40. B acquires monies from A by mistake or in breach of trust, which B passes on to a third party, who uses them to purchase land of which third party becomes registered proprietor – Monies held on constructive trust for A – Not mere equity – Caveat by A based on constructive trust upheld – AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235. No purchaser’s lien and so no caveatable interest because purchaser in breach of contract of sale – Ironbridge Holdings Pty Ltd v O’Grady [2020] VSC 344.

AE Brighton Holdings Pty Ltd v UDP Holdings Pty Ltd [2020] VSCA 235 (11 September 2020) was an unsuccessful application for leave to appeal from the case of that name covered in Blog 32, in which Ginnane J dismissed an application under the Transfer of Land Act s. 90(3) for caveats to be removed.  The facts are now restated from that Blog and supplemented –

  • Esposito Holdings Pty Ltd (Esposito Holdings) agreed to sell and the first defendant (UDP) agreed to purchase the issued shares in a company. An arbitration occurred related to disputes arising under that agreement.  The arbitral Award stated that Esposito Holdings had engaged in misleading and deceptive conduct contrary to s. 18 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) and that its sole shareholder and director Mr Antonio Esposito was involved in the contravention within the meaning of s. 2(1) and for the purposes of s. 236 of Schedule 2.  The Award also declared that on and from 31 January 2014 Esposito Holdings held the purchase price on constructive trust for UDP which had suffered loss of $54,144,847.
  • The plaintiff (AE Brighton) purchased and became registered proprietor of four properties.
  • There was prima facie evidence that, when Mr Esposito was also sole shareholder and director of AE Brighton, part of the purchase price received from UDP under the share sale agreement was paid by Esposito Holdings, possibly through another company controlled by Mr Esposito, to AE Brighton to purchase the properties, possibly in the case of one purchase through repayment of an earlier loan used for that purchase.
  • In 2017 UDP caveated over the properties on the grounds of an implied, resulting or constructive trust.
  • In 2018 the Supreme Court gave UDP leave to enforce the Award and ordered that it be given effect as a judgment of the Court (‘Award recognition judgment’).
  • In 2019 AE Brighton entered contracts to sell two of the properties.

After the decision of Ginnane J in October 2019 UDP took an assignment of a mortgage registered on the properties, took possession, as mortgagee in possession rescinded the contracts of sale, and sold the properties with settlement due on 4 September 2020.  Its solicitor swore that the net proceeds of sale would be paid into court pending resolution of a proceeding.

The Court of Appeal (Kyrou, Kaye and Sifris JJA) held or stated –

  1. The law related to applications under s. 90(3) in conventional terms (eg see Blog 1). [25]-[26]
  2. A successful challenge to the exercise of judicial discretion by Ginnane J required establishment of an error of the kind identified in House v The King (1936) 55 CLR 499 at 505. [27]
  3. Only a legal or equitable interest in land could sustain a caveat and accordingly, as stated by the High Court in Boensch v Pascoe [2019] HCA 49 (Blog 29), a mere statutory right to take steps to avoid a transaction did not suffice – the interest asserted must be in existence when the caveat was lodged. A mere equity, defined in various ways including ‘a right, usually of a procedural character, which is ancillary to some right of property, and which limits it or qualifies it in some way’, was not a proprietary interest. [28]-[29]
  4. The constructive trust of the type upon which UDP relied was an institutional trust arising from the retention of funds known to have been paid by mistake. More particularly –

(a)        This trust arose at the time when the person who received the funds acquired knowledge of the mistake, if the moneys paid could still be identified at that time.  The recipient’s conscience was then bound and it would be against conscience for the recipient to use the funds as his or her own. [30]

(b)      “Knowledge” meant the payee having actual knowledge, or wilfully shutting his or her eyes to the obvious, or wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make, or having knowledge of circumstances which would indicate the facts to an honest or reasonable person. [31]

  1. A third party may be liable to account as a constructive trustee where it received trust property with notice that it was being dealt with in a manner involving a breach of trust. In accordance with the equitable principle of tracing, the beneficial owner of misappropriated property could recover it or its traceable proceeds from someone holding the asset, subject only to the defence of bona fide purchaser for value without notice.  Where a trustee wrongfully used trust money to provide part of the cost of acquiring an asset, the beneficiary was entitled at his or her option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his or her personal claim against the trustee for the amount of the misapplied money. [32]-[33]
  2. This case had two features usually absent from cases where a caveator claimed an interest under a constructive trust –

(a)     There was a declaration, recognised by the Award recognition judgment which itself had the effect of declaring as a matter of law, that Esposito Holdings held the purchase price paid by UDP on constructive trust for UDP from 31 January 2014;

(b)    Secondly, the sole director of the corporate registered proprietor of the properties (Mr Esposito) had given sworn evidence at a public examination that funds subject to the constructive trust were used to purchase the properties.  He was aware of all the facts giving rise to the constructive trust.  As he was its sole director his knowledge was attributable to Esposito Holdings.  It was its knowledge of those facts, which operated on its conscience, that could give rise to an institutional constructive trust without the need for a court order and which enabled the arbitrator to declare the existence of a constructive trust from 31 January 2014.  Importantly, as Mr Esposito was also the sole director of the plaintiff, his knowledge was attributable to the plaintiff.

The combination of those two features established a prima facie case that the beneficiary of the constructive trust had an equitable interest in the properties, in accordance with the principles of tracing. [55], [56], [58].

  1. The Evidence Act 2008 s. 91 provided that evidence of the decision, or of a finding of fact, in an Australian or overseas proceeding was inadmissible to prove the existence of a fact that was in issue in that proceeding. However, s. 91 did not preclude Ginnane J from relying on the Final Award and the evidence adduced in the arbitration, as they were not being used to prove the existence of any fact but were being considered in assessing whether there was sufficient evidence to enable UDP to establish a prima facie case of the existence of a caveatable interest. [45], [59]-[60]

In Ironbridge Holdings Pty Ltd v O’Grady [2020] VSC 344 (11 June 2020), Ginnane J, the facts and relevant holdings were –

  • In 2006 the plaintiff entered a contract of sale to purchase land from vendors of which the defendant was the survivor.  The settlement date was no later than 7 years but was extended.
  • A deposit and certain instalments of purchase money were paid, but the final instalment was not.  Part of the land was transferred.  The vendor rescinded the contract.
  • The purchaser caveated on the basis of an alleged equitable (purchaser’s) lien over the untransferred land to secure repayment of instalments of purchase money and interest.
  • The purchaser succeeded in a claim for restitution.  However the purchaser was held not to have a caveatable interest.  His Honour observed that where title was not conveyed the purchaser’s lien secured the repayment of monies paid by the purchaser, to whom it gave a right to sell the property and take a share of the proceeds of sale in an amount equal to the debt.  But there must be a debt which the lien could secure.  Here there was no lien because the purchaser was in default of its obligations under the contract: the purchaser was only entitled to the lien where the contract went off through no fault of its own. [307], [309], [310], [312]-[314]

Philip H. Barton

Owen Dixon Chambers West

21 September 2020

 

7. RECENT SUPREME COURT CASES Dec 2017 – Feb 2018 (1 of 6)

Today’s blog is the first of six brief entries discussing recent Supreme Court cases.

 Whether a purchaser of a lot in land yet to be subdivided, who caveats over all the land, can, after subdivision and transfer to it of the lot sold, retain the caveat over the rest of the land.

 Bisognin & Anor v Hera Project Pty Ltd & Anor [2017] VSC 783 (15 December 2017) Daly AsJ.

 The chronology was –

13 March 2015          Plaintiffs enter contract to sell the southern portion (“southern lot”) of their soon to be subdivided land to the first defendant, retaining the northern portion (“northern lot”).

4 March 2016            Sloss J holds the vendors contractually required to undertake water supply and sewerage facility works.  Works remain unperformed. 

3 June 2016               Purchaser caveats claiming an estate in fee simple over the whole of the land, the interest claimed being as purchaser. 

16 December 2016    Court of Appeal holds the purchaser contractually required to pay fees (the “bonds”) on the vendors’ behalf to Water Authorities.  Payments subsequently made.

22 May 2017              Riordan J orders specific performance of the contract.  Vendors appeal seeking relief including recovery of southern lot.  Appeal subsequently heard but judgment reserved.

15 September 2017   Registration of plan of subdivision creating both lots.

Caveat remains registered over both. 

2 October 2017       Settlement of sale of southern lot. 

27 October 2017    Application to remove caveat under Transfer of Land Act s. 90(3). 

The purchaser argued that: the caveat was lodged to secure the vendors’ performance of their outstanding contractual obligations; by not undertaking the works the vendors had taken the benefit of the bonds; if the vendors did undertake the works and the bonds were refunded the vendors were required to repay the bonds to the purchaser, and this obligation created a lien or a resulting or constructive trust. 

Daly AsJ removed the caveat, holding –

  1. A purchaser of land anticipated to be subdivided could caveat over the whole of the land before subdivision, and over the purchased land after subdivision.  But on transfer of a subdivided lot the purchaser retained no interest in the unsold lot.
  2. The purchaser was in effect seeking to use the unsold lot as security for contractual obligations: but, absent a contractual term creating a charge, continuing actual or contingent liabilities of the vendor did not create a caveatable interest in the land retained.  
  3. Referring to authority that a purchaser had a lien over the property to secure repayment of the deposit if the contract ended, even if the vendors’ contingent liability to repay the bonds automatically created a lien there was no serious question to be tried that this created the estate or interest claimed in the caveat.