Category: Constructive trust based on derivative company proceeding

Blog 62. Caveators lost in blizzard, but obtain injunction.

Reindel & Ors v Confreight Pty Ltd & Ors (No 2) [2022] VSC 442, Daly AsJ (8 August 2022).

This case arises from the same development as that the subject of Blog 61.   It concerns imposition of caveats based on Barnes v Addy claims, no caveatable interest being found to exist. In the 1874 English case of Barnes v Addy (1874) LR 9 Ch. App. 244 at 251 – 252 Lord Selborne LC stated –

“Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility.  That responsibility may no doubt be extended in equity to others who are not properly trustees, if … But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers … unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees”.

Subsequent cases have worked out the scope of these principles, known as the “first and second limbs of Barnes v Addy”, ie knowing receipt of trust property or dishonest assistance in a breach of trust (being an accessorial liability).

The facts were –

  • In around 2015 Messrs Reindel, Murone and Monson decided to carry out a multi – unit residential development in Windsor. A company (WDC) was incorporated to perform the development.  It was trustee of a unit trust in which Confreight Pty Ltd (Confreight) and Supply Chain Logistics (SCL) controlled respectively by Murone and Monson together held 35%, and an entity associated with Reindel held 65%, of the units.  In 2020 the development was completed and WDC was wound up with negligible return to Confreight and SCL.
  • Five residential units in the development valued at approximately $2 m. in total had been transferred by WDC, one to Reindel and four to a company controlled by him (Blizzard Winds).  On 3 February 2021 the liquidator wrote to the unit holders in the trust seeking information including on this transfer.  On 15 February 2021 the liquidator made his statutory report including stating that there were claims totalling over $2 m. by unsecured creditors.
  • In the first half of 2021 Confreight and SCL caveated over the five Windsor units and over a Toorak property of which Reindel’s wife Ms Runhardt had been registered proprietor since 2015. Relevantly the interest in land claimed was as beneficiary of an “implied, resulting or constructive trust”.
  • In July 2021 Reindel and associated parties commenced a proceeding under the Transfer of Land Act s. 90(3) to remove the caveats. The caveators opposed this and, if their opposition failed, applied to restrain the registered proprietors from dealing with the land pending the determination of their proceeding referred to below.
  • In August 2021 Confreight and SCL commenced a proceeding (the investors’ proceeding) alleging inter alia that: Reindel had caused WDC to transfer much cash and the Windsor units to himself and his associated entities for little or no consideration; by reason of his alleged breaches of fiduciary duty and of trust they were inter alia entitled to orders that property of the unit trust be transferred to WDC (in its capacity as trustee), and/or equitable compensation for the value of property transferred from WDC in breach of trust or for less than market value, and certain other relief.
  • The defendants to the investors’ proceeding in substance denied the allegations against them, alleging that transfers were in reduction of debts duly owing.
  • The plaintiffs in the investors’ proceeding also alleged that Reindel had used WDC’s funds for mortgage payments on and renovations to the Toorak property. Reindel admitted these payments into his and Runhardt’s joint account, and that payments were applied to paying the mortgage, but denied misappropriation.  The plaintiffs also alleged that Runhardt participated in Reindel’s breach of fiduciary duty and breach of trust by receiving trust property with knowledge of his breaches.  Runhardt basically denied all allegations concerning her.
  • On 14 September 2021 WDC’s liquidator applied to intervene in the caveat proceeding, supported by an affidavit exhibiting his letter of 3 February and his report. He subsequently did not pursue this application.
  • The caveat and injunction proceedings were heard in October 2021 with judgment reserved. Although no orders were made in the caveat or the investors’ proceeding that the evidence in one proceeding would stand as evidence in the other Daly AsJ would (footnote [92]) if necessary have ordered this now as for then (traditionally “nunc pro tunc”). Her Honour stated ([25]) that the findings and issues raised by the liquidator’s report and letter and WDC’s accounting records were a generally reliable guide to the affairs of WDC and the unit trust, although it was unnecessary for present purposes to determine whether the concerns raised therein had been established.  Her Honour noted ([64]) that the liquidator’s affidavit, his letter, his report and the accounting records revealed evidence of the transfers of Windsor units being for no consideration or at an undervalue, although it was premature to conclusively determine whether in breach of trust or otherwise invalid (also [34]).
  • In January 2022 the liquidator sought, inter alia, court approval to enter an agreement to assign certain unspecified causes of action to a Mr Baker – it was unclear but her Honour inferred that there was a substantial overlap between these causes of action and those in the investors’ proceeding ([31]). The liquidator also applied to be appointed as a receiver of the unit trust, deposing that he believed that this was necessitated by cl. 12.5 of the trust deed which provided that on its liquidation WDC ceased to be trustee of the trust.
  • Clause 37 of the trust deed provided:

“the rights of the trustee to indemnity for losses … and to recoupment for expenditure incurred shall … be limited to the monies and property comprising the Trust Fund … but this clause shall not be construed as in any way limiting the liability of any trustee (or of any director of a company which is a trustee hereof) to the unit holders for any breach of trust involving the dishonesty or wilful act or omission of that trustee or director.”

Daly AsJ removed the caveats but granted an interlocutory injunction restraining Reindel and Blizzard Winds from dealing with their residential units –

  1. The possibility of the caveators having a prima facie case of an interest in the land was undermined if they lacked standing to bring their claims in the investors’ proceeding, or this was in doubt. Generally the proper party to bring a claim to recover trust property was the trustee but this was subject to “special circumstances”, eg collusion between the third party wrongdoer and the trustee, insolvency of the trustee, or where the trustee was unwilling or unable to take action to recover trust property. There were real doubts whether the caveators had standing to, in effect, recover WDC’s property.  Alternatively, any claim for damages and/or equitable compensation would have to be calculated by reference to their shares in the unit trust.  [40]-[41], [46], [47]
  2. Confreight and SCL could also in their capacity as shareholders of WDC apply under s. 237 of the Corporations Act 2001 (Cth) to bring a derivative action to bring the claims in the investors’ proceeding on behalf of WDC. This application had not been made, although they had made an informal application for leave to continue the investors’ proceeding standing in the shoes of WDC in its capacity as trustee. [48]
  3. On the issue of standing, the position was somewhat fluid and far from clear cut. There was some doubt whether on its liquidation WDC remained as trustee of the unit trust or whether the liquidator was ready, willing, and able to pursue any claim by WDC against third parties for the benefit of the beneficiaries (and creditors) of the trust, but it appeared that liquidator had not reached a final position.  Clause 37 of the trust deed preserved the beneficiaries’ entitlement to pursue claims against the trustee and the directors, at least on their own behalf. And although the plaintiffs arguably needed curial leave to proceed with their claims in the investors’ proceeding to recover trust property, it was in the context of the current case neither necessary nor appropriate to determine the possible fate of this application for leave.  It was accordingly difficult for present purposes finally to resolve the question of standing and this undermined the caveats, given that the entitlement to lodge a caveat must exist at the time of lodgement. [55], [56], [57], [62], [63]
  4. The caveators must demonstrate a prima facie case, ie a probability of being found to have the asserted legal or equitable rights or interest in the land. The ‘prima facie case’ test was preferable to the ‘serious question to be tried’ test of such rights or interest. [69]-[70]
  5. The caveats over the Toorak property were unsustainable. Runhardt was alleged at most to have accessorial liability for Reindel’s (and WDC’s) alleged breach of trust.  In Barnes v Addy cases a constructive trust was only imposed over the property concerned on a curial determination to this effect.  Until then there was no proprietary interest, even where it was claimed that trust property could be “traced” to a particular (other) property.  Further, any “notice” Runhardt had of Reindel’s alleged breach of trust postdated her becoming registered proprietor of the Toorak property. [80]-[82], [91(c)], [138]
  6. Even if breach of trust or of fiduciary duty was established against Reindel or WDC, the liability of Blizzard Winds was (notwithstanding that Reindel was its sole director) only accessorial. Further, even if the transfers to Blizzard Winds were arguably tainted by fraud which could be sheeted home to it so it lost the protection of indefeasibility of title, and a court ultimately determined to impose a constructive trust over the units, the entitlement of a former registered proprietor to set aside a transfer for fraud was an in personam claim giving rise to a mere equity, not an equitable and so caveatable interest.  Accordingly the caveats over its property would also be removed. [83]-[87], [91], [94], [96], [138]
  7. The claim concerning the transfer to Reindel was also only an in personam claim incapable of supporting a caveat. [87], [91(a)], [94], [96], [138]
  8. However, Reindel and Blizzard Winds would be restrained from dealing with the units transferred to them. Runhardt would not be restrained from dealing with the Toorak property. [117]-[121], [133], [137], [138]

       Philip H. Barton

          Owen Dixon Chambers West

        Monday, November 7, 2022

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