New South Wales Supreme Court CITATION : Brebrich as Trustee for S & A Superannuation Fund v Maxpower Mortgage Services Pty Limited; Brebrich as Trustee for S & A Superannuation Fund v Maxpower Mortgage Services Pty Limited [2008] NSWSC 454 HEARING DATE(S) : 6 May 2008 JUDGMENT DATE : 16 May 2008 JURISDICTION : Equity JUDGMENT OF : Jagot AJ CATCHWORDS : TRUST - plaintiffs invested in a unit trust - trust's investments appear to have failed - plaintiffs sought redemption of their units in unit trust and for payment of their entitlements - plaintiffs' evidence did not substantiate declarations and orders sought LEGISLATION CITED : Corporations Act 2001 CATEGORY : Principal judgment 4668 of 2007 PLAINTIFF Stephen & Anita Brebrich as trustees for S & A Superannuation Fund DEFENDANT Maxpower Mortgage Services Pty Limited as trustee for the Compounding Unit Trust Number One PARTIES : 5567 of 2007 PLAINTIFF Stephen & Anita Brebrich as Trustees of S & A Superannuation Fund DEFENDANT Maxpower Mortgage Services Pty Limited FILE NUMBER(S) : SC 4668 of 2007; 5567 of 2007 SOLICITORS : Mr S Brebrich, in person Mr W Andrews, solicitor IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Jagot AJ 16 May 2008 4668 of 2007 Stephen Brebrich and Anita Brebrich as trustees for S & A Superannuation Fund v Maxpower Mortgage Services Pty Ltd as trustee for the Compounding Unit Trust Number One 5567 of 2007 Stephen Brebrich and Anita Brebrich as trustees for S & A Superannuation Fund v Maxpower Mortgage Services Pty Ltd as trustee for the Compounding Unit Trust Number One JUDGMENT 1 HER HONOUR: These proceedings concern an investment that has not turned out as the plaintiffs hoped. Facts 2 The plaintiffs relied on a single affidavit of Mr Stephen Brebrich. The defendant also relied on the documents annexed to that affidavit. 3 The plaintiffs are the trustees of "S & A Superannuation Fund". In early 2003 the plaintiffs attended an investment seminar. Mr Judd, a director of the defendant, described a new trust called "The Compounding Unit Trust Number One" as a method of allowing people with smaller amounts of money to invest in projects. Mr Judd said the trust would invest in the three most appropriate projects from a group of five, with the objective being to spread the risk. The minimum investment period would be two years with the trust ceasing to operate in February 2006. The plaintiffs obtained an overview brochure and sample agreement at the seminar. 4 The overview brochure described the trust as providing a diversified range of investments with a mix of high and stable return rates to be compounded over two years to produce a quality investment in five choice assets. The overview identified the trust as involving the pooling of investments with those of other unit holders. The overview referred to the investments as providing certain "non-guaranteed" project returns and briefly described each investment. The overview stated that the trust would be completed on settlement of the last contracted investment and that funds could not be withdrawn within two years unless substitute investors were simultaneously found. 5 The plaintiffs attended one or two more seminars before deciding to invest in the trust. Mr Brebrich, one of the plaintiffs, described the events that followed. It is not easy to reconcile the order of events he described with the dates on various documents. In any event, it is clear that the plaintiffs applied to the defendant, as trustee of the trust, for 40,000 units in the trust at $1.00 per unit. On 8 May 2003 they received from the defendant an initial unit trust certificate and agreement to be signed and returned with their cheque. 6 Minutes signed by Mr Brebrich for S & A Superannuation Fund bear the date 19 May 2003 and authorise the application for 40,000 units in The Compounding Unit Trust Number One. 7 The plaintiffs' cheque for $40,000 was presented on 21 May 2003. 8 By letter dated 22 May 2003 the defendant sent the plaintiffs a unit certificate and the trustee minutes for S & A Superannuation Fund dated 19 May 2003, in addition to an application for units, agreement and tax file number, and bank account notification required to be returned to the defendant. 9 There are two documents styled "unit trust certificate". The first records that S & A Superannuation Fund is a unit holder in The Compounding Unit Trust Number One and is granted all the rights and privileges pertaining thereto as the owner of 40,000 x $1.00 units. The second, dated 22 May 2003, is in the following terms: Pursuant to the terms of a Deed dated 20th November 2002, MAXPOWER MORTGAGE SERVICES PTY LTD ACN 091 321 603 as trustee of the COMPOUNDING UNIT TRUST NUMBER ONE HEREBY CERTIFIES that Stephen Brebrich and Anita Brebrich as trustees for S and A Superannuation Fund of 27 Kerry Road, Blacktown NSW 2148 are the registered holders of 40,000 Units in the trust fund of the COMPOUNDING UNIT TRUST NUMBER ONE constituted by the said Deed such as Units being held subject to and with the benefit of the terms and conditions of the said Deed. 10 The agreement signed by the plaintiffs and defendant is dated 25 May 2003. It contains few provisions as follows: Purpose: Funds to be deposited in NAB bank account – Compounding Unit Trust No. 1, then invested in certain asset classes. To be read in conjunction with: Unit Trust Certificate Terms and Conditions Rate of return: The rate of return from the forms of investments undertaken from time to time. The earnings will be split proportional between Unit holder/s. Earnings will be compounded for a period of 2 years. Commencement of fee calculation: Day after payment of funds to trading account. Disbursement to Unit holders: Closing February 2006 or as agreed by unit holders. Termination of this agreement: 90 Days or as agreed to by the parties in writing. 11 Mr Brebrich said he had never seen the trust deed dated 20 November 2002 until some time in 2007. The parties to the deed are Jennifer Swan as settlor and the defendant as trustee. 12 The deed recites the intention to establish a trust with the settlor having paid $10.00 to the trustee and the deed being made with the intention of each registered holder taking and holding units upon the terms and conditions of the deed. A registered holder is defined to mean the person for the time being registered as a holder of a unit. A unit is an undivided part of or share in the trust fund as described in cl 5. The trust fund is all the property held by the trustee upon the trusts of the deed. 13 Clause 5 provides that the beneficial interest in the trust fund shall be divided into units with every unit conferring a fixed entitlement to the capital and income of the fund in accordance with cl 3. 14 Clause 3(a) specifies that the trustee shall hold the income entitlement of the trust fund upon trust for the registered holders pro rata for that part of the year the units are held and in proportion to the number of units held. 15 Clause 3(b) specifies that the trustee shall hold the capital of the trust fund upon trust for the registered holders in proportion to the number of units held. 16 Under cl 3(c) the trustee shall pay, apply or deal with the share of the income of the trust fund to which a registered holder is entitled in such manner as the registered holder may from time to time direct. 17 Clause 3(d) entitles a registered holder to a beneficial interest in the trust fund but provides that a registered holder may not interfere with or question the exercise or non-exercise of the trustee's rights and powers in dealing with the trust fund, exercise any rights, powers or privileges in respect of any investment forming part of the trust fund, or require the transfer of any assets or property that from time to time constitute the trust fund. 18 Clause 4 regulates the period of the trust and its determination (with the vesting day being, in effect, the first to occur of the date appointed by the trustee and one day before the eightieth anniversary of the date of the trust deed). 19 Clause 8 concerns the redemption of units. 20 Under cl 8(a) a registered holder may request the trustee to redeem units by notice in writing. 21 Under cl 8(b) the trustee may in its discretion refuse or consent to such a request having regard to the ongoing viability of the trust. 22 Clause 10 specifies the general powers of the trustee (including broad powers in cl 10.1(a), to invest as the trustee thinks fit and in cl 10.2 to vary or transpose all or any investments of the trust fund). 23 Clause 14.1 provides that: In the professed execution of any trust power authority or discretion conferred by this Deed on the Trustee the Trustee shall not be held liable for any loss or damage occurring as a result of its concurring or refusing or failing to concur in any exercise or proposed exercise of such trust power authority or discretion nor shall the Trustee be held liable for any loss to the Trust Fund or the income therefrom arising by reason of any improper investment made in good faith or for the negligence or fraud of any agent employed by it or by any other Trustee hereof although the employment of such agent was not strictly necessary or expedient or by reason of any mistake or omission made in good faith by any Trustee or Trustees hereof or by reason of any other matter or thing except wilful and individual fraud or wrongdoing on the part of the Trustee or the Trustees who are sought to be made liable. 24 Under cl 20 all registered holders are bound by the trust deed. 25 S & A Superannuation Fund received annual tax distribution statements for the years ending 30 June 2004, 30 June 2005, and 30 June 2006. S & A Superannuation Fund did not receive any distribution of income from the trust. On 19 February 2006 S & A Superannuation Fund sought redemption of its units. The trustee responded on 21 February 2006 enclosing a request for redemption and draft trustee minutes for S & A Superannuation Fund. Mr Brebrich completed those documents and returned them shortly thereafter. 26 By letter dated 15 June 2006 the trustee informed the plaintiffs that the trustee had recently suffered losses. The letter referred to the trustee having met its obligations to pay interest to investors but that it was now obvious the requests for redemption could not be met at this time. The letter noted that the trustee was working towards arrangements to provide "additional security to all investors who have requested redemption" related to a property development by two other companies at a site known as Parkers Road. The letter sought acceptance of this arrangement, presumably in substitution for the redemption of units. 27 The trustee followed up this letter on 30 June 2006 enclosing further details of the terms of this offer. Mr Brebrich, on behalf of S & A Superannuation Fund, responded on 9 July 2006. He rejected the offer, set out his dissatisfaction with the conduct of the trust, and (amongst other things) noted his view that the trust was involved in a managed investment scheme but had broken the rules for these schemes. 28 The plaintiffs then commenced proceedings in the Local Court claiming $58,169 from the defendant. The defendant filed a defence essentially reciting various provisions of the trust deed. 29 The plaintiffs commenced proceedings in this Court on 21 September 2007 by way of summons. The Local Court proceedings were thus transferred to this Court on 2 November 2007. 30 The summons (amongst other things) sought orders requiring the defendant to produce the trust accounts and the register of registered holders, and to allow the plaintiffs to inspect the records of the trust. The defendant (ultimately) did not oppose those claims. White J thus made orders in accordance with paragraphs 7, 8 and 9 of the summons on 11 December 2007. 31 In addition to these events the plaintiffs tendered a series of email communications between Mr Brebrich and Mr Judd. Those emails suggest that the trust's investments have largely, if not wholly, failed, but the evidence went no further. 32 The parties agreed that the remaining paragraphs of the summons (paragraphs 1 to 6) encapsulated the whole of the relief claimed by the plaintiffs in both proceedings. 33 In paragraphs 1 to 6 of the summons the plaintiffs sought the following: 1. A declaration that there is an agreement between the plaintiffs and the defendant whereby the defendant was required to pay to the plaintiffs the amount of their entitlement in the Trust Fund of the Compounding Unit Trust Number One ("Trust") on or about 28 February 2006 or alternatively 18 May 2006 ("Agreement"). 2. A declaration that the defendant is estopped from denying the existence of the Agreement. 3. An order that the defendant specifically perform the Agreement and to pay to the plaintiffs the amount of their entitlement in the Trust Fund. 4. A declaration that pursuant to the terms of the Trust Deed the defendant was required to pay to the plaintiffs their entitlement of the income of the Trust, annually as from 30 June 2005. 5. In the alternative to order 3, above, an order that the defendant pays to the plaintiffs their entitlement to accumulated income of the Trust Fund as from 30 June 2005. 6. In the alternative to orders 3 and 5, above, the plaintiffs seek damages. 34 Paragraph 10 of the summons sought the appointment of a receiver in the event the defendant failed to comply with any other orders of the Court. The plaintiffs did not address paragraph 10 in their submissions and, in terms, it depends on the making of the other orders sought. Submissions 35 The plaintiffs did not have legal representation. Mr Brebrich submitted that the plaintiffs had complied with the correct procedures to redeem their units. As the defendant had refused their request, they had no option other than to commence proceedings. They wanted payment of their entitlement from the trust fund or, alternatively, damages. The plaintiffs considered that the defendant had not fully complied with orders 7, 8 and 9 made on 11 December 2007. The plaintiffs did not see how the trust deed could be relevant given that they did not know about it or its terms when they purchased their units. They only knew about the agreement dated 25 May 2007. They also thought the defendant was operating in breach of provisions relating to managed investment schemes and considered the representations to them about the investments the trust would make misleading. 36 The defendant submitted that all documents in the possession of the defendant had been produced as required by the orders, but a number of documents were in the custody of the Australian Securities and Investments Commission. The defendant noted that the unit certificate the plaintiffs obtained referred to the trust deed. Further, the plaintiffs had invested in a unit trust. By definition, a unit trust requires a deed regulating the respective rights and obligations of unit holders and the trustee. The trust deed specifies that the trustee is entitled to refuse to redeem units in its discretion (cl 8(b)). The trustee's reasons for not doing so in this case were clear; there were no funds available. With respect to the damages claim, cl 14 of the trust deed operates. There was no pleading or evidence relating to alleged misleading or deceptive conduct or in relation to any alleged breach of requirements for a managed investment scheme. Accordingly, the declarations and orders sought could not be made. Discussion 37 The principal relief sought by the plaintiffs relates to an agreement they asserted required the defendant to pay them the amount of their entitlement in the trust fund on or about 28 February 2006 or 18 May 2006 (paragraphs 1 to 3 of the summons). Paragraph 4 of the summons relies on rights pursuant to the trust deed itself and is thus inconsistent with the plaintiffs' claim that the trust deed is irrelevant. Paragraph 5 of the summons also appears to relate to the provisions of the trust deed. The alternative claim in paragraph 6 to damages remained at large. The plaintiffs did not, for example, identify any claim for loss from misleading or deceptive conduct. Nor did they make any claim calling in aid any of the provisions of the Corporations Act 2001 with respect to managed investment schemes (recognising that the evidence in this case did not address whether the unit trust was or was not a managed investment scheme regulated by the Corporations Act, ss 9 and 601ED). Given the limited nature of both the claims in the summons and evidence in support it is not possible to deal with the allegations raised in passing in Mr Brebrich's submissions about misleading and deceptive conduct or breach of the requirements for managed investment schemes. 38 There are difficulties with the plaintiffs' claims. For example, insofar as paragraph 1 of the summons refers to a right to payment on or about 28 February 2006 it appears to arise both from the document styled agreement dated 25 May 2003 and the trust deed dated 20 November 2002. The agreement refers to "disbursement to unit holders" said to involve "closing February 2006 or as agreed by unit holders". This provision of the agreement is presumably the source of the date 28 February 2006 in paragraph 1 of the summons. The trust deed deals with rights with respect to the redemption of units (cl 8) and the agreement refers to termination on notice of 90 days. Given that the plaintiffs requested redemption of their units on 19 February 2006, the trust deed and agreement together are presumably the source of the date 18 May 2006 in paragraph 1 of the summons. The plaintiffs' principal claims thus implicitly accepted that the agreement dated 25 May 2003 is essentially meaningless without the trust deed. In other words, the relief sought in the summons is inconsistent with the submissions about the trust deed being irrelevant to the legal arrangements between the parties. 39 The acceptance in the summons of the relevance of the trust deed reflects the practical realities of the arrangement between the plaintiffs and defendant. For example: (1) The defendant is a party to the agreement in its capacity as trustee for The Compounding Unit Trust Number One. The agreement of 25 May 2003 does not constitute the defendant as the trustee. It follows that the defendant must have been so constituted by another document (namely, the trust deed). (2) The purpose of The Compounding Unit Trust Number One was to pool small investments by a number of people. The agreement of 25 May 2003 does not regulate any rights and obligations of investors as between themselves. It follows that another document must regulate those rights and obligations (namely, the trust deed). (3) The plaintiffs invested in an entity called a unit trust. The plaintiffs claimed an entitlement to be paid the amount of their entitlement in the trust fund. The agreement of 25 May 2003 does not identify the plaintiffs' entitlement in the trust fund other than to the extent that it cross-refers to the need to read the agreement in conjunction with the unit trust certificate. (4) The agreement of 25 May 2003 refers to the need for it to be read in conjunction with the unit trust certificate. The unit trust certificate refers to the plaintiffs being the registered holders of units pursuant to the trust deed. 40 It is true that this unit trust certificate is dated 22 May 2003 whereas the funds were invested on 21 May 2003. Nevertheless, for the reasons given above, it is inconceivable that the plaintiffs intended that the provisions of the agreement alone should regulate their legal relationship with the defendant and other investors. Further, it is impossible for the agreement dated 25 May 2003 alone to regulate the legal relationship between the plaintiffs and defendant; without the trust deed the agreement means little, if anything. In any event, and as noted, the claims in the proceedings cannot be reconciled with the submission that the trust deed should simply be disregarded as irrelevant. 41 The trust deed is drafted in broad terms. The trustee was entitled under cl 8(b) to refuse to redeem the plaintiffs' units. Leaving aside that provision, it cannot be the case that, after 90 days' notice, the plaintiffs would be entitled to recover at least the capital sum they invested (as part of the submissions and the proceedings transferred from the Local Court appeared to assume). 42 The plaintiffs invested in a unit trust that, even on the limited information apparently made available to the plaintiffs, involved "non-guaranteed" project returns, one described as a "blue sky" return within two years. No part of the arrangement could be understood as involving a risk free investment under which, if the plaintiffs were unhappy with the outcomes, they could recover their capital investment on demand. That would be irreconcilable with the nature of the venture in which the plaintiffs invested. 43 Further, the rights to income under the trust deed depend on the investments having generated returns (cl 3 and the definition of "income entitlement" and "income"). The evidence (sparse as it was) suggests only that the trust's investments might have failed and no more. The agreement also does not provide any meaningful provision about income distribution. There is a reference to earnings being compounded for two years and earnings being split proportionally between unit holders. This too assumes that there will be some earnings for distribution. 44 The declarations and orders sought by the plaintiffs have to be considered in this context. 45 The relief sought in paragraphs 1 to 3 of the summons assumes that there has been some return from the investments not paid to the plaintiffs in breach of the agreement and trust deed. The evidence does not enable that finding to be made. Paragraphs 4 and 5 of the summons are subject to the same observation. The claim for damages in paragraph 6 of the summons, as noted, remained at large. The evidence does not support the claim other than to the extent (not disputed by the defendant) that the investments made by the trust appear not to have yielded any return. In any event, that claim would have to contend with cl 14 of the trust deed relied on by the defendant and not addressed by the plaintiffs (either through evidence or submissions). 46 In these circumstances there is no proper basis in the evidence for the making of any of the declarations or orders sought. The plaintiffs' sense of grievance is understandable. Nevertheless the claims made in these proceedings cannot be sustained on the evidence adduced. Orders Proceedings 4668 of 2007 (1) The summons, other than paragraphs 7, 8 and 9, is dismissed. (2) The exhibits may be returned. Proceedings 5567 of 2007 (1) The proceedings are dismissed. (2) The exhibits may be returned. 47 Costs may be argued (noting the orders made on 13 December 2007 in the plaintiffs' favour). **************************** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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