CB Darvall & Darvall v Moloney & Anor (No 2) [2007] QSC 337

SUPREME COURT OF QUEENSLAND CITATION: CB Darvall & Darvall v Moloney & Anor (No 2) [2007] QSC 337 PARTIES: AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION (applicant) v ATLANTIC 3 FINANCIAL (AUST) PTY LTD (first respondent) and FREDERICK MICHAEL ACKER (second respondent) and GERILYN MARIE POLANSKI (third respondent) CB DARVALL & DARVALL (A FIRM) (appellant/respondent) v GREGORY MICHAEL MOLONEY and PETER IVAN FELIX GEROFF AS COURT APPOINTED LIQUIDATORS AND TRUSTEES OF THE UNREGISTERED MANAGED INVESTMENT SCHEMES KNOWN AS THE MACKAY LEAGUES CLUB LIMITED SCHEME, THE NUMINKO PTY LTD SCHEME AND THE CLEARVIEW PROPERTIES SCHEME, FORMERLY CONDUCTED BY ATLANTIC 3 FINANCIAL (AUST) PTY LTD ACN 056 262 723 (IN LIQUIDATION) (respondents/applicants) FILE NO: S4426 of 2003 DIVISION: Trial Division PROCEEDING: Application DELIVERED ON: Reasons given on 16 November 2007 Orders made on 19 November 2007 DELIVERED AT: Supreme Court, Brisbane HEARING DATE: 6 July 2007 JUDGE: Wilson J ORDER: 1. That the application by CB Darvall & Darvall filed on 14 February 2006 and amended on 29 May 2006 (“the application”) be dismissed. -- 1 of 10 -- 2 2. That CB Darvall & Darvall pay the Liquidators’ costs of and incidental to the Application, including reserved costs, to be assessed on the standard basis. 3. That CB Darvall & Darvall pay the Liquidators’ costs of and incidental to the application filed by the Liquidators on 26 April 2007, including the reserved costs of 15 May 2007, to be assessed on the standard basis. CATCHWORDS: CORPORATIONS – MANAGED INVESTMENT SCHEMES – PROOFS OF DEBT REJECTED BY LIQUIDATORS – APPEALS AGAINST LIQUIDATORS’ DECISIONS – the liquidators of a company which was trustee of unregistered managed investment schemes rejected the proofs of debt of a solicitors’ firm – the firm appealed against those decisions – whether the appeal should be dismissed EQUITY – TRUSTS AND TRUSTEES – POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES – INDEMNITY, LIEN AND REIMBURSMENT – GENERAL PRINCIPLES – the solicitors’ firm seeks to exercise a right of subrogation to the trustee’s right to be indemnified for costs out of the trust property – the trust sustained losses due to the trustee’s breach – it is a precondition to the trustee exercising its right of indemnity (and therefore to the firm exercising a right of subrogation to that right) that it make good any losses caused by the breach of trust – whether that precondition extends to costs incurred before the breach of trust was committed PROCEDURE – SUPREME COURT PROCEDURE – QUEENSLAND – PROCEDURE UNDER RULES OF COURT – SUMMARY JUDGMENT – the solicitors’ firm brought an application under Chapter 13 Part 5 of the Uniform Civil Procedure Rules 1999 (Qld) for the determination of preliminary questions – the applicant liquidators seek an order under that Part of the UCPR, consequential on the determination of the preliminary questions – the consequential order sought is that the appeal be dismissed – such an application is akin to an application for summary judgment – whether to dismiss the appeal Corporations Act 2001 (Cth), s 601ED(5), s 601EE Uniform Civil Procedure Rules 1999 (Qld), r 292, r 293, r 484, r 485 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1990) 30 ACSR 377, cited A & D Douglas Pty Ltd v Lawyers Private Mortgages Pty Ltd [2006] FCA 520, cited Bernstrom v National Australia Bank Ltd [2003] 1 Qd R 469; [2002] QCA 231, cited Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R -- 2 of 10 -- 3 232; [2005] QCA 227, followed Foodco Management Pty Ltd v Go My Travel Pty Ltd [2002] 2 Qd R 249; [2001] QSC 291, cited General Credits Limited v Tawilla Pty Ltd [1984] 1 Qd R 388, cited Gray v Morris [2004] 2 Qd R 118; [2004] QCA 5, cited In re Suco Gold Pty Ltd (in liquidation) (1983) 33 SASR 99, cited Moloney v Bells Securities Pty Ltd [2005] QSC 13, cited Queensland University of Technology v Project Constructions (Aust) Pty Ltd (in liq) [2003] 1 Qd R 259; [2002] QCA 224, cited RWG Management Ltd v Commissioner for Corporate Affairs [1985] VR 385, cited COUNSEL: P D Tucker for the appellant/respondent CB Darvall & Darvall M Luchich for the respondent/applicant liquidators SOLICITORS: Marler & Darvall for the appellant/respondent CB Darvall & Darvall Gadens for the respondent/applicant liquidators [1] Wilson J: On 17 July 2003 Fryberg J ordered that 15 unregistered managed investment schemes operated by Atlantic 3 Financial (Aust) Pty Ltd (“Atlantic 3”) be wound up pursuant to s 601EE of the Corporations Act 2001 (Cth). [2] Liquidators were subsequently appointed to wind up five of those schemes, including those known as – 1. the MLC Scheme; 2. the Numinko Scheme; 3. the Clearview Scheme. [3] CB Darvall and Darvall (“Darvalls”) lodged proofs of debt with the liquidators, relevantly in the winding up of these schemes – MLC Scheme $187,997; Numinko Scheme $48,043.13; and Clearview Scheme $51,322.43. Those proofs were rejected by the liquidators. [4] Darvalls appealed against the rejection of the proofs of debt. [5] Darvalls and the liquidators sought the preliminary determination of a number of separate questions.1 My decision in relation to the determination of those questions was delivered on 9 November 2006.2 1 Pursuant to r 483 Uniform Civil Procedure Rules 1999 (Qld) (“UCPR”). -- 3 of 10 -- 4 [6] The liquidators now seek orders pursuant to r 485 or alternatively r 484 of the UCPR dismissing the appeal against the rejection of the proofs of debt and for costs. Nature of application [7] Rules 484 and 485 provide – “484 Orders, directions on decision If a question is decided under this part, the court may, subject to rule 475, make the order, grant the relief and give the directions that the nature of the case requires. 485 Disposal of proceedings The court may, in relation to a decision of a question under this part, as the nature of the case requires — (a) dismiss the proceeding or the whole or part of a claim for relief in the proceeding; or (b) give judgment, including a declaratory judgment; or (c) make another order.” [8] It was common ground that the present application is akin to an application for summary judgment. In that regard rules 292 and 293 provide – “292 Summary judgment for plaintiff (1) A plaintiff may, at any time after a defendant files a notice of intention to defend, apply to the court under this part for judgment against the defendant. (2) If the court is satisfied that — (a) the defendant has no real prospect of successfully defending all or a part of the plaintiff’s claim; and (b) there is no need for a trial of the claim or the part of the claim; the court may give judgment for the plaintiff against the defendant for all or the part of the plaintiff’s claim and may make any other order the court considers appropriate. 293 Summary judgment for defendant 2 CB Darvall & Darvall v Moloney & Anor [2006] QSC 345. -- 4 of 10 -- 5 (1) A defendant may, at any time after filing a notice of intention to defend, apply to the court under this part for judgment against a plaintiff. (2) If the court is satisfied — (a) the plaintiff has no real prospect of succeeding on all or a part of the plaintiff’s claim; and (b) there is no need for a trial of the claim or the part of the claim; the court may give judgment for the defendant against the plaintiff for all or the part of the plaintiff’s claim and may make any other order the court considers appropriate.” [9] The interpretation and application of the summary judgment rules has been considered in a number of cases.3 In Deputy Commissioner of Taxation v Salcedo4 Williams JA summarised the effect of these authorities when he said – “ultimately the rules are there to facilitate the fair and just resolution of the matters in dispute. Summary judgment will not be obtained as a matter of course and the judge determining such an application is essentially called upon to determine whether the respondent to the application has established some real prospect of succeeding at a trial; if that is established then the matter must go to trial.”5 The basis of Darvalls’ claim [10] Darvalls are solicitors who did work for Atlantic 3 in connection with these three managed investment schemes (inter alia). They rely on a right of subrogation (as creditor of Atlantic 3 in its capacity as trustee of the schemes) to any right Atlantic 3 has to be indemnified out of the assets of each of those schemes. [11] Under the general law a trustee is entitled to be indemnified out of the trust estate against liabilities properly incurred in the execution of the trust.6 In Commissioner of Stamp Duties for NSW v Buckle7 the High Court approved this statement by the editors of Scott on Trusts8 – “Where the trustee acting within his powers makes a contract with a third person in the course of the administration of the trust, although the trustee is ordinarily personally liable to the third person on the contract, he is entitled to indemnity out of the trust estate. If he has 3 Queensland University of Technology v Project Constructions (Aust) Pty Ltd (in liq) [2003] 1 Qd R 259; Bernstrom v National Australia Bank Ltd [2003] 1 Qd R 469; Gray v Morris [2004] 2 Qd R 118; Foodco Management Pty Ltd v Go My Travel Pty Ltd [2002] 2 Qd R 249; Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 232. 4 [2005] 2 Qd R 232. 5 Deputy Commissioner of Taxation v Salcedo [2005] 2 Qd R 232, [17]. 6 Worrall v Harford (1802) 8 Ves Jun 4; 32 ER 250. 7 (1998) 192 CLR 226, 245. 8 W Fratcher, Scott on Trusts (4 th ed) §246; see also J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (7 th ed, 2006) [2102]. -- 5 of 10 -- 6 discharged the liability out of his individual property, he is entitled to reimbursement; if he has not discharged it, he is entitled to apply the trust property in discharging it, that is, he is entitled to exoneration.” In Queensland s 72 of the Trusts Act 1973 (Qld) provides – “72 Reimbursement of trustee out of trust property A trustee may reimburse himself or herself for or pay or discharge out of the trust property all expenses reasonably incurred in or about the execution of the trusts or powers.” [12] Although a creditor does not ordinarily have any claim against the trust assets, it may have an indirect claim against those assets by way of subrogation to the trustee’s right of indemnity.9 That is the nature of Darvalls’ claim. Grounds of rejection [13] The grounds on which the liquidators rejected the proofs of debt included – (a) that each scheme was operated illegally and in breach of trust; (b) that the right of indemnity (if any) is lost unless and until Atlantic 3 makes good the loss suffered by the scheme as a result of the breach of trust; and (c) that if Atlantic 3 has no right of indemnity, there is no right to which Darvalls can be subrogated. 17 December 1999 [14] New legislation came into force making the operation of the unregistered schemes unlawful;10 ASIC issued Class Order 99/1639, which exempted certain types of schemes (including the schemes relevant to this matter) from complying with the new requirements until 17 December 1999.11 Atlantic 3 continued to operate the schemes, unregistered, beyond that date. In doing so it acted in breach of trust. [15] Darvalls assert a right of subrogation to Atlantic 3’s right of indemnity only in respect of work undertaken prior to 17 December 1999. The amount of fees referable to the period prior to that date is as follows – MLC Scheme $115,164.21 Numinko Scheme $3,415.75 Clearview Scheme $24,566.30 The preliminary questions [16] The preliminary questions put to the Court included six described as “the Indemnity Questions”. The parties were in agreement as to the answers to the following four questions – 9 J D Heydon and M J Leeming, Jacobs’ Law of Trusts in Australia (7 th ed, 2006) [2112]. 10 Managed Investments Act 1998 (Cth), which inserted chapter 5C into the Corporations Law. 11 See the affidavit of D F Pennicott, filed 28 February 2006 (document 397), exhibit DFP-3. -- 6 of 10 -- 7 (a) Is Atlantic 3 entitled to a right of indemnity out of the assets of each scheme for professional fees incurred by it in the operation of the schemes so far as they relate to work done prior to 17 December 1999? Answer: Only to the extent that Darvalls establish as a matter of fact that the legal fees claimed were reasonably and properly incurred by Atlantic 3 by reference to facts including the following: (i) the quantum of the fees claimed; (ii) the items of work done in respect of the fees; (iii) that the work done in respect of the fees was in relation to the particular scheme; (iv) that there was a valid and enforceable client agreement under the Queensland Law Society Act 1952 (Qld). (d) Was the operation of the schemes by Atlantic 3 in breach of s 601ED(5) of the Corporations Act 2001 (Cth) a breach of trust by Atlantic 3? Answer: Yes. (e) Is it a pre-condition to Atlantic 3 being entitled to recover from the assets of the schemes expenses incurred in the operation of the schemes that it make good any loss occasioned by the said breach of trust? Answer: Yes. (f) Are Darvalls entitled to any right of subrogation to the assets of the schemes for professional fees rendered by them to Atlantic 3 for the operation of the schemes in the event that no right of indemnity out of the assets of the schemes subsists in favour of Atlantic 3? Answer: No. There was insufficient evidence for the Court to determine the other two questions which were – (b) Is Atlantic 3 entitled to a right of indemnity out of the trust assets of each scheme for professional fees incurred by it in the unlawful operation from 17 December 1999 of each scheme? (c) Further or alternatively, are the legal expenses incurred by Atlantic 3 in operation of each of the schemes from 17 December 1999 expenses not properly incurred by it as trustee of the schemes by reason of the unlawful operation of each of the schemes? Precondition of making good the loss [17] On the hearing of the preliminary questions, Darvalls and the liquidators agreed that it is a precondition to Atlantic 3 being entitled to recover from the assets of a scheme expenses incurred in the operation of the scheme that it make good any loss -- 7 of 10 -- 8 occasioned by the operation of the scheme in breach of s 601ED(5) of the Corporations Act. [18] In General Credits Limited v Tawilla Pty Ltd12 McPherson J said – “The trustee has the right to indemnity out of the trust assets in respect of liabilities properly incurred in the affairs of the trust; and the claim of creditors in equity to be subrogated to that right has often been recognized: see, e.g., Vacuum Oil Co. Pty. Ltd. v. Wiltshire (1945) 72 C.L.R. 319, 335-336. But the creditors’ claim necessarily depends on the existence of a right exercisable by the trustee to be indemnified: ibid. If the liability incurred by the trustee was not authorized or properly incurred; or if, through some misapplication of trust assets, the trustee is in debit on the trust accounts, no right of indemnity can exist, nor can any claim to subrogation arise in favour of a creditor: Re Johnson (1880) Ch.D. 548, 552; Re Frith [1902] 1 Ch. 342.” [19] As Brooking J said in RWG Management Ltd v Commissioner for Corporate Affairs13 – “… a balance is to be struck between what is due [to the trust from the trustee] by way of compensation [for loss caused by breach of trust] and what is due by way of indemnity [to the trustee from the trust] and … if the balance is in favour of the trustee he may recover from the estate to that extent.” There is no reason in principle to draw a distinction between a creditor’s claim on the trust estate which arose before the breach of trust and one which was incurred in breach of trust. The balance has to be struck at the time of judgment.14 [20] In this case the balance must be struck between – ● the loss of capital and the liquidators’ fees (that is, compensation due to the trust from the trustee) on the one hand; and ● the fees owed to Darvalls by the trustee (that is, the amounts due to the trustee from the trust property by way of indemnity), on the other. Unless Darvalls’ fees exceed the loss of capital and the liquidators’ costs, the trustee has no right of indemnity and there is no right to which Darvalls can be subrogated. Trustee’s default - loss of capital [21] Funds were invested in the schemes as follows15 – 12 [1984] 1 Qd R 388, 389-390. 13 [1985] VR 385, 397-398. 14 See Target Holdings Ltd v Redferns (A Firm) [1996] 1 AC 421, 437 (Lord Browne-Wilkinson). 15 Affidavit of G M Moloney, filed 26 June 2007 (document 434), exhibit GMM-1. -- 8 of 10 -- 9 17 December 1999 onwards Unknown MLC Scheme $1,178,905 0 Numinko Scheme $988,984 0 Clearview Scheme $1,555,314 $869,191 [22] The liquidators have estimated the percentage return of capital as at 31 December 2006 as follows16 – MLC Scheme 19.1% Numinko Scheme -1.17%-0.89% Cleaview Scheme (over 5 sub groups) Varying percentages between 0% and 23% [23] Clearly in each scheme the loss of capital invested after 17 December 1999 (ie in breach of trust) exceeds the proof of debt. The liquidators’ costs [24] The schemes were rendered liable to be wound up under s 601EE only because they were operated contrary to section 601ED(5). Their continued operation and the continued taking of money from investors after 17 December 1999 was a factor in the appointment of independent persons to wind up these three schemes.17 The costs of the liquidation are thus predicated on a breach of trust.18 [25] The following costs have been approved in accordance with paragraphs 6 and 7 of the order of Mullins J and paid to the liquidators from the assets of the schemes19 – MLC Scheme $224,009.52 Numinko Scheme $385,328.12 Clearview Scheme $654,769.06 [26] The liquidators’ costs exceed Darvalls’ proof of debt in relation to each scheme. Darvalls’ contentions [27] Are the liquidation costs costs for which Atlantic 3 is necessarily liable? Darvalls submit that it is most likely the schemes would have been wound up in any event even if Atlantic 3 had ceased to operate them on 17 December 1999. The regulatory scheme was such that they could have come within the run out provisions – that is, ASIC may have granted exemptions from the registration requirement for a limited 16 Affidavit of G M Moloney, filed 16 May 2007 (document 430), exhibit GMM-1. 17 See ASIC v Atlantic 3 Financial (Aust) Pty Ltd [2003] QSC 265, [55], [62], [103] (Mullins J). 18 See generally Moloney v Bells Securities Pty Ltd [2005] QSC 13 and A & D Douglas Pty Ltd v Lawyers Private Mortgages Pty Ltd [2006] FCA 520, [615]-[619]. 19 Affidavit of G M Moloney, filed 26 April 2007 (document 426), [25]-[37], [38]-[58], [59]-[71]. -- 9 of 10 -- 10 time to allow the winding up of the schemes.20 Of course, there would still have been some costs to wind up the schemes, and counsel for Darvalls submitted that there should be a set off of such costs. But there is no evidence of the quantum of such costs and so assuming the submission is correct in principle (a question which I do not decide), this does not arise on the present application. [28] Counsel further submitted that the expected return to investors is so small that the process of asset realisation is called into question. This was an attack on the quantum of the liquidators’ fees. However, it is based on speculation and not evidence. [29] Then it was submitted that Atlantic 3 had used some of its own money to prop up the schemes, and that this gave rise to a set off. Darvalls failed to satisfy the evidentiary onus they bore in raising this. They relied on an affidavit sworn on 25 July 200321 by the second respondent Dr Acker. However, Dr Acker – (a) asserted that such payments had been made in respect of the MLC Scheme but failed to quantify them or to provide any supporting material; (b) said nothing about payments made in respect of the Numinko scheme; and (c) did not say that Atlantic 3 had made any payments from its own funds in respect of the Clearview scheme. Summary [30] In the case of each scheme, the liquidators’ costs exceed Darvalls’ proof of debt (both the total proof and that part of it which relates to the period up to 17 December 1999). The loss of capital after 17 December 1999 is greater than the proof of debt. The balance of account between Atlantic 3 (the trustee) and the investors (the beneficiaries) is not in favour of Atlantic 3. Conclusion [31] Darvalls have no real prospect of succeeding (in whole or in part) in their appeal against the rejection of the proofs of debt. There is no need for a trial. [32] The application filed on 14 February 2006 and amended on 26 May 2006 (being the appeal against the rejection of the proofs of debt) should be dismissed. [33] I will hear counsel on the costs of that application and on the costs of the application filed by the liquidators on 26 April 2007. 20 See Class Order 99/1639, which appears as exhibit DFP-3 to the affidavit of D F Pennicott, filed 28 February 2006 (document 397). 21 Document 51, [83], [92], [203]. -- 10 of 10 --