Udp Holdings Pty Ltd v Esposito Holdings Pty Ltd (in liq)
[2021] VSC 528
•26 August 2021
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2019 04810
| UDP HOLDINGS PTY LTD (subject to deed of company arrangement) (receivers and managers appointed) (ACN 167 100 692) | Plaintiff |
| v | |
| ESPOSITO HOLDINGS PTY LTD (in liquidation) (ACN 079 763 303) | First Defendant |
| and | |
| AE BRIGHTON HOLDINGS PTY LTD (in liquidation) (ACN 166 492 306) | Second Defendant |
| and | |
| HAGIT PTY LTD (ACN 150 965 825) | Fourth Defendant |
| and | |
| GORAN TEMELKOVSKI | Fifth Defendant |
| and | |
| REGISTRAR OF TITLES | Sixth Defendant |
| and | |
| SPEAK MONEY PTY LTD (ACN 642 793 262) | Ninth Defendant |
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JUDGE: | Richards J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 19 and 20 July 2021 |
DATE OF JUDGMENT: | 26 August 2021 |
CASE MAY BE CITED AS: | UDP Holdings Pty Ltd v Esposito Holdings Pty Ltd (in liq) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 528 |
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EQUITY – Constructive trust – Funds paid by first defendant to second defendant in breach of trust – Plaintiff seeking to trace proceeds of constructive trust into real property purchased by second defendant – Whether funds paid to second defendant subject to constructive trust – Second defendant a volunteer and on notice of facts giving rise to constructive trust – Whether ‘first in, first out’ rule applies to prevent tracing of funds – Whether funds can be traced into overdrawn home loan account – Backwards tracing claim considered – Plaintiff did not establish necessary co-ordination between the depletion of funds subject to the constructive trust and acquisition of the property.
PRACTICE AND PROCEDURE – Application to join successor trustee as defendant – Whether successor trustee a necessary party – Just and convenient to determine questions between successor trustee, plaintiff, former trustee and its liquidator – Successor trustee joined – Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 9.06(b).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C Young QC with Mr P Annabell | Ashurst Australia |
| For the First Defendant | No appearance | |
| For the Second Defendant | Ms V Bell | Norton Rose Fulbright Australia |
| For the Fourth Defendant | Mr G Efron | Efron & Associates |
| For the Fifth Defendant | No appearance | |
| For the Sixth Defendant | No appearance | |
| For the Ninth Defendant | Mr JA Ribbands | TF Grundy Lawyer |
HER HONOUR:
On 31 January 2014, UDP Holdings Pty Ltd purchased a dairy business from Esposito Holdings Pty Ltd. It did so by acquiring the shares in 5 Star Foods Pty Ltd from Esposito Holdings, pursuant to a Share Sale Agreement dated 11 December 2013. Antonio Esposito, the sole director and shareholder of Esposito Holdings, was also a party to the Share Sale Agreement. The agreed purchase price was approximately $70 million.
Shortly after completion of the sale, it emerged that the dairy business had been overcharging its largest customer for some years. The business collapsed, and various disputes between UDP Holdings and Esposito Holdings were referred to arbitration.
The arbitrator’s final award of 1 October 2018 included a declaration that, on and from 31 January 2014, Esposito Holdings held the purchase price on a constructive trust for UDP Holdings. On 5 October 2018, Croft J made an order giving effect to the arbitrator’s award as a judgment of the Supreme Court of Victoria.
In this proceeding, UDP Holdings seeks to trace money the subject of that constructive trust into properties that it claims were purchased with that money. It alleges that about $22 million of the purchase price was transferred by Esposito Holdings to a second company owned and controlled by Mr Esposito, AE Brighton Holdings Pty Ltd, and that AE Brighton used that money to buy four properties in Victoria:
(a) 2 Kinane Street, Brighton (or the Kinane Street property);
(b) 92 The Esplanade, Brighton (or The Esplanade property);
(c) 639 and 649 Williams Road, Werona; and
(d) 101 Trunk Lead Road, Bunkers Hill.
The two Brighton properties were sold in September 2020.[1] The balance of the sale proceeds, an amount of $4,515,391.55, was paid into Court. AE Brighton is still the registered proprietor of the country properties at Werona and Bunkers Hill.
[1]The circumstances leading up to the sale are set out in the Court of Appeal’s judgment in AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 236, [2]-[13].
The relief sought by UDP Holdings in this proceeding includes declarations that it is entitled to trace the sum of $22,622,356.06 into the properties or the proceeds of sale, and that AE Brighton holds the properties or their proceeds on trust for UDP Holdings. UDP Holdings also seeks orders for the sale of the country properties, and an order for payment to it of the proceeds of the sale of the Brighton properties that were paid into Court.
By the time I reserved judgment on 20 July 2021, there were two active defendants to the proceeding, AE Brighton and Speak Money Pty Ltd.
On 12 May 2021, AE Brighton was wound up by court order, and John Ross Lindholm of KPMG was appointed as liquidator. Mr Lindholm did not oppose UDP Holdings being granted leave to proceed against AE Brighton in this proceeding, under s 471B of the Corporations Act 2001 (Cth). I am satisfied that I should make that order, with effect from 12 May 2021.
AE Brighton and Mr Lindholm appeared at the trial, and neither consented to nor opposed the relief sought by UDP Holdings. AE Brighton made helpful submissions on two legal issues.
In addition, Mr Lindholm applied at the trial for orders enabling him to sell the country properties. Those orders were agreed to by UDP Holdings and, ultimately, were not opposed by any defendant. It was plainly appropriate that Mr Lindholm should have the powers necessary to manage the sale of these properties, and be able to commence the sale process without further delay. Accordingly, on 4 August 2021, I made an order under s 63 of the Trustee Act 1958 (Vic) giving Mr Lindholm, in his capacity as liquidator of AE Brighton, powers of sale in respect of the country properties.
Speak Money was joined as the ninth defendant at the trial, at its request. I set out the background to and reasons for its joinder at [72] to [89] below.
There were a number of other defendants that ultimately took a passive role.
(a) The first defendant, Esposito Holdings, was wound up by court order on 5 December 2018. The liquidator of Esposito Holdings is Matthew James Byrnes of Grant Thornton. Esposito Holdings filed a defence on 20 December 2019, in which it made various admissions. Significantly, based on the arbitrator’s award, it admitted that it held payments made to it as part of the purchase price on constructive trust for UDP Holdings, and that, in breach of that trust, on 24 February 2014 it paid $17,000,000 to AE Brighton.
(b) The fourth defendant, Hagit Pty Ltd, claimed an estate or interest in the Kinane Street property, based on a loan advanced to Violeta Esposito in March 2018.[2] While Hagit formally denied both the existence and the alleged breach of the constructive trust, and appeared at the trial, it did not tender evidence or make any submissions. Hagit accepted that its claim would rank behind UDP Holdings’ claim, if established.
(c) The fifth defendant, Goran Temelkovski, claimed an estate or interest in the Brighton properties, based on a facility agreement between Mr Temelkovski and AE Brighton dated 5 November 2013. On 12 May 2021, Mr Temelkovski admitted that UDP Holdings’ estate or interest in the properties takes priority over his claim. He took no further part in the proceeding.
(d) The sixth defendant, the Registrar of Titles, advised the Court in July 2020 that he did not intend to appear in the proceeding.
[2]Violeta Esposito, also known as Violeta Stojkevski, is married to Mr Esposito. See further [73]-[74] below.
I have concluded that UDP Holdings can trace the proceeds of the constructive trust into the properties, and has the following equitable interests in them:
(a) $80,000 of the $536,359.19 paid into Court following the sale of the Kinane Street property;
(b) all of the funds held in Court in respect of The Esplanade property; and
(c) all of the country properties.
My reasons for those conclusions follow.
Findings of fact
I make the following findings of fact, based on admissions and the uncontested evidence tendered by UDP Holdings at trial.
On 31 January 2014, UDP Holdings purchased the shares in 5 Star Foods from Esposito Holdings, pursuant to the Share Sale Agreement dated 11 December 2013.
At all relevant times until 31 January 2014, Mr Esposito was the sole director and controlling mind of 5 Star Foods and its subsidiary, United Dairy Power Pty Ltd. At all relevant times until 14 April 2016, Mr Esposito was the sole director and controlling mind of Esposito Holdings and AE Brighton.
Between 31 December 2013 and 31 January 2014, UDP Holdings paid the following amounts pursuant to the Share Sale Agreement:
(a) $2,099,960 to AE Brighton on 31 December 2013;
(b) $2,400,000 to AE Brighton on 13 January 2014; and
(c) $18,122,356.06 to Esposito Holdings on 31 January 2014.
The payment of $2,099,960 was credited to AE Brighton’s Westpac Banking Corporation account 72-7009 on 6 January 2014. The payment of $2,400,000 was credited to AE Brighton’s Westpac account 72-7009 in two parts, $2,200,000 on 10 January 2014 and $200,000 on 13 January 2014.
As Esposito Holdings admitted, it held on constructive trust for UDP Holdings the payments made to Esposito Holdings as part of the purchase price under the Share Sale Agreement.[3] The amount of $18,122,356.06 paid by UDP Holdings to Esposito Holdings on 31 January 2014 was subject to the constructive trust.
[3]Defence of the first defendant dated 20 December 2019, [9](a).
In breach of the constructive trust, Esposito Holdings paid $17,000,000 to AE Brighton on 24 February 2014.[4] The entire amount was paid into AE Brighton’s Westpac account 72-7009.
[4]Defence of the first defendant dated 20 December 2019, [13](a).
There is nothing to suggest that any consideration passed from AE Brighton to Esposito Holdings in respect of this payment. I find that AE Brighton received the payment of $17,000,000 as a volunteer. In addition, through Mr Esposito, its sole director and controlling mind, AE Brighton was on notice of the facts that gave rise to the constructive trust.
Those facts included, as found by the arbitrator and admitted by Esposito Holdings in this proceeding:
(a) Mr Esposito was aware, before 31 January 2014, of overcharging by United Dairy Power, a subsidiary of 5 Star Foods, of its largest customer, National Foods Australia Pty Ltd;
(b) Mr Esposito gave directions to employees to carry out the overcharging;
(c) Mr Esposito was aware that there was no entitlement to overcharge under the contract with that customer;
(d) the overcharging resulted in there being breaches of nine warranties of the Share Sale Agreement;
(e) UDP Holdings did not know about the overcharging until after 31 January 2014 and the overcharging was not disclosed to UDP Holdings;
(f) Mr Esposito was aware that the result of the overcharging was to increase dramatically the value of shares in the business being sold by increasing the EBITDA[5] that was being used for the purpose of valuation; and
(g) UDP Holdings paid the purchase price under a mistake of fact being unaware of the matters in paragraphs (a)–(d) and (f) above.
[5]Earnings Before Interest, Taxes, Depreciation, and Amortization.
The evidence on which the arbitrator based these findings was also tendered in this proceeding. I make the same findings, adopting the reasons given by the arbitrator in his interim award dated 21 September 2018. AE Brighton made no criticism of the arbitrator’s findings, or his reasoning, and did not submit that I should make any different findings.
AE Brighton used the money it had received from Esposito Holdings to buy The Esplanade property and the country properties. It had already purchased the Kinane Street property from its own funds and borrowed funds, including a home loan from Westpac. It used $80,000 of the money received from Esposito Holdings to install a tennis court at the Kinane Street property, and another $6,640,000 to temporarily reduce the amount owed to Westpac on its mortgage over the property. I base these findings on the analysis of AE Brighton’s financial records in the two reports of Stephen Millington, forensic accountant. The financial transactions in relation to each property are set out in detail below.
On 15 April 2015, Esposito Holdings made a further payment of $700,000 into AE Brighton’s Westpac account 72-7009.[6] This additional payment was made some time after the payments that UDP Holdings seeks to trace into the properties. I therefore make no finding as to whether this payment was made in breach of the constructive trust.
[6]Revised report of Stephen Millington dated 15 April 2021, [49]-[50].
2 Kinane Street, Brighton
AE Brighton purchased 2 Kinane Street, Brighton in 2013 for $10,800,000, to which AE Brighton contributed a deposit of $540,000 before settlement, and payments totalling $2,236,342.31, made at settlement on 21 November 2013. The balance of the purchase price was paid by Westpac as mortgagee.
On 21 November 2013, AE Brighton withdrew $6,640,000 from a Westpac home loan account 72-7092. I infer that this home loan account was secured by a mortgage over the Kinane Street property.
AE Brighton later spent $80,000 installing a tennis court at the Kinane Street property. A cheque for $80,000 was drawn on AE Brighton’s Westpac account 72-7009 on 16 April 2014. I infer that this payment was referable to the tennis court.
On 11 August 2014, AE Brighton transferred $6,640,000 from its Westpac account 72‑7009 to its home loan account 72-7092, bringing the home loan account balance to zero. However, the mortgage was not discharged at that time, and remained in place until the property was sold in September 2020. Further withdrawals were made from the home loan account 72-7092 from May 2015 onwards. The account was more than $7,400,000 in debit by September 2020.
The Kinane Street property was sold on 4 September 2020, for $10,995,600. The balance of the sale proceeds was only $536,359.19, which was paid into Court on 23 September 2020.
92 The Esplanade, Brighton
AE Brighton purchased 92 The Esplanade, Brighton on 28 February 2014 for $3,843,800. AE Brighton contributed the whole of the purchase price and other sale costs, a total of $4,066,845.55.
This amount was paid by a withdrawal of $384,380 from AE Brighton’s Westpac account 72-7009 on 24 February 2014, and a further withdrawal of $3,692,625.35 from the same account on 28 February 2014. An amount of $10,159.80 was credited to the account on 25 September 2014.
The Esplanade property was sold on 4 September 2020, for $5,504,400. The balance of the sale proceeds was $3,979,032.36, which was paid into Court on 23 September 2020.
101 Trunk Lead Road, Bunkers Hill
AE Brighton purchased 101 Trunk Lead Road, Bunkers Hill on 22 July 2014 for $1,400,000. AE Brighton contributed the whole of the purchase price and other sale costs, a total of $1,478,178.14.
This amount was paid by a withdrawal of $70,000 from AE Brighton’s Westpac account 72-7009 on 26 June 2014, and further withdrawals of $78,588 and $1,329,651.06 from the same account on 22 July 2014.
639 and 649 Williams Road, Werona
AE Brighton purchased 639 and 649 Williams Road, Werona on 12 December 2014 for $1,900,000. It contributed the whole of the purchase price and other sale costs, a total of $2,007,639.19.
This amount was paid by the following withdrawals from AE Brighton’s Westpac account 72-7009:
(a) $190,000 on 18 November 2014;
(b) $270,916.15 on 12 December 2014;
(c) $1,443,259.24 on 12 December 2014; and
(d) $103,463.80 on 18 February 2015.
Constructive trust
UDP Holdings claims that the following payments received by AE Brighton were impressed with the constructive trust:
(a) $2,099,960 paid by UDP Holdings to AE Brighton on 31 December 2013;
(b) $2,400,000 paid by UDP Holdings to AE Brighton on or about 13 January 2014;
(c) $17,000,000 paid by Esposito Holdings to AE Brighton on 24 February 2014; and
(d) $700,000 paid by Esposito Holdings to AE Brighton on 15 April 2015.
I find that the first two of these payments were not subject to the constructive trust. I accept that the payments were made by UDP Holdings as part of the purchase price payable to Esposito Holdings under the Share Sale Agreement. However, for some reason the payments were made directly to AE Brighton, and not to Esposito Holdings.[7] Esposito Holdings did not have those funds as at 31 January 2014, or any time after that date, and so they cannot be regarded as trust funds.
[7]Revised report of Stephen Millington dated 15 April 2021, [18](a)(i)-(ii), [18](a)(x), [32], [34], [38]. I note that cl 4.3(a) of the Share Sale Agreement provided for payment of the purchase price ‘to the Seller or to the person or persons and in the manner that the Seller directs in writing not less than 2 Business Days before the due date for payment’.
The third payment of $17,000,000 was made after 31 January 2014, and clearly was subject to the constructive trust. It was paid by Esposito Holdings in breach of the trust, and was received by AE Brighton as a volunteer with notice of the trust.[8] The beneficial interest in those funds therefore remained with UDP Holdings.
[8]See findings at [21]-[24] above.
It is not necessary to determine whether the order giving effect to the arbitrator’s declaration of the constructive trust is a judgment in rem – that is, conclusively against the whole world.[9] It is enough that AE Brighton was on notice of the constructive trust when it received the payment of $17,000,000 in February 2014.
[9]UDP Holdings submitted that the order was a judgment in rem, relying on Stephenson J’s reasoning in His Eminence Petar the Diocesan Bishop of the Macedonian Orthodox Diocese of Australia and New Zealand v Kotevich [2014] NSWSC 1215, [60]-[61]. AE Brighton disputed the proposition that an arbitrator’s award can operate in rem, referring to a passage in Michael J Mustill and Stewart C Boyd, The Law and Practice of Commercial Arbitration in England, (Butterworths, 2nd ed, 1989) 149, and numerous authorities applying that passage. It also pointed out that Kotevich had not been followed in any subsequent case concerning judgments in rem.
The final payment of $700,000 was made after all of the transactions that UDP Holdings claims can be traced into the properties, and so I make no finding as to whether it was subject to the constructive trust.
Traceable proceeds of the constructive trust
The $17,000,000 that was paid into AE Brighton’s Westpac account 72-7009 on 24 February 2014 remained the property of UDP Holdings. It is clear that, from those funds, AE Brighton acquired The Esplanade property and the country properties. The following payments can be traced from AE Brighton’s Westpac account 72-7009 into those properties:
(a) a total of $4,066,845.55 towards the purchase of 92 The Esplanade, Brighton;[10]
(b) a total of $1,478,178.14 towards the purchase of 101 Trunk Lead Road, Bunkers Hill;[11] and
(c) a total of $2,007,639.19 towards the purchase of 639 and 649 Williams Road, Werona.[12]
[10]See [32]-[33] above.
[11]See [35]-[36] above.
[12]See [37]-[38] above.
Speak Money submitted that the amount of $4,066,845.55 paid out of AE Brighton’s account 72-2009 for the purchase of The Esplanade property could not be regarded as trust money. I understood this submission to be based on the ‘first in, first out’ rule – that is, the principle that where a trustee withdraws money from a mixed fund, the trustee is presumed to have used its own money first.[13] Speak Money argued that AE Brighton should be taken to have applied its own money – specifically the payments received directly from UDP Holdings in January 2014 – towards the acquisition of The Esplanade property.
[13]Re Hallett’s Estate; Knatchbull v Hallett (1880) 13 Ch D 696.
I reject that submission. The ‘first in, first out’ rule only applies ‘where it provides a more satisfactory remedy for a beneficiary against a defaulting trustee’.[14] It does not prevent money being traced from AE Brighton’s bank account into The Esplanade property, in circumstances where the funds in the account have all been dissipated but the proceeds of the sale of The Esplanade property remain in AE Brighton’s name.[15]
[14]Re Global Finance Group Pty Ltd (in liq) (2002) 26 WAR 385, [101].
[15]Re Oatway; Hertslet v Oatway [1903] 2 Ch 356, 360; Re Tilley’s Will Trusts; Burgin v Croad [1967] Ch 1179, 1185.
UDP Holdings therefore has an equitable interest in the $3,979,032.36 paid into Court following the sale of The Esplanade property, and in each of the country properties.
It remains to be determined whether UDP Holdings can trace any funds into the Kinane Street property – that is, whether it has any interest in the $536,359.19 that was left over after the sale of the property. AE Brighton purchased the Kinane Street property in November 2013, before any payments were made under the Share Sale Agreement, and before the constructive trust took effect on 31 January 2014. The property was not acquired using the proceeds of the constructive trust.
UDP Holdings seeks to trace the following payments into the Kinane Street property:
(a) $80,000 paid from AE Brighton’s Westpac account 72-7009 on 16 April 2014 for the installation of a tennis court at the property; and
(b) $6,640,000 transferred from AE Brighton’s Westpac account 72-7009 into AE Brighton’s home loan account 72-7092 on 11 August 2014.
The $80,000 spent on the tennis court involved the application of trust money to the improvement of the Kinane Street property, and may be traced into the property. In Boscawen v Bajwa,[16] Millett LJ said:
If the plaintiff’s money has been applied by the defendant, for example, not in the acquisition of a landed property but in its improvement, then the court may treat the land as charged with the payment to the plaintiff of a sum representing the amount by which the value of the defendant’s land has been enhanced by the use of the plaintiff’s money.
AE Brighton did not dispute that there was an increase in the value of the Kinane Street property equivalent to the amount it spent on the tennis court.
[16][1996] 1 WLR 328, 335 (Boscawen).
The more difficult question is whether the transfer of $6,640,000 into the home loan account 72-7092 is traceable into the property. The difficulty arises because, while the payment brought the account balance to zero, it did not result in the discharge of the mortgage over the property. AE Brighton later withdrew all of those funds, and more, from the home loan account before the mortgage was discharged on the sale of the Kinane Street property.[17]
[17]See [30] above.
UDP Holdings contended that the payment could be traced, not only into the home loan account 72-7092, but into the Kinane Street property. It based this contention on a further statement of Millett LJ in Boscawen,[18] that if the plaintiff’s money has been used to discharge a mortgage on the defendant’s land, then the court may treat the land as subject to a charge by way of subrogation in favour of the plaintiff. It also relied on Credit Union Australia Ltd v Lyons,[19] in which the defendant had applied funds wrongly withdrawn from an unsecured credit account to reduce mortgage debts secured by two properties. Justice White held that the court could treat those properties as charged with the payment to the plaintiff of the amounts so applied.[20]
[18]Boscawen, 335.
[19][2009] NSWSC 1188 (Lyons).
[20]Lyons, [30].
Both AE Brighton and Speak Money were quick to point out that the payment had not resulted in the discharge of the mortgage over the Kinane Street property. AE Brighton submitted that an equitable charge might arise through the doctrine of subrogation where the underlying security was discharged, but not otherwise. In this case, subrogation could not operate because Westpac had continued to rely on its security over the Kinane Street property, and it could not be said that UDP Holdings stood in the shoes of Westpac.
AE Brighton referred me to McClure J’s observation in Re Global Finance Group Pty Ltd (in liq)[21] that the better view is that a proprietary claim to the traceable product will fail if trust money is paid into an overdrawn account.[22] It also referred to observations to similar effect made by the New South Wales Court of Appeal, in obiter, in Russell Gould Pty Ltd v Ramangkura.[23]
[21](2002) 26 WAR 385.
[22]Re Global Finance, [129].
[23](2014) 87 NSWLR 552, [36]-[37] (Russell Gould).
Consideration
Tracing is not a right or a remedy; it is a process for identifying trust property that has passed into the hands of a third party, by exchange or transfer, and no longer exists in its original form. The claimant seeks to establish a proprietary interest in the traceable proceeds of the trust, in order to obtain equitable remedies in respect of those proceeds.[24]
[24]Re Global Finance, [94]-[95] and the authorities cited.
The process of tracing involves the application of a set of rules to the facts of the particular case, although the rules about tracing into a mixed fund are ‘complex and not invariably applied’.[25] Where traceable proceeds of a trust are paid into an overdrawn account, the ‘overwhelming balance of authority is to the effect that a proprietary claim to the traceable product will fail’.[26]
[25]Re Global Finance, [99].
[26]Re Global Finance, [129] and the authorities cited.
I do not accept UDP Holdings’ submission that the $6,640,000 transferred by AE Brighton into its home loan account 72-7092 on 11 August 2014 can be traced into the Kinane Street property. While the payment reduced AE Brighton’s indebtedness to the bank to zero, at least for the time being, AE Brighton did not acquire any property as a result of the payment. It was already the registered proprietor of the Kinane Street property. Had the mortgage been discharged, UDP Holdings might have been subrogated to the property right of the mortgagee bank, whose debt had been paid out.[27] But that is not what occurred here – the mortgage to Westpac remained in place.
[27]Boscawen, 335 (Millett LJ); Heperu Pty Ltd v Belle (2009) 76 NSWLR 230, [135] (Allsop P); Russell Gould, [37].
To the extent that there is conflict between the authorities of Re Global Finance and Lyons, I prefer McLure J’s exposition of the principles of tracing in Re Global Finance, including where trust money is paid into an overdrawn account. Her Honour’s conclusion that tracing will fail in these circumstances was supported by authority,[28] and has been cited with approval on a number of occasions.[29] In addition, her Honour’s explanation of the rationale of the rule is persuasive:[30]
The rationale for the rule which prevents equitable tracing into an overdrawn bank account is that the property being traced must continue to exist in some form up to the time of, and through to, the traceable product. An overdrawn bank account is a debt owing by the trustee to the bank. The effect of a payment into an overdrawn account is to reduce or cancel the trustee’s indebtedness to the bank. Tracing is a factual process and a trust fund or part of it which is dissipated cannot be traced. The extinguishment or reduction of the trustee’s indebtedness is regarded in effect as the disappearance of the property.
[28]Re Diplock; Diplock v Wintle [1948] Ch 465, 521; James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62; Bishopsgate Investment Management Ltd (in liq) v Homan [1995] Ch 211; Re Goldcorp Exchange Ltd [1995] 1 AC 74.
[29]See, eg, Re Rowena Nominees Pty Ltd; Ex Parte Conlan (2006) 199 FLR 415, [44]; Williams v Peters [2010] 1 Qd R 475 [5] (McMurdo P), [36] (Muir JA); Freelance Global Ltd (in liq) v Bensted Ltd [2016] VSC 181, [36]-[37]; Carr v Council of the Law Society of New South Wales [2020] NSWCA 276, [31] (White JA).
[30]Re Global Finance, [135].
By contrast, it is not clear to me that White J’s conclusion in Lyons – that trust money could be traced into a defendant’s mortgage accounts – was supported by the authority cited.[31] In particular, the passage referred to in Boscawen concerned a situation where the plaintiff’s money had been used to discharge a mortgage, not to reduce the debt owing in a mortgage account. I also note that White JA (as his Honour now is) has recently cited McLure J’s observations in Re Global Finance with approval.[32]
[31]Lyons, [30] and the authorities cited.
[32]Carr, [31]. See also Re All Class Insurance Brokers Pty Ltd (in liq); Vardy v Westpac Banking Corporation [2014] NSWSC 475, [41]-[42].
Alternative submission – backwards tracing
UDP Holdings made an alternative submission that the principles of tracing are sufficiently broad to allow funds subject to the constructive trust to be traced backwards into the Kinane Street property.
The legal basis for this submission was the conclusion of the Privy Council in Federal Republic of Brazil v Durant International Corporation[33] – that a court ‘should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect’.[34] The Board held that it should not matter whether an account used as a conduit for the transfer of funds was in credit or overdraft at the time,[35] and continued:[36]
The Board therefore rejects the argument that there can never be backward tracing, or that the court can never trace the value of an asset whose proceeds are paid into an overdrawn account. But the claimant has to establish a co-ordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund. This is likely to depend on inference from the proved facts, particularly since in many cases the testimony of the trustee, if available, will be of little value.
[33][2016] AC 297 (Brazil v Durant). See also Foskett v McKeown [1988] Ch 265, 284 (Scott VC).
[34]Brazil v Durant, [38].
[35]Brazil v Durant, [39].
[36]Brazil v Durant, [40].
UDP Holdings accepted that this approach has not to date been applied in Australia, but said that there was no reason in principle why it should not be applied in this case.
The factual basis for UDP Holdings’ backwards tracing submission was that there was an interconnected scheme by which Mr Esposito used the funds the subject of the constructive trust to buy the properties, including the Kinane Street property. It relied on the following matters to demonstrate the existence of this scheme:
(a) at the time the Kinane Street property was purchased, the Share Sale Agreement was already in Mr Esposito’s contemplation;
(b) Mr Esposito directed funds received at completion to AE Brighton, which he had created as a special purpose vehicle to acquire property in Brighton; and
(c) during his examination on 9 November 2015, Mr Esposito said that the funds received from UDP Holdings were used to purchase properties, including the Kinane Street property.
AE Brighton and Speak Money argued that accepting UDP Holdings’ alternative submission would involve a significant broadening of the doctrine of tracing, as it has been applied in Australia. They submitted that the Court could only trace the funds paid into the home loan account 72-7092 in August 2014 backwards into the acquisition of the Kinane Street property in November 2013 by ignoring the ordinary rules of tracing.
Whatever the state of Australian law in relation to backwards tracing, I am not persuaded that UDP Holdings has established the factual basis to trace the funds backwards into the Kinane Street property.
It is the case that Mr Esposito gave evidence on 9 November 2015 during the public examination of the affairs of 5 Star Foods that AE Brighton had used the money it received from Esposito Holdings to purchase all four properties, including the Kinane Street property. That evidence was relied on by both Ginnane J and the Court of Appeal in refusing AE Brighton’s application to remove the caveat lodged by UDP Holdings over the property.[37]
[37]AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2019] VSC 688, [23]-[27]; AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235, [55], [64].
Having established an arguable case that the money AE Brighton obtained from the Share Sale Agreement was used to purchase the Kinane Street property, UDP Holdings was entitled to maintain its caveat over the property – on condition that it commence this proceeding to make good its claim. However, the totality of the evidence at the end of the proceeding, in particular Mr Millington’s meticulous analysis of the relevant financial transactions, does not bear out Mr Esposito’s statement that AE Brighton used the proceeds of the sale to purchase the Kinane Street property.
Mr Esposito signed the contract for the purchase of the Kinane Street property on 19 September 2013, and AE Brighton completed the purchase on 21 November 2013.[38] I am unable to find that Mr Esposito had an expectation of receiving payment from UDP Holdings at either time. While the dairy business was for sale then, a price had not yet been agreed. UDP Holdings’ consultants ‘spent about a year in the data room’ on due diligence before it offered to purchase the business.[39] The Share Sale Agreement was not signed until 11 December 2013.
[38]See [27] above.
[39]Affidavit of Antonio Esposito dated 17 December 2020, [22].
As noted, the major source of funds for the purchase of the Kinane Street property was a loan from Westpac secured by a mortgage over the property. According to Mr Esposito, in about August 2014, his bank manager ‘suggested that we temporarily put some money from the [AE Brighton’s Westpac account 72-7009] into the mortgage account in order to reduce interest until we worked out what we would do with it’.[40] The money was taken back out of the account when Mr Esposito started his new dairy business.[41] The bank statements for the home loan account 72-7092 are consistent with the funds having been parked there temporarily in August 2014, before being withdrawn again during 2015. The mortgage was not discharged following the payment of $6,640,000 into the home loan account and, as discussed above, the money was not used to acquire the Kinane Street property.
[40]Affidavit of Antonio Esposito dated 17 December 2020, [18].
[41]Affidavit of Antonio Esposito dated 17 December 2020, [19].
UDP Holdings has not established a co-ordination between the depletion of the funds subject to the constructive trust and the acquisition of the Kinane Street property, and so there is no factual basis on which I could trace the August 2014 payment backwards into the acquisition of the asset.
Summary
In summary, I find that UDP Holdings has an equitable interest in:
(a) $80,000 of the $536,359.19 paid into Court in respect of the Kinane Street, property;
(b) all of the $3,979,032.36 paid into Court following the sale of The Esplanade property; and
(c) all of the country properties.
Joinder of Speak Money
Speak Money applied at the trial to be joined as a defendant to the proceeding, under r 9.06(b) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic). The application was supported by an affidavit of Simon Gunn, a solicitor employed by TF Grundy Lawyer, the solicitor for Speak Money.
Mr Gunn deposed that he was instructed by Charles Pellegrino, the sole director of Speak Money, and that declarations of bare trust had been made in respect of the properties that are the subject of this proceeding, designating Violeta Esposito as beneficiary. He exhibited to his affidavit copies of these declarations of trust, apparently signed by Mr Esposito as director of AE Brighton:
(a) on 30 October 2013 in respect of 2 Kinane Street, Brighton;
(b) on 14 February 2014 in respect of 92 The Esplanade, Brighton;
(c) on 14 May 2014 in respect of 101 Trunk Lead Road, Bunkers Hill; and
(d) on 24 November 2014 in respect of 639 and 649 Williams Road, Werona.
Each of these documents nominated Ms Esposito as beneficiary, and provided that the beneficiary could at any time by deed remove the trustee and appoint a new trustee.
Also exhibited to Mr Gunn’s affidavit were copies of deeds of replacement and appointment in respect of all four trusts, dated 12 May 2021, apparently signed by Ms Esposito, replacing the existing trustee AE Brighton with a new trustee, Speak Money.
Mr Gunn set out the basis on which Speak Money sought leave to be joined as a party to the proceeding:[42]
(a)Speak Money has replaced AE Brighton as the trustee of the Bare Trust in respect of each of the properties and any orders that might be made in relation to the payment of moneys ought take into account the fact that Speak Money is the trustee of those amounts;
(b)In circumstances where AE Brighton is now in liquidation and the conduct of the Defence is being undertaken by the liquidator, there may be matters which are relevant to the defence of the proceeding, but to which the liquidator of AE Brighton may not be privy;
(c)The liquidator of AE Brighton has a responsibility to creditors which may not coincide with the interests of the trustee and the beneficiary of the trusts; and
(d)By reason of the replacement of AE Brighton as the trustee, the interests of AE Brighton remain limited to a claim for indemnity for itself from the trusts’ assets. It has no role to play in protecting the ongoing interests of the beneficiary to the trusts.
[42]Affidavit of Simon Hugh Liam Gunn dated 16 July 2021, [12].
Acknowledging that the application was made at a very late stage in the proceeding, Mr Gunn conveyed his instructions that Speak Money did not wish to see the trial adjourned and was prepared to proceed on the scheduled date, 19 July 2021.
Speak Money submitted that it was both a person ‘whose presence before the Court is necessary to ensure that all questions in the proceeding are effectually and completely determined and adjudicated upon’, for the purposes of r 9.06(b)(i) of the Rules, and ‘a person between whom and any party to the proceeding there may exist a question arising out of, or relating to, or connected with, any claim in the proceeding which it is just and convenient to determine’, for the purposes of r 9.06(b)(ii). It emphasised the breadth of r 9.06(b), and its object of preventing multiple proceedings.[43]
[43]Relying on Boral Resources (Vic) Pty Ltd v Robak Engineering and Construction Pty Ltd [1999] 2 VR 507, [5] (Tadgell JA), [23] (Batt JA).
Speak Money relied principally on the fact that it had been named as a respondent to the liquidator’s summons seeking powers to sell the country properties, filed prior to trial on 16 July 2021. It accepted that its interest in the properties could be no greater than AE Brighton’s, and that AE Brighton was responding to issues related to that interest, but said that as current trustee it was intimately concerned in the resolution of the question of the extent of that interest. It also accepted that, as a successor trustee, it would be bound by the determination in this proceeding of AE Brighton’s interest in the properties. However, it submitted that it had a keen interest in the determination of that question, and had a voice to be heard on its resolution.
In response to a number of case management concerns raised by UDP Holdings, counsel for Speak Money assured me that it would not apply for an adjournment of the trial. It wished to hear the evidence and arguments put forward by UDP Holdings and AE Brighton, before deciding whether to ask questions and make submissions of its own.
The joinder application was opposed by UDP Holdings, principally on case management grounds. It highlighted the lateness of the application, and the lack of any explanation for the delay in making it. The tenor of UDP Holdings’ submission was that joining Speak Money had the potential to disrupt the trial, in circumstances where it could not say what case it wished to advance.
UDP Holdings also argued that Speak Money was not a necessary party to the proceeding, because the determination of UDP Holdings’ claims against AE Brighton would bind both Ms Esposito, as beneficiary of the alleged trusts,[44] and Speak Money, as successor trustee.[45]
[44]Relying on Gleeson v J Wippell & Co [1977] 1 WLR 510, 515; Young v Murphy [1996] 1 VR 279, 286-7; Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 16.02.
[45]Relying on George Spencer Bower and KR Handley, Res Judicata (LexisNexis, 4th ed, 2009) [9.44].
For completeness, I note that UDP Holdings did not accept the authenticity of the copy declarations of trust exhibited to Mr Gunn’s affidavit. It pointed out that AE Brighton had not alleged the existence of the bare trusts in the proceeding, and had not discovered the documents now relied on by Speak Money.
AE Brighton and the liquidator were neutral in relation to the joinder application, but expressed concern at any possibility that the trial might be derailed. They accepted that Speak Money had a right to be heard on the liquidator’s summons.
After hearing argument on the joinder application, I reserved my decision. Speak Money appeared on a provisional basis for the balance of the first day of the trial.
Consideration
As events transpired, Speak Money’s participation did not derail the trial, which was all but completed by the end of the first day. Speak Money did not seek to cross-examine any of the witnesses whose statements and affidavits were tendered by UDP Holdings and AE Brighton. It sought to tender only one bundle of bank statements, which had been omitted from the documents tendered by UDP Holdings. It made succinct submissions on the issue of whether UDP Holdings could trace funds into AE Brighton’s home loan account 72-7092 for the Kinane Street property. Those submissions augmented the submissions made by AE Brighton on the same question.
The case management concerns expressed by UDP Holdings in opposition to the joinder application were valid, but in the end its fears were not realised. Speak Money’s conduct during the trial addressed concerns that I held about the lateness of its application to be joined, and the potential for its joinder to further delay the trial and the determination of the proceeding.
I did not consider that Speak Money was a necessary party to the proceeding, for the purposes of r 9.06(b)(i) of the Rules. Speak Money’s interest in the properties could be no better than AE Brighton’s. Speak Money accepted that the determination of UDP Holdings’ claims against AE Brighton in this proceeding binds Speak Money, as successor trustee. It also binds Ms Esposito, as beneficiary of the alleged trusts.[46]
[46]Young v Murphy [1996] 1 VR 279, 286-7 (Brooking J); Rules, r 16.02(1).
However, I was persuaded that there might exist questions arising out of, or relating to, or connected with claims in the proceeding that it would be just and convenient to determine as between UDP Holdings, AE Brighton, the liquidator, and Speak Money. Speak Money claims to be the new trustee of trust properties that are the subject of this proceeding. Given the history of disputation over the trust properties, it appeared to me to be in everyone’s interests for Speak Money to be heard in this proceeding, and for it to be unequivocally bound by the result. In addition, all parties accepted that Speak Money was entitled to be heard in relation to the liquidator’s summons.
For those reasons, on the second morning of the trial I made an order under r 9.06(b)(ii) of the Rules, joining Speak Money as the ninth defendant to the proceeding.
Disposition
I will hear the parties as to the appropriate form of order to give effect to this judgment, and on the question of costs.
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