ss 555 and 556 of the Corporations Act: Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018)] 354 ALR 436 (Killarnee) and Re Amerind Pty Ltd; Commonwealth v Byrnes and Hewitt (2018) 54 VR 230, [276] and [281]. That latter decision was affirmed on appeal to the High Court by reasons published yesterday: Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20.
It can be accepted that the liquidator is required to apply the property of the Company in accordance with the law which includes the interpretation of the provisions of the Corporations Act by the courts. However, the real issue involves the extent to which the Company is entitled to any rights of exoneration or recoupment from the assets of the trust.
Limited obligations as bare trustee
The liquidator now accepts that the capacity on which the Company held the Property in trust was limited to that of a “bare trustee”. That acceptance is appropriate in the circumstances where it has been determined that the trust was not the unit trust which had been intended but a trust imposed by law as a result of the nature of the transactions between the parties. In consequence of that, the trustee had duties limited to possessing and maintaining the Property, until such time as those beneficiaries required it to be conveyed. The trustee was required to protect the property and vindicate the rights attaching to it: CGU Insurance Limited v One.Tel Limited (In Liquidation) (2010) 242 CLR 174, 182-183 [36]. So much is true both prior to and after the failed joint endeavour constructive trust arose on the entry into administration of the Company. After that time, the Property was held on the bare constructive trust as declared here. Prior to that time, although it was not argued in these terms, the Company did not hold the Property in its own right, but rather subject to the beneficial interests arising from the payments of funds (with its knowledge) from the various express trusts manifested in the GAF Account and Wall & Co trust accounts.
The liquidator asserts that the Company is entitled to be indemnified out of the assets of the trust in respect of those debts the “debts necessarily relating to liabilities incurred by the Company as trustee to maintain and safeguard the Property”. To that extent the Company retains an equitable lien to enforce the rights of indemnity: see generally Lane (trustee), in the matter of Lee (bankrupt) v Deputy Commissioner of Taxation [2017] 253 FCR 46, [35]-[102] (Lane); Killarnee [30]-[42] per Allsop CJ.
There was no real dispute that, prima facie, the Company is entitled to discharge from the assets of the trust the debts which arose out of the trusteeship. As the actual trust on which the Property was held was not the purported unit trust which failed, the debts relating to that contemplated trust cannot be paid by use of the assets of the constructive trust. The liquidator did not contest to the contrary and was content for any direction concerning the discharging of debts to be limited to those debts of the constructive trust.
In relation to this aspect of the matter the following declaration and directions ought to be made:
It is declared that the Company has a right of indemnity from the assets of the Trust for Trust debts, being those debts properly incurred as trustee of a constructive trust.
The plaintiff is justified in calling for proofs of Trust debts of the Company, being those debts properly incurred as a trustee of a constructive trust, and to have recourse to the assets of the Trust to satisfy those claims, as accepted.
The plaintiff is justified in recovering the costs and expenses incurred by the Company and the plaintiff in realising the assets of the Trust, and otherwise dealing with the Trust, from the assets of the Trust.
Clear accounts rule
However, the trustee’s right of indemnity from the assets of the trust is subject to the “clear accounts rule” to the effect that before the trustee can rely upon its right of indemnity it must make good any loss which it has caused to the trust: RWG Management Ltd v Commissioner for Corporate Affairs (Vic) [1984] VR 385; Australian Securities and Investments Commissionv Letten (No 17) (2011) 286 ALR 346, [20].
As the facts in this matter reveal, those involved in the management and operation of the Company lacked the skill, knowledge or understanding to carry out the necessary tasks in any appropriate manner. The Company made no attempt to ascertain what its duties were nor did it appreciate that the unit trust had failed such that its obligations, duties and rights in relation to the Property were limited. It is not clear whether and to what extent the Company caused loss to the trust by reason of any breach of trust duty. To the extent to which such loss occurred its right to indemnity is reduced. That said, to the extent to which it incurred debts which are not payable from the trust funds, the incurring of such debts did not cause the trust loss.
It follows that the order allowing the liquidator to discharge debts properly incurred in the management of the trust (Trust debts) out of the estate is limited by the clear accounts rule.
Cost of liquidation and remuneration
The liquidator seeks an order that the costs of the winding up and his remuneration are payable from the proceeds of the sale of the Property as a trust asset. He submits that the only assets which are available are the trust assets such that the net proceeds of sale should be available to meet the winding up costs.
A difficulty with such an order in this case is that the Company’s business was not solely that of acting as the trustee of the trust. Here, the unit trust, which was to be the object of the Company’s business, failed and the only trust which existed was the constructive trust. That trust did not require administration as the unit trust would have required. It is not to the point that Company was not aware that its only obligations were those of a bare trustee. The consequence of this is that several activities of the Company were outside of the scope of the actual trusteeship and many of the debts incurred were not trust debts. Necessarily, it follows that the winding up of the Company does not merely involve the administration of the Company as trustee. It involves the winding up of the Company apart from its role as trustee.
The liquidator submitted that he is “entitled to be paid his costs and expenses, whether for administering trust assets or for general liquidation work, because he is effectively carrying on the trustee’s duty of managing the trust for the benefit of the trust or trusts”. In support of that he relied upon the decision of Kennedy J in Re Mackie Group Pty Ltd (in liq) (2017) 122 ACSR 537, 545 -547, [51]-[67]. However, as that decision itself makes clear, the company in question had no other activities other than that of a trading trust. That being so, the general liquidation work was only consequential upon its activities as trustee and, on that foundation, the whole of the liquidation costs were to be paid from the assets of the trust.
Here, no global order can be made allowing the liquidator to recover all of the costs of the administration and of the winding up from the assets of the trust. An apportionment will necessarily be required to be undertaken to separate the costs of the administration and winding up relating to the trust from other costs. As the Company’s activities extended beyond its conduct as a trustee it is inappropriate that the trust assets bear the burden of the whole of the costs of winding up. In this respect, orders concerning the assets available to meet the costs of winding up do not have their origin only under the Corporations Act. In Lane (at [154]-[194]) there was substantial consideration of the application of the principles in Re Universal Distributing Co (in liq) (1933) 48 CLR 171 and Re Berkeley Applegate (Investment Consultants) Ltd (in liq) [1989] Ch 32 concerning the entitlement of those engaged in winding up trustees to utilise trust assets for the purposes of discharging their costs, charges and remuneration. Those two cases had been carefully considered by Finkelstein J in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 and, in Lane, his Honour’s views were summarised as follows:
His Honour noted that the principles in Berkeley Applegate and Re Universal Distributing required that attention be directed to identifying the entities for whose benefit the work by the liquidator was conducted. In that case, it was held that to the extent to which the work was done by the liquidator in what was, effectively, the administration of the trust, the costs, expenses and remuneration were to be paid out of the trust assets (at p 385). To the extent to which the work done was in the ordinary winding up of the company, referred to by his Honour as “general liquidation matters”, it was to be paid for out of the assets beneficially owned by the company. Where the company in liquidation only acted as a trustee of the relevant trust, and the trust itself is insolvent, it might be that much of the work involved in “general liquidation matters” was necessary in the proper administration of the trust and, therefore, chargeable against the trust assets. On the other hand, where the insolvent trustee has only non-trust creditors but insufficient assets of its own to meet the costs, expenses and remuneration of a liquidator or bankruptcy trustee, it is difficult to identify any basis on which an order might be made permitting recourse to the trust assets or the right of exoneration to satisfy the shortfall.
The above principles are applicable in the present case and they permit the liquidator to have recourse to the trust assets for his costs and expenses of the liquidation and for recovery of his remuneration to the extent to which his work concerned the assets of the trust. The nature of the work for which such sums are recoverable are referred to, albeit not exclusively, at para [191] in Lane. Here, the administration of the trust was a part of the winding up of the Company such that a portion of the cost of the general liquidation matters should also be met out of the trust assets as identified by Finkelstein J.
Yesterday, the High Court delivered judgment in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth [2019] HCA 20. There is some indication there (see [167]-[171] per Gordon J) that the liquidator’s costs and expenses so far as they relate to the trust might be regarded as trust debts. Accepting that to be the case, the result would be the same and the liquidator is not entitled to charge the trust assets with the costs of general insolvency work which is not referable to the trust.
It is to be emphasised that the Court is not being asked in this application to make any determination of the reasonableness of the liquidator’s costs and expenses or his remuneration. That matter can be raised and considered, if necessary, on another occasion.
As appears above, orders are made appointing the liquidator as the receiver of the Property for the purposes of realising it. He also seeks an order for the costs, expenses and remuneration as receiver relating to the sale of the Property. For the reasons referred to above, such an order is appropriate. That does not mean that the liquidator is paid twice for undertaking the same work in different capacities. Such an order merely puts beyond doubt that he is entitled to recover his costs, expenses and remuneration relating to the sale of the Property.
Insofar as the liquidator has sought directions in relation to the recovery of the costs and expenses incurred in the administration and winding up of the following direction should be made:
The plaintiff, in his capacity as administrator and liquidator of the Company and as receiver of the Property, is entitled to be paid from the proceeds of the sale of the Property:
(a)his costs, expenses and remuneration to the extent to which they relate to work undertaken by the plaintiff in relation to the administration of the Trust including the work undertaken to render the Company’s right of exoneration available to meet the claims of the Company’s creditors, whose debts were incurred in the administration of the trust;
(b)an amount in respect of his costs, expenses and remuneration relating to general insolvency matters, to the extent the costs, expenses and remuneration concern the administration of the Trust.
A declaration ought to be made as the liquidator’s entitlement to a lien over the property of the trust in respect of his entitlement to be paid the identified costs, expenses and remuneration:
It is declared that the plaintiff is entitled to a lien over the assets of the Trust in respect of his fees, expenses, and outlays incurred in his capacity as administrator and, subsequently, as liquidator of the Company to the extent allowed by the Court.
Costs
The liquidator seeks an order that his costs of this proceeding be paid from the proceeds of the sale of the Property. He also seeks an order that his costs be paid from those proceeds in accordance with the order of priority in s 556.
In the usual course, where a trustee acts reasonably and in good faith in the administration of a trust, it is entitled to look to the trust assets for reimbursement of any expenses incurred. Here, the liquidator, acting through the Company as trustee brought this application because there was uncertainty about the rights and interests of the various competing interests. The beneficiaries of the trust were not able to agree upon their respective proportions, or upon the orders which should be made in relation to the trust. In addition, those previously in control of the Company failed to conduct the trust as was required with the result that the circumstances of the trust were confused and disorganised. That supports the appropriateness of the liquidator’s conduct in bringing these proceedings.
Some of the defendants suggested that the liquidator should pay the costs of the action seemingly because the litigation was protracted. There is no substance in that submission. The liquidator’s actions were entirely proper and by these proceedings he sought to have the rights of the parties to the Property determined as expeditiously as possible. If there were any delay or protraction it arose as a result of the conduct of a number of the defendants.
Although it is unfortunate to have to mention it, it is also relevant that a number of the Community members appeared to raise several scurrilous allegations about the manner in which the liquidator was engaging in his task of winding up the Company. None of them were established or even supported with admissible evidence. In such circumstances it was reasonable for the liquidator to seek the advice of the Court so as to put the issues raised beyond doubt.
In the result, the liquidator’s costs of the proceedings ought to be paid from the proceeds of the sale of the Property and of any other trust property. It matters not whether they are to be regarded as a direct impost on the proceeds or merely the exercise of a right of exoneration: Woodgate, in the matter of Bell Hire Services Pty Ltd (in liq) [2016] FCA 1583, [24]; Killarnee (at [105]-[108]).
The appropriate order in relation to the payment of costs is:
The plaintiff’s costs of the proceeding (including reserved costs), calculated on a full indemnity basis, be paid out of the assets of the Trust and, to the extent not satisfied from the assets of the Trust, be costs in the liquidation.
The liquidator’s right to indemnity from the trust assets in respect of costs should be secured by a declaration of a lien over the trust assets (ie the Property) for those costs. In this respect the order should be:
It is declared that the plaintiff has a lien over the assets of the Trust for his costs of these proceedings.
Similarly, the costs of the third, fourth, fifth and sixth defendants ought to be paid out of the proceeds of sale. Their involvement through solicitors and counsel was necessary to determine the respective rights of the parties. In that respect the appropriate costs order ought to be:
The third, fourth, fifth and sixth defendants’ costs of the proceeding (including reserved costs), calculated on a full indemnity basis, be paid out of the assets of the Trust.
Otherwise the other defendants appeared for themselves and any recoverable costs would be relatively minor. Their involvement in the action did not assist in the resolution of the issues and, to a not insignificant degree, it generally increased the complexity and length of the proceedings and of the final hearing.
I certify that the preceding two hundred and twenty-five (225) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Derrington. Associate:
Dated: 20 June 2019
SCHEDULE OF PARTIES
QUD 32 of 2018 Defendants
Fourth Defendant:
MELISSA HIRSCH
Fifth Defendant:
STUART NEWMAN
Sixth Defendant:
NORMA GEELIN MOU
Seventh Defendant:
PHILLIP MORANDINI
Eighth Defendant:
DEAN MOONEY
Ninth Defendant:
CRAIG SCOTT
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