Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd

[2016] NSWCA 28

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Woodlawn Capital Pty Ltd v Motor Vehicles Insurance Ltd [2016] NSWCA 28

Hearing dates:

29 and 30 October 2015

Date of orders:

09 March 2016

Decision date:

09 March 2016

Before:

Macfarlan JA at [1];
Ward JA at [2];
Gleeson JA at [253]

Decision:

(1) Appeal allowed in part.
(2) Set aside order 6 of the orders made on 21 April 2015 and in lieu thereof order 6 should be as follows:
6(a)   Woodlawn pay MVIL’s costs on the party/party basis of the following issues:
(i) the liability of Woodlawn to account to it for the balance of the funds retained by Woodlawn after termination of the respective agreements between the parties in November 2011 (after the deduction of those accrued fees that were established to be owing under the Asset Management Agreement);
(ii) the liability of Woodlawn to restore to the trust fund, and account to MVIL for, amounts wrongly appropriated in respect of GST and the “fees on fees” issue;
(iii) the claim by MVIL for pre-judgment interest; and
(iv) the claim by Woodlawn for damages for injurious falsehood.
6(b)   MVIL pay Woodlawn’s costs on the party/party basis of the following issues:
(i) the s 925A issue and s 46B claim; and
(ii) MVIL’s claim for damages for breach of the IMA in respect of its trading activities and for misleading and deceptive conduct (other than the costs of MVIL in establishing the existence of events of default entitling it validly to terminate the respective agreements) and the claim for accrued fees under the AMA.
(3) Order Woodlawn to pay MVIL’s costs of the appeal.
(4) Dismiss with costs the cross-appeal.
(5) Dismiss with costs the application by MVIL for leave to appeal from the decision of Stevenson J of 26 June 2015.

Catchwords:

CONTRACTS – general contractual principles –interpretation of contracts – proper construction of release and indemnity clause in respective agreements – whether contractual right to withdraw moneys from funds held in trust gave rise to, or had same incidents and operation as, equitable lien

 

CORPORATIONS – right to rescind agreements under s 925A Corporations Act 2001 (Cth) – entitling facts for purposes of s 925A(2)

  COSTS – whether appellant entitled to costs of defending proceedings where appellant a trustee – whether proceedings defended substantially in own interest rather than in capacity as trustee – whether indemnity clause released appellant from liability or indemnified it in relation to costs

Legislation Cited:

Australian Securities and Investments Commission Act 2001 (Cth)
Civil Procedure Act 2005 (NSW), s 100
Companies Act 1997 (PNG)
Corporations Act 2001 (Cth), ss 766A, 766B, 766C, 924, 924A, 925A, 925B, 925E, 925F, 925H, 1012IA
Corporations Regulations 2001, cl 7.1.35
Independent Public Business Corporation Act 2002 (PNG), s 46B
Trustee Act 1925 (NSW), ss 59(4), 63
Uniform Civil Procedure Rules, r 42.25(2)

Cases Cited:

ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1
Agusta Pty Limited v Provident Capital Limited [2012] NSWCA 26
Armitage v Nurse [1998] Ch 241
Chief Commissioner of Stamp Duties (NSW) v Buckle [1998] HCA 4; (1998) 192 CLR 226
CPT Custodians Ltd v Commissioner of State Revenue [2005] HCA 53; (2005) 224 CLR 98
Darlington Futures Limited v Delco Australia Pty Limited [1986] HCA 82; (1986) 161 CLR 500
Elsewhere Investments Pty Ltd v Oksa [2014] NSWSC 537
European Bank Limited v Robb Evans of Robb Evans & Associates [2010] HCA 6; (2010) 240 CLR 432
F Hoffman-La Roche & Co AG v Secretary for Trade and Industry [1975] AC 295
Financial Services Authority v Sinaloa Gold plc [2013] UKSC 11; [2013] 2 AC 28
Firth v Centrelink [2002] NSWSC 564; (2002) 55 NSWLR 451
Frost v Bovaird [2012] FCAFC 60; (2012) 203 FCR 95
Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29
Hewett v Court [1983] HCA 7; (1983) 149 CLR 639
House v R [1936] HCA 40; (1936) 55 CLR 499
Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125
In re Beddoe; Downes v Cottam [1893] 1 Ch 547
In re Spurling’s Will Trusts; Philpot v Philpot [1966] 1 WLR 920
Jennings v Mather [1902] 1 KB 1
Kupang Resources Limited v International Litigation Partners Pte Limited [2015] WASCA 89
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66
Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2014] NSWSC 1503
Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2014] NSWSC 1846
Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2015] NSWSC 401
Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2015] NSWSC 845
National Trustees Executors and Agency Company of Australasia Limited v Barnes [1941] HCA 3; (1941) 64 CLR 268
R v Khazaal [2012] HCA 26, (2012) 246 CLR 601
re Llewellin; Llewellin v. Williams (1887) 37 Ch D 317
Ruby v Marsh [1975] HCA 32; (1975) 132 CLR 642
Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 359; (1931) 45 CLR 359
Spencer v Fielder [2015] 1 WLR 2786
Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584
Tresize v Bilato Nominees Pty Ltd (1986) 83 FLR 44
Turner v Hancock (1882) 20 Ch D 303
Unilever Australia v Petrevska [2013] NSWCA 373; (2013) 85 NSWLR 677
Walters v Woodbridge (1878) 7 Ch D 504
Warton v Yeo [2015] NSWCA 115

Texts Cited:

D O’Sullivan and S Elliott, R Zakrzewski, The Law of Rescission, 2014, 2nd ed, Oxford University Press
JD Heydon and MJ Leeming, Jacobs’ Law of Trusts in Australia, 7th ed, 2006, LexisNexis Butterworths
RP Meagher and WMC Gummow, Jacobs’ Law of Trusts in Australia, 6th ed, 1997, LexisNexis Butterworths

Category:

Principal judgment

Parties:

Woodlawn Capital Pty Limited (Appellant/Cross-Respondent; Applicant on leave application)
Motor Vehicles Insurance Limited (Respondent/Cross-Appellant; Third Respondent on leave application)
Timothy Patrick Breen (First Respondent on leave application)
Timothy James McNamara (Second Respondent on leave application)

Representation:

Counsel:
JC Kelly SC with DP O’Connor (Appellant/Cross-Respondent)
J Giles SC with Ms H Mann (Respondent/Cross-Appellant

  Solicitors:
Uther Webster & Evans (Appellant/Cross-Respondent; Respondents on leave application)
Gadens (Respondent/Cross-Appellant; Applicant on leave application)

File Number(s):

CA 2015/00124297; CA 2015/214801 (leave application)

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity Division

Citation:

[2014] NSWSC 1503; [2015] NSWSC 401; [2015] NSWSC 845

Date of Decision:

21 April 2015

Before:

Stevenson J

File Number(s):

2012/83573

HEADNOTE

[This Headnote is not to be read as part of the judgment]

From 2009 to 2011, the appellant, Woodlawn Capital Pty Ltd (Woodlawn), provided investment and asset management services to the respondent, a company incorporated in Papua New Guinea (Motor Vehicles Insurance Ltd (MVIL)). It did so first under the terms of an Investment Management Agreement executed in July 2009 and then under the terms of a second Investment Management Agreement and separate Asset Management Agreement executed in June 2010. A Trust Deed was executed on 6 May 2010 but said to commence 27 July 2009, recording the establishment and terms of a trust (the MVIL Trust), under which Woodlawn held the funds invested with it by MVIL as trustee.

In November 2011, MVIL requested the repatriation of the funds under MVIL’s management by a letter which the primary judge held had the effect of terminating all the agreements between Woodlawn and MVIL.

Woodlawn maintained that it was entitled to retain the bulk of the funds then held by it on trust for MVIL (some AUD 22m) in payment of claimed early termination fees under the Investment Management and Asset Management Agreements and in payment of accrued fees due under the latter agreement.

MVIL brought proceedings seeking urgent interlocutory relief to restrain Woodlawn from dealing with the funds. By consent and without admissions, Woodlawn agreed to orders in March 2012 which had the effect of freezing the MVIL funds pending the resolution of the matter. Those freezing orders were varied in November 2014 to permit the payment out of some of the retained funds to Woodlawn, in the context of which the directors of Woodlawn gave a personal undertaking to the Court to restore the funds so released to it if the Court were so to order.

The hearing of the substantive disputes commenced in September 2014. MVIL alleged breach by Woodlawn of fiduciary duties, misleading and deceptive conduct, breach of contract, breach of trust and negligence on Woodlawn’s part. It also alleged that the various agreements it had entered into with Woodlawn were unenforceable by reason of s 925E of the Corporations Act 2001 (Cth) and were ultra vires, illegal, void and/or unenforceable at the suit of Woodlawn pursuant to s 46B of the Independent Public Business Corporation Act 2002 (PNG). It claimed the recovery of the whole of its funds without any deduction, as well as repayment of all the fees it had been charged during the term of the agreements.

Woodlawn in response pressed its entitlement to accrued fees and the claimed early termination fees, as well as damages for injurious falsehood relating to a press release that had been issued in November 2011 by a Minister of the Papua New Guinea government in relation to the funds.

The primary judge found that MVIL had validly terminated the agreements for various events of default committed by Woodlawn, including breach of warranties under the respective agreements by reason of it not holding an Australian Financial Services Licence (AFSL) when it entered into the agreements. Woodlawn was therefore not entitled to any fees beyond those that had accrued at the date of termination. As to the accrued fees, the primary judge found that Woodlawn had wrongly appropriated GST in respect of the fees charged and that there had been some double counting in respect of the calculation of fees, determining the quantum of accrued fees as being in the order of AUD 3.5m (against which an offset was applied to result in the amount payable in respect of the accrued fees – which was released in advance of the final orders by way of a variation of the freezing orders – as being in the order of AUD 2.9m). The primary judge found that there had been misleading and deceptive conduct and other breaches of the agreements but said that no damages had been proved to have been suffered as a result.

His Honour held that a statutory right of rescission had arisen but that MVIL was not entitled to recover the whole of the amounts it had paid under the agreements because that right had been lost by reason of it not having been exercised within a reasonable time after MVIL became aware that Woodlawn did not hold, and was required to hold, an AFSL.

His Honour dismissed the claim by Woodlawn for damages in relation to the media release. He ordered that Woodlawn pay MVIL pre-judgment interest accrued on the funds it had retained and one-third of MVIL’s costs.

Woodlawn appealed from his Honour’s orders for pre-judgment interest and costs, arguing that these fell within the terms of a release and indemnity provision in the respective agreements. MVIL in turn cross-appealed from the dismissal of its claim based on s 925E of the Corporations Act and the order it was entitled to only one-third of its costs. It also sought leave to appeal in respect of the refusal by his Honour, after final orders had been made in the proceedings, of its application to enforce the undertaking that had been given to the Court by the directors of Woodlawn in November 2014. That application had been made by MVIL in circumstances where Woodlawn had failed to satisfy the judgment debt against it in respect of pre-judgment interest.

Held: allowing Woodlawn’s appeal in part and dismissing MVIL’s cross-appeal and application for leave to appeal, by Ward JA (Macfarlan and Gleeson JJA agreeing at [1] and [253], respectively)

(1) (at [88], [104] & [109]-[110]) that, in relation to the s 925A issue, the primary judge did not err in his identification of the relevant entitling facts that enlivened MVIL’s right to rescind the agreements (namely, that Woodlawn carried on financial services business and was required to hold, and not exempt from the requirement to hold, an AFSL); the evidence did not support the primary judge’s inference that MVIL became aware of the entitling facts in July 2011; but that since MVIL had not proved when it did become relevantly aware, it was not possible to determine whether MVIL had exercised its right within a reasonable time.

(2) (at [135]) that the primary judge did not err in ordering Woodlawn to pay pre-judgment interest; although the order was compensatory, it did not amount to a claim for damages so as to fall within the scope of the release.

(3) (at [155]; [161]) that Woodlawn’s right to withdraw amounts from the trust fund in payment of its fees was no more than a contractual right held in its capacity as investment and asset manager; it was not a right to retain possession of the funds in its capacity as trustee and did not amount to or have the same incidents or operation as an equitable lien.

(4) (at [189]; [192]) that there was a contractual release in respect of Woodlawn’s liability for some (but not all) of MVIL’s costs of the proceedings, but that Woodlawn’s costs of defending the proceedings were outside the scope of the contractual indemnity and were not recoverable by it in its capacity as trustee at general law or pursuant to s 63 of the Trustee Act 1925 (NSW) since Woodlawn had acted substantially for its own benefit rather than in the interests of MVIL.

(5) (at [191]) that since the costs incurred by MVIL in relation to some of the issues in the proceedings were within the scope of the release clause, the primary judge’s otherwise acceptable broad brush approach to costs was not appropriate as it carried with it the risk that the order so made might cover some of the costs that were contractually released; hence the one-thirds cost order in favour of MVIL should be set aside in favour of a costs order in MVIL’s favour calculated on an issue by issue basis.

(6) (at [244]) that the primary judge did not err in the House v R sense in declining to make an order enforcing or giving effect to the undertaking given by the directors of Woodlawn.

Judgment

1. MACFARLAN JA: I agree with Ward JA.

2. WARD JA: The present proceedings arise out of a dispute following the termination of agreements pursuant to which Woodlawn Capital Pty Limited (Woodlawn) provided investment and asset management services to Motor Vehicles Insurance Limited (MVIL), a company incorporated in Papua New Guinea under the Companies Act 1997 (PNG). MVIL’s sole shareholder is the Independent Public Business Corporation of Papua New Guinea (IPBC), a statutory corporation wholly owned by the State of Papua New Guinea.

3. Broadly speaking, though this by no means encapsulates the breadth of the issues that were in dispute between the parties, Woodlawn maintained that on the early termination of the agreements it was entitled to retain most of the funds that it then held on trust for MVIL, in payment of claimed early termination fees and some accrued fees under one of the agreements. MVIL denied that it was obliged to pay any early termination fees and demanded the recovery of the funds. It also claimed that it was entitled to recover the whole of the fees and charges that had been paid during the term of the respective agreements on the basis of a statutory right to rescind the relevant agreements due to Woodlawn’s failure to hold an Australian Financial Services Licence (AFSL) at the time of entering into the agreements.

4. The primary judge held, among other things, that a statutory right of rescission had arisen but that MVIL had lost that statutory right by failing to exercise it within a reasonable period after it became aware of the facts entitling it so to do and by having affirmed the agreements. His Honour further found that the agreements had been validly terminated for default and that Woodlawn was therefore not entitled to any early termination fees but was entitled to certain accrued fees. The parties challenge different aspects of the primary judge’s findings on these and other issues in the proceedings.

Background

5. On 22 July 2009, MVIL and Woodlawn executed an Investment Management Agreement under which MVIL appointed Woodlawn to manage the “Portfolio”, which was defined in cl 1.1 as “all the investments managed by the Investment Manager [Woodlawn] under the Investment Mandate [a document attached to the agreement] together with all income and accretions in respect of them or any part thereof”. The agreement was for a minimum 2 year term, commencing on the date of execution of the agreement (the Initial Term), though subject to a right of early termination by MVIL under cl 8.3.

6. On 24 July 2009, MVIL paid to Woodlawn a sum of money roughly equivalent to AUD 43.7m (Papua New Guinea Kina 96,479,986) for investment in accordance with the said agreement. Woodlawn acknowledged that it held the transferred funds on trust for MVIL and that MVIL retained “beneficial and legal ownership of all funds” (by letter forwarded to MVIL in September 2009). (Nothing turns for present purposes on the 2009 Investment Management Agreement, though its existence may explain the confusion that later arose on the part of MVIL when it proceeded to terminate Woodlawn’s appointment as investment manager and called for the repatriation of its funds in November 2011 (see [14] below).)

7. In 2010, MVIL and Woodlawn executed three further agreements: a second Investment Management Agreement dated 22 June 2010 (the IMA), which the parties agreed was to replace the first such agreement but was not to operate retrospectively (Recitals B and C to the IMA) and which was for an initial term of “at least until” 27 July 2016 (cl 8.1); an Asset Management Agreement also dated 22 June 2010 (AMA); and a trust deed recording the establishment and terms of a trust known as the MVIL Trust, executed on 6 May 2010 but said to commence 27 July 2009 (the Trust Deed). A right of early termination by MVIL was contained in cl 8.3 of each of the IMA and AMA.

8. Under the IMA, there was a similar provision to that contained in the 2009 Investment Management Agreement expressly appointing Woodlawn as the Investment Manager to manage the Portfolio (defined in the same terms as it was in the earlier agreement). There was no material difference between the Investment Mandates attached to the respective Investment Management Agreements. Clause 9.3 of the IMA contained an express acknowledgement that Woodlawn held the Portfolio on trust for MVIL (pursuant to the Trust Deed).

9. Under the AMA, MVIL appointed Woodlawn (there defined as the Asset Manager) “to advise on and where appropriate manage the Portfolio” on the terms set out in that agreement (cl 2(a)). “Portfolio” was defined in cl 1.1 to mean “all assets of MVIL which would be regarded as either cash or investments for the purposes of the Accounting Standards together with all income and accretions in respect of them or any part thereof”. It was common ground that this included the funds the subject of the IMA. Hence, in respect of those funds, Woodlawn held three roles: Investment Manager under the IMA, Asset Manager under the AMA, and trustee under the Trust Deed.

10. By November 2011, coinciding with the worsening of the then European financial crisis, the value of the Portfolio managed by Woodlawn for MVIL had reduced from around AUD 43.7m to around AUD 30.5m. At around that time, there was also a change in the management of MVIL, with the appointment of a new board of directors following a change of government in Papua New Guinea.

5. On 17 November 2011, the then Acting Chief Executive Officer of MVIL, Mr Moses Koiri, wrote to Woodlawn. In that letter, headed “Repatriation of MVIL Funds under Management and Termination of Investment Mandate [sic] Agreement”, Mr Koiri advised Woodlawn that the new board of directors appointed by IPBC had “resolved that the funds under management by your firm be repatriated within 14 days of receipt of this letter”. Mr Koiri further stated that this would also bring to an end the “Investment Mandate [sic] Agreement” and sought advice as to whether there were any outstanding fees to be settled “so this matter can be amicably finalized”. (I interpose to note that the primary judge held that this letter had the effect of terminating all the agreements between the parties. Later interest calculations were predicated on the date for repayment of the funds having been 1 December 2011, 14 days after the November letter.)

6. Woodlawn’s response, by letter dated 29 November 2011 and signed by one of its directors – Mr Breen, was to the effect that Woodlawn assumed MVIL intended to terminate both the IMA and the AMA. MVIL was informed that Woodlawn required the provision of certain documents (including an original termination and redemption request) in order to terminate each of the agreements and redeem the balance of MVIL funds. The letter went on to state that:

Under the terms of the Agreements; in the instance of the early termination, Woodlawn has the right to charge asset management, investment management, administration and foreign exchange hedging fees calculated for the period commencing on the termination date up until expiry of the Initial Term based upon the respective value of the Portfolios on the termination date.

13. Woodlawn estimated the outstanding fees chargeable on termination (as at 31 December 2011) of the respective agreements as being: under the IMA, a fee of AUD 5,981,672 exclusive of GST; and under the AMA, a fee of AUD 10,554,456 exclusive of GST. It also advised MVIL that there were fees currently accrued and outstanding under the AMA of AUD 2,278,964 inclusive of GST. It stated that all amounts owing to Woodlawn would be deducted from the funds held by it before any amounts were remitted to MVIL.

14. MVIL’s initial response to the suggestion that it would be liable for early termination fees (by letter, inexplicably marked “without prejudice”, sent on 6 January 2012) proceeded on the incorrect assumption that there had been only one investment management agreement and that this had already expired on 22 July 2011. In that letter, Mr Koiri demanded the transfer of all MVIL’s investments with Woodlawn, without deduction. That demand was reiterated, following a meeting on 13 January 2012 by letter of that date also marked “without prejudice”.

15. Mr Koiri’s misapprehension as to the relevant agreements then in place between the two entities was drawn to his attention by Woodlawn in a letter dated 11 January 2012. There was then a meeting between representatives of the parties to discuss the matter, following which MVIL confirmed its requirement for the repatriation of the funds. Woodlawn then issued a further estimate, on 19 January 2012, of the termination fees it claimed were payable, based again on an assumed termination date of 31 December 2011. This time the estimated fees payable on termination comprised: accrued fees under the AMA of AUD 1,346,795, the early termination fee in respect of the IMA of AUD 6,948,576 and the early termination fee in respect of the AMA of AUD 12,338,208, each of those amounts being inclusive of GST. The total of those fees represented the bulk of the funds then held by Woodlawn on trust for MVIL.

16. On 13 February 2012, solicitors acting for MVIL wrote to Woodlawn, asserting that there had been events of default under the respective management agreements, including: non-compliance with the requirement to comply with any relevant law and breach of warranties under the respective agreements (by reason of the fact that Woodlawn had not, at all relevant times, held an AFSL) and the failure of Woodlawn to comply with the repatriation instruction given in November 2011. The letter went on expressly to terminate the agreements, the date of termination there being said to be the date of the letter.

17. Further correspondence ensued in which, in summary, Woodlawn: denied that MVIL was entitled to terminate either of the management agreements on the basis of an event of default; asserted its entitlement to the fees claimed; and offered to remit to MVIL the “undisputed amount” (i.e., the amount not claimed by it by way of termination or accrued fees) in PNG Kina currency. Converted into Australian currency at the relevant time, MVIL understood the effect of this to be that, of an amount of about AUD 29.6m then held by Woodlawn, Woodlawn did not dispute that about AUD 4m was repayable to MVIL, the balance representing Woodlawn’s claimed fees of about AUD 25.6m.

18. On 2 March 2012, Woodlawn proffered an undertaking not to deal with the funds until 2 April 2012 or such other time as might be agreed. However, MVIL regarded it as unacceptable that the funds remain in Woodlawn’s hands for the duration of the dispute. It sought the transfer of all MVIL portfolio funds held by Woodlawn into the respective solicitors’ trust accounts (the funds held in PNG Kina to its own solicitors’ account and the funds held in Australian dollars to Woodlawn’s solicitors’ account); as well as the provision of an undertaking in respect of the funds held in Australia that was clearly intended to preserve the fund pending a resolution of the matter by agreement or by order of the Court. No such undertaking was provided by Woodlawn.

19. On 9 March 2012, an amount of about AUD 4.1m was remitted to MVIL by Woodlawn. Woodlawn retained a sum of about AUD 26m. Following further correspondence as to how the remaining funds were to be held pending resolution of the parties’ dispute, MVIL commenced proceedings against Woodlawn and its two directors (Messrs Breen and McNamara) in the Commercial List of the Equity Division of the Supreme Court in March 2012 by summons seeking urgent interlocutory relief.

20. On 20 March 2012, by consent and without admissions, injunctive relief was granted restraining Woodlawn, by itself or its officers, servants and agents, from encumbering, disposing of or otherwise dealing with the MVIL funds then held by it (the Fund, as defined in the agreed orders) (the March freezing orders).

21. By the time the proceedings were heard in September 2014, a myriad of issues had been raised in the respective parties’ Commercial List statements. MVIL’s claims extended to allegations of breach of fiduciary duties, misleading and deceptive conduct under the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth), breach of contract, breach of trust and negligence. It was further alleged that the various agreements were unenforceable by reason of s 925E of the Corporations Act and that those agreements were ultra vires, illegal, void and/or unenforceable at the suit of Woodlawn pursuant to s 46B of the Independent Public Business Corporation Act 2002 (PNG).

22. Damages were sought (for breach of contract, negligence and misleading and deceptive conduct). In the alternative, an account of profits or equitable compensation was sought. Declaratory relief was sought in relation to the validity of the termination of the various agreements or their rescission in accordance with s 925B of the Corporations Act. Restitutionary orders were also sought in relation to the repayment of all amounts deducted by Woodlawn from the Investment Management Portfolio, whether by way of fees, charges, commission or otherwise (some AUD 6.4m).

23. Woodlawn in turn claimed entitlement to accrued fees under the AMA and to early termination fees under both the IMA and AMA. It also claimed damages for injurious falsehood relating to a press release that had been issued by a Minister of the Papua New Guinean government in November 2011 in relation to the funds.

Primary judgments

24. The matter was heard by Stevenson J in the Commercial List of the Equity Division. His Honour delivered four judgments in the proceedings. References in my reasons to judgment paragraph numbers are, unless otherwise indicated, to those in the principal judgment.

25. The principal judgment (Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2014] NSWSC 1503) was handed down on 30 October 2014 and dealt with most of the issues then between the parties, some being reserved for determination after the parties had had the opportunity to consider his Honour’s reasons and to make further submissions in a hearing on 30 March 2015. His Honour’s findings on the issues dealt with in the principal judgment were summarised (from [24]-[47]) as follows.

26. His Honour concluded that Woodlawn had acted in breach of contract in a number of respects, the most significant being its investment of the Portfolio in breach of the Investment Mandate, but that MVIL had not proved that it had suffered any damage as a result of that breach and that, in any event, Woodlawn was not liable for such damages by reason of an exclusion clause (cl 5) in the IMA and AMA respectively.

27. His Honour found that all the relevant agreements (i.e., the IMA, the AMA and the Trust Deed) had been validly terminated on 17 November 2011; that such termination had effect under the IMA and AMA as a termination for an event of default; and that Woodlawn had no entitlement to fees beyond those that had accrued to the date of termination (and hence no entitlement to early termination fees). As to the accrued fees claimed by Woodlawn, his Honour found that it had not been entitled to charge GST on the fees under the successive IMAs and found in favour of MVIL on the “fees on fees” issue (an issue relating to MVIL’s contention that there had been double counting in relation to the calculation of fees).

28. His Honour concluded that, by not having an AFSL, Woodlawn had committed a further event of default as it was in breach of a warranty that it held all relevant licences and authorities, but, as adverted to earlier, held that MVIL had lost its statutory right (under s 925A of the Corporations Act) to rescind the agreements by reason of it not having exercised the right within a reasonable period and having affirmed the agreements. (Had the agreements been validly rescinded, the effect of that would have been that Woodlawn would not only have lost any entitlement to recover fees but it would also have been liable to refund all amounts it had deducted from the fund by way of fees, charges and commission.)

29. His Honour further found that Woodlawn had engaged in misleading and deceptive conduct but that MVIL had not made out a “no transaction” case in respect of the licences issue.

30. As to Woodlawn’s claims, as noted earlier its entitlement to accrued fees under the AMA was established and quantified (though subject to any set-off of amounts that might be found to be owing by Woodlawn to MVIL following determination of the issues left open in the principal judgment) but its claims for early termination fees and for damages for injurious falsehood in relation to the press release failed.

31. The balance of the issues in the proceedings, which included: the question of costs, the consequences of his Honour’s findings on the GST and “fees on fees” issues, and MVIL’s claim for pre-judgment interest, were dealt with in a third judgment published on 10 April 2015 (Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2015] NSWSC 401). By then, an issue as to the claimed accessorial liability of Woodlawn’s directors that had been left open in the principal judgment was no longer pressed by MVIL.

32. In the third judgment, his Honour concluded, relevantly, that: MVIL was entitled to repayment of AUD 559,194 for wrongly appropriated GST (that claim not being excluded by an exclusion clause in the IMA); Woodlawn was entitled to its reasonable costs and expenses of administering the fund while it remained in its possession by reason of the March freezing orders (but only in an amount of AUD 18,936 referrable to external accountants’ costs); MVIL was entitled to pre-judgment interest; Woodlawn should pay one-third of MVIL’s costs of the proceedings; and MVIL should pay the directors’ costs of the proceedings but only to the extent (if any) that those costs exceeded those otherwise incurred by Woodlawn.

33. In the meantime, prior to the listing of the matter for submissions on the then remaining issues in the proceedings, MVIL had applied to have the sum of AUD 20m paid to it out of the fund the subject of the March freezing orders and Woodlawn had in turn applied for release to it of the sum of AUD 2,957,521 in respect of its accrued fees (there remaining in dispute an amount of AUD 633,634 of claimed accrued fees relating to the GST issue and the “fees on fees” issue). Those applications were dealt with in his Honour’s second judgment (Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2014] NSWSC 1846), delivered ex tempore on 17 December 2014. In the context of that application, Woodlawn’s directors gave to the Court an undertaking (the Undertaking) described by his Honour, and recorded in the Court orders, as an undertaking to “restore any funds released” in the event that the Court were so to order ([19]).

34. Orders were made on 21 April 2015 in accordance with short minutes of order prepared by the parties to reflect his Honour’s reasons in the first and third judgments.

35. His Honour’s fourth and final judgment in the matter was delivered in June 2015 and related to an unsuccessful application by MVIL for orders to enforce or give effect to the Undertaking in circumstances where Woodlawn had failed to pay the judgment debt in relation to pre-judgment interest (Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2015] NSWSC 845).

Appeal proceedings

36. Woodlawn has appealed on two issues: the making of the order for the payment by it of pre-judgment interest (in the sum of AUD 4,866,115.11) and the making of the costs order against it. In response to MVIL’s cross-appeal, it has filed a notice of contention seeking to affirm on additional grounds his Honour’s decision on what I will refer to as the s 925A issue, i.e., the finding that MVIL had lost its statutory right of rescission.

37. MVIL, by amended notice of cross-appeal, appeals from the dismissal of its cross claim in respect of the s 925A issue and the order that it was entitled only to one-third of its costs of the proceedings. It has also filed an amended notice of contention raising the s 925A issue and issues as to the costs and interest orders.

38. In separate proceedings, heard together with the main appeal proceedings, MVIL has sought leave to appeal in respect of the refusal by his Honour in June 2015 to make orders in relation to the Undertaking. Woodlawn opposes the grant of such leave.

39. Woodlawn accepts that if MVIL succeeds on its cross appeal in relation to the s 925A issue then those parts of Woodlawn’s appeal which rely on the respective agreements will not arise (because in those circumstances Woodlawn would not be entitled to enforce the agreements having regard to s 925E of the Corporations Act). In that event, the only remaining issues in Woodlawn’s appeal would be those relating to the award of pre-judgment interest to MVIL (and then only on the basis raised by ground 5 of its notice of appeal) and its claim for costs on the basis of its position as trustee (ground 8).

40. It is therefore convenient to deal first with the s 925A issue.

Section 925A issue – MVIL’s cross-appeal grounds 1 & 2; MVIL’s amended notice of contention ground 1; Woodlawn’s notice of contention grounds 1 & 2

41. In its amended notice of cross appeal, MVIL contends that the primary judged erred:

1 … in holding that, by operation of s 925A(2) and (3) of the Corporations Act 2001 (Cth), [MVIL] could not exercise the right under s 925A(1) of the Corporations Act (which it otherwise was entitled to exercise) to rescind the three agreements between it and [Woodlawn] …:

a. because [MVIL] knew all of the facts necessary to enliven the right to rescind the Agreements under s 925A(1) on about 7 July 2011;

b. when his Honour should have held that [MVIL] did not know all of those facts or matters necessary to enliven the right to rescind the Agreements under s 925A(1) before December 2011; and

c. consequently his Honour should also have held that [MVIL] exercised its right conferred by s 925A(1) to rescind the Agreements within a reasonable time after learning those facts and matters, and without having affirmed the Agreements.

2   … because of the error referred to in ground 1, in holding that [MVIL]:

a. had not rescinded the Agreements under s 925A(1) of the Corporations Act;

b.   was not entitled to judgment for an amount including an amount equal to all fees paid by [MVIL] to [Woodlawn] together with interest thereon from the date of rescission;

c.   was only entitled to a judgment in a sum which allowed [Woodlawn] to set off fees the trial judge held were payable by [MVIL] to [Woodlawn] under the agreement described as the “Asset Management Agreement”; and

d.   was only entitled to one third of its costs of the proceedings.

42. Similarly, in its amended notice of contention, in relation to grounds 1-7 of the grounds of appeal, MVIL contends that:

1 The trial judge should have held that the respondent had exercised the right under s 925A(1) of the Corporations Act 2001 (Cth) to rescind the agreements between it and [Woodlawn] (respectively the IMA and AMA) and that, by operation of s 925E of the Corporations Act, [Woodlawn] was not entitled to rely on clause 5 of the IMA or clause 6.3 of the AMA.

43. Woodlawn, in its notice of contention seeks the principal judgment to be affirmed on the s 925A issue on the following additional grounds:

1 The primary Judge should have held that [MVIL] had knowledge of all of the facts which gave rise to the requirement that [Woodlawn] hold an Australian Financial Services Licence for the purpose of ss 924A and 925A of the Corporations Act 2001 (Cth) (“Act”) by reason of its execution and knowledge of the terms of the Investment Management Agreements, the Asset Management Agreement and the Trust Deed (“Agreements”).

2 In the alternative, the primary Judge should have found that [MVIL] failed to discharge its onus of proving when it first became aware of all the facts necessary to enliven the right to rescind the Agreements under s 925A(1) of the Act.

Relevant statutory provisions

44. Section 925A(1) of the Corporations Act, read with s 924A of the Act, provides a statutory right of rescission where an agreement is entered into by a person (the “non-licensee” – here, Woodlawn) and another person (the “client”, not being a financial services licensee – here, MVIL) that constitutes, or relates to, the provision of a financial service by the non-licensee if:

(a)   the agreement is entered into in the course of a financial services business carried on by the non-licensee; and

(b)   the non-licensee does not hold an Australian financial services licence covering the provision of the financial service, and is not exempt from the requirement to hold such a licence.

45. Pursuant to s 766A(1) of the Corporations Act, a person provides a financial service if that person provides “financial product advice” within the meaning of s 766B of the Act (s 766A(1)(a)) or “deal(s) in a financial product” within the meaning of s 766C of the Act (s 766A(1)(b)).

46. The statutory right of rescission conferred by s 925A(1) is subject, relevantly for present purposes, to the operation of sub-ss 925A(2) and (3) of the Act. (Sub-section (4) is irrelevant since there is no suggestion that Woodlawn informed MVIL before the relevant agreements were entered into that it did not hold an AFSL.) The first three sub-sections of s 925A provide as follows:

(1)   Subject to this section, the client may, whether before or after completion of the agreement, give to the non-licensee a written notice stating that the client wishes to rescind the agreement.

(2)   The client may only give a notice under this section within a reasonable period after becoming aware of the facts entitling the client to give the notice.

(3)   The client is not entitled to give a notice under this section if the client engages in conduct by engaging in which the client would, if the entitlement so to give a notice were a right to rescind the agreement for misrepresentation by the non-licensee, be taken to have affirmed the agreement.

47. The consequences of rescission include that the non-licensee is unable to enforce the relevant agreement or to recover its fees in any form (ss 925E and 925F) and that all fees paid prior to rescission are recoverable (s 925H).

Findings as to the existence of a right of rescission

48. Having had regard to the text of the respective agreements and evidence given by Mr Breen as to MVIL’s investment process, as summarised in a document he had drafted called “Investment Advisory” ([347]-[352]), his Honour found that Woodlawn gave MVIL “financial product advice” within the meaning of s 766B of the Corporations Act ([354]). In particular, his Honour had regard to the facts that, under the respective IMAs, Woodlawn’s duties included the giving of “advice” and “recommendations”, which were to be consistent with the attached Investment Mandate, and that, under the AMA, Woodlawn was appointed “to advise on and where appropriate manage” the Portfolio (cl 2(a)) and part of its duties (cl 3.1(a)(2)) was to advise on the management of the Portfolio.

49. His Honour further found that Woodlawn had dealt in a financial product for the purposes of s 766C of the Act (see [355]-[367]). His Honour did not accept Woodlawn’s contention that the exception in s 766C(3) was enlivened because, although it acted at all times as trustee, it nonetheless dealt with financial products on its own behalf and as principal. His Honour also rejected Woodlawn’s submission that the effect of Regulation 7.1.35 had the effect that, despite s 766C, Woodlawn did not deal in financial products.

50. His Honour said that it was clear that Woodlawn carried on its financial services business in Australia ([392]) and that the fact that its client was abroad was irrelevant ([393]); and rejected Woodlawn’s submission that, as an agent of MVIL, it was immune from the application of Part 7 of the Corporations Act by reason of derivative Crown immunity ([396]).

51. Hence, his Honour concluded (at [406]) that Woodlawn was at all relevant times required to hold an AFSL. There was no dispute that Woodlawn did not hold such a licence until 29 July 2011. His Honour therefore found that the warranty given by Woodlawn in the respective agreements (the IMA and AMA) that it held all requisite licences and authorities was false; that Woodlawn had committed an event of default as defined in cl 8.4(k) of the IMA and AMA; and that a statutory right of rescission under s 925A had arisen ([409]).

52. There is no challenge to any of those findings. Woodlawn accepts (as it did at all relevant times) that it did not hold an AFSL when it entered into the relevant agreements and now accepts (having previously denied) that it was required to do so. Rather, the challenge by MVIL to his Honour’s decision on the s 925A issue goes to his Honour’s conclusion that MVIL had lost its statutory right of rescission. MVIL maintains that his Honour wrongly identified the requisite facts of which MVIL had to be aware before time started running for the purposes of determining whether the right of rescission was exercised within a reasonable time (s 925A(2)) or whether there had been an affirmation of the relevant agreements (s 925A(3)) (the entitling facts). Before turning to his Honour’s findings on this issue, it is necessary to add some further details to the chronology of events briefly set out earlier in these reasons.

Further factual background relevant to question of MVIL’s awareness of the entitling facts

53. In around April/May 2011, Woodlawn obtained advice from its then lawyers (McCullough Robertson) which Woodlawn described (in the timeline of events later provided by Woodlawn to its second set of lawyers) as being that there “may be an issue with enforceability of contract” and that “the enforceability issue has arisen” as Woodlawn did not hold an AFSL and, as such, the warranty in the IMA “may have been breached” by it (my emphasis). The advice was put somewhat more definitively than that in an (undated) email from McCullough Robertson (which presumably is the email referred to in the said timeline of events) to the directors of Woodlawn. There, it was said that:

On the basis Woodlawn Capital does still not hold an AFSL it has been in breach of the agreement since it commenced.

I recognise it has been the intention to obtain the AFSL immediately when ASIC first raised the issue back in 2009 but this is still outstanding.

On the basis there is no AFSL there is a real issue with the enforceability of the arrangement. (my emphasis).

54. The tenor of that advice was not that there was any “licensing ambiguity” (as Mr Breen chose to describe it in later correspondence with MVIL) but, rather, that Woodlawn had been in breach of the agreement (there referring to the IMA) since it commenced and therefore that there was a “real issue” (which I would read as meaning more than “some doubt” or ambiguity) with its enforceability. In cross-examination, Mr Breen accepted that in May 2011 his previous solicitors had told him that Woodlawn did need an AFSL; that it had always needed one; and that the contract could be “rejected” if it did not have one.

55. In any event, however the April/May 2011 advice may have been understood by the directors of Woodlawn at the time, nothing was conveyed to MVIL at that point as to Woodlawn’s lack of an AFSL and whether it was or might be required to hold one, or as to there being any issue as to the enforceability of the agreements.

56. Mr Breen’s apparent explanation for not informing MVIL of the licensing position at that stage, given after the cross-examination referred to at [54] above was the non-responsive answer to the following question:

Q.   But you didn’t tell your client that, did you?

A.   We had lost confidence in that legal advisor and sought a second opinion.

57. Notwithstanding his professed lack of confidence in the advice received from McCullough Robertson, it seems that Mr Breen did not wait to obtain a second opinion before commencing steps to apply for an AFSL. He signed an application for that purpose (which was lodged with ASIC by letter dated 23 June 2011 after it had been counter-signed by Mr McNamara) on 8 June 2011.

58. It was not until 27 June 2011 that Woodlawn retained other lawyers (Baker & McKenzie) for advice, among other things, on whether Woodlawn was appropriately licensed as at the signing of the contracts. (Presumably, this was the second opinion to which Mr Breen referred in his cross-examination.) No written advice from Baker & McKenzie going to the licensing issue was produced. Mr Breen’s recollection was that the advice was explained in a teleconference just prior to the drafting of a letter to MVIL, to which I refer below (at [60]ff). His account of the advice given was that “[t]here was suitable ambiguity from Baker’s and they said that we may require an AFSL, but it was best to get one to ensure that there was no further ambiguity”. Mr Breen said that he had kept no record of that teleconference.

59. At around the same time as Woodlawn was seeking a second opinion as to the licensing issue, MVIL, apparently at the direction of its sole shareholder, was contemplating the termination of its arrangements with Woodlawn. On 5 July 2011, the company secretary of MVIL (Mr Doko) forwarded to Mr Breen a copy of an email that Mr Doko and the then Investment Manager of MVIL (the now deceased Mr Poponawa) had received earlier that day from the Managing Director of MVIL, Dr Mua. In that email, Dr Mua had asked Mr Doko and Mr Poponawa to “determine the severance consequence as IPBC [MVIL's parent company] wants us to sever the agreement”. Mr Doko in turn asked Woodlawn to advise on the “break cost” as per Dr Mua’s email. Mr Breen’s response that same day (with no hint of any “licensing ambiguity” or issue as to the enforceability of the agreements) was to the effect that the termination fees payable if the IMA were to be terminated early would be PGK 22,500,000.

60. However, by letter dated the following day, addressed to Mr Poponawa, Woodlawn did draw attention to the existence of an issue as to the enforceability of the agreements (the 6 July letter). I interpose to note that Mr McNamara deposed in his affidavit ([80]) that the 6 July letter was written after Woodlawn had received advice from Baker & McKenzie; and Mr Breen, who signed the 6 July letter, said that it was drafted in conjunction with Baker & McKenzie. If so, then the fact that it followed hot on the heels of the request by MVIL for information as to any break cost may simply be fortuitous. Nevertheless, in terms of the chronology of events it can be noted that the first communication of any licensing “ambiguity” came at a stage when the implications of unenforceability of the agreements must have had a real commercial significance to Woodlawn, MVIL by then having signalled an intention to terminate the agreements.

61. There was some conflict in the evidence (to which I refer later) as to whether this letter was sent to MVIL on 6 July 2011 or handed to its representatives at the end of a meeting on 7 July 2011. His Honour seems to have accepted that it was sent in advance of the meeting, presumably on the date that it bore.

62. The 6 July letter commenced by referring to the IMA and AMA in place between Woodlawn and MVIL and went on, relevantly, as follows:

Under the Australian regulatory framework the provision of financial services is regulated by the Australian Securities and Investment Commission (ASIC). For an Australian company to provide financial services it is required to either (i) hold its own Australian Financial Services License [sic] (AFSL), or (ii) be an Authorised Representative of a third party AFSL holder.

Initial legal advice received by Woodlawn Capital, and an ASIC review indicated that Woodlawn Capital met its licensing requirements. However subsequently, Woodlawn Capital has received further separate legal advice which indicates that its initial authorisations may not have met all of ASICs licencing [sic] obligations. This legal advice also suggests that the initial licensing arrangements under which Woodlawn Capital was operating may affect the enforceability of the IM and AM Agreements. As such we thought it best to bring this to your attention both verbally and in writing so that MVIL was aware of this matter.

Subsequent to this new legal advice, Woodlawn Capital has immediately implemented authorisation changes to remove any licensing ambiguity and made itself a Corporate Authorised representative of an appropriate AFSL holder …. Additionally, Woodlawn Capital has also submitted an application for its own AFSL … and we are of the opinion that this will be granted in the next month or two. Once we have received our AFSL we will advise you in due course. (my emphasis)

63. Both Mr Breen and Mr McNamara, each of whose evidence on this issue was accepted by his Honour (at [425]), deposed in their respective affidavits to having had a meeting with Dr Mua and Mr Poponawa in Brisbane on 7 July 2011 at which they said there was a discussion about the contents of the 6 July letter. His Honour noted that neither Mr Breen nor Mr McNamara was challenged in cross-examination about the conversation on 7 July 2011.

64. Mr Breen’s version in his affidavit of the 7 July 2011 conversation, consistently with the terms in which the 6 July letter was couched, was not to the effect that Woodlawn required an AFSL but rather was to the effect that: “[w]e have received some legal advice about the need for Woodlawn to have an Australian Financial Services Licence” and that “we are concerned that our agreements with MVIL may not be enforceable if Woodlawn needs an AFSL but does not have one” (my emphasis). Nevertheless, on his version of the conversation it was at least clear that what was conveyed to the MVIL representatives was that Woodlawn did not have an AFSL (since they were told that Woodlawn had thought ASIC did not require it to have a licence and that Woodlawn was now “fast-tracking” the issue of a licence). According to Mr Breen, Dr Mua’s response was that they (presumably, MVIL) were happy with the work Woodlawn had done and he saw no reason why they should change anything; and Mr Poponawa agreed that things should “continue as they are, business as usual”.

65. Mr McNamara’s affidavit version of the conversation was similar to that of Mr Breen, though he does not give an account of what either Mr Breen or he had said about the content of the 6 July letter. Mr McNamara said that Dr Mua said, in effect, that MVIL was happy with the work Woodlawn had done for MVIL; it had been of great assistance; they understood that any issues with the licence would be remedied; that if there had been a breach it had not left MVIL out of pocket so they saw no reason to interfere with the contracts that were in place and that they would like all of the agreements to continue. He said that Mr Poponawa had agreed and had said that things “should continue as they are”.

66. No evidence was adduced by MVIL from Dr Mua (who by the time of these proceedings had left the employ of MVIL, apparently not at his own instigation – see [70] below). Affidavits sworn by Mr Poponawa, who died before the proceedings were heard, were read in the proceedings. Mr Poponawa’s affidavit evidence was that the 6 July letter had been given to him at the 7 July meeting and that Mr McNamara and Mr Breen did not refer to or speak about the 6 July letter at the meeting on 7 July 2011 and had only handed the letter to him and to Dr Mua at the end of the meeting. He denied that a conversation to the effect of that recounted by each of Mr McNamara and Mr Breen had taken place and deposed that he was not happy with Woodlawn’s performance in managing the fund and would not have said that things should continue as they were. His Honour understandably approached that evidence with caution as Mr Poponawa’s evidence had not been able to be tested in cross-examination ([421]).

67. On 29 July 2011, Woodlawn was granted an AFSL. It is not clear whether that fact was directly communicated to MVIL at the time, as Mr Breen’s 6 July letter had foreshadowed. Nevertheless, by at least 3 August 2011 the fact that Woodlawn held an AFSL was disclosed at the footer of Woodlawn’s email communications.

68. Mr McNamara deposed in his affidavit that, following the meeting on 7 July 2011, Woodlawn continued to manage the MVIL fund; bought and sold securities from time to time; rendered services to MVIL under the AMA; and provided financial management services to MVIL. He deposed that he had heard nothing from MVIL, or anyone else on its behalf, concerning “the licensing issue” in 2011 and that Woodlawn would not have continued to perform work for MVIL after 7 July 2011 (other than whatever work might have been legally required of it in the discharge of its duty to account as the trustee of the fund) if Woodlawn had been told that any of the agreements with MVIL was at an end or that Woodlawn would not be paid for its work. His Honour referred to this evidence (at [439]) as being unchallenged.

69. That MVIL understood that Woodlawn was continuing to provide some investment or management services over the period from July 2011 is evidenced by, among other things, correspondence from MVIL on 9 August 2011 in which it confirmed that from 30 June 2011 the base currency for the IMA was to be the Australian dollar and requested that all portfolio reports and performance statistics be calculated using that currency.

70. According to both Mr Breen and Mr McNamara, they had a discussion with Mr Doko (shortly after they received advice from Mr Doko on 13 September 2011 that Dr Mua had been asked to resign by the new board of MVIL) in which Mr Doko said words to the effect that MVIL was happy with the work Woodlawn was doing and to ask that Woodlawn “keep going, business as usual, until things work themselves out” and “carry on as usual”.

71. The September 2011 quarter was described by Mr McNamara as an extremely volatile period in global financial markets with significant falls in the value of stocks and shares around the world. It is not disputed that trading in this quarter had a significant negative impact on the MVIL Portfolio managed by Woodlawn.

72. It was against this background that in November 2011, following the change of government in Papua New Guinea and subsequent change in the board of MVIL, MVIL sent its letter requesting the “repatriation” of the funds (referred to at [11] above). In the course of the correspondence following that request, MVIL made reference (in the 6 January 2012 letter referred to at [14] above) to the fact that Woodlawn had “only acquired its AFS licence from ASIC a few months ago”.

73. The subsequent 13 February 2012 letter from MVIL’s solicitors expressly terminating the respective agreements (referred to at [16] above) also made reference to the fact that Woodlawn had not held an AFSL in the context of asserting a breach of warranty/event of default. The letter did not advert to the statutory right of rescission under s 925A of the Corporations Act or state in terms that MVIL wished to rescind the respective agreements, although it made clear MVIL’s position that the agreements were thereby (presumably if not before) being terminated.

74. I interpose to note that reliance is placed by MVIL on Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 359; (1931) 45 CLR 359 for the proposition that it was entitled as at 17 November 2011 to rely on any grounds available to it at the time (whether known or not), including the statutory right to rescind, in order for there to be a valid termination. Reference is made in this context to the application by Ball J of the principles in Shepherd v Felt to rescission ab initio in Elsewhere Investments Pty Ltd v Oksa [2014] NSWSC 537 (at [62]). No issue was taken on appeal in the present case as to the sufficiency of the wording of the 17 November 2011 letter (or for that matter the 13 February 2012 letter) to amount to a valid exercise of the statutory right of rescission, assuming that such a right had not already been lost by one or both of those dates. (MVIL also points to the relief sought in the proceedings as conveying its wish to rescind the agreements.)

Requisite awareness for the purpose of s 925A(2)

75. Sub-section 925A(2) (which has been extracted earlier at [46] above) refers to awareness by the client “of the facts entitling the client to give the notice”. It was accepted by both parties that the requisite awareness does not include awareness of the existence of the statutory right to rescind. That was made clear by the Full Court of the Federal Court in ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; (2014) 224 FCR 1. There, the Full Court (Jacobson, Gilmour and Gordon JJ) said (at [1422]) that:

… The conditioning facts before a notice may be given pursuant to the provision [s 925A] are twofold. First, when did the client become aware of the facts entitling it to give a notice. This says nothing about awareness of any right to rescind, that is an awareness of the meaning and effect of ss 924A and 925A of the Corporations Act as applicable to the relevant facts. It is merely the client’s awareness of “the facts” giving rise to such an entitlement which is required. The facts are those, proof of which, in combination, are capable of establishing the matters set out in s 924A(1). The second condition is that the notice be given within a “reasonable period” after the client became relevantly aware. (my emphasis)

76. At [1426], the Full Court, while accepting that matters of complexity in relation to a particular agreement “are no doubt a factor in the length of time it might take for a client to become relevantly aware” of the entitling facts, emphasised that the starting point of the enquiry under s 925A was when the client first became aware of all the relevant facts proof of which was necessary to establish the matters set out under s 924A. The Full Court described this as “a simple question of fact capable, ordinarily, of direct proof”.

77. The entitling facts in the ABN AMRO case were said by the Full Court (at [1410]) to be those that had been identified by the primary judge (Jagot J): first, that the party providing the financial services did not hold an AFSL covering the provision of financial services in relation to the particular financial product in question (there, derivatives referred to as Rembrandt 2006-3 notes); second that it was not exempt from the requirement to hold an AFSL covering the provision of the financial service in relation to those notes; third the terms of the AFSL that the financial services provider did hold (which did not permit it to deal in derivatives); and fourth, the legal character of the said notes (which were not debentures but were derivatives).

78. In the present case, no issue arises as to awareness of any particular limits on the provision of financial services covered by the holder of an AFSL, as was the case in ABN AMRO, since it is accepted that Woodlawn had no AFSL at all.

Findings as to MVIL’s knowledge of facts entitling it to rescind

79. The entitling facts were identified by his Honour as being those referred to in s 924A ([427]) and were articulated as follows ([434]):

… that IMAs and the AMA had been entered into in the course of a financial services business carried on by Woodlawn … and that Woodlawn did not have, but required, an AFSL at the time it entered those agreements.

80. His Honour concluded (at [429]), by reference both to the 6 July letter and to the discussion at the 7 July 2011 meeting, that MVIL became aware in July 2011 both that Woodlawn required an AFSL and that it did not have one ([429]).

81. His Honour considered it implicit in the statement contained in the 6 July letter (that an Australian company providing financial services “is” required to hold an AFSL) that Woodlawn was providing financial services ([431]) and, while acknowledging that the statements in the 6 July letter and in the conversation on 7 July 2011 used the word “may”, his Honour was of the view that, combined with the revelation to MVIL that Woodlawn was in the process of applying for an AFSL, those statements “must have made clear” to Dr Mua and Mr Poponawa, and hence to MVIL, that Woodlawn required an AFSL ([432]-[433]).

82. As to the fact that Woodlawn did not have an AFSL, his Honour said it was clear that MVIL became aware of this from the 6 July letter and the 7 July conversation since Woodlawn “said as much” and had stated that it had taken steps to obtain an AFSL ([430]).

Consideration of s 925A issue

Was there an error in identification of the entitling facts or the finding that MVIL became aware of them in July 2011?

83. MVIL contends that his Honour erred both in the identification of the entitling facts and in applying a test of constructive knowledge (there referring to his Honour’s use (at [434]) of the expression “put on notice of the facts”) as opposed to actual knowledge or awareness.

84. As to the first of those alleged errors (identification of the entitling facts), MVIL submits that the entitling facts included: the appropriate characterisation under the Corporations Act of the actual service provided as a “financial service”; that the service provider (Woodlawn) was not, but was legally required to be, licensed to provide that particular service to the rescinding party; and that Woodlawn was not exempt from that requirement under any specific statutory provision. This broadly accords with Woodlawn’s stated position as to the requisite entitling facts in its written submissions.

85. Where that articulation of the entitling facts relevantly differs from that given by the primary judge (see [79] above) lies in the inclusion (as a separate entitling fact) of the fact that Woodlawn was not exempt from the requirement to hold such a licence. His Honour did not expressly refer to the fact that Woodlawn was “not exempt” from the requirement to hold an AFSL; rather, he referred to it being “required” to hold an AFSL. (Senior Counsel for MVIL, Mr Giles SC, described the forensic battleground at first instance on this issue as being one as to the awareness of Woodlawn needing an AFSL – not that it did not need one because of an exemption, which no doubt helps to explain the terms in which his Honour framed the issue.)

86. Sub-section 924A(1)(b) in terms refers to the non-licensee being “not exempt from the requirement to hold such a licence” (as opposed to the non-licensee being “required” to hold such a licence). They are in a sense opposite sides of the same coin. Lack of an exemption from a requirement to hold an AFSL is predicated on there being a requirement to do so in the first place (i.e., a requirement from which one is not exempt). From the opposite perspective, if the ultimate conclusion is that one is required to hold an AFSL then that implicitly involves a conclusion that there is no applicable ground of exemption from such a requirement.

87. As Woodlawn submits, the phrase “required an AFSL” is a rolled up conclusion which expresses the legal effect of a number of facts. Sub-section 924A(1)(b) necessarily encompasses both a conclusion as to the existence of a requirement to hold an AFSL and the absence of any applicable exemption from that requirement. Thus, while, for the purposes of subs 925A(2), what is required is not knowledge of the legal effect of the entitling facts (i.e., that there is a legal entitlement to rescind), those facts themselves appear to involve conclusions as to various matters (including the characterisation of the non-licensee’s business as a financial services business and the lack of an exemption from the requirement to hold an AFSL).

88. Consistently with the way in which the relevant entitling facts were identified in ABN AMRO, and with the wording of subs 924A(1), the relevant entitling facts in my opinion were as Woodlawn has submitted: first, that the agreements were entered into in the course of a financial services business carried on by Woodlawn (the entitling fact raised by subs 924A(1)(a)); second, that Woodlawn did not hold an AFSL covering the provision of the financial service at the relevant time; and, third, that Woodlawn was not exempt from the requirement to hold such a licence – i.e., put in positive terms, that it was required to hold such a licence (the last two entitling facts being raised by subs 924A(1)(b)). I do not agree that his Honour relevantly erred in the identification of the entitling facts when he described the third of them without express reference to the lack of an exemption from the requirement to hold an AFSL. I read the reference to the requirement to hold an AFSL in his Honour’s reasons as encompassing the conclusion that there was no exemption therefrom.

Was the correct test of awareness applied?

89. As to the second alleged error, the level of knowledge or awareness that his Honour considered was required, MVIL points to his Honour’s use of the expression “put on notice” and argues that whether the 6 July letter put MVIL “on notice” or on enquiry (as to whether Woodlawn required, and was not exempt from, the requirement to hold an AFSL) is not the issue; rather, what is required by s 925A(2) is actual awareness.

90. MVIL notes that the general rule at common law is that there can be no affirmation where the party entitled to rescind “is merely suspicious, put on inquiry, or has … constructive notice of the relevant facts” (as stated by D O’Sullivan, S Elliott, R Zakrzewski in The Law of Rescission, 2014, 2nd ed, Oxford University Press at [23.26], though the authors do go on to say at [23.30] that it may be that a lesser degree of knowledge is required for election outside the general law of rescission, referring to Australian decisions relating to statutory rights to rescind). MVIL submits that actual awareness, in the sense considered in Unilever Australia Ltd v Petrevska [2013] NSWCA 373; (2013) 85 NSWLR 677 at [22]ff, was required in the present context.

91. In ABN AMRO, the question whether the client was “relevantly aware” of the entitling facts was approached on the basis of actual not constructive awareness, though (as the parties here accept) it was not necessary for the client to be aware of the legal effect of those facts.

92. If his Honour’s use of the phrase “put on notice” is read in context as meaning that the 6 July letter and statements made in the July conversation amounted to an implicit disclosure of the second and third of the entitling facts, from which awareness on the part of MVIL can reasonably be inferred, then the finding at [434] is a finding of awareness (not constructive awareness) of the matters both expressly and implicitly disclosed or conveyed by Woodlawn. His Honour’s observation that “Mr Breen said as much in the second paragraph of his letter” points to the language earlier used by his Honour in [434] as being the language of implicit disclosure, not that of constructive awareness in the sense of the recipient simply being put on enquiry. I am therefore not persuaded that his Honour erred in assessing the level of awareness that was required for the purposes of determining the s 925A issue.

Challenges to the findings as to the s 925A issue

93. Turning then to the particular findings challenged by MVIL, it accepts that in July 2011 it was, in effect, told that Woodlawn did not have an AFSL. (Such a conclusion is inescapable having regard to the text of the 6 July 2011 letter and the discussion that his Honour accepted took place on 7 July 2011. There would be no need to apply for an AFSL if Woodlawn was already the holder of one.) However, MVIL contends that his Honour erred in holding that at the same time it also learnt the following three things: first, that Woodlawn was carrying on a “financial services business” by providing “financial product advice”; second, that Woodlawn was subject to a requirement to hold an AFSL for those services; and, third, that Woodlawn was not exempt from such a requirement.

94. As to the first, MVIL contends that his Honour erred in concluding (at [431]) that it was implicit, in the statement contained in the 6 July letter that for an Australian company to provide financial services it “is” required either to hold its own AFSL or to be an Authorised Representative of a third party AFSL holder, that Woodlawn was providing financial services.

95. However, the 6 July letter commenced by drawing attention to the IMA and AMA and was clearly written with reference to those agreements. The statement as to the general regulatory requirements for a company providing financial services in that context could only sensibly be read as conveying that what was encompassed in the provision of services under those agreements was the provision of financial services. Otherwise there could be no point to the discussion that followed as to the euphemistically described “licensing ambiguity”. In my opinion, his Honour did not err in concluding that the letter conveyed to MVIL that Woodlawn was carrying on a financial services business by reference to the services it provided under the IMA and the AMA.

96. Woodlawn also points to the knowledge that MVIL had, having executed the respective agreements, of the duties Woodlawn had under those agreements, in particular the giving of advice and recommendations which were to be consistent with the Investment Mandate. It argues that his Honour’s findings as to the giving of financial product advice within the meaning of s 766B(1) (at [347]-[354]) and the dealing in financial products within the meaning of s 766C (at [355]-[367]) were based on the terms of the agreements of which MVIL became aware when it executed the agreements.

97. There can be no argument that MVIL was not aware of the terms of the agreements it had executed. It was aware that Woodlawn’s services related to the investment and management of its Portfolio and that Woodlawn was providing those services as part of its business for the fees provided for in the agreements. It must be concluded that in those circumstances MVIL, when it received the 6 July letter, if not before, was aware that the financial services being provided by Woodlawn in the course of performing its duties under the respective IMAs and AMA were such as to fall within the ambit of what was described in the 6 July letter as “the provision of financial services” to which the Australian regulatory provisions were generally applicable, even though the letter went on to suggest there was some ambiguity as to whether an AFSL was required to cover the provision of those services.

98. The second and third of the matters to which MVIL points (the requirement, and lack of exemption from the requirement, to hold an AFSL) can be considered together. MVIL emphasises that the 6 July letter was expressed in the language of potential risk, referring to concerns about the impact of “licensing ambiguity”. It is submitted that the language used does not support the findings of awareness (at [431] and [434]) and that neither did the conversation on 7 July 2011. MVIL argues that the letter amounted to an admission (in ambiguous language) that Woodlawn did not have an AFSL and suggested that there was some risk that it might require one. It is submitted that the general statement at the commencement of the letter as to the requirement under Australian regulatory law for an Australian company providing financial services to hold an AFSL was not a disclosure of the fact that Woodlawn did require (and was not exempt from holding) an AFSL. I agree.

99. Woodlawn submits that his Honour was correct in holding that the revelation that Woodlawn was in the process of applying for an AFSL must have made clear to MVIL’s representatives that Woodlawn required an AFSL. I disagree. The 6 July letter seems to have been drafted so as to avoid any such admission – the very reference to “licensing ambiguity” makes that clear. Woodlawn was not conveying by that letter that it required an AFSL; rather, it was conveying that, in order to remove any doubt, it was applying for one. Similarly, Mr Breen’s account of what he said at the 7 July meeting was in very qualified terms: that he thought that ASIC did not require Woodlawn to have a licence but “now the lawyers think we may need one” and was concerned that the arrangements “may not be enforceable if Woodlawn needs an AFSL but does not have one” (my emphasis). Woodlawn’s application for an AFSL in that context was being put forward as something to remove any “uncertainty” in the business relationship and because it might need such a licence (not because it acknowledged that it did need one).

100. Woodlawn submits that knowledge of the facts giving rise to the conclusion that Woodlawn was not exempt from the requirement to hold an AFSL is proved by reference to the terms of the agreements entered into by MVIL as Woodlawn’s only client, pointing out that the facts which negatived the potential exemptions in the Corporations Regulations 2001, cll 7.1.35, 7.1.35(1), 7.1.35(2) (referred to by his Honour at [369]-[388]) were facts relating to the terms of the agreements themselves. So, for example, it points out that under the Trust Deed, MVIL had the power to direct Woodlawn as to how to deal with the trust property (cl 3.1(c)) and hence MVIL was “entitled” to give an instruction to Woodlawn to acquire a “particular financial product” for the purpose of s 1012IA of the Act (as a result of which the financial product was one held under a “custodial arrangement” and sub-regulation 7.1.35(2) was satisfied – as found by his Honour at [385]-[386]).

101. That, however, amounts to a submission that MVIL was aware that Woodlawn required an AFSL because of terms in the relevant agreements that, as a matter of law, had that result. It requires awareness of the legal consequences of those contractual provisions. I do not agree that awareness of those legal consequences can be established simply by reference to the execution of the agreements themselves.

102. Particularly when Woodlawn seems to have been at pains in the 6 July letter and in the 7 July 2011 conversation to emphasise the “licensing ambiguity” (Mr Breen going so far as to say at [50] of his affidavit that “Australia’s financial services licensing is very difficult to understand. Even the lawyers seem to have difficulty”), the suggestion that MVIL’s awareness of the requirement (and lack of any relevant exemption from that requirement) that Woodlawn hold an AFSL was established simply by reason of its execution of agreements imposing duties that were later held to have negatived a potential exemption from such a requirement cannot be accepted.

103. Woodlawn submits that the inference his Honour drew (at [433]) – that it must have been clear to MVIL from the statements made in the 6 July letter and the 7 July meeting, as well as the revelation that Woodlawn was in the process of applying for an AFSL, that Woodlawn required an AFSL – was one that was properly open to be drawn from the words used and the action taken, in a context in which the respective senior executives were meeting to discuss a “very important question, which bore on the enforceability of the agreements under which they were doing business together”. I do not accept that proposition. The tenor of the 6 July letter and the 7 July 2011 conversation, as recounted by Messrs Breen and McNamara, was that Woodlawn was taking steps to obtain an AFSL in circumstances where there was some doubt as to whether they needed one (a “licensing ambiguity”) and that this gave rise to an “uncertainty” as to the enforceability of the arrangements between the parties; not that there was some issue of critical importance to be considered or resolved as to the enforceability of the agreements because it required and did not hold an AFSL (still less that MVIL might by reason of the licensing “issue” have an entitlement at that stage to rescind the agreements and to recover all the charges and fees paid since their inception).

104. I therefore consider that the evidence did not support the inference that his Honour drew as to Woodlawn becoming aware in July 2011 that Woodlawn was required to hold an AFSL (and was not exempt from that requirement).

105. That gives rise to the issue raised by the second ground in Woodlawn’s notice of contention. MVIL maintains that, on the evidence, it first knew all of the relevant facts at the earliest in December 2011. (That is slightly earlier than the date it contended in its third amended commercial list statement it first became so aware – that being 17 January 2012 – but is not material for present purposes.)

106. The relevance of the December 2011 date is that this was when an external lawyer (Mr Keehn) had given advice to the managing director of IPBC, Mr Abe, to the effect that Woodlawn needed an AFSL when it began to manage and invest MVIL’s funds in 2009, but that Woodlawn did not obtain an AFSL until late July 2011. Mr Abe deposed in his affidavit to a conversation to that effect occurring after he had received an AFSL search of Woodlawn from IPBC’s legal counsel on 5 December 2011 and deposed that when he received the AFSL search was the first time he had become aware that Woodlawn had not obtained an AFSL until 29 July 2011. Similarly, Mr Keehn deposed to having had such a conversation with Mr Abe in December 2011. Mr Keehn deposed that he then received instructions to draft a letter of termination (that being the draft of what was sent by MVIL on 6 January 2012).

192. Woodlawn thus has the benefit of the release for claims made against it (provided the claims fall within the release part of the clause) and can rely on the fact that entities associated with it have the benefit of an indemnity in respect of the claims the subject of the indemnity part of the clause. This would presumably be of benefit to Woodlawn which might, absent the agreement by MVIL to indemnify those other persons, be the recipient of claims by them in relation to liability that those other persons might have in carrying out functions arising out of or in connection with the matters or activities contemplated in the deed. Such a construction of the clause makes explicable the apparent difference in scope, where the claim is a claim in negligence, between the release and the indemnity.

193. While I accept that on this construction there remains some infelicity in the inclusion in the indemnity of reference to claims “arising out of this deed”, in circumstances where the Indemnified Persons are not a party to the deed and not contractually bound thereby, it may well be that the expression “arising out of this deed” would in an appropriate case extend to accessorial claims (say, by MVIL against an officer, employee or agent of Woodlawn for inducing or assisting in a breach by Woodlawn of the deed or for misleading or deceptive conduct in relation to the deed) or claims by other entities against an Indemnified Person that arise out of Woodlawn’s conduct as investment/asset manager, to which the indemnity would apply. The fact that there are textual difficulties on either side’s preferred construction of the indemnity means that infelicity in the use of the language does not mandate the construction for which Woodlawn contends.

194. Therefore, although in large part on a basis not argued before the primary judge, I consider his Honour was correct in concluding that Woodlawn was not contractually entitled to be indemnified in respect of the whole of its costs of the proceedings.

Trustee’s right of indemnity re costs

199. The second basis on which Woodlawn challenges the costs order made against it is set out in ground 8 of the notice of appeal:

8 Further and in the alternative, the Court below erred in not holding that the costs of [Woodlawn] of successfully defending [MVIL’s] claims were trustee costs and expenses properly incurred and that [Woodlawn] is entitled to be indemnified by [MVIL] in respect of those costs, as of right, under the general law and under section 59(4) of the Trustee Act 1925, including the costs of the cross summons in the court below and interest on costs.

200. Relevant in considering that ground is the issue raised in MVIL’s amended notice of contention, namely that:

2 The trial judge should have held that [Woodlawn] had no right to exercise an indemnity under s 59(4) of the Trustees Act 1925 (NSW) [sic], r 42.25 of the Uniform Civil Procedure Rules 2005 or the trust deed between the parties in relation to the costs of the proceedings having:

(a) not obtained advice under s 63 of the Trustees Act [sic] to the effect that it was proper for [Woodlawn] to defend [MVIL]’s claim and to bring a cross-summons;

(b)   having substantially been unsuccessful in the proceedings; and

(c)   having conducted itself unreasonably and, or, in substance for its own benefit rather than for the benefit of the respondent as beneficiary of the trust.

201. Woodlawn relies (as it had done before his Honour) on the principle that a trustee is entitled to be indemnified out of the trust fund against “all his proper costs, charges and expenses incident to the execution of the trust” (see National Trustees Executors and Agency Company of Australasia Limited v Barnes [1941] HCA 3; (1941) 64 CLR 268 at 277 per Williams J) and on s 59(4) of the Trustee Act, which provides a statutory right of indemnity to the same effect.

202. Woodlawn argues that this principle applies to costs, charges and expenses incurred by it in defending the claims brought by MVIL even where its defence was unsuccessful, referring to the statement by Williams J in Barnes at 279 that:

If a trustee is sued by beneficiaries who complain of some act or omission by the trustee, he is entitled to defend his conduct as an incident of such administration (In re Llewellin; Llewellin v. Williams [(1887) 37 Ch D 317 at 327]). Even if he fails in the suit, he may be allowed his costs out of the estate, but, if he succeeds, as in this case, he is clearly entitled thereto. (my emphasis)

203. Woodlawn complains that the primary judge did not refer in his reasons in the third judgment on the costs issue to the above passage in Barnes and nor did his Honour refer to the following authorities to which Woodlawn had made reference in its submissions: Llewellin (1887) 37 Ch D 317 at 327, where Stirling J said:

A trustee is entitled in an ordinary case to recover out of the trust estate, as charges and expenses properly incurred, all his costs of an action which he has properly defended; of which the case of Walters v Woodbridge [(1878) 7 Ch D 504] is a very strong illustration; and so where a tenant for life has properly defended an action to restrain him from exercising his powers under the [Settled Land] Act the difference between solicitor and client and party and party costs would seem to me to be charges and expenses incidental to the exercise of the power.

and Walters v Woodbridge (1878) 7 Ch D 504, where James LJ said (at 510):

The Court is very strict in dealing with trustees, and it is the duty of the Court, as far as it can, to see that they are indemnified against all expenses which they have honestly incurred in the due administration of the trust.

204. His Honour did, however, refer to the contention made by Woodlawn that it was entitled to be indemnified as a matter of general law and expressly noted that this contention was made by reference to what Williams J had said in Barnes. Moreover, his Honour clearly addressed, albeit briefly and largely by adoption of MVIL’s submissions on the point, the question whether the costs of defending the proceedings were incidental to the execution of the trust. Therefore, the complaint that his Honour did not refer to the particular passages in the above authorities does not assist Woodlawn. His Honour clearly had in mind the question whether a costs order should be made in Woodlawn’s favour by application of the principle articulated in Barnes.

205. Woodlawn characterises the present litigation as a case where it was sued by MVIL (the beneficiary) which complained of some act or omission by it as trustee. In so doing, in my opinion it places disproportionate focus on the claim made by MVIL that it account to it as trustee for the trust fund and downplays the commercial benefit to or of the claims made in respect of the IMA and AMA.

206. Woodlawn points by way of example to Armitage v Nurse where an order limiting the trustees’ entitlement to reimburse themselves out of the trust fund (to only 20% of their costs) because they were defending themselves and had taken points which cost money and in respect of which they were unsuccessful was set aside. At 263, Millett LJ (with whom Hutchison and Hirst LJJ agreed), referring to the circumstances in which it has been suggested that trustees may lose their right of recoupment for the costs of unsuccessfully defending themselves against an action brought by the beneficiary, made reference to statements in Turner v Hancock (1882) 20 Ch D 303 (at 305) to the effect that those rights “can only be lost or curtailed by such inequitable conduct on the part of a mortgagee or trustee as may amount to a violation or culpable neglect of his duty under the contract” and in In re Spurling’s Will Trusts; Philpot v Philpot [1966] 1 WLR 920 at 935-936 to the effect that it is not enough, to deprive trustees of their right to recoup their costs out of the trust fund, that the claim is a claim to recover money from them for the benefit of the trust, and that “even if the claim succeeds, yet they may not have so conducted themselves as to lose their right of recoupment”.

207. Woodlawn notes that in the present case it successfully defended itself against the s 925A claim (and a claim that the agreements were unenforceable having regard to provisions applicable under the law of Papua New Guinea – the s 46B claim), the value of which it says was about AUD 10m, as well as MVIL’s claim for damages in relation to its trading (in which the damages claimed amounted to about AUD 7.6m). It notes that it succeeded in establishing its entitlement to accrued fees of AUD 3,591,155 (against which was offset the amounts it owed in respect of the GST and “fees on fees” issues). It also points out that his Honour rejected MVIL’s claim that it was guilty of wilful breach. MVIL in response points out that although its claim for damages in relation to the trading claim failed, it succeeded in establishing that there had been breaches of the relevant agreements entitling it validly to terminate those agreements, as a consequence of which it successfully resisted the claim by Woodlawn to be entitled to early termination fees in a substantial amount.

208. MVIL argues that his Honour correctly found that Woodlawn could not rely on the indemnity under general law to recover its costs because the proceedings were not “incidental to the execution of the trust”. MVIL submits, as it did at first instance, that this was an adversarial commercial dispute about Woodlawn’s own rights and liabilities, including rights and liabilities that did not relate to the trust (such as Woodlawn’s claims for fees payable under the AMA and for damages for injurious falsehood), and says that Woodlawn sued as a commercial litigant in its own right.

209. MVIL argues that a trustee which litigates in substance for its own benefit and not for the benefit of the fund is treated as any other litigant for the purpose of costs (referring to r 42.25(2) of the Uniform Civil Procedure Rules in this regard). It places reliance on what was said in Spencer v Fielder [2015] 1 WLR 2786 (at [27]) to the effect that what matters is whether, in substance, trustees who are parties to litigation are acting in the best interest of the trust rather than for their own benefit. (See also in this context the discussion in Frost v Bovaird [2012] FCAFC 60; (2012) 203 FCR 95 from [53]-[84].)

210. MVIL points out that his Honour’s characterisation of the proceedings (as not being incidental to the execution of the trust) also prevents Woodlawn from relying on the right of indemnity under s 59(4) of the Trustee Act. It submits that the expenses concerned were not expenses incurred in or about execution of the trustee’s trusts or powers but were expenses incurred by conduct outside the scope of the trust (referring to Gatsios Holdings Pty Ltd v Nick Kritharas Holdings Pty Ltd (in liq) [2002] NSWCA 29 at [9] and [14] per Spigelman CJ).

Consideration

211. In determining this issue, it is important to note that the general principles articulated in Barnes do not gainsay that there remains a discretion as to the application of those principles in circumstances where the trustee has unsuccessfully defended proceedings brought against it in its capacity as trustee (see Warton v Yeo [2015] NSWCA 115 per Basten JA at [6]). The trustee “may” in those circumstances be allowed costs out of the trust fund; but there may also be circumstances in which it is appropriate that the trustee not have the benefit of a costs order in its favour. There is no absolute rule in this regard. Moreover, while the circumstances in which a trustee may be deprived of a costs order include where it has acted with impropriety those are not the only circumstances in which that may be the appropriate result. It is also relevant to take into account whether the trustee has been acting in substance for its own benefit in the litigation (as reflected in UCPR r 42.25(2)).

212. In the present case, in my opinion his Honour did not err in concluding that Woodlawn had acted in substance for its own benefit in adversarial proceedings and was not litigating in the interests of the beneficiary (MVIL) or as an incident of the execution or administration of the trust. Certainly, the claims made by MVIL included claims made against Woodlawn in its capacity as trustee (requiring it to account for the trust fund that it had retained on termination of the proceedings) but in essence a very large part of the dispute was as to whether Woodlawn was entitled (as it had claimed it was) to charge substantial early termination fees on the termination of its respective appointments as investment manager and asset manager.

213. True it is that Woodlawn claimed a charge over the trust property the subject of the Trust Deed (that now being asserted to be not a charge but a contractual right having the same incidents as an equitable lien over the trust fund) until its claimed entitlement to fees had been determined. Ultimately, however, the right it had was no more than a contractual right to withdraw moneys from the trust fund to pay its own fees under the commercial agreements it had entered into with MVIL. The suggestion that this gave rise to a charge or an equitable lien was, with respect, a novel one and involved the conflation of Woodlawn’s different capacities under the respective agreements.

214. As noted, in the course of the proceedings, the right Woodlawn maintained it was entitled to exercise when retaining the trust fund was variously described as an equitable lien, a charge, a contractual right supported by an equitable lien and a contractual right that has the same operation or terms as an equitable lien. At the time the repatriation request was refused, the funds retained exceeded by around AUD 4m the maximum amount of any fees claimed by Woodlawn. The suggestion that it was to the benefit of the fund that the amount of the accrued fees be ascertained and that this was germane to the administration of the fund, ignores the substantial commercial benefit Woodlawn sought to achieve through its cross-claim in the proceedings.

215. Both parties may be seen, in hindsight, to have made overarching claims. Nevertheless, it defies common sense not to conclude that Woodlawn was in substance acting for its own benefit in seeking the recovery of a substantial amount of fees claimed by it as owing not in its capacity as trustee but under commercial agreements by which it was appointed as investment/asset manager.

216. In those circumstances, his Honour did not err in my opinion in exercising his discretion as to costs against making an order that Woodlawn be indemnified for its costs of the proceedings.

Notice of contention

217. Having reached that conclusion, it is not necessary to consider ground 2 of MVIL’s notice of contention, in which it seeks to support his Honour’s conclusion on costs on two additional bases: first, the failure of Woodlawn to seek directions from the Court under s 63 of the Trustee Act to the effect that it was justified in defending the claim and bringing the cross-claim as trustee (referring to In re Beddoe; Downes v Cottam [1893] 1 Ch 547 and Macedonian Orthodox Community Church StPetka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66); and, second, that as it was unsuccessful in the proceedings there was no clear entitlement on general law principles to the indemnity, and there would simply be a discretion in the court to allow an indemnity (referring to Barnes and Warton v Yeo to which I have referred already).

218. Woodlawn accepts that it did not apply for judicial advice before it filed its defence and cross summons (a step that the High Court in the Macedonian case at [74] considered to be necessary as a consequence of the provisions of s 63 of the Trustee Act) but points out that the High Court in that case did not address the question of the consequence of such a failure of a trustee and argues that it is a matter that goes only to the exercise of discretion under the general law and s 59(4) of the Trustee Act. Whether or not the failure to seek such advice should sound in an order depriving the trustee of its costs, it reinforces the characterisation of this litigation as being in the commercial interests of Woodlawn. In any event, this is not necessary to decide as I have already concluded that there was no error in the exercise of his Honour’s discretion not to make an order indemnifying Woodlawn as trustee for its costs of the proceedings.

Application for leave to appeal re undertaking given by directors of Woodlawn

219. The final issue to be determined is MVIL’s application for leave to appeal from the refusal of the primary judge to grant the relief sought by MVIL in June 2015 to enforce or give effect to the Undertaking given by Woodlawn’s directors at the time the March freezing orders were varied to permit the release, inter alia, of funds to Woodlawn on account of accrued fees that had been found due to it under the AMA (which was, as noted earlier, an undertaking “to restore any funds released in the event that the Court was to so order”).

220. The circumstances in which the Undertaking was given have already been summarised. In the present proceedings, it is accepted by the respondents to the leave application (i.e., the directors and Woodlawn, to whom I will refer in order to avoid confusion as the opponents) that the Undertaking is still on foot and that the Court could make an order for the restoration of the funds released to Woodlawn if it were disposed to do so (opponents’ submissions at [20]; [40]). Indeed, the opponents rely on the subsistence of the Undertaking as a reason why leave to appeal from the fourth judgment should not be granted.

221. The final orders made in the proceedings on 21 April 2015 (by way of the adoption of short minutes of order agreed between the parties) included the following note:

4(c)   The entitlement of [Woodlawn] to be paid accrued fees of $3,591,155 pursuant to its cross claim has been satisfied by it giving [MVIL] credit for fees overpaid and “fees on fees” totalling $633,634 and the payment of $2,957,521 pursuant to the orders made on 17 December 2014.

222. After the final orders were made, Woodlawn released the balance of the trust funds that it held to MVIL. However, Woodlawn has not paid the judgment debt of AUD 4,807,635.71 (which represents the pre-judgment interest it was ordered to pay).

223. By notice of motion filed on 12 May 2015, MVIL sought orders to give effect to the Undertaking, including an order that the directors of Woodlawn pay to it the sum of AUD 2,957,521 (i.e., an amount equivalent to the amount that had been released to Woodlawn pursuant to the November 2014 variation of the March freezing orders). The relief sought included in the alternative an order that the directors pay the said amount to Woodlawn as trustee for MVIL and that Woodlawn, forthwith on receipt of that amount pay it to MVIL “in partial reduction of paragraph 3 of the judgment entered on 21 April 2015”.

224. Woodlawn maintains that the orders sought by MVIL had no connection with the Undertaking, since they were directed at the payment of moneys by the directors personally, not by Woodlawn, and did not seek that the directors procure Woodlawn to restore the funds “so released” to Woodlawn as trustee of the fund (but had sought the payment of that amount to MVIL).

225. His Honour heard the motion on 26 June 2015 and dismissed it with costs, delivering ex tempore reasons for that decision (the fourth judgment). His Honour considered that the fact that it was open to MVIL to enforce its judgment against Woodlawn, whose entitlement to be paid “has been satisfied” by the interlocutory release of funds, weighed against the exercise of discretion in favour of MVIL to enforce the Undertaking ([24]-[25] of the fourth judgment).

226. MVIL contends that his Honour erred by misconstruing the Undertaking and that, in any event, his Honour’s discretion miscarried in the House v R sense. In its draft notice of appeal, it seeks an order that the directors pay the said sum to Woodlawn to hold on trust for MVIL. (It no longer seeks an order for payment by the directors of that amount direct to it.)

222. The errors identified by MVIL in his Honour’s refusal to grant the relief it sought may be summarised as follows.

223. First, MVIL submits that his Honour did not take into account all the circumstances in which the Undertaking was proffered, including his Honour’s expressed reasons for accepting the Undertaking, and in effect erroneously construed the purpose and effect of the Undertaking as being a question “of unconfined discretion”.

224. MVIL maintains that enforcement of the undertaking was governed or directed by its purpose and that this was as security for the repayment of the money paid to Woodlawn if, after any set-off (consequent upon the determination of the outstanding GST/fees on fees issues) Woodlawn owed MVIL more than the balance of the then frozen trust fund.

225. MVIL notes, by reference to European Bank Limited v Robb Evans of Robb Evans & Associates [2010] HCA 6; (2010) 240 CLR 432 at [14]-[18], that interlocutory undertakings are often designed to protect parties from the consequences of an interlocutory decision should it ultimately turn out not to be the correct way of adjusting the interests between the parties and maintains that the Undertaking given by the directors was the same or analogous to the kind of undertaking to be proffered as the “price” for interlocutory relief such as the usual undertaking as to damages. It submits that, while there is a discretion not to enforce an undertaking of that type, the discretion is directed to disentitling conduct by the successful party and is confined (referring to Financial Services Authority v Sinaloa Gold plc [2013] UKSC 11; [2013] 2 AC 28 at [18]-[19], applying F Hoffman-La Roche & Co AG v Secretary for Trade and Industry [1975] AC 295 at 361E).

226. MVIL points to the language used when the Undertaking was given, namely that it was “for the return of the fund if called upon to do so” and that it was proffered as a personal undertaking from the directors “in support of Woodlawn”, 17 December 2014); and argues that, by analogy with the usual undertaking as to damages, the Undertaking was proffered as the “price” for the release of funds to Woodlawn in the context of the uncertain outcome of the claims then still to be decided by the Court and the potential liability and inability of Woodlawn to pay a judgment debt in excess of the balance of the then frozen trust fund.

227. The opponents do not cavil with the proposition gleaned by MVIL from Robb Evans but point out that the Court there (at [14]) emphasised that the undertaking (there, an undertaking as to damages) is given to the court for enforcement of the court and is not a contract between the parties or other cause of action on which one party can sue another. They also argue that the analogy sought to be drawn with the usual undertaking as to damages is flawed.

228. The opponents submit that the Undertaking was not given as a form of security or promise on which MVIL could sue the directors but was for the enforcement by the court. They argue that the “comfort” the primary judge said he drew from the Undertaking was not related to the facilitation of debt collecting by MVIL but was because it enabled the court to reconstitute the fund if thought fit. They further submit that the usual undertaking as to damages is “typically” occasioned by a judgment that goes against the party giving the undertaking and note that in the present case the final judgment resolved the question of its entitlement to be paid the AUD 2.9m in its favour.

229. The second perceived error is identified as being that, having misconstrued the Undertaking, his Honour erroneously took into account the impact of the events following the interlocutory release of the funds (including the final orders and commencement of proceedings in this Court) as favouring making no further order. MVIL submits that the impact of the events following the release of the funds constituted good reason to make the order.

230. MVIL points to the fact that the final orders reserved to it liberty to apply and noted the continuing effect of the undertaking unaffected by the orders. It maintains that, once it became clear that Woodlawn was not prepared to satisfy the judgment debt, in the absence of countervailing factors the court’s discretion should have been exercised to correct the interlocutory adjustment by holding the directors to their Undertaking. It further submits that the existence, at the time the motion was heard, of the appeal proceedings was not a reason for refusing an order (though it accepts it may have been a reason for staying the order) and submits that this involves House v R error.

231. MVIL notes that his Honour had earlier in his reasons referred to the purpose of the Undertaking as protecting MVIL against the risk of Woodlawn’s non-compliance with the final orders (see [26] of the fourth judgment; [19] of the second judgment) and says that this is inconsistent with what was said at [28] of the fourth judgment as to the existence of the appeal proceedings.

232. MVIL also points to the fact that his Honour did not accept an argument by Woodlawn in November 2014 that the funds should not be released to MVIL because of the possibility of an appeal (second judgment at [9] and [10]), and says that the possibility of an appeal was similarly not the reason for the court’s acceptance of the Undertaking from Woodlawn’s directors (second judgment at [19]).

233. The third perceived error is said to be an error in concluding that the form of the 21 April orders could not be reconciled with the enforcement of the Undertaking and that this was a matter that weighed against the exercise of discretion in MVIL’s favour (see [27] of the fourth judgment).

234. MVIL maintains that on the proper construction of the Undertaking there was nothing in the form of the 21 April orders to prevent the Court from enforcing the Undertaking and argues that this is also an error in the House v R sense.

235. Fourth, it is submitted that his Honour erred in considering that only Woodlawn, and not its directors, could “restore” moneys to the trust fund (see [21] of the fourth judgment).

236. In response to those complaints, the opponents submit that on entry of the final judgment the question of entitlement of the AUD 2.9m as between MVIL and Woodlawn was res judicata and there was no basis upon which the primary judge could rationally and consistently order that a sum be repaid by Woodlawn in face of a final judgment that it was entitled to be paid that sum; nor was there any basis for an order that the directors do so if such an order could not be made against Woodlawn.

237. Finally, MVIL submits that there was no principle preventing third parties (the directors) from paying money to a trustee to be held on trust and therefore his Honour wrongly considered that only Woodlawn could restore moneys to the trust fund. It submits that unless the Undertaking allowed for or required the directors to reconstitute the fund if called upon to do so, then it had no content and that, objectively, it could not have been intended to have no content.

238. The essence of the response by the opponents to the proposition that his Honour erred in not giving relief by reference to the Undertaking is to the effect that it was acknowledged in the note to the court orders that release of the funds to Woodlawn operated as payment as against an entitlement that had already been found as a matter of right and that what is now sought by MVIL is a duplicated claim of right as to the same fund. The opponents argue that Woodlawn had the benefit of a finding not only that it was entitled to the accrued fees but also that it was entitled to be paid those fees out of the trust fund pursuant to cl 6.3 of the AMA and note that there was no appeal against those findings. In those circumstances it is argued that the claim against the directors is an attempt to recover the same amount of money for the second time. The argument is that the Undertaking was premised on the basis that the moneys would be restored because a claim to those moneys had been established as against Woodlawn; and that there was no such finding.

Consideration

244. I am not persuaded that his Honour erred in the exercise of his discretion in the House v R sense, so as to warrant appellate intervention. His Honour’s reasons do not indicate that his Honour considered that he was exercising an unconfined discretion in the sense suggested by MVIL. His Honour was clearly mindful of various factors, including the circumstances in which the Undertaking was proffered, the orders that had been made, and the events as they had transpired at the conclusion of the hearing. His Honour did not fail to take into account considerations that should have been taken into account and the considerations he did have regard to were relevant to the exercise of his discretion. The weight that his Honour placed in balancing those various considerations did not disclose an error of principle nor was the result so manifestly wrong as to bespeak an error of the kind required to warrant interference by this Court.

245. Leaving aside the opponents’ argument that the directors could not “restore” the fund because the sum in question was released to Woodlawn (which seems to me an exercise in semantics), the purpose of the Undertaking, as is apparent from the transcript of the occasion when it was proffered, was to provide a mechanism by which the fund the subject of the March freezing orders could be restored (relevantly, for the benefit of MVIL though I note that a similar undertaking was given in Woodlawn’s favour by MVIL) if it transpired (as it did) that there were further adjustments to be made as to the amount owing to Woodlawn, or payable to MVIL, once the matter had been finally determined.

246. The Undertaking must be seen as having been given by the directors and accepted by his Honour on the basis that if it later transpired that there were additional amounts to be set-off against the amount to which his Honour had held Woodlawn was entitled in respect of its accrued fees, such that MVIL would be prejudiced by any of the “frozen” fund having been released prior to the final determination of all issues in the proceedings, then the directors would make good (and in that sense restore) an equivalent sum to that which had been released to Woodlawn if required to do so.

247. The complaint by MVIL, in effect, is that had the Undertaking not been given Woodlawn would have retained the sum in question (subject to the March freezing orders) and this would have enabled MVIL to offset (against a judgment for the accrued fees in favour of Woodlawn) the judgment it ultimately obtained for pre-judgment interest. I am not unsympathetic to that complaint. The directors of Woodlawn in effect secured payment to the company, in advance of the final determination of all the issues in the proceedings, of moneys to which Woodlawn had been held to have a contractual entitlement but against which there was the prospect of a set-off in MVIL’s favour once the remaining issues in the proceedings were determined. MVIL is now in the position that Woodlawn has not met a liability that could otherwise have been partially discharged by way of set-off of the respective judgments. It seems to me that the character of the funds being retained by Woodlawn as trust funds does not relevantly change that situation. In other words, it does not seem to me that it would be necessary, to enliven the Undertaking, that there be established a liability on the part of Woodlawn of a particular character (such as a liability of it as trustee to reconstitute the trust fund or to restore to it amounts wrongly appropriated from the trust fund).

248. Moreover, to the extent that the opponents rely on the terms of the consent orders in support of their resistance to enforcement of the Undertaking, that raises concerns as to whether on the construction now advanced the Undertaking had any real content at the time it was proffered (though Senior Counsel for Woodlawn was adamant that it did).

249. Nevertheless, it was a question of discretion as to whether his Honour considered that in all the circumstances there should be an order enforcing or giving effect to the Undertaking. His Honour was not persuaded that the directors should be required, in effect, to pay back the amount that had been released to Woodlawn and hence to reconstitute the trust fund. Reasonable minds may well have differed as to whether the Undertaking should be enforced. That is not to the point. I am not persuaded that his Honour erred in the exercise of his discretion in the House v R sense such as to warrant appellate intervention in this regard. I would therefore refuse leave to appeal with costs.

Conclusion

250. For the reasons set out above I would dismiss the appeal and, subject to the relief to be granted consequent upon my conclusion as to the operation of cl 5 to release costs in relation to particular issues in the proceedings, the cross-appeal.

251. As to the costs of the appeal, the end result is that, apart from the variation in the costs order (which may or may not ultimately produce a more favourable outcome for Woodlawn and which will presumably lead to the incurring by both parties – absent agreement as to the apportionment of costs between the respective issues – of yet more costs being incurred in the costs assessment exercise), Woodlawn has been unsuccessful in its challenge to his Honour’s decisions. In those circumstances, I consider that MVIL has in substance been the successful party on the appeal and should have its costs of the appeal.

252. The orders I propose are as follows:

1. Appeal allowed in part.

2. Set aside order 6 of the orders made on 21 April 2015 and in lieu thereof order 6 should be as follows:

6(a)   Woodlawn pay MVIL’s costs on the party/party basis of the following issues:

1. the liability of Woodlawn to account to it for the balance of the funds retained by Woodlawn after termination of the respective agreements between the parties in November 2011 (after the deduction of those accrued fees that were established to be owing under the Asset Management Agreement);

2. the liability of Woodlawn to restore to the trust fund, and account to MVIL for, amounts wrongly appropriated in respect of GST and the “fees on fees” issue;

3. the claim by MVIL for pre-judgment interest; and

4. the claim by Woodlawn for damages for injurious falsehood.

6(b)   MVIL pay Woodlawn’s costs on the party/party basis of the following issues:

5. the s 925A issue and s 46B claim; and

6. MVIL’s claim for damages for breach of the IMA in respect of its trading activities and for misleading and deceptive conduct (other than the costs of MVIL in establishing the existence of events of default entitling it validly to terminate the respective agreements) and the claim for accrued fees under the AMA.

3. Order Woodlawn to pay MVIL’s costs of the appeal.

4. Dismiss with costs the cross-appeal.

5. Dismiss with costs the application by MVIL for leave to appeal from the decision of Stevenson J of 26 June 2015.

253. GLEESON JA: I have had the advantage of reading in draft the comprehensive reasons of Ward JA. I agree with the orders proposed by Ward JA for the reasons given by her Honour.

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Amendments

11 March 2016 - Typographical amendments

Decision last updated: 11 March 2016