Blog 43. Claim for constructive trust based on derivative company proceeding.

AAGG Developments Pty Ltd v Saafin Constructions Pty Ltd & Ors [2020] VSC 768, Derham AsJ., 17 November 2020, was one of several Supreme Court cases between the same or related parties arising from the same transactions.  It is necessary to set out some factual background outside the judgment the subject of this Blog.

  • Hassan, Mohamed and Wael El-Saafin (‘the Saafin Parties’) were directors of and/or shareholders in the first defendant (‘the Company’). In 2015 the Company entered a contract with a builder to develop land owned by the Company in North Melbourne (‘the Land’).
  • On 28 October 2016 the Company entered agreements with a financier (‘Balanced Securities’) to finance this development in part secured by registered mortgage over the Land.
  • Building works were performed, a dispute arose between the Company and builder, and in April 2018 the Company terminated the building contract with the development partially completed.
  • On 9 April 2018 a Mr Franek purported to appoint receivers to the Company pursuant to an agreement securing a loan by him to Wael El-Saafin. On 18 April 2018 Balanced Securities assigned its rights to Franek, recording that about $3m was owed to it.  Subsequently, Franek nominated another company (‘MAG’) as the assignee.  Franek also assigned his personal rights to MAG.  The receivers resigned but were reappointed by MAG.
  • On 20 June 2018 various debts allegedly owing by the Company were assigned to MAG, with the purpose of turning unsecured into secured debt.  MAG then claimed that the debt owed to it was about $8.2m. by reason of the Balanced Securities loan, the Franek loan, interest, costs, and the debt assigned on 20 June.
  • Between 27 June and early August 2018: Hassan and Mohamed El-Saafin (‘the Saafins’) offered to pay approximately $4.4m. being what they considered was the sum required to obtain a discharge of the mortgage; MAG and the receivers disputed this amount; and the Supreme Court made restraining orders which were dissolved on undertakings by the receivers to the same effect.
  • On 9 July 2018, MAG as mortgagee entered into a contract to sell the Land to the plaintiff (‘AAGG’) by private sale for $4.5m. The shareholders in AAGG were persons associated with parties already involved in the above transaction, including the builder.  The sale was settled on 20 July 2018 and AAGG became registered proprietor.  The Saafins continued to offer to pay out the mortgage until advised of this sale.
  • On 26 July 2018 the Company and the Saafin Parties lodged a caveat over the Land, claiming an implied, resulting or constructive trust in their favour.
  • On 7 August 2018 the Supreme Court made interlocutory orders including restraining AAGG from dealing with the Land. The judge found a serious question to be tried as to whether: the 20 June debts were validly the subject of MAG’s security interest, and; the sale to AAGG should be set aside.
  • The Company subsequently went into liquidation.
  • In El-Saafin & Anor v Franek & Ors (No 4) [2020] VSC 389 (‘El-Saafin (No. 4)’) Lyons J. gave leave for the Saafin Parties to make a derivative claim on behalf of and in the name of the Company for relief including for a declaration that AAGG held the Land on constructive trust for the Company and orders that AAGG be restrained from disposing of the Land and re-convey it to the Company. His Honour found that a solid foundation existed for this relief.  However, this decision was subject to an appeal which had been heard with judgment reserved.  Nonetheless, pursuant to El-Saafin (No. 4) a proceeding (‘the Derivative Proceeding’) was commenced by the Company and the Saafin Parties as plaintiffs against AAGG and others.  This was fixed for trial in February 2021.

AAGG applied under s. 90(3) of the Transfer of Land Act for removal of the caveat and to restrain the Saafin Parties from lodging any further caveat.

Derham AsJ refused the application, holding –

  1. To the extent necessary, the plaintiff had leave pursuant to s. 471B of the Corporations Act 2001 to proceed with the current applications against the Company. [20]
  2. Notwithstanding appointment of Receivers and Managers to a company, its directors retained, generally speaking, residual powers enabling them to authorise the lodging of a caveat in the name of the company to protect its proprietary interest in land pending the determination of litigation to establish that interest. The Saafin Parties who were directors of the Company were in that position when the caveat was lodged.  The contrary view was not open without a thorough examination of the terms of appointment of the Receivers and Managers (there being no material in evidence enabling this examination). [13]-[14]
  3. The existence of the Derivative Proceeding and the claims for relief made in it established a prima facie basis for the interest claimed in the caveat by the Company, through the Saafin Parties, derivatively. The analysis of facts and law by Lyons J in El-Saafin (No 4) was the prima facie case.  The formulation of the interest claimed in the caveat was to be viewed having regard to the claims by the Saafin Parties ‘on behalf of and in the name of the Company’ in the Derivative Proceeding.   [15]-[17]
  4. By reason of the impending trial of the Derivative Proceeding, but subject to the outcome of the appeal in El-Saafin (No 4), the balance of convenience favoured the maintenance of the caveat to await the outcome of the appeal, or, if the appeal failed, of the Derivative Proceeding. [19]
  5. If the Court of Appeal reversed or varied the orders in El-Saafin (No 4) the underlying basis for the caveat may be destroyed and it then may be appropriate that the current application be revisited. Accordingly although the application under s. 90(3) would be refused there would be liberty to re-apply. [12]

Philip. H. Barton
Owen Dixon Chambers West
Tuesday, May 18, 2021

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