Blog 103. Caveat survives complicated proceeding involving the Law of Contract, Trust and Misleading or Deceptive Conduct.

Glen v Sherwood & Ors [2026] VCC 668, Judge A. Ryan.

This case involves a caveat to only a minor degree. However it is a comprehensive survey of the legal principles engaged when, following representations alleged to the misleading or deceptive, money is contributed to a joint venture which breaks down.

The facts were –

In 2011 the first defendant (Sherwood), Woodland and Whittingham applied for a patent for a metal detection system. They assigned the patent to a company (Goldwing), of which they were directors. Patents were subsequently granted in countries including Australia.
A business venture of development and commercialization of this system, mineral exploration and processing of intellectual property was formed. In about 2014 a partner in Pricewaterhouse Coopers (PwC), Tierney, joined the venture.
In 2017 the third defendant Alluvial Mining Pty Ltd (Alluvial) was incorporated. Sherwood and Woodland were its co-directors and equal shareholders.
Subsequently, Sherwood’s acquaintance Doreian invested $135,000 into the venture.
In around early 2018 the plaintiff (Glen) was invited to invest in the venture in an amount to be determined by him. Sherwood asserted that Glen was also invited to be the lawyer for the business, but Glen denied this.
On 26 March 2018 Sherwood told Glen that he, Woodland, Tierney, Adams (another financial investor) and Doreian, were developing the venture, which was worth $25 m.; and that in return for any investment Glen would receive shares in the company conducting the venture commensurate with the amount of his investment and based on the agreed value of the company (the March representations).
On 28 March 2018 Alluvial obtained an exploration licence.
At meetings on 6 and 7 April 2018: according to Glen but denied by Sherwood, Sherwood said that Tierney, in his capacity as a partner at PwC, had valued the business at $25 m.; Glen made a file note noting this independent valuation but with a footnote “NB: Due Diligence – need to view at least a basic statement of valuation with summary of the reasons behind that type of value.” In fact, because he trusted Sherwood and Sherwood had said there was no written valuation, Glen did not view a valuation (nor had Tierney valued the business). He also did not ask Tierney about it and Tierney (having been told by Sherwood of the $25 m. valuation) never disavowed it.
Sherwood represented to Glen on or about April to June 2018, and in subsequent conversations including on 30 July 2018 and 4 October 2018, that as further investment in the business Doreian had agreed to invest the proceeds of an insurance claim due to her.
On 25 April 2018 Glen obtained a bank loan to invest in the venture.
On 1 May 2018 Glen emailed Sherwood and Woodland inter alia stating in substance that: he was willing to be involved in the group; he would take some equity, quantum as yet undecided; it was urgent to formalise a Heads of Agreement/Memorandum of Understanding setting out at least the basic tenets of the agreement between the group of six (Sherwood, Woodland, Doreian, Adams, Tierney and himself) the business structure proposed, a business plan, and its aims and objectives; and thereafter a formal Shareholders Agreement could be finalised incorporating these matters.
On 30 May 2018 Glen emailed Sherwood stating that he hoped to reduce to writing the relevant aspects of the “Strategic Business Plan” and joint venture arrangement, and providing a detailed checklist of issues on which Sherwood was to give instructions to finalise the joint venture.
The second defendant (Geotic) was registered on 27 July 2018. Its co-directors were Sherwood and Woodland and its sole shareholder was Alluvial.
On 3 August 2018 Glen transferred $50,000 to Alluvial, being the first of 9 transfers to it totalling $375,000.
On 6 August 2018 Sherwood and Woodland entered a contract on behalf of the venture to purchase a rural property (Property) for $293,000. Sherwood had earlier told Glen that it contained extensive gold resources which the venture would excavate.
On 5 October 2018 Glen at Sherwood’s request paid $293,000 to settle the purchase in the name of Geotic. Adams subsequently moved there, living as a manager rent free.
On 8 July 2019 Doreian signed an agreement acknowledging that she held two Victorian exploration licences on trust for Arum 79 Pty Ltd. Glen made a file note recording that Doreian was holding the licences on –

“behalf of the ‘group’ [and] that the ELs will perform part of the overall ‘assets’ of the group. That the group will manage the ELs [and] that Simone [Doreian] is the ‘caretaker’ of the ELs for the group”.

On 9 July 2019 the group of six signed a Memorandum of Understanding (MOU) dated 25 June 2019, drawn by Glen, setting out the “business structure and plan” and (in cl. 2.4(b)) obligations to be performed by Sherwood, Woodland and their respective corporate entities. Clause 2.4 included critical steps to be undertaken by Sherwood including incorporation of a holding company; finalization of a share sale agreement removing Whittingham; and the shares in all subsidiary companies being transferred to the holding company (in which Glen was to be issued shares).
On 3 September 2019 Glen obtained a bank loan, part being paid to Alluvial.
On 22 October Sherwood emailed other group members inter alia advising of discussions with another possible joint venturer, Rogers, on initial terms of a working position and share purchase within their group, to be legally documented, and that “the total group value position based on today’s agreement is in excess of one hundred million dollars.”
Glen gave evidence that Sherwood told him that Rogers was buying in at $1 m. for a 1% share, so valuing the new company at $100 m. Tierney agreed that, in the context of Rogers investing, a higher valuation of $100 m. was discussed. Sherwood’s evidence was that the uplift in value of $75 m. is “not straightforward, it’s not just Bob [Rogers], it’s the whole thing that goes together”.
On 27 December 2019 Sherwood emailed Glen and Tierney that amounts received by 31 December 2019 would receive share allocation at the valuation of $25 m. but that subsequent amounts would be recorded against the new company value or returned.
On 30 December 2019 Glen made his 7^th payment to Alluvial, on, he said, the understanding that the “new company value” was $100 m. He made his last such payment on 6 January 2020. His investment totalled $688,000.
During 2022 Sherwood ceased to provide information or to account to Glen.
On 8 May 2023 two exploration licenses were granted to Doreian for the use and benefit of Sherwood, Geotic and Alluvial.
In July 2023 there was widespread group concern about lack of progress and of (particularly from Sherwood) information. Tierney gave evidence about Sherwood failing to complete accounting records which were a necessary precursor to incorporation of a new holding company. A letter of demand to Sherwood from Doreian’s solicitors on 4 August seeking a refund of her investment and notifying her withdrawal from the venture was met on 18 August with dispute from Sherwood’s solicitors accompanied by an offer of $135,000 by Rogers to Doreian for transfer to him of the exploration licences granted on 8 May.
In August 2023 Glen caveated over the Property, claiming an interest pursuant to an implied, resulting or constructive trust, decided to leave the venture and commenced this proceeding.
Tierney subsequently withdrew from the venture.
On 20 November 2023 a deed of settlement was executed between Doreian, Sherwood, Woodland, Goldwing, Alluvial, Alluvial Enterprises (a subsidiary of Alluvial) and Geotic. The terms of the deed with Doreian included that: the business relationship between Doreian, Sherwood and Woodland and the companies had irretrievably broken down (Recital F); Sherwood would arrange repayment of $135,000 to Doreian (paragraph 1) and on receipt Doreian would transfer her exploration licences to Rogers; and Doreian’s interest in the business would be transferred to a third party nominee.
Glen did not become aware of the deed of settlement with Doreian until after issue of this proceeding. Sherwood did not tell him that Doreian’s investment had been repaid with funds provided by Rogers or that exploration licences held by her on trust for the joint venture were transferred to Rogers.

Glen sued Sherwood, Geotic and Alluvial Mining. Geotic counterclaimed for removal of the caveat.

Section 18(1) of the Australian Consumer Law (ACL) provided that:

“A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

Sections 4(1) and s4(2) of the ACL were deeming provisions to the effect that a representation as to a future matter was taken to be misleading under s. 18 if the representor did not have reasonable grounds for making it.

Judge Ryan held –

Contract.

Any alleged oral agreement between the parties did not amount to an immediately binding contract, for the following reasons –

- The discussions lacked clarity, were flexible, and critical matters were omitted. A reasonable business person in the position of the parties would consider that these were simply conversations concerning Glen’s possible investment and future steps. The requisite contractual intention was lacking because the essential terms of the alleged contract were uncertain and incomplete, including the precise terms and obligations of any other party and their identities,
- Post-contractual conduct may be relied upon to determine the existence of an oral contract. However, the conduct relied upon by the plaintiff, being first the objective in the MOU cl. 1 to “reflect the verbal agreements and discussions that have been occurring between the parties prior to the formalisation of this written agreement”, and second being an email dated 13 August 2019 from Sherwood to Glen saying “…. just making the formal funding call as per the shareholder agreement”, could not be construed as an acknowledgment by the defendants of the existence of an earlier binding oral agreement in the terms pleaded;
- the parties’ subjective intentions were inadmissible as an aid to construction.

[8], [81]-[90]

Discussion by Judge Ryan of the criteria for formation of a contract. [76] – [80]

The MOU did not create an immediately binding agreement. It fell within the third category of Masters v Cameron (1954) 91 CLR 353 namely:

“Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. … Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract” because –

1. the following text of the MOU led to a construction that it was not intended to be immediately binding:
  1. the heading being “Memorandum of Understanding (Business Structure and Plan)”;
  2. Recital cl. 6 stated that the parties “are desirous of joining together” etc (indicative of an intention to take future steps as opposed to a presently concluded agreement) and “developing and progressing a range of business projects” and developing “Potentially further yet unidentified subsidiary businesses” (both of which lacked completion and certainty and fitted with the document’s description as a business plan);
  3. Clause 1 dealt with the “Objects of the Business Structure and Business Plan”, a primary objective being to “set out in a very broad and preliminary way a business plan description” and sub-paragraph (e) provided to “set out broadly” etc. Such wording suggested merely a business plan;
  4. Clause 3.13(b) referred to any further purchase of shares in the ultimate holding company at a value to be determined in accordance with the provisions of a document not yet drawn for a company not yet in existence;
  5. Clause 7 referred to proposed projects noting that the business “proposes to enter into specific projects”, ie a future intention or plan;
  6. Clause 8 stated that the “in principle” arrangements referred to herein were to be provided for in a formal shareholder’s agreement: the term “in principle” carried some weight, particularly absent any other wording in the MOU suggesting it was immediately legally binding;
2. the context in which the parties were operating. A reasonable business person would have understood that the parties wished to record the state of their negotiations and set out a business plan detailing future steps to implement the joint venture, particularly where an earlier joint venture between the inventors of the patent was unresolved and subject to finalising a proposed share sale agreement.

[8], [106]-[110]

Discussion by Judge Ryan of the construction of contracts. [92]-[97]

If the MOU had been a binding agreement her Honour would have found that its terms included cl. 2.4 and an implied term that each party would undertake all steps necessary to give effect to its provisions within a reasonable time. [113], [116]

If the MOU had been a binding agreement her Honour would have found that Sherwood breached cl. 2.4 because he either abandoned it or failed to undertake all necessary steps to progress the joint venture in a timely fashion. However, her Honour would not have found that he misused any sums from the Alluvial account, or that there was a breach related to Glen’s access to Alluvial’s bank account, and accordingly any terms related to this would not have been breached. [120]-[124]

Reliance damages were damages for wasted expenses incurred in anticipation of, and reliance on, the performance to a contract by another party. It was, however, insufficient that the plaintiff spent money in anticipation of, or reliance on, performance of a defendant’s contractual obligation; and that money was wasted or partly wasted after taking account of any benefit obtained by the plaintiff from the expenditure. It must also be shown that the money was wasted because of the breach of contract. In other words, the plaintiff would have recovered the money if that obligation had not been breached. [134]

Where the breach had resulted in (namely, caused or increased) uncertainty about the position of the plaintiff if the contract had been performed, then the discharge of the plaintiff’s legal burden of proof was facilitated by assuming (or inferring) in the plaintiff’s favour that, had the contract been performed, then the plaintiff would have recovered the expenditure reasonably incurred in anticipation of, or reliance on, the performance of the contract. The strength of this assumption or inference, and thus the weight of the burden placed on the party in breach to adduce evidence to rebut the inference in whole or in part, depended on the extent of the uncertainty resulting from the breach. [129], [135]-[136]

Assuming the defendants were in breach, there was uncertainty about the position of the plaintiff had the breach not occurred, ie because the business was not yet developed and commercialized its value and profitability remained highly speculative, and this gave rise to the facilitation principle. Applying that principle, the court should assume or infer that had the contract been performed Glen would have recovered the expenditure reasonably incurred in anticipation of its performance. Thus there was an increased burden on the defendants to adduce evidence to rebut the inference. They had not done so. Accordingly, if the MOU was a binding agreement breached by Sherwood her Honour would have found that Glen was entitled to reliance damages of $821,650.65, being the sum of $668,000 paid to the defendants and $153,650.65 paid by him in interest to borrow the sum paid to the defendants. [127], [138], [139], [140

Joint endeavour constructive trust.

The elements of a joint endeavour constructive trust were:

- a joint relationship or endeavour, in which expenditure was shared for the common benefit in the course of and for the purposes of which an asset is acquired; and
- the substratum of that joint relationship or endeavour had been removed or the joint endeavour prematurely terminated without attributable blame; and
- it would be unconscionable for the benefit of those monetary and non-monetary contributions to be retained by the other party to the joint venture.

[147]

Discussion by Judge Ryan of the law related to joint endeavour constructive trusts. [146]-[156]

There was a joint endeavour between the parties as regards the purchase of the Property. In reliance on the joint venture Glen paid the purchase price and invested a total of $688,000. As he had yet to receive any return on his investment he acted to his detriment in doing so. [158], [162], 163]

Three of the original six joint venturers (ie Doreian, Tierney and Glen) having left, the proposed joint venture outlined in the MOU between the six named participants had collapsed. No attributable blame causing the breakdown could be sheeted home to Glen. His decision to withdraw from the project was blameless having regard to the fact that by the time he decided to leave Tierney and Doreian had already left, and he had yet to receive any equity share or return on his investment. There was no hard evidence that the project was effectively underway and it was unlikely to be commercialised in the near future. [173], [175], [176]

Accordingly the defendants had not made good on the expectation they encouraged. [179]-[180]
It would be unconscionable for Geotic to retain the beneficial interest in the Property because –
1. Glen contributed the purchase price of the Property;
2. no other joint venturer contributed financially (Doreian did contribute $135,000 but had been repaid);
3. a payment by Adams recorded in the MOU long predated the formation of the joint venture;
4. of a dearth of evidence about the work of other joint venture parties and so it was difficult to assess their contributions;
5. the defendants retained the remaining assets of the joint venture;
6. retention by Geotic of its beneficial interest in the Property without having to account to Glen for his contribution towards the price, would give it an unintended and unconscionable windfall.

[189], [191], [192]

Having regard to the serious nature of conferring proprietary interests in persons other than the legal owner a constructive trust would not be imposed over property if other equitable remedies existed capable of doing full justice. [195]

A constructive trust in favour of Glen over the Property would not be the appropriate remedy, because an order for restitution of his payment to Geotic would suffice to assuage Geotic’s conscience in equity. Orders imposing a constructive trust and transferring the Property would also entail the difficulty of non – parties being affected by them, including the joint venturers Adams (also residing there) and Woodland, and Rogers who said he had acquired exploration licences from Doreian and may also have purchased her interest in the joint venture. Proprietary orders would reduce the asset pool otherwise available to the remaining joint venture parties, who had a right to heard on this as a matter of procedural fairness, and for that reason alone a constructive trust would not be imposed and a transfer not be ordered. [197]-[199]

An additional reason for not imposing a constructive trust over the sum of $375,000 paid by Glen to Alluvial was that it had been expended, was no longer identifiable and Glen had not provided a schedule of traceable proceeds. Equity would not impose a constructive trust over dissipated or untraceable funds. [201]-[202]

Accordingly on the joint endeavour trust claim Glen was entitled to restitution of the sums he invested by way of equitable compensation because:

1. he paid the sum of $688,000 as contributions towards the joint venture;
2. the consideration for his investment had wholly failed;
3. the joint venture had broken down prematurely with no attributable blame on his part;
4. there were no applicable contractual provisions dealing with the treatment of the parties’ contributions in this event;
5. it would be unconscionable for the defendants to retain the benefit of Glen’s contributions because this could not have been intended in these circumstances.

[8], [174], [197], [199], [200], [203], [204]

No resulting trust.

The presumption of a resulting trust arose where A advanced money used to purchase property held in the name of B. The law presumed that A intended to maintain a beneficial interest over that property. This presumption could not, however, prevail over the actual intention of that party as established by the overall evidence. [206], [207], [209]

Glen’s payment of $293,000 used to purchase the Property attracted the presumption of resulting trust. However the presumption was rebutted by the fact that this contribution was made by Glen on the understanding that the Property was to be acquired for the benefit of the joint venture as a whole and not for him personally. It was a part of Glen’s overall investment. [208]-[211]

Were the payments of $375,000: subject to a trust; or loans; or (other than pursuant to a joint endeavour constructive trust) did they attract the remedy of equitable compensation or damages?

The payments of $375,000 were not advanced by Glen pursuant to a trust in his favour. They were invested for the benefit of the joint venture as a whole as opposed to for Glen personally, ie invested for business purposes, not as funds to be held separately or returned. Further, it was impossible to create a trust where the subject moneys had been expended, in this case in the course of developing of the business venture. [212]

Nor were the funds loans. [212]

Nor was Glen entitled (other than pursuant to a joint endeavour constructive trust) to an order for damages or equitable compensation in the sum of $375,000, being in effect reimbursement of the moneys he paid to Alluvial which were applied towards expenses incurred by the joint venture. [213], [214]

Misleading or deceptive conduct.

The four steps in determining whether s. 18 of the ACL was breached were –

1. Identifying with precision the conduct said to contravene s 18(1).
2. Whether it was in trade or commerce.
3. Considering what meaning the conduct conveyed to its intended audience; and whether, if the pleaded conduct was said to amount to a representation, it was established by the evidence.
4. Whether the conduct, in light of the meaning it conveyed, was misleading or deceptive or likely to mislead or deceive, ie whether it had the tendency to lead into error. Whether conduct was misleading or deceptive was a question of fact to be determined objectively by a consideration of the impugned conduct in the circumstances in which it occurred.

The third and fourth steps required the court to characterise, as an objective matter, the conduct viewed as a whole and its notional effects, judged by reference to its context, on the state of mind of the relevant person or class of persons. That context included the immediate context being relevantly, all the words in the document or other communications and the manner in which those words are conveyed—not just a word or phrase in isolation—in the broader context of the relevant surrounding facts and circumstances.

[216]

Discussion by Judge Ryan of the law related to misleading or deceptive conduct under s. 18 of the ACL. [216]-[223]

By reason of ss. 4(1) and 4(2) of the ACL the representor (here Sherwood) was deemed not to have reasonable grounds unless evidence was adduced to the contrary. If such evidence was adduced the representee then had to prove that the grounds relied upon were not reasonable. The expression “reasonable grounds” meant that at the time the representation was made the representor had facts sufficient to induce, in the mind of a reasonable person, a basis for making the representation. This was assessed objectively not be reference to the maker’s subjective state of mind. [218]

In an action for damages under s. 236 of the ACL the plaintiff must establish that the contravening conduct caused that person’s loss, ie only that the contravention was a, not the sole, cause of the loss and damages sustained. The plaintiff must show reliance on the conduct. [219]

Discussion by Ryan J. of the concepts of causation and reliance. [220]-[223], [280], [286]

As to compensation –

- In most cases the appropriate measure of loss caused by misleading and deceptive conduct was the measure of loss for the tort of deceit.
- The existence of a compensable loss and quantum was ascertained by inquiring whether and by how much that person was worse off as a result of acting or refraining from acting on an inducement of false representations by the other person.
- The amount of damages may be reduced under s. 236 if the person claiming contributed to the loss or damage by failing to take reasonable care.

[219], [221], [223]

The March representations were genuine representations as to the then state of affairs and not misleading or deceptive given the circumstances in which they were made. [227], [274]

The representation by Sherwood to Glen on or around 6 April 2018 that Tierney had valued the business at $25 m. was untrue and thereby Sherwood engaged in misleading or deceptive conduct. It was made during the course of commercial negotiations relating to the investment and structure of the proposed joint venture business and so in trade or commerce. Glen relied on this representation: he made the decision to invest in the joint venture business in part because of this representation. His negligence, if any, did not sever the causal link. [247], [248], [275], [276], [279], [281], [293], [294]

The representation by Sherwood to Glen concerning Doreian agreeing to invest the proceeds of an insurance claim due to her was about a future matter, being her potential intention to invest when she received the proceeds. However, Sherwood did have reasonable grounds for making this representation and accordingly this conduct was not misleading or deceptive. [254], [273]

The representation by Sherwood that Rogers had agreed to invest $1 m. in the business, and so the business would be worth $100 m., was untrue and so misleading or deceptive as he did not agree to invest in the business at all. Glen relied on this representation in investing further moneys, being keen to take up shares at the prior valuation of $25 m. [278], [282], [293]

The representations by Sherwood or around 27 December 2019 as to investment before 31 December 2019 attracting shares at a proportion compared with a valuation of $25 m., and subsequent investment attracting shares at a proportion compared with a valuation of $100 m. were made during the course of commercial negotiations relating to the investment and structure of the proposed joint venture business and so in trade or commerce. Glen relied on them in deciding to invest. His negligence, if any, did not sever the causal link. [266]-[267], [279], [293], [294]

Where money was paid as a consequence of misleading conduct, the loss so suffered included not only that money but also the cost of borrowing it or the loss from its investment. Judgment would accordingly be entered against Sherwood for damages of $688,000 for misleading or deceptive conduct. [8], [295]

Caveat

Glen had a proper basis for lodging the caveat to protect his equitable interest in the Property. [8], [296], [297]

Philip H. Barton

Owen Dixon Chambers West

Thursday, October 22, 2026

Blog 102. A Federal Court case concerning a caveat, equitable priorities and much else besides.

Credit Suisse AG v Gu (No 3) [2026] FCA 439, Cheeseman J.

This is the first Blog covering a Federal Court case, gratefully brought to my attention by a follower of this Blog. I use the word “gratefully” advisedly – as I traversed its 476 paragraphs I did not always experience this feeling! I occasionally reflected that, having done sundry misdeeds and contemplating whether to stop entirely, Macbeth said –

“I am in blood Stepp’d in so far, that, should I wade no more, Returning were as tedious as go o’er.” (Act 3, Scene 4)

This case is a long priority contest between three parties covering multiple grounds with a minor caveat element. No Victorian cases are cited, but the principles enunciated apply equally in Victoria. This Blog has been very difficult to format within the limits of WordPress, particularly in the case of the subsections of s. 121 of the Bankruptcy Act, and my friend Frank, who is responsible for putting the Blog into cyberspace, says it has taken 5 years off his life.

The facts were –

In 2017 Mr Gu entered a contract to purchase a residential property in Sydney (the Property) for $10 m. with a $1 m. deposit.
In March 2017 Credit Suisse agreed to advance $6 m. to Gu for this purchase.
At that time Gu was a director of i-Prosperity Pty Ltd (IPPL). On 3 and 15 March and 13 April monies were transferred from IPPL’s accounts into Gu’s HSBC account (the First, Second and Third IPPL Sums). On 18 April $3.2 m. was paid from that account to a solicitor’s trust account. That day $500,000 was also transferred from IPPL into that trust account (the Fourth IPPL Sum). On 21 April trust monies in the sum of $3,654,987.14 were applied by those solicitors towards the purchase price and acquisition costs.
The sale settled. On or about 3 May 2017 Gu became registered proprietor of the Property subject to Credit Suisse’s mortgage. The mortgage provided that the mortgagee’s consent was required before any further interest in the property was granted (cl. 5.7(c)).
Subsequently, $280,000 of IPPL’s funds were paid to Credit Suisse as follows: $200,000 on 12 May 2017, $30,000 on 5 July 2019 and $50,000 on 22 January 2020 (the Fifth, Sixth and Seventh IPPL Sums). Credit Suisse treated those sums as credits to the current account associated with the mortgage facility, applying them to meet interest due.
In June 2019 a series of related agreements involving Gu and Great Lands Investment Pty Ltd (Great Lands) were made. One was a loan agreement dated 28 June by which it lent him $3 m. repayable after two months secured inter alia by an unregistered mortgage over the Property, as to which a caveat was lodged that day. The loan agreement provided for a lower interest rate of 2% per month in the ordinary course, but in cll. 5.4, 5.5 and 5.7(a)(ii) stipulated a higher interest rate of 4% per month upon default, with compounding and capitalisation in the default regime.
Within Great Lands Mingjie (Jason) Zhang had authority to act in relation to this loan including in relevant discussions with Gu. IPPL on behalf of Gu paid Jason Zhang $700,000 on 20 September 2019 and $500,000 on 6 February 2020 (the Jason Zhang payments).
On 10 March 2020 four persons (the Hu Parties) sued IPPL and another company seeking repayment of monies invested pursuant to a convertible debenture arrangement. The Hu Parties obtained a freezing order for $5,750,000 against the defendants.
On 15 April 2020 this proceeding was settled on terms including payment by the defendants of an agreed sum. Following non-payment the Hu Parties obtained judgment on 14 May 2020 for $5,761,972.60. (the First Judgment Debt).
The parties to this litigation then negotiated during which Gu proposed that i‑Prosperity Capital Management Pty Ltd (IPCM) grant security over its assets in the Hu Parties’ favour. Their solicitor responded by seeking particulars of those assets and their value. The Hu Parties generally interrogated the financial information provided by IPPL and Gu, including proposed security, and conducted a title search disclosing the registered mortgage and the Great Lands caveat.
A draft Deed of Guarantee and Indemnity (the Hu Deed) between the Hu Parties (described as the Beneficiaries), Gu and IPCM (described as the Guarantors) and IPPL was circulated. On 1 June Gu’s solicitor sought to delete cl. 7.2 of the draft while otherwise preserving the broader package of the proposed deal. The Hu Parties’ solicitor refused this deletion, but that solicitor’s contemporaneous communications revealed that the caveat’s purpose was to provide the most uninvasive form of security pending payment on 30 June 2020, when the caveat would be removed immediately.
On or about 2 June 2020 the Hu Deed was executed. It recited or provided –
- the Hu Parties’ concern that the First Judgment Debt would be unpaid and their desire to pursue further relief (Recital D);
- for a standstill agreement lasting until 30 June 2020 (Recital E);
- that Gu and IPCM guaranteed payment of the First Judgment Debt by 30 June, indemnified the Hu Parties against loss from non-payment, and undertook not to dissipate assets pending payment (cls. 1.1, 5, 8);
- Clause 7, headed “Security” provided:

“7.1 Security for Beneficiaries
The Beneficiaries agreeing to the Guarantee Proposal … is subject to and conditional upon I[P]CM entering into a general security deed under which I[P]CM agrees to grant a security interest in and over all of the I[P]CM’s … property to the Beneficiaries …

7.2 Caveat
Gu hereby grants to the Beneficiaries a caveatable interest in the [Property] … and consents to the Beneficiaries lodging and maintaining a caveat on the title to the Property until … the Judgement Debt has … been paid and discharged in full.

7.3 No security for the Guarantors
The Guarantors have not taken, and will not take, security from the Debtors for or in consideration of the Guarantors assuming their obligations …”

The Hu Parties agreed to forbear from enforcement of the First Judgment Debt, or commencing certain proceedings until after 30 June 2020.

On or about 3 June the Hu Parties caveated, consistently with cl. 7.2.
In mid 2020 IPPL went into liquidation.
The First Judgment Debt was not paid by 30 June 2020. The Hu Parties sued Gu and IPCM as guarantors and on 21 August 2020 obtained judgment against Gu for $5,929,897.86 (the Second Judgment Debt).
In early 2021 the Property was sold by receivers appointed by Credit Suisse. Over $5.5m remained after they and it were paid out (the Surplus Funds). This proceeding concerned entitlements to those funds.
On 10 August 2021 Gu became bankrupt.
On 17 January 2022 a Deed of Assignment and Sale was executed by which Gu’s trustee in bankruptcy assigned to the Hu Parties the trustee’s right to pursue claims under ss. 120 and 121 of the Bankruptcy Act against Great Lands and others.
On 28 January 2022, the Hu Parties’ solicitor gave notice of this assignment.

Section 121 of the Bankruptcy Act provided (omitting headings) –

“(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:“(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:

(a) the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and

(b) the transferor’s main purpose in making the transfer was:

(i) to prevent the transferred property from becoming divisible among the transferor’s creditors; or

(ii) to hinder or delay the process of making property available for division among the transferor’s creditors.

…

(2) The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.

…

(3) Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.

…

(4) Despite subsection (1), a transfer of property is not void against the trustee if:

(a) the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and

(b) the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and

(c) the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.

…

(4A) For the purposes of this section, a rebuttable presumption arises that the transferor was, or was about to become, insolvent at the time of the transfer if it is established that the transferor:

(a) had not, in respect of that time, kept such books, accounts and records as are usual and proper in relation to the business carried on by the transferor and as sufficiently disclose the transferor’s business transactions and financial position; or

(b) having kept such books, accounts and records, has not preserved them.

…

(5) The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.

…

(8) This section does not affect the rights of a person who acquired property from the transferee in good faith and for at least the market value of the property.

…

(9) For the purposes of this section:

(a) transfer of property includes a payment of money; and

(b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and

Section 100-5 of Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy)) permitted the trustee in bankruptcy to assign a right to sue conferred by the Act and s. 100-5(4) provided that if such a right is assigned, a reference in this Act to the trustee in relation to the action was taken to be a reference to assignee.

Legal issues raised were –

Whether clause 7.2 of Hu Deed created an equitable charge and if so what amounts it secured.
Whether the Great Lands mortgage was void against Gu’s trustee in bankruptcy, and by assignment the Hu Parties, by reason of s. 121(1) of the Bankruptcy Act, including whether Great Lands established the good faith defence under s. 121(4).
The Great Lands mortgage being void against the Hu Parties, what consideration must be repaid to it by them under the Bankruptcy Act s. 121(5) and s. 100-5 of Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy))?
Whether the Higher Interest Rate clauses in the Great Lands loan were void and unenforceable as a penalty.
If the Great Lands mortgage had remained operative, would the Jason Zhang payments have reduced Gu’s debt to Great Lands under its loan?
If the Great Lands mortgage had remained operative, would it have covered costs?
Whether, on the assumption that Great Lands had a surviving secured claim under the its loan and mortgage, these should be denied enforcement by reason of People’s Republic of China (PRC) law.
The legal principles for determining questions related to movement of monies.
Was IPPL the beneficiary of a purchase monies resulting trust?
Was IPPL the beneficiary of a constructive trust based on Black v S. Freedman?
Was IPPL the beneficiary of a constructive trust arising from Gu’s breaches of fiduciary or directors’ duties?
Was IPPL subrogated to the rights formerly held by Credit Suisse by reason of the Fifth, Sixth and Seventh IPPL Sums?
Was IPPL subrogated to Great Lands’s position by the Jason Zhang payments?
Who between the Hu Parties and Great Lands had priority to the Surplus Funds?
Who between the Hu Parties and IPPL had priority to the Surplus Funds?
Who between IPPL and Great Lands had priority to the Surplus Funds?

Cheeseman J. held –

Whether clause 7.2 of Hu Deed created an equitable charge and if so what amounts it secured.

Whether cl. 7.2 of the Hu Deed created an equitable charge or other proprietary security interest, or merely the right to caveat, was a question of construction to be determined objectively by reference to its text, context and purpose, requiring a reading of the instrument as a whole. Relevant considerations included the presence or absence of the familiar language of charge or mortgage, the place of the clause within the instrument, the evident commercial purpose of the transaction, and whether the clause was directed only to the practical support of a caveat or to conferring a present security interest.
1. In favour of an equitable charge or other proprietary security interest was:
  1. the words of present grant in cl. 7.2;
  2. the heading “Security”;
  3. the linkage between the caveat and payment in full of the First Judgment Debt;
  4. the commercial purpose of the Deed as a forbearance and security arrangement. However, those considerations were not determinative: construing a commercial instrument did not require that every phrase be forced to perform independent proprietary work – the starting point remained the legal effect actually produced by the text read as a whole, not the avoidance of semantic redundancy. [58], [59]
2. In favour of a mere right to lodge and maintain a caveat was:

1. 1. Clause 7.2 did not employ the familiar language of charge or mortgage; nor expressly confer any right of realisation. In the setting of a solicitor-drafted commercial deed concerned at least partly with the provision of security, those omissions were significant and enhanced by the immediate adversarial setting of the Deed as a negotiated standstill. Clause 7.2 was capable of operating merely as employing a caveat as a practical restraint on dealings with the Property;
  2. The text and structure of cl. 7. Clause 7.1 expressly required IPCM to enter into a general security deed. By contrast, cl. 7.2 did not require Gu to grant security in those terms. Clause 7.3 reinforced that contrast in the way in which the subclauses of cl. 7 were framed;
  3. The commercial setting and course of negotiations. The Hu Parties were insisting on a package of protections rather than merely personal promises of payment. They were being asked to forbear until 30 June but continuing to seek information about the proposed security and unprepared simply to rely on Gu’s assurances of payment or of no undisclosed dealings. A caveat would impede dealings with the Property thereby reducing their informational disadvantage;
  4. The broader structure of the Deed. Read as a whole it was apt to establish a regime of guarantees, forbearance and preservation of assets pending payment. In that setting, cl. 7.2 was more naturally understood as part of that preservation regime rather than as conferring a proprietary security interest;
  5. The existence of the Credit Suisse mortgage and in particular the requirement in its cl. 5.7(c). [42], [60]-[72], [75]

In conclusion, the correct interpretation of cl. 7.2 was (b). [36], [38], [39], [74], [76], [470]

If, however, the Hu Deed did create an equitable charge, it would, on its proper construction, secure all amounts for which Gu became liable to the Hu Parties under it including the First Judgment Debt, interest and liabilities arising under the indemnity in cl. 5. Although the contractual liabilities under the Deed merged in the Second Judgment, such that the Hu Parties could not again sue on the underlying causes of action, the security was not lost by that merger while the judgment remained unsatisfied. The charge would continue to secure Gu’s liabilities as crystallised in the Second Judgment. [32], [81]-[87]

Whether the Great Lands mortgage was void against Gu’s trustee in bankruptcy, and by assignment the Hu Parties, by reason of s. 121(1) of the Bankruptcy Act, including whether Great Lands established the good faith defence under s. 121(4).

As to the challenge by the Hu Parties to the Great Lands mortgage based on s. 121(1) of the Bankruptcy Act:
1. For the purposes of s. 121, the grant of a mortgage or charge may constitute a transfer of property. The Hu Parties carried the onus of establishing that it was void under s. 121(1); [97], [98], [103]
2. The Hu Parties could not, by force that section alone, succeed to the position of a mortgagee or other proprietary claimant to the Surplus Funds. Rather, the statutory question was whether that mortgage was void against the trustee and, if so, whether the trustee’s statutory right to recover property or obtain restitution had been validly assigned to the Hu Parties and may now be enforced by them; [99]
3. The requisite purpose of the transferor may be established directly from the facts and circumstances of the transaction, or indirectly by operation of statutory presumptions; [104]
4. Establishment of insolvency, or impending insolvency, bore directly upon the purpose inquiry under s. 121(1); [105]
5. Great Lands having conceded that Gu was insolvent or about to become so when its mortgage was granted, the presumption in s. 121(2) applied and Gu’s main purpose in granting the mortgage was taken to be that described in s. 121(1)(b). The Great Lands mortgage was accordingly, subject to it establishing a good faith defence, void against the Hu Parties pursuant to s. 121(1); [107]-[108], [198], [471]

As to whether Great Lands established its good faith defence under s. 121(4) –
1. The transferee bore the onus of establishing each element in ss. 121(4)(a), (b) and (c); [109], [114]
2. The requirements in ss. 121(4)(b) and (c) were expressed in objective terms. The statutory question was not exhausted by the transferee’s assertion of its subjective belief. The inquiry was whether, on the facts known to the transferee at the time, the transferee proved that the relevant inference was not one that it could reasonably draw. This prevented the defence from succeeding by reason of the transferee’s wilful blindness, but it may be possible, in certain circumstances, for the defence to succeed even in the case of the transferee’s honest ineptitude; [119]
3. In applying ss 121(4)(b) and (c), the ordinary principles for drawing of inferences from proved facts applied. Where direct proof was unavailable, a reasonable and definite inference on the balance of probabilities may be drawn from proved facts, not being a matter of conjecture, guesswork or surmise. In the case of a corporate transferee, the inquiry proceeded by reference to the knowledge of the natural persons who had acted on its behalf in negotiating, arranging or implementing the transaction, applying ordinary principles of attribution; [120]-[121].
4. As to whether Great Lands as the transferee, had established the element of value for the purposes of s.121(4)(a) –
  1. The property transferred was the mortgage itself, ie, the proprietary interest granted over the Property to secure the $3 m. advanced not merely a chose in action to recover a fixed principal sum. It was a proprietary security interest securing a bundle of monetary rights defined by the Great Lands transaction documents, including contingent and accruing interest liabilities; [125]
  2. The term “consideration” imported its ordinary legal and commercial meaning; [129]
  3. Where, as here, the mortgage secured an expanded and potentially escalating set of liabilities, including interest liabilities, the market value of the proprietary interest transferred could not simply be equated with principal alone. It secured liabilities beyond the $3 m. advanced. The same conclusion followed from the Great Lands Loan. Great Lands had failed to discharge its onus under s. 121(4)(a). [133], [135], [136], [162]
5. Great Lands failed to discharge its onus under s. 121(4)(b). The proscribed purpose was reasonably inferable from facts known to it; [153], [156], [157], [162]
6. Great Lands failed to discharge its onus under s. 121(4)(c). Gu’s insolvency or impending insolvency was reasonably inferable at the time of the transfer. [158]-[161], [162].
7. The defence under s. 121(4) accordingly failed. [162], [198], [471]

The Great Lands mortgage being void against the Hu Parties, what consideration must be repaid to it by them under the Bankruptcy Act s. 121(5) and s. 100-5 of Schedule 2 to the Bankruptcy Act (Insolvency Practice Schedule (Bankruptcy))?

As to the consideration to be repaid to Great Lands under s. 121(5) and s. 100-5 of the Insolvency Practice Schedule:
1. Great Lands bore the onus of proving the value of the consideration to be refunded; [167]
2. The Jason Zhang payments were accepted and treated by those concerned as being on account of Gu’s indebtedness under the Great Lands loan, and not as partial redemptions of an investment by Zhang. There was a binding arrangement to this effect – any contemplated written instrument was no more than a fuller record of an arrangement already concluded and implemented (ie this was not in the “third class” described in Masters v Cameron). Accordingly they must be brought to account in determining the refund; [186], [187]
3. As to the content of that arrangement in allocating those loan repayments between principal and interest, Zhang and Gu were proceeding on the footing that the relevant interest provisions were those in the Great Lands loan, including the higher interest rate, whereby the payment of $700,000 would comprise $200,000 of interest and $500,000 of principal and the payment of $500,000 would comprise $450,000 of interest and $50,000 of principal. However (see below) the higher-rate default provisions were void as penalties, entailing adjustment of the parties’ agreed allocation. Thus the excess amounts would be brought to account instead as reductions of principal, and so the payment of $700,000 would reduce principal by $532,328.77 and the payment of $500,000 would reduce principal by $274,461.61; [188]-[192]
4. With this gross reduction of principal by $806,790.38 the amount to which Great Lands was entitled was $2,193,209.62 being the amount equal to the value of the consideration of $3,000,000 given by Great Lands for the transfer avoided, less $806,791 repaid. [193], [199], [471]
In giving effect to this statutory entitlement the relief to which Great Lands was entitled would be moulded to avoid double recovery and ensure that it did not both retain the benefit of those payments and obtain a refund of the same value. This remedial outcome followed from the absence of any surviving proprietary security interest held by either Great Lands or the Hu Parties in the Surplus Funds. [194]
The amount to which Great Lands was entitled under s. 121(5) did not include any interest possibly recoverable by Great Lands if it had enforced its personal rights under the loan, rather than receiving the statutory repayment under s. 121(5). Interest was not payable on the amount due under s. 121(5), nor under s. 51A of the Federal Court of Australia Act 1976 (Cth). [196]-[197], [199]

Whether the Higher Interest Rate clauses in the Great Lands loan were void and unenforceable as a penalty.

A provision requiring payment upon default was not penal merely because engaged by breach. The question was whether the stipulated consequence was out of all proportion to, or exorbitant or unconscionable having regard to, the legitimate interest which the provision was designed to protect. A clause increasing the rate of interest on default, or one providing for compound interest, was not necessarily penal. The inquiry was fact specific. [204]
The higher interest rate clauses were void and unenforceable as a penalty. The combined effect of the increase from 2% per month to 4% per month, plus compounding and capitalisation upon default, imposed a substantially more onerous liability than before default, and Great Lands did not establish a legitimate interest justifing it. The consequences were out of all proportion to, or exorbitant or unconscionable having regard to, Great Lands’ legitimate interest in repayment which the provisions were designed to protect. [205], [209]

If the Great Lands mortgage had remained operative, would the Jason Zhang payments have reduced Gu’s debt to Great Lands under its loan?

These payments were to be brought to account in reduction of Gu’s debt to Great Lands under its loan. [212]

If the Great Lands mortgage had remained operative, would it have covered costs?

Costs properly proved to be secured by the Great Lands mortgage would be recoverable. [213]

Whether, on the assumption that Great Lands had a surviving secured claim under its loan and mortgage, these should be denied enforcement by reason of People’s Republic of China (PRC) law.

The arrangements whereby Great Lands drew the funds lent to Gu did not involve the movement and use of RMB (the official currency of the PRC) funds in China in a manner engaging PRC foreign exchange controls and related provisions of PRC law: ie the proper characterization of the transaction did not involve the movement and use for the purpose of effecting what was, in substance, the provision of value to Gu in Australia outside the ordinary channels contemplated by such controls. The relevant documents recorded two distinct loan agreements, only one being the Great Lands loan. There was no applicable PRC civil law illegality, nor any basis in public policy or clean hands, for refusing enforcement of the Great Lands loan or mortgage. The transactions were also not tainted by PRC criminal law. [252], [253], [257], [260]-[262]

The legal principles to be applied in determining questions related to movement of monies.

The Court was required to determine questions related to the movement of monies. The following principles applied:
1. Factual issues were to be determined by reference to the whole of the evidence bearing upon the movement, application and character of the relevant monies, including the agreed facts, the contemporaneous banking records and solicitors’ trust account records, the witness evidence concerning those records, and the later accounting and ledger materials.
2. The inquiry was one of inference from the proved facts and the documentary record considered as a whole. Where direct proof was unavailable, factual findings were possible by inference from proved facts, including contemporaneous documents, but the inference must be a reasonable and definite inference on the balance of probabilities and not a matter of conjecture, guesswork or surmise; it was insufficient that the evidence permitted competing inferences of equal probability.
3. Primary recourse should ordinarily be had to any available contemporaneous documents, and findings should if possible be reasoned from contemporary materials, objectively established facts and the apparent logic of events rather than from demeanour alone.
4. To the extent that the competing characterisations include an allegation of misappropriation or other serious wrongdoing, the evidence must be scrutinised with appropriate care before such an inference was drawn, consistently with Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336, as reflected in s 140 of the Evidence Act 1995 (Cth). This approach did not alter the standard of proof, but directed a court not lightly to make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of serious wrongdoing.
5. Later bookkeeping descriptions and ledger labels were relevant, but not conclusive of the underlying legal character of a transaction; their weight depended upon their provenance, consistency and objective reliability.
6. In particular, to characterise a payment as a loan it was necessary to identify objective facts supporting the conclusion that the payment was made on terms for repayment. The essence of a loan was an advance of money coupled with an obligation of repayment. Neither a formal written loan agreement nor an agreement for interest were essential. But nor did the mere use of expressions such as “director loan”, without more, establish a concluded loan arrangement.
7. Where, as here, monies passed through an intermediate mixed account before transfer to the solicitors’ trust account, the tracing inquiry was to be undertaken by reference to orthodox equitable principle and not by treating later ledger classifications as dispositive. [275]-[278]

Was IPPL the beneficiary of a purchase monies resulting trust?

1. Funds sourced from IPPL were applied in the acquisition of the Property;
2. Those funds were not advanced to Gu under a concluded loan agreement;
3. The passage of funds through the Gu’s account did not alter their character as IPPL funds applied toward the acquisition. This conclusion accorded with orthodox tracing principles for trust money passing through a mixed account. If allocation of any deficiency within a mixed trust fund as between competing trust claimants was in question, there would be proportionate distribution rather than a first-in, first-out application of the rule in Clayton’s Case. [169], [176], [193].
4. Later accounting records and a ledger reclassification exercise did not reliably reflect the legal character of the underlying transactions at the time of payment.
5. Accordingly, with the qualification that $20,000 was withdrawn from Gu’s account after deposit of the First IPPL Sum and not applied toward the acquisition, the First to Third IPPL Sums formed part of the $3.2 m. transferred from Gu’s account to the solicitors’ trust account on 18 April 2017, and the Fourth IPPL Sum was also paid directly into that trust account that day. The total of IPPL Funds traced into the acquisition of the Property was $1,045,246.14. [337]-[341], [349]

1. Where property was acquired in the name of one person with money provided by another, equity may presume a resulting trust; rebuttable by evidence that the provider intended that the recipient take a beneficial interest, or that the money was provided on some different basis (eg gift or loan). The critical inquiry was the actual intention of the provider at the time of the purchase, objectively ascertained. The relevant evidence included the acts and declarations of the parties before or at the time of the purchase, or so immediately thereafter as to form part of the transaction, and the provider’s intention at the time may be proved by admissible evidence directed to that question.
2. The presumption was not displaced by material that was merely neutral, equivocal, or otherwise incapable of demonstrating an intention inconsistent with beneficial acquisition.
3. If the monies were provided on a footing inconsistent with beneficial acquisition, no resulting trust arose merely because they were later applied in the purchase.
4. Costs incidental to the acquisition may be treated as part of the relevant contribution.

[346]-[348], [352]-[354]

Subject to the deduction of $20,000, the First to Fourth IPPL Sums were contributions to the price in the requisite sense. There was insufficient evidence to displace any presumption of a trust. Accordingly Gu held the Property pursuant to a purchase money resulting trust for IPPL to the extent of $1,045,246.14 and any traceable accretions to that amount, reflected in the Surplus Funds. [349]-[351], [353], [354], [472]

Was IPPL the beneficiary of a constructive trust based on Black v S. Freedman?

A constructive trust based on Black v S. Freedman [1910] HCA 58; 12 CLR 105 arose where money had been stolen. It attached immediately to the money and adhered to it and its traceable product. The equitable obligations arose at the time of theft or, in the case of a volunteer recipient (regardless of notice), upon acquisition of knowledge. The trust was institutional rather than remedial. [272], [364]-[366]
The said funds of $1,045,246.14 were misappropriated by Gu from IPPL, not lent, given or having a consensual basis entitling him beneficially to retain or use them. Accordingly to this extent a constructive trust of the Black v S. Freedman kind existed. [368], [369], [372], [373], [374], [472]

Was IPPL the beneficiary of a constructive trust arising from Gu’s breaches of fiduciary or directors’ duties?

As a director of IPPL Gu owed fiduciary duties to it under ss. 180, 181 and 182 of the Corporations Act. However a mere breach of fiduciary or statutory duty did not establish that the impugned property or its traceable proceeds were held on constructive trust for the company. Such a breach may only give rise to a right in equity to impeach the transactions and obtain personal or ancillary equitable relief – a mere equity or other personal equitable claim, such as an account of profits or equitable compensation, not a proprietary interest.

[264], [271], [273], [274], [357], [380], [382]-[384]

If the facts found did not support a purchase money resulting trust or a Black v S. Freedman constructive trust, Gu’s breaches of fiduciary and statutory duty would not have given rise to an immediate institutional constructive trust. On that conditional footing, and treating the impugned payments as dealings effected by Gu acting within the scope of his authority to cause IPPL to make payments, albeit in breach of duty, those dealings were at most voidable, with IPPL having a mere equity to impeach the transactions or obtain other equitable relief. [386]

Was IPPL subrogated to the rights formerly held by Credit Suisse by reason of the Fifth, Sixth and Seventh IPPL Sums?

As to subrogation –
1. Subrogation was an equitable remedy by which a person who had discharged, in whole or in part, a secured debt owed by another may be treated in equity as standing in the position of the creditor, to the extent of discharge. In a general sense, it was the process by which one party was substituted for another so that the former may enforce the latter’s rights against a third party for that party’s own benefit. The remedy was not confined to a single fixed category but was fashioned by reference to the particular circumstances and the nature of the unconscionability arising from retention of the payment without recognition of the payer’s position; [388]
2. Where an existing security was discharged, the equitable foundation of subrogation was unconscionability not unjust enrichment. It was unconscionable for a mortgagor, or those claiming through the mortgagor, to treat the payment as simply discharging the encumbrance, rather than preserving the benefit of the security for the person whose funds discharged the debt. A presumption existed that a third party discharging a mortgage intended to keep it for its own benefit, rebuttable by objective circumstances that the payment was made on some other basis, including as an unsecured advance; [389]-[390], [401]
3. Subrogation may also be available if funds were applied under a defective transaction, or in circumstances defeating the position of the person whose money was used. Relief in these circumstances did not depend upon proof of payer subjectively intending to take an assignment of the security but upon whether, absent subrogation, it would be unconscionable for the defendant to deny the proprietary interest claimed; [391]
4. The subrogated party being treated in equity as standing in the position of the original secured creditor, the original charge was not necessarily assigned or kept alive for all purposes, but equity regulated the parties’ legal relations as if the benefit of the security had been preserved and assigned to the payer to the extent necessary to prevent unconscionability. Equity did not treat the subrogated party as having acquired a wholly new interest at the time of payment, but treated the existing security as continuing for such party’s benefit, so enjoying to the extent of discharge the benefit of the pre-existing security and its priority. [392]

The payments from its funds were applied in reduction of Gu’s indebtedness under the mortgage and it was presumed that IPPL intended to keep the Credit Suisse mortgage alive for its own benefit. The other parties failed to discharge the onus of rebutting that presumption by proving objective circumstances showing the payments were made on another basis, such as any arrangement obliging Gu to repay them as loans or unsecured advances. IPPL was in equity subrogated to the rights formerly held by Credit Suisse to the extent of $280,000 and so acquired an proprietary interest in the Surplus Funds. [401], [409], [410], ]420], [421], [422], [472]

Was IPPL subrogated to Great Lands’s position by the Jason Zhang payments?

Where the original secured creditor remained unpaid and continued to have use for the security, any entitlement of a third-party payer to stand in that creditor’s position could not operate in a presently enforceable way in competition with the creditor’s subsisting rights. This conclusion was reinforced here by the further finding that the Great Lands Mortgage was void against the trustee. In light of both this finding, and that the Jason Zhang payments were to be brought to account in reduction of Gu’s indebtedness to Great Lands, IPPL had no present entitlement to compete with Great Lands while Gu’s debt to Great Lands remained unpaid. Accordingly IPPL’s Great Lands subrogation claim only mattered if Great Lands’ own entitlement did not exhaust the Surplus Funds. Accordingly IPPL had not established any presently enforceable right of subrogation to the position formerly held by Great Lands under its mortgage. [424], [425], [428], [431], [473]

Who between the Hu Parties and Great Lands had priority to the Surplus Funds?

As to priority between equitable interests:

1. The earlier in time would usually prevail if the merits were equal;
2. Nonetheless the Court must search for the better equity, and the holder of the later equity bore the onus of showing some circumstance sufficient to displace the earlier equitable interest. What was required is not mere lateness or absence of notice, but some act, default or other circumstance of tangible and distinct significance affecting the justice of the competing claims, assessed in light of the whole of the conduct and surrounding circumstances. The entire conduct of each party with an equitable interest must be taken into account;
3. The position of the second equitable claimant was not preferred simply because that claimant took their securities without notice of the first encumbrance, or because of both that fact and that the second claimant acquired a later interest for value;
4. Mere failure by the holder of a prior equitable interest to caveat did not, without more, constitute postponing conduct. [91], [444]-[447], [462], [463]
As to priority between the Hu Parties and Great Lands to the Surplus Funds:

1. Neither held any secured proprietary interest therein and as unsecured creditors of Gu their entitlement of either to participate in the Surplus Funds was subject to the statutory order of payment in bankruptcy. [194]-[195]
2. But Great Lands’ entitlement to refund under s. 121(5) of $2,193,209.62 took priority over the claims of unsecured creditors including the Hu Parties. The purpose of the statutory scheme would be undermined if a party’s entitlement to recovery of consideration for a transfer voided under s. 121 could be eroded by rateable participation with unsecured creditors. This priority reflected how the statutory scheme had balanced competing policy imperatives: the cost of voiding transfers pursuant to s. 121(1) and thereby enlarging the pool of unsecured creditors against the transferor was offset by the transferee’s closely confined entitlement to recover lost consideration pursuant to s. 121(5) above and beyond the claims of unsecured creditors. [433], [434], [474]

Who between the Hu Parties and IPPL had priority to the Surplus Funds?

As to priority between IPPL’s interests and those of the Hu Parties:
1. Each of IPPL’s equitable interests arose, for priority purposes, when each came into existence, because each arose by operation of law upon the application of IPPL’s funds, independent of discretionary curial intervention. This was in the case of –
  1. the purchase money resulting trust, by 3 May 2017 at the latest;
  2. the Black v S. Freedman constructive trust, immediately upon the wrongful taking and misapplication of the funds;
  3. subrogation to Credit Suisse, when IPPL’s funds were applied to reduce the mortgage debt. [438], [439], [440], [441], [458]
2. IPPL did not represent to the Hu Parties either positively, or by omission in circumstances calling for disclosure or otherwise, that it had no beneficial interest in the Property. Mere non-disclosure of IPPL’s now-established proprietary claims did not constitute such a representation, still less one displacing its earlier equitable position. This was reinforced by the fact that the Hu Parties had entered the Hu Deed because they desired within a narrow period of forbearance to use the leverage available to obtain the best security and practical protection for satisfaction of the First Judgment Debt, not because of confidence in Gu or in the accuracy of what they had been told. And, even if it was reasonably foreseeable that a person in the Hu Parties’ position might rely on an assumption of the kind alleged, they did not in fact so rely. [452], [453], [454], [455], [460]
3. Also material was that the claim of the Hu Parties to postponement was on a different basis from that existing if they had succeeded in establishing an equitable charge or other security. They did not by force of s. 121 alone succeed to the position of a mortgagee or other proprietary claimant; rather, the statutory question was whether the Great Lands Mortgage was void against the trustee and its consequences. That difference told against any broad conclusion that IPPL should be postponed simply because the Hu Parties later obtained contractual protections and, as assignees, statutory rights arising from the trustee’s position. [456]
4. Accordingly interests of IPPL were not postponed to any interest claimed by the Hu Parties. [457], [460], [475]

Who between IPPL and Great Lands had priority to the Surplus Funds?

IPPL’s interests were not postponed to that (on the assumption that it retained a competing equitable interest) of Great Lands. IPPL did not by acquiescence or silence convey that it had no interest or assented to the creation or priority of the Great Lands Mortgage. The knowledge of Gu was not attributable to it. Its failure to caveat was not postponing conduct. [464]-[467]

Philip H. Barton

Owen Dixon Chambers West

Wednesday, July 29, 2026

Blog 96. Prima facie case of implied, resulting or constructive trust but caveat removed on balance of convenience.

Barnard v Otten [2025] VSC 313, Irving AsJ (3 June 2025)

The facts were as follows –

Rhianna Otten was the daughter of Sharon Otten and sister of Declan Otten. Rhianna was until her death on 1 April 2024 the partner and fiancée of the plaintiff (Carl) (the couple). Carl deposed –
- Before 2018 the four of them discussed purchasing a property, including initially in Rhianna’s name, then to be subdivided and part be transferred into Sharon’s name. But the couple did not pursue this because of difficulty finding land and cost.
- Rhianna and Declan opened a joint bank account (the joint account) into which Sharon made deposits. This account was not used to pool funds for a property purchase. Sharon and Rhianna did not agree to purchase a property.
- In around 2020 the couple purchased a house at Corio (the Property) for $416,000, negotiated by Rhianna, using a loan from a financier secured by first mortgage and an $85,000 gift from the sale of Sharon’s house at Melton described by Sharon as an ‘early inheritance’. Rhianna became its registered proprietor. The couple and children lived in the house.
- With the couple’s agreement Sharon purchased, he believed using her proceeds of sale, and placed, a moveable granny flat onto the Property, into which Sharon and Declan moved in mid-2021, living rent free and not contributing to mortgage repayments.
- Until 1 April 2024 the couple made all mortgage repayments, being about $80,000, from their joint finances and also paid all rates, insurance and utilities bills. Sharon paid for gas supply to the granny flat.
On the other hand Sharon deposed –
- Following the sale of her property she had approximately $220,000. She agreed to Rhianna and Declan opening a bank account in their names so that she (Sharon) could make deposits to protect that money from her other daughter Taylah. She paid $100,000 into this joint account in October 2018.
- In 2018 Sharon and Rhianna began discussing property purchase. She (Sharon) suggested finding land with subdivision potential, to be purchased in Rhianna’s name and then subdivided so that sufficient for a granny flat could transferred into her (Sharon’s) name. They then involved Declan and Carl in their discussions.
- She paid $70,700 into the joint account in November 2019 and a further $25,907.50 between March 2018 and February 2020.
- The four persons created a Facebook group chat containing discussions about purchasing a property together.
- On 16 December 2020 the Property was purchased in Rhianna’s name using her (Sharon’s) contribution of $85,000 and the mortgage loan.
- She neither sought legal advice nor caveated because she was clear about her agreement with Rhianna. The couple and the children moved into the Property. The granny flat was subsequently constructed using Sharon’s funds from the joint account and she and Declan moved in. They did not contribute to loan repayments.
- The granny flat was not portable and its cost of relocation would exceed initial construction costs.
- At least fortnightly Rhianna borrowed money from Sharon and Declan for living expenses.
Rhianna died intestate. Subsequently her aunt made one mortgage repayment. Carl became registered proprietor of the Property in his capacity as administrator of Rhianna’s estate. The mortgage was in default with interest accruing inducing a default notice. Carl engaged an agent to sell the Property, requiring vacant possession.
Carl and Sharon were in dispute about possession of the Property. The mortgagee issued notices to vacate to her.
Sharon caveated over the Property claiming an implied, resulting or constructive trust with an absolute prohibition on dealing with it.
Carl applied under the Transfer of Land Act 903 for removal of the caveat. He also sought possession, which was dismissed because the Property had been vacated.

Irving AsJ ordered removal of the caveat, holding –

A joint endeavour constructive trust arose where there was a joint relationship or endeavour; an asset was acquired in the course thereof; the joint relationship or endeavour was prematurely terminated; one party had made financial or non-financial contributions for the purpose thereof; and it would be unconscionable to permit the other party to retain the benefit of the relevant property where the contributions were made in circumstances where it was not specifically intended that the other party should so enjoy it. [49]
A common intention constructive trust arose where there was a common intention or understanding that a person would acquire an interest in property and that person has acted to his or her detriment in reliance on that intention or understanding. [50]
Equity would presume that a person held property on resulting trust, proportionate to the contribution, where another person contributed to its purchase and the property was held in the name of the first person. If the contributor was the parent of the person holding the property, a rebuttable presumption of advancement arose. [51]
The caveator established a prima facie case of an interest in the Property by virtue of an implied, resulting or constructive trust, because –

1. her evidence was of providing monies pursuant to an agreement with the couple to purchase a property together sufficient to subdivide and accommodate a granny flat for Sharon and Declan;
2. her provision of $85,000 in purchase monies was undisputed, although the evidence of whether this was a gift to Rhianna conflicted;
3. a granny flat was established which Sharon and Declan occupied;
4. notwithstanding Carl disputing any agreement to jointly purchase the Property, and that the $85,000 was a contribution and not a gift, a prima facie case of Sharon’s asserted interest sufficed;
5. conflicts in evidence were to be resolved at trial.

[7], [66], [73]

However, the balance of convenience favoured removal of the caveat because: the mortgagee’s intention to sell the Property was undisputed and the caveat depressed the price; although the caveat claimed an absolute prohibition Sharon’s interests in the Property were at most not asserted to be to the whole Property; Sharon could claim on the funds remaining after the mortgagee was paid out. [7], [67]-[71], [73]

Philip H. Barton

Owen Dixon Chambers West

Tuesday, August 05, 2025

Blog 74. Leave to appeal against Blog 65 refused

Dolan v Dolan [2023] VSCA 136, Court of Appeal.

In this case the Court of Appeal refused leave to appeal from the decision of Ierodiaconou AsJ ([2022] VSC 543) the subject of Blog 65. The Court of Appeal decision is particularly helpful because the court summarises a number of basic caveat litigation points arising under the TLA s. 90(3), namely:

An application under s. 90(3) is interlocutory in nature, requiring application of the two-stage test of serious question to be tried and balance of convenience, not ordinarily requiring final determination of disputed factual issues or claims, and not giving rise to an issue estoppel or res judicata (although an application under s. 90(3) may amount to an abuse of process).
Where an arguable case is established the caveator is generally required to commence a proceeding with a Writ and pleadings.
As to admissibility of evidence.
That an order removing a caveat to permit sale, with part of the sale proceeds being held on trust pending final determination of the dispute, may be appropriate where the caveator was not in possession or where the claimed interest conferred no possessory right, but may be inappropriate where the claimed interest, of which there was a serious question to be tried, conferred possessory rights or represented the whole or a substantial proportion of the beneficial proprietary interest.

It is helpful first to set out the original decision, commencing with the facts particularly relevant to the appeal –

In about 1998 the first defendant (Christine) and other persons purchased land at Lorne (the parent title) for $105,000 with Christine being registered as to a half interest. They agreed to subdivide it into two blocks, with her taking one. She deposed that she contributed $52,500 towards the purchase. The plaintiff (Shannan), who was Christine’s daughter, deposed that she (Shannan) contributed $20,000 towards the purchase.
Due to her age and income Christine could not obtain a loan to fund construction of a house. However, a Bendigo Bank employee advised that if she transferred her interest in the parent title to Shannan an acceptable loan could be secured in Shannan’s name. Christine deposed that Shannan accepted her proposal to make this transfer so that Shannan could obtain a loan on Christine’s behalf, but that both before and after subdivision she (Christine) would continue as beneficial owner, and that Shannan also accepted other proposed terms relating to the transfer. Shannan denied accepting this proposal.
In 2001 Christine transferred her moiety in the parent title to Shannan, the consideration stated in the Transfer being as “An Agreement to Transfer”. Following subdivision, one block (the property) was transferred to Shannan, the consideration in that Transfer being stated as “In pursuance of an Agreement between the Transferors for partition of the said land …”, and Shannan in 2003 became registered proprietor of this block. The bank established a loan account in Shannan’s name with an overdraft limit of $140,000 secured by a mortgage.
Christine deposed that the costs for acquisition of the parent title and construction and fit‑out of the house were funded primarily from her personal resources and from the loan account, Shannan only contributing about 7% of overall build costs. Christine also deposed to making mortgage repayments and that she paid all outgoings including council rates, home insurance, and for maintenance and improvement. Shannan deposed that the overall build costs were largely drawn down from the loan account, that from 2004 to 2006 she made loan payments, and that Christine did not use her personal resources to fund overall build costs.
Upon completion of the house in 2003/2004 Christine, Shannan, and another family member took up residence. Shannan left in 2006. In 2021 Christine caveated on the ground of ‘implied, resulting or constructive trust’. Shannan applied under the Transfer of Land Act s. 90(3) for removal of the caveat.

Ierodiaconou AsJ dismissed the application, holding –

There was a serious question to be tried that Christine was the beneficiary of a common intention constructive trust (she alleged as to 93% of the equitable title). This was supported by: her deposing to the required common intention or agreement; reference to an agreement in the Transfer (her Honour appears to state in the Transfer to Shannan of the subdivided block, but quaere this is a slip for the Transfer to Shannan from Christine); and Christine’s contribution to loan repayments. Moreover, it appeared to be common ground that Christine contributed most of the purchase price of the parent title and that for many years she made payments into the mortgage loan account and resided on the property.
There was a serious question to be tried that Christine was the beneficiary of a resulting trust (she alleged as to 65% of the equitable title) arising from her contributions to the purchase price of the parent title and to construction and fit-out.
The balance of convenience favoured maintenance of the caveat because of: Christine’s long residence; her age being elderly; evidence of her investing her life savings into the property; the fact that Shannan proposed to sell the property with vacant possession with only $20,000 from the net proceeds being distributed to Christine pending resolution of the dispute; Christine’s claim of a substantial interest in the property; and Christine’s inability to buy another property or rent one in Lorne. Any hardship for Shannan could be met by Christine’s undertaking to maintain mortgage and property expense payments, which would maintain the status quo of many years, and Christine being required within 7 days to commence a proceeding to establish her interest in the property.

The Court of Appeal refused leave to appeal, holding –

The decision at first instance was discretionary and to impugn it the applicant must establish an error of a kind explained in House v The King (1936) 55 CLR 499. [83]
The proposed ground of appeal that the Associate Judge had conducted a “trial” of the Originating Motion (without the applicant being aware of it) and had not just heard the Summons, whereby the final orders created an issue estoppel or res judicata that Christine had a caveatable interest, was misguided and a distraction. The true issue was that the nature of the order made, ie to refuse to order removal of the caveat, reflected in the conclusion in the order dismissing the summons, was interlocutory in nature, in the sense that it did not finally determine any rights in the property. It was interlocutory because the relief sought was under the Transfer of Land Act s. 90(3) requiring the caveator to establish a serious question to be tried of an estate or interest in the land and that the balance of convenience favoured the maintenance of the caveat until trial. An application for removal of a caveat did not ordinarily present an occasion for the final determination of disputed factual issues or claims. Not only was it usual for an application under s. 90(3) to be by Summons or Originating Motion, and for it to be determined by the two-stage test, but where an arguable case was established the caveator was generally required to commence a proceeding to have the claim to an interest in the land determined in a properly constituted suit with a Writ and pleadings. An Originating Motion was ill-suited to such a dispute and there may be no utility in keeping it on foot. [47]-[55]
The Associate Judge had applied these principles. She had not determined whether the applicant had any equitable interest in the property, but done no more than dismiss the Summons. No issue estoppel or res judicata [56], [57], [60], [61]
However, in the absence of a relevant change in circumstances, an application to remove the caveat may be an abuse of process. [62]
The submission that the Associate Judge was not entitled to rely on matters stated in a draft Statement of Claim exhibited to and repeated in a paragraph of an affidavit, and in particular the pleading of an agreement between Christine and Shannan, was rejected. The fact that a paragraph in an affidavit was in the same form as a pleading was inconsequential. Admissibility of the paragraph was determined by reference to the Evidence Act 2008. Although the form of the paragraph was open to the criticism that it was conclusionary it was admissible because the evidence was relevant and on its face came from the deponent’s personal knowledge. The evidence was capable of reasonably bearing upon whether there was a triable issue of an agreement or understanding reflecting a common intention as to the beneficial ownership of the property. The other evidence of an agreement included the change in title, the payment by Christine of part of the purchase price of the parent title and construction costs, and the fact that she continued to occupy the property without paying rent. In any event, counsel had conceded before the Associate Judge that he was ‘not going to argue that there isn’t a prima facie case here in relation to the caveat’. [65], [71]-[75]
The proposed ground of appeal that the Associate Justice should have determined that at best Christine was entitled to a lesser equitable remedy, ie an order requiring Shannan to hold some of the sale proceeds on trust pending final determination of the dispute, was not established. The Associate Justice was correct in concluding that Christine had raised a serious question to be tried that she held a beneficial interest in the property. As to the balance of convenience, the caveat itself did not confer any rights on Christine to occupy the property for the purpose of the caveat nor (although likely to affect the ability to sell and price) prevent sale. [42], [84]-[89]
In considering whether the balance of convenience favoured the retention of the caveat, it was necessary to consider the nature of the claimed interest and what the caveat was designed to protect. In cases where the caveator was not in possession or where the claimed interest conferred no possessory right, the claimed proprietary interest may be adequately protected by removing the caveat, allowing the property to be sold and, by orders or undertakings, for the proceeds or part of them to be secured until the respective interests in the property can be determined. Conversely, where the claimed interest conferred possessory rights or represents the whole or a substantial proportion of the beneficial proprietary interest, it may be appropriate to maintain the caveat and so not alter the registered title pending trial. In this context two points required examination –

1. Did the interest claimed by Christine give her a possessory right to the property? On her primary case, she claimed to own 93% of the beneficial interest based on a common intention constructive trust. She had also been in possession since the construction of the house. In those circumstances it was arguable that the equitable interest would follow the legal interest and give her a right to possession. Alternatively, establishment of her right to equitable relief may arguably also found an order restraining Shannan from evicting her.
2. In her draft pleading and in her submissions at first instance Christine accepted that the property should be sold but only after determination of the respective equitable interests. Shannan’s submission that, in circumstances where both parties sought sale and distribution of proceeds, it was (necessarily) wrong for the caveat to remain was invalid. It was open to the Associate Judge to conclude that the caveat should not be removed before the determination of equitable interests because the practical effect this would be a sale and transfer of title with the real risk of an order for possession against Christine. Christine’s ability to secure alternative accommodation was heavily dependent on her knowing the extent of, and being able to realise, any interest she may have in the property, accordingly the status quo plainly favoured retention of the caveat. And if Christine was successful on her primary claim and Shannan has no more than a 7% beneficial interest Shannan’s interest may possibly be satisfied without sale. [90]-[93], [96]-[99]
The Associate Judge was alive to possible prejudice to Shannan from maintenance of the caveat including exposure to mortgage repayments. She correctly decided that the undertakings proffered by Christine to pay certain amounts were adequate to meet any prejudice. An application to lead fresh evidence to the effect that the mortgage had been in arrears was refused. [100], [102], [103]

Philip H. Barton

Owen Dixon Chambers West

Tuesday, July 25, 2023

Blog 65. Mother v Daughter. Mother’s caveat based on constructive or resulting trust survives.

Dolan v Dolan & Anor [2022] VSC 543, Ierodiaconou AsJ, (14 September 2022) concerns a dispute between mother and daughter over property of which the daughter was registered proprietor, the mother being held to have a caveatable interest based on a constructive or resulting trust. The facts were –

In about 1998 the first defendant (Christine) and other persons purchased land at Lorne (the parent title) for $105,000 with Christine being registered as to a half interest. They agreed to subdivide it into two blocks, with her taking one. She deposed that she contributed $52,500 towards the purchase. The plaintiff (Shannan), who was Christine’s daughter, deposed that she contributed $20,000 towards the purchase, and it was common ground that Shannan paid Christine $20,000 at about the time of purchase.
Due to her age and income Christine could not obtain a loan to fund construction of a house. However, a Bendigo Bank employee advised that if she transferred her interest in the parent title to Shannan an acceptable loan could be secured in Shannan’s name. Christine deposed that Shannan accepted her proposal to make this transfer so that Shannan could obtain a loan on Christine’s behalf, but that both before and after subdivision she (Christine) would continue as beneficial owner, and that Shannan also accepted other proposed terms relating to the transfer. Shannan denied accepting this proposal. .
In 2001 Christine transferred her moiety in the parent title to Shannan, the consideration stated in the Transfer being as “An Agreement to Transfer”. Following subdivision, one block (the property) was transferred to Shannan, the consideration in that Transfer being stated as “In pursuance of an Agreement between the Transferors for partition of the said land …”, and Shannan in 2003 became registered proprietor of this block. The bank established a loan account in Shannan’s name with an overdraft limit of $140,000 secured by a mortgage.
Christine deposed that the costs for acquisition of the parent title and construction and fit‑out of the house were funded primarily from her personal resources and from the loan account, Shannan only contributing about 7% of overall build costs. Christine also deposed to making mortgage repayments and that she paid all outgoings including council rates, home insurance, and for maintenance and improvement. Shannan deposed that the overall build costs were largely drawn down from the loan account, that from 2004 to 2006 she made loan payments, and that Christine did not use her personal resources to fund these costs.
Upon completion of the house in 2003/2004 Christine, Shannan, and another family member took up residence. Shannan left in 2006. In 2021 Christine caveated on the ground of ‘implied, resulting or constructive trust’. Shannan applied under the Transfer of Land Act s. 90(3) for removal of the caveat.

Ierodiaconou AsJ dismissed the application, holding –

There was a serious question to be tried that Christine was the beneficiary of a common intention constructive trust (she alleged as to 93% of the equitable title). This was supported by: her deposing to the required common intention or agreement; reference to an agreement in the Transfer (her Honour appears to state in the Transfer to Shannan of the subdivided block, but quaere this is a slip for the Transfer to Shannan from Christine); and Christine’s contribution to loan repayments. Moreover, it appeared to be common ground that Christine contributed most of the purchase price of the parent title and that for many years she made payments into the mortgage loan account and resided on the property. [69], [71]
There was a serious question to be tried that Christine was the beneficiary of a resulting trust (she alleged as to 65% of the equitable title) arising from her contributions to the purchase price of the parent title and to construction and fit-out. Disputes about whether there was an agreement on the nature of Christine’s interest in the property, whether the presumption of advancement applied, and whether, as Shannan alleged, Christine was guilty of fraud, could only be resolved at trial. [69], [72], [75]
The balance of convenience favoured maintenance of the caveat because of: Christine’s long residence; her age; evidence of her investing her life savings into the property; the fact that Shannan proposed to sell the property with vacant possession with only $20,000 from the net proceeds being distributed to Christine pending resolution of the dispute; Christine’s claim of a substantial interest in the property; and Christine’s inability to buy another property or rent one in Lorne. Any hardship for Shannan could be met by Christine’s undertaking to maintain mortgage and property expense payments, which would maintain the status quo of many years, and Christine being required within 7 days to commence a proceeding to establish her interest in the property. [76]-[78]
There would be an order for amendment of the caveat to assert Christine’s claim to a 93% interest in the property. [80]

Philip H. Barton

Owen Dixon Chambers West

Tuesday, February 21, 2023

37. Caveat claiming resulting implied or constructive trust removed – No prima facie case – Difference between “prima facie case” and “serious question to be tried” tests – Circumstances in which hearsay admissible on application under TLA s. 90(3).

SMAV Nominees Pty Ltd v Bakal Enterprises Pty Ltd [2020] VSC 203 (24 April 2020), Derham AsJ

Comment. This case is interesting for the following reasons –

1. It considers the circumstances in which hearsay is admissible on an application to remove a caveat under the Transfer of Land Act s. 90(3). See also Blog 11.

2. Derham AsJ considers whether the caveator has to show, as to the existence of its asserted legal or equitable rights in the land, on the one hand a prima facie case or on the other hand a serious question to be tried. His Honour states that the first is the correct test (as previously stated in Blog 1) and indeed states (at [64]) that the first test requires a higher standard than the second, citing the decision of Warren CJ in Piroshenko v Grojsman [2010] VSC 240; (2010) 27 VR 489. It is, however, difficult to find any case in which a court holds that a caveator met one and not the other test (in this case Derham AsJ finds that caveator failed both), and indeed in Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd [2015] FCA 888 at [33] (not a caveat case) Edelman J stated that the difference between the two tests is one of language not of substance.

3. Although his Honour simply ordered that the caveator pay the plaintiff’s costs of the application he reserved liberty to apply in relation to his proposed orders. It was ominous that he also found that the caveat had been used as a bargaining chip as this may foreshadow indemnity costs – see Blog 35 and previous Blogs on costs.

The facts were –

· In October and November 2017 the plaintiff’s sole director Mavroudis loaned Sabawi a total of $200,000.

· In April 2018 Mavroudis was introduced to 294 Pound Road Hampton Park (“the property”) by Sabawi, whom he believed to be a licensed real estate agent. On 13 April he signed a “Letter of Offer Expression of Interest” and paid a holding deposit of $10,000 to one of the vendors at the direction of Sabawi.

· On or about 17 April 2018 Sabawi asked Mavroudis for his bank account details so that he could repay the loan of $200,000. Mavroudis did this. Sabawi subsequently advised Mavroudis that he had repaid the $200,000 to his account. Mavroudis received the $200,000 into his account on 18 April 2018, recorded in his bank statement as “Inward Telegraphic Transfer 180490”.

· On 7 July 2018 Sabawi presented the contract of sale to Mavroudis for signing with the purchaser named as “294 Pound Road Pty Ltd” and the vendor’s estate agent named as a particular company formed by the two of them other than for the purpose of selling real estate. Mavroudis signed only after insisting that the document be altered to show the plaintiff as purchaser and the sale as being by private treaty. The plaintiff became registered proprietor.

· On 23 August 2019, the solicitors for the plaintiff and Mavroudis received a letter of demand from the then solicitors for the first defendant (“Bakal Enterprises”) demanding repayment of $200,000. Among other things the letter alleged that, following discussion with an unnamed mutual friend, Bakal Enterprises had paid $200,000 into Mavroudis’s account on 18 April 2018 as a contribution towards a development on the property, which had fallen over. Shortly before this letter Mavroudis received a telephone call to similar effect from, he gathered, Bakal, who was Bakal Enterprises’ sole director.

· On 27 August 2019 the plaintiff’s solicitors responded, stating that Mavroudis’ first knowledge of these allegations was in this telephone call and refuting them. On 16 September 2019 the then solicitors for Bakal Enterprises responded confirming that the mutual friend was Sabawi, enclosing a receipt so as to corroborate the statement that Bakal Enterprises and not Sabawi had made the $200,000 payment, and demanding its repayment.

· The plaintiff heard nothing further until receiving notice that Bakal Enterprises through its new solicitors Madgwicks had caveated on 10 February 2020 claiming a freehold interest in the property on the basis of a resulting implied or constructive trust.

· The plaintiff’s solicitors demanded removal of the caveat and stated that the $200,000 had been repayment of a loan by Sabawi. On 27 and 28 February Madgwicks and the plaintiff’s solicitors communicated, in the course of which:

· Madgwicks stated that Sabawi denied the loan, maintaining that the caveator had an interest in the land arising from the contribution of $200,000 towards its purchase;

· the plaintiff’s solicitors provided documentary evidence of the $200,000 loan to Sabawi, foreshadowed caveat removal proceedings, reiterated Mavroudis’ previous account of the facts, and stated that: the plaintiff had purchased the property with its own funds and financial assistance from Mavroudis’s father; a planning permit for a subdivision of the property was imminent; the plaintiff had a very interested buyer once it could sell with plans and permits but that this was impeded by the caveat.

· On or about 5 March Bakal and Sabawi conferred with Madgwicks. On 12 March Madgwicks wrote to the plaintiff’s solicitors stating, after reiterating its instructions about the $200,000 payment, that Sabawi had instructed it that Mavroudis inappropriately altered the name of the purchaser in the contract of sale from 294 Pound Road Pty Ltd (to be incorporated between Mavroudis and Sabawi) to the plaintiff’s name and “[we] are informed by Mr Sabawi that this change was made under false pretences and without adequate payment to Mr Sabawi, who was instrumental in facilitating the sale in the first place …. Mr Sabawi is currently attending to swearing a statutory declaration confirming the above…”.

The plaintiff applied under s. 90(3) of the Transfer of Land Act for removal of the caveat. Before the caveator filed any evidence Madgwicks offered in return for withdrawal of the caveat that $300,000 be held in trust pending determination of the dispute.

The material before the court included –

· an affidavit by the caveator’s solicitor which stated that a statutory declaration was being prepared by Sabawi;

· an affidavit by Bakal. This affidavit exhibited a statutory declaration, inferred by his Honour to have been prepared by Madgwicks, said to have been made by Sabawi, containing Sabawi’s evidence including disputing Mavroudis’ account of the facts. Bakal asserted that Sabawi had not sworn an affidavit because of the social distancing measures required in the COVID-19 pandemic. The statutory declaration omitted reference to the false pretences allegation contained in Madgwicks’ letter of 12 March. It included that: in March 2018 Sabawi told Mavroudis that he was getting a friend to pay the deposit for the purchase; that after the $200,000 payment, Mavroudis acknowledged to Sabawi that the plaintiff had received the money; and he informed Mavroudis at the time of payment that the money was sent to him from Bakal for the purposes of the purchase.

· Bakal’s affidavit contained a rendition of financial and property dealings between Sabawi and Bakal , with repetition of statements allegedly made by Sabawi about Mavroudis. Bakal deposed –

· that he did not know Mavroudis personally and other than the transfer of the $200,000 he had not had any relationship or dealings with him or his entities;

· (partly denied by Mavroudis) as to an alleged involvement in this transfer of $200,000, garnished with further complex dealings. He deposed that: on or about 18 April 2018, he transferred $200,000 to the plaintiff by electronic fund transfer, without contact between the plaintiff (or Mavroudis) and Bakal Enterprises (or Bakal); the details of who and when to pay were provided by Sabawi to him. The reference on the payment produced by Bakal was “Deposit Pound Road”.

· affidavits by Mavroudis in which he deposed that when he signed the contract of sale he did not know, or know of, the caveator or anyone associated with it, and that he had not entered into any agreement, either personally or through any agent, with the caveator or any other party in relation to the property. Mavroudis deposed that there was no truth in the account in the statutory declaration.

The plaintiff submitted that the statutory declaration was inefficacious for non- compliance with the Oaths and Affirmations Act 2018 in its execution and witnessing.

Derham AsJ held –

1. Sabawi could have sworn an affidavit deposing to the matters in his statutory declaration. The inconsistencies between the statutory declaration and matters raised in correspondence, in particular in the Madgwicks letter of 12 March, were relevant to an assessment of the strength of the caveator’s claim. [27]-[28]

2. However, regardless of the efficacy of that statutory declaration under the Oaths and Affirmations Act, the material in it was admissible because –

(a) Under r. 43.03(2) of the Supreme Court (General Civil Procedure) Rules 2015, on an interlocutory application an affidavit may contain a statement of fact based on information and belief if the grounds were set out. This included the identification of the supplier of the information, ie its source. Nonetheless, the Court had a discretion to admit an affidavit non-compliant in this regard;

(b) Section 75 of the Evidence Act 2008 provided that in an interlocutory proceeding the hearsay rule did not apply to evidence if the party who adduced it also adduced evidence of its source. The source must be identified by name;

(c) If Bakal’s affidavit had related the material in the statutory declaration as what he had been told by Sabawi it would have been admissible, this application being interlocutory and the source being disclosed. [51]-[56]

3. His Honour set out the law on caveats in conventional terms, which, as this law is set out in Blog 1, it is unnecessary to repeat except in one regard. His Honour noted that: the caveator bore the onus of establishing a prima facie case to be tried, ie a probability on the evidence that the caveator will be found to have the asserted legal or equitable rights or interest in the land, not that it was more probable than not that at trial it (his Honour states “the plaintiff” but this appears to be a slip) would succeed; and that probability is sufficient to justify the practical effect which the caveat has on the ability of the registered proprietor to deal with the property in accordance with their normal proprietary rights;

this test was often used interchangeably with whether the caveator established a serious question to be tried, but the prima facie case test was to be preferred;

the “prima facie case” test required a higher standard that the “serious question to be tried” test. [30]-[33], [64]

4. Where two people provided the purchase money for a property jointly, but the property was put into the name of one of them only, the property was, in the absence of a relationship giving rise to a presumption of advancement, presumed to be held on resulting trust in favour of the unregistered party in proportion to their contribution. [57]

5. The caveator had not established a prima facie case or even, if it had been applicable, satisfied the serious question to be tried test, because Mavroudis gave evidence that he believed the payment of $200,000 was repayment of a debt and the evidence to the contrary was at best contained in Sabawi’s statutory declaration, which was of little weight, ambiguous and contrived. Insofar as it purported to ascribe knowledge to Mavroudis of the purpose of the payment, it did not support a resulting trust claim: there was no identification of the supposed beneficiary of the trust beyond “a friend” and the ambiguous statement that the money was sent to the plaintiff by Bakal for the purpose of purchasing the property. That might indicate that the beneficiary was to be Sabawi or Bakal. The only objective evidence supporting the caveator’s claim was the payment of $200,000 itself and the record that Bakal produced that it related to “Pound Road”. However, there was no evidentiary link between the payment of $200,000 and the payment of the deposit nearly three months later. [58]-[65], [76]

6. For the same reasons there was also no prima facie case of a Muschinski v Dodds constructive trust. There was no evidence of consensus between the caveator and the registered proprietor which could give rise to a joint endeavour. [66]-[69]

7. There was no suggestion that the existence of a claim for restitution gave rise to any equitable interest in the property. [70], [76]

8. The caveat had been used as a bargaining chip to obtain payment of $200,000. Although there were many cases in which a caveat dispute was resolved as proposed by the caveator’s solicitors, with the addition of a mechanism for the resolution of the dispute sometimes involving the caveator commencing a proceeding, the registered proprietor was entitled to deal with its property as it saw fit without being restrained by the injunctive effect of the caveat unless the caveator established a proper basis for the caveat. [73]-[76]

9. The caveator was ordered to pay the plaintiff’s costs of the application. His Honour however reserved liberty to apply in relation to his proposed orders. [77]

Philip H. Barton

Owen Dixon Chambers West

26 May 2020

19. Foreign money invested in property – whether trust created or mere loan – caveat removed but sale monies paid into trust.

Oz Envision Development Pty Ltd & Anor v Yuan (11 October 2018) [2018] VSC 607 McDonald J.

The facts were –

In or about 2012 the defendant transferred$5.01 m. to enable the first plaintiff to acquire two properties.
One property was subdivided into three units.
In 2016 a deed of arrangement was entered into between the first plaintiff and the defendant whereby funds from the sale of this land were to be paid to the second plaintiff to enable it to undertake property development.
Contracts of sale of the three units for a total of $2,665,000 were entered into.
The defendant caveated over both properties claiming that the advance of monies gave rise to a caveatable interest pursuant to an implied or resulting trust.

The plaintiffs alleged that the funds were merely a loan and so gave rise to no caveatable interest.

The defendant, who was a Chinese National, deposed that:

the purpose of the payment was to invest $5 m. in Australia, this being required for the purpose of seeking Australian residency;
the director of the first plaintiff was so appointed because he held the required residency status for directorship of a company in Australia which the defendant did not;
there was no discussion as to a loan including as to interest and that his intention was “that the money I paid to the First Plaintiff meant that the properties purchased by the First Plaintiff were my properties”.

McDonald J held –

There was a serious question to be tried that a caveatable interest existed based on a resulting trust. There was no written loan agreement or evidence of a verbal loan agreement, and this absence was consistent with the terms of the deed. Financial evidence of a loan, produced by the plaintiffs, in particular unaudited balance sheets of some weight, was nonetheless inconclusive. [8], [10]-[11], [13], [17]
However, the balance of convenience favoured removal of the caveats because they were having a significant adverse effect upon the first plaintiff’s business, were preventing completion of the contracts, and were affecting the rights of the innocent purchasers. [17]-[19]
Nonetheless, the proceeds of sale would not be distributed in accordance with the deed but would be paid into trust or an interest bearing account (in the solicitors’ names) pending trial. The argument that this was contrary to the implementation of the deed was overcome by the first defendant’s allegations that he, being illiterate in English, had been induced to execute the deed by fraudulent misrepresentation by the director of the first plaintiff about its terms. [20]-[21], [23], [25]

Comment:

From a non-legal aspect this case is a manifestation of the common phenomenon of foreign money being advanced to buy Australian property on terms not clearly documented.
His Honour did not spell out the law of resulting trusts, but where property is put into the name of a non-contributor, or one of a number of contributors,to the purchase price, it is generally presumed to be held by the registered proprietor on trust for the contributors in proportion to their contributions, eg:Piroshenko v Grojsman [2010] VSC 240 (in which the claim failed on the facts).
However, money lent for the purpose of being applied towards the purchase price of land does not, on being so applied, entitle the lender to an estate or interest in the land, unless the parties intended that the lender should have security for the loan: Simons v David Benge Motors Pty Ltd [1974] VR 585.

Category: Resulting Trust

Blog 103. Caveat survives complicated proceeding involving the Law of Contract, Trust and Misleading or Deceptive Conduct.

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Blog 102. A Federal Court case concerning a caveat, equitable priorities and much else besides.

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Blog 96. Prima facie case of implied, resulting or constructive trust but caveat removed on balance of convenience.

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Blog 74. Leave to appeal against Blog 65 refused

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Blog 65. Mother v Daughter. Mother’s caveat based on constructive or resulting trust survives.

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37. Caveat claiming resulting implied or constructive trust removed – No prima facie case – Difference between “prima facie case” and “serious question to be tried” tests – Circumstances in which hearsay admissible on application under TLA s. 90(3).

1. It considers the circumstances in which hearsay is admissible on an application to remove a caveat under the Transfer of Land Act s. 90(3). See also Blog 11.

The facts were –

· In October and November 2017 the plaintiff’s sole director Mavroudis loaned Sabawi a total of $200,000.

· The plaintiff heard nothing further until receiving notice that Bakal Enterprises through its new solicitors Madgwicks had caveated on 10 February 2020 claiming a freehold interest in the property on the basis of a resulting implied or constructive trust.

· The plaintiff’s solicitors demanded removal of the caveat and stated that the $200,000 had been repayment of a loan by Sabawi. On 27 and 28 February Madgwicks and the plaintiff’s solicitors communicated, in the course of which:

· Madgwicks stated that Sabawi denied the loan, maintaining that the caveator had an interest in the land arising from the contribution of $200,000 towards its purchase;

The plaintiff applied under s. 90(3) of the Transfer of Land Act for removal of the caveat. Before the caveator filed any evidence Madgwicks offered in return for withdrawal of the caveat that $300,000 be held in trust pending determination of the dispute.

The material before the court included –

· an affidavit by the caveator’s solicitor which stated that a statutory declaration was being prepared by Sabawi;

· Bakal’s affidavit contained a rendition of financial and property dealings between Sabawi and Bakal , with repetition of statements allegedly made by Sabawi about Mavroudis. Bakal deposed –

· that he did not know Mavroudis personally and other than the transfer of the $200,000 he had not had any relationship or dealings with him or his entities;

The plaintiff submitted that the statutory declaration was inefficacious for non- compliance with the Oaths and Affirmations Act 2018 in its execution and witnessing.

Derham AsJ held –

2. However, regardless of the efficacy of that statutory declaration under the Oaths and Affirmations Act, the material in it was admissible because –

(b) Section 75 of the Evidence Act 2008 provided that in an interlocutory proceeding the hearsay rule did not apply to evidence if the party who adduced it also adduced evidence of its source. The source must be identified by name;

(c) If Bakal’s affidavit had related the material in the statutory declaration as what he had been told by Sabawi it would have been admissible, this application being interlocutory and the source being disclosed. [51]-[56]

this test was often used interchangeably with whether the caveator established a serious question to be tried, but the prima facie case test was to be preferred;

the “prima facie case” test required a higher standard that the “serious question to be tried” test. [30]-[33], [64]

6. For the same reasons there was also no prima facie case of a Muschinski v Dodds constructive trust. There was no evidence of consensus between the caveator and the registered proprietor which could give rise to a joint endeavour. [66]-[69]

7. There was no suggestion that the existence of a claim for restitution gave rise to any equitable interest in the property. [70], [76]

9. The caveator was ordered to pay the plaintiff’s costs of the application. His Honour however reserved liberty to apply in relation to his proposed orders. [77]

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19. Foreign money invested in property – whether trust created or mere loan – caveat removed but sale monies paid into trust.

Oz Envision Development Pty Ltd & Anor v Yuan (11 October 2018) [2018] VSC 607 McDonald J.

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1. It considers the circumstances in which hearsay is admissible on an application to remove a caveat under the Transfer of Land Act s. 90(3). See also Blog 11.

The facts were –

· In October and November 2017 the plaintiff’s sole director Mavroudis loaned Sabawi a total of $200,000.

· The plaintiff heard nothing further until receiving notice that Bakal Enterprises through its new solicitors Madgwicks had caveated on 10 February 2020 claiming a freehold interest in the property on the basis of a resulting implied or constructive trust.

· The plaintiff’s solicitors demanded removal of the caveat and stated that the $200,000 had been repayment of a loan by Sabawi. On 27 and 28 February Madgwicks and the plaintiff’s solicitors communicated, in the course of which:

· Madgwicks stated that Sabawi denied the loan, maintaining that the caveator had an interest in the land arising from the contribution of $200,000 towards its purchase;

The plaintiff applied under s. 90(3) of the Transfer of Land Act for removal of the caveat. Before the caveator filed any evidence Madgwicks offered in return for withdrawal of the caveat that $300,000 be held in trust pending determination of the dispute.

The material before the court included –

· an affidavit by the caveator’s solicitor which stated that a statutory declaration was being prepared by Sabawi;

· Bakal’s affidavit contained a rendition of financial and property dealings between Sabawi and Bakal, with repetition of statements allegedly made by Sabawi about Mavroudis. Bakal deposed –

· that he did not know Mavroudis personally and other than the transfer of the $200,000 he had not had any relationship or dealings with him or his entities;

The plaintiff submitted that the statutory declaration was inefficacious for non- compliance with the Oaths and Affirmations Act 2018 in its execution and witnessing.

Derham AsJ held –

2. However, regardless of the efficacy of that statutory declaration under the Oaths and Affirmations Act, the material in it was admissible because –

(b) Section 75 of the Evidence Act 2008 provided that in an interlocutory proceeding the hearsay rule did not apply to evidence if the party who adduced it also adduced evidence of its source. The source must be identified by name;

(c) If Bakal’s affidavit had related the material in the statutory declaration as what he had been told by Sabawi it would have been admissible, this application being interlocutory and the source being disclosed. [51]-[56]

this test was often used interchangeably with whether the caveator established a serious question to be tried, but the prima facie case test was to be preferred;

the “prima facie case” test required a higher standard that the “serious question to be tried” test. [30]-[33], [64]

6. For the same reasons there was also no prima facie case of a Muschinski v Dodds constructive trust. There was no evidence of consensus between the caveator and the registered proprietor which could give rise to a joint endeavour. [66]-[69]

7. There was no suggestion that the existence of a claim for restitution gave rise to any equitable interest in the property. [70], [76]

9. The caveator was ordered to pay the plaintiff’s costs of the application. His Honour however reserved liberty to apply in relation to his proposed orders. [77]

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Oz Envision Development Pty Ltd & Anor v Yuan (11 October 2018) [2018] VSC 607 McDonald J.

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· Bakal’s affidavit contained a rendition of financial and property dealings between Sabawi and Bakal , with repetition of statements allegedly made by Sabawi about Mavroudis. Bakal deposed –