Commercial Law Update - A Breach of Trust

Snapshot

• The ubiquitous use of trusts as vehicles for commercial activity can leave successful litigants with an empty judgment at the conclusion of an expensive proceeding.
• Anticipating this, a litigator can structure a proceeding to avoid this problem, if the right circumstances exist.
• In Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd the applicants succeeded in obtaining judgment against unitholders of a trust even though the trustee was impecunious.

In Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd1 the applicants successfully obtained judgment against beneficiaries as well as against the impecunious trustee. They were only able to do so because they had properly structured the proceeding with all necessary parties joined, and pleaded the case appropriately seeking relief against them.

The case was a complex building case in relation to a project to construct apartments in Melbourne. The development project was carried out by a unit trust with a corporate trustee (Twentieth Green). The unitholders were four companies, each of which was controlled by an individual. Each individual was also a director of Twentieth Green. Colin Price, together with his wife, controlled one of the unitholders (Grovan). Price, together with his wife, also controlled the contracted builder for the project, Colin R Price & Associates Pty Ltd (CRP).

At trial various claims were brought by CRP alleging that it had been underpaid for the building works and by Grovan, that it had not been paid its proper entitlements as a beneficiary of the trust. Central to Grovan’s claims was the allegation that, to the extent that it had been underpaid its entitlements, the other unitholders had been overpaid theirs. This was alleged to have been a breach of trust against which it sought relief.

After a long trial, the judge held that CRP (as a creditor) and Grovan (as a unitholder) were each entitled to be paid a sum of money by Twentieth Green. By that stage it was apparent that Twentieth Green had no assets with which to satisfy that judgment. Therefore, Grovan and CRP sought that the other unitholders be required to make necessary repayments so as to permit Twentieth Green to fulfil its obligations to pay them and, in the final result, sought orders that the other unitholders pay the relevant sums directly to CRP and Grovan.

The trial judge refused to make such orders, saying:

“In my view, the order for payment of the relevant amount to Grovan should be made against Twentieth Green alone rather than against Twentieth Green and other respondents. Grovan’s claim is that Twentieth Green, as trustee, has not carried out its duties (both to account to Grovan for its share of the proceeds of the Project and not to make payments other than for proper purposes). These are claims against Twentieth Green as trustee; they are not claims against other unitholders. It is evident that Twentieth Green does not presently have any assets; it may be expected that Twentieth Green will seek to recover amounts paid to other unitholders and third parties to enable it to pay Grovan the amount to which it is entitled. If Twentieth Green were unwilling to take action to recover the relevant amounts, Grovan may wish to institute proceedings, either in Grovan’s own name or in the name of the trustee: see JD Heydon and MJ Leeming, Jacob’s Law of Trusts in Australia (7th ed, 2006), [2303]. But it remains to be seen whether this will be necessary and any such claim is beyond the scope of the present proceeding”.2

The consequence of this finding was that Grovan and CRP obtained empty judgments against Twentieth Green. Grovan and CRP appealed the decision. On appeal the Full Court held that the trial judge was wrong not to have made the orders against the other unitholders.3

Despite the respondents’ arguments to the contrary, the Full Court held that the claims against the other unitholders were advanced in the pleadings and were pressed in opening and closing submissions by Grovan.4

The respondents argued that there was no juridical basis for a claim to be advanced by a beneficiary of a trust for repayment of monies wrongly paid by the trustee to other beneficiaries or to third parties. They argued that such a claim was unsupported by authority and involved a radical rewriting of trust law to allow claims against an impecunious trustee to be visited on the beneficiaries.5

The Full Court rejected those arguments.

“. . . contrary to the respondents’ submission, there is a juridical basis for such a claim. Where ‘special circumstances’ exist, a beneficiary under a trust such as Grovan may bring proceedings that ordinarily should be brought by the trustee in his, her or its own right against a third party or other beneficiary on any cause of action, legal equitable or statutory, that the trustee has against that defendant. The beneficiary must join the trustee and the third party as defendants if such special circumstances exist” (citations omitted).6

“Special circumstances” would embrace collusion between the trustee and the other beneficiaries or third parties against whom recovery was sought, or insolvency of the trustee, or any “excusable or inexcusable” failure of the trustee to protect the interests of the trust.7

The Full Court continued:

“In our respectful view, in circumstances where:

(a) the proceedings were structured so that the trustee, the directors of the trustee, the unitholders, and the directors or controllers of the unitholders were all before the Court;
(b) Grovan advanced claims against those parties seeking repayments to be made by the unitholders to the extent that they had been overpaid and sought orders for payment to Grovan; and
(c) Twentieth Green has no assets;

his Honour erred in refusing to make orders against the unitholders in favour of Grovan in respect of those amounts which he found were due to be paid to Grovan by Twentieth Green. The pool of profit from the Project was fixed and any order in favour of Grovan properly involved making adjustments between the unitholders for distributions or other payments made in error or in breach of trust, and making orders for repayment of monies by unitholders who were wrongly paid. Orders in favour of Grovan may have also properly involved orders against any director of Twentieth Green who caused the payments in breach of trust”.8

The Full Court placed considerable emphasis on the need in a modern system of justice to avoid a multiplicity of proceedings.9 This is enshrined in s22 of the Federal Court of Australia Act 1976 (Cth) which provides:

“Determination of matter completely and finally

“The Court shall, in every matter before the Court, grant, either absolutely or on such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided.”

In further reasons,10 and applying the same reasoning, the Full Court held that, to the extent that CRP had not been paid what it was owed by Twentieth Green, the unitholders had been overpaid their distributions by the trustee. Given that all of the parties were before the Court, the matters had been pleaded and pressed at trial and on appeal, and special circumstances existed, the Full Court held that Grovan had standing to enforce the trustee’s right to recover the overpayments to the unitholders and ensure that the sums so recovered were paid to CRP. Under those circumstances, and in order to avoid a multiplicity of proceedings, it ordered the unitholders to make payment directly to CRP.

Conclusion

The key to why the orders could be made in this case was the three factors of the decision set out above.11

Directors of a trustee company should be mindful of the possibility that breaches of trust can be sheeted home to beneficiaries who are advantaged by that conduct. As alluded to by the Court, such conduct can also ground liability in the directors who caused the trustee to default in its obligations.

Litigators should consider such beneficiaries and directors as possible defendants when commencing litigation involving such breaches of trust.

*The author appeared as counsel for the applicants at trial and the appellants on appeal.

1. Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd [2017] FCAFC 75; (2017) 251 FCR 404; (2017) 349 ALR 100; (2017) 120 ACSR 451.
2. Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd (No 2) [2016] FCA 883 at [44].
3. Note 1 above, at [100].
4. Note 1 above, at [101].
5. Note 1 above, at [99].
6. Note 1 above, at [102].
7. Note 1 above, at [103-104].
8. Note 1 above, at [109].
9. Note 1 above, at [110]-[114].
10. Colin R Price & Associates Pty Ltd v Four Oaks Pty Ltd (No 2) [2017] FCAFC 101 at [16]-[18].
11. Note 8 above