Supreme Court New South Wales Medium Neutral Citation: Woodward v Woodward [2014] NSWSC 481 Hearing dates: 19 and 28 February 2014 Decision date: 28 April 2014 Jurisdiction: Equity Division Before: Robb J Decision: Subject to the solicitor for the plaintiff and the solicitor for the defendants advising the court that they are prepared to hold the funds in accordance with order (3): (1)Order that Zelotde Pty Ltd, as trustee for the Rungdee Trust, be joined in these proceedings as the third defendant. (2)Grant leave to the third defendant to apply on seven days' notice to the plaintiff for an order vacating the order that it be joined as a third defendant, and vacating or varying any of these orders as made against it. (3)On the plaintiff by his counsel giving the usual undertaking as to damages, order each of the defendants to cause all monies under their joint or separate control that were paid out of the Woodward Family Trust's account following the resolutions made by the second defendant on or about 14 June 2013 to be paid within seven days into a joint account in the name of the solicitor for the plaintiff and the solicitor for the defendants, to be retained by those solicitors pending the further order of the court. (4)Grant leave to the defendants on seven days' notice to the plaintiff to apply to the court for an order varying order (3) to authorise the solicitors for the parties to release to the defendants, or any of them, any specified sum for use by the defendants in any manner approved by the court. (5)Direct the solicitors for the plaintiff and the defendants to advise the associate to Robb J within three working days whether or not they are prepared to hold the monies on the terms of order (3). (6)Order that the costs of the plaintiff's application for interlocutory relief be each party's costs in the cause. Catchwords: EQUITY - trusts and trustees - assets of trust - whether trustee contravened duties - whether to preserve funds paid out of trust account pending determination of dispute - JOINDER OF PARTIES - whether the party would suffer procedural unfairness - whether there is substantial claim against the party Cases Cited: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 Category: Interlocutory applications Parties: George Lloyd Woodward (plaintiff) Grant Nicholas Woodward (first defendant) Highland Grazing Company (second defendant) Zelotde Pty Ltd (third defendant) Representation: Counsel: M Bradford (plaintiff) Solicitors: Carroll & O'Dea (plaintiff) File Number(s): 2013/322337 Judgment 1The plaintiff, Mr George Lloyd Woodward is a self-employed businessman. He is the father of the first defendant, Mr Grant Nicholas Woodward. 2The second defendant, Highland Grazing Company Pty Ltd, is the trustee of a discretionary trust called the "Woodward Family Trust" (the "Trust"). The Trust was established by the plaintiff in 2008. 3The first defendant is the sole shareholder in the second defendant. He has also been since 23 November 2010 its sole director. 4These proceedings concern the fate of assets of the Trust that have been paid out of the Trust's bank account by the second defendant at the instigation of the first defendant. Detailed information concerning the payment became available during the hearing before me, when a letter dated 19 February 2014 from the defendants' accountant to their solicitor was made available to the plaintiff. The letter stated that it enclosed copies of the minutes in relation to distributions from the Trust by the second defendant in June 2013. 5The first minute is undated and is described as "Distribution of Income". It is signed as a true and correct record by the first defendant. It states: "It was resolved that pursuant to the powers vested in the company as trustee of the Trust, that the net income of the trust for the year ended 30 June 2013 be distributed as follows: Beneficiary Amount Highland Grazing Company Pty Limited $399,843.70 25.16% Rungdee Trust $1,189,537.22 74.84% 6The second minute is called "Distribution of Capital". It is dated 14 June 2013, and is also signed by the first defendant. It states: "It was resolved that pursuant to the powers vested in the company as trustee to the Trust, that the capital of the trust be distributed as follows: Beneficiary Amount Rungdee Trust $1,383,218.63 7It is apparent that, before the two minutes came to light, the plaintiff was aware that substantial funds had been paid out of the Trust's account, but was not aware of the precise circumstances in which that had happened. 8The plaintiff commenced these proceedings by filing a summons on 5 October 2013. The plaintiff sought certain orders the point of which was to cause him to be appointed as the director of the second defendant in lieu of the first defendant, and for relief to ensure that, through enquiry and an account, the assets of the Trust were preserved. By order 7 the plaintiff sought an order pending the hearing that the first and second defendants be restrained from operating any bank account into which Trust funds have been or will be paid, and from disposing of any funds belonging to the Trust which are in their possession, other than by paying the same into the credit of the Trust Term Deposit account with the National Australia Bank. 9On 4 November 2013 Darke J granted an interlocutory injunction, up to and including 3 December 2013, whereby he restrained the first and second defendants from operating any bank account of the Trust, other than by depositing money into the account of the Trust, and from taking any steps to remove any assets of the Trust from Australia. 10As appears from his Honour's reasons for judgment, the second defendant was registered on 12 February 2008, and on 19 February 2008 the plaintiff paid amounts totalling $500,010 into a National Australia Bank account in the name of the Trust. Initially, the plaintiff and his wife were directors of the second defendant along with the first defendant. The plaintiff and his wife retired as directors on 23 November 2010, leaving the first defendant in sole control of the Trust. 11The family continued to operate amicably until April 2013, when the plaintiff's other son, Mark, was killed when he fell from a building in Thailand. Mark had travelled to Thailand with the first defendant. That tragic event has led to considerable acrimony within the family, and the poisoning of relations between the plaintiff and the first defendant. 12By consent, on 3 December 2013 the interlocutory injunction was extended to 12 December 2013. On 12 December 2013 the injunction was further extended by consent to 30 January 2014. There was a direction that the plaintiff file and serve an amended summons by 16 December 2013. The proceedings were adjourned to 3 February 2014. The hand written short minutes of order originally provided for an adjournment to 30 January 2013. That date has been struck through, and the date 3 February 2013 inserted instead. The result was that technically the interlocutory injunction expired on 30 January 2014. That result was probably not intended. 13An amended summons was filed by the plaintiff on 16 December 2013. Among other things, the plaintiff added a claim for a declaration that the trust deed dated 18 February 2008, which created the Trust, was valid, and an order that the second defendant breached its trust when it distributed the whole of the capital in the Trust. Order 7 was amended to seek an order, until further order, that the defendants forthwith do all things necessary to deposit all monies withdrawn or otherwise dispersed from the Trust account since 1 June 2013 into the Trust's bank account. 14On 3 February 2014 by consent the interlocutory injunction granted on 4 November 2013 was continued pending further order. 15On 14 February 2014 the plaintiff was given leave to file a notice of motion in court. Principally, it sought an order against the first defendant that he be restrained from operating any bank accounts of "the Rungdee Trust", other than to make deposits into that trust's account, and from taking any steps to remove any assets of that trust from Australia. It also sought an order with a similar effect against Zelotde Pty Ltd ("Zelotde)" That company is the trustee of the Rungdee Trust. It appears that the plaintiff was attempting to trace the movements of the money taken out of the Trust's account, and to obtain specific orders to protect the funds. I have been informed by counsel for the plaintiff that Ball J declined to make an order directly against Zelotde, because it was not a party to the proceedings. 16On 14 February 2014 Ball J made the orders sought in the notice of motion for interlocutory relief against the first and second defendants up to 19 February 2014. 17On 19 February 2014 the matter came on before me in the Duty List. Among other things I directed the plaintiff to file points of claim by 25 February 2014 to set out the basis of his claim for substantive relief. I stood the proceedings over to 28 February 2014. I extended the order made by Ball J to 5 PM on the same date. It was not necessary to extend the order that was continued on 3 February 2014, as that order was made until further order. 18I directed the plaintiff to provide points of claim, as the terms of the two minutes of the resolutions made by the second defendant in June 2013 had become available during the course of the hearing on 19 February 2014. On their face the minutes appeared to show that the first defendant, as director of the second defendant, had purported to cause that company in its capacity as trustee of the Trust to make formal dispositions of the Trust's assets under the authority of the trust deed. Before the plaintiff had knowledge of the minutes he was, so to speak, 'shooting in the dark'. All the plaintiff knew was that the Trust's assets had been taken out of its bank account. Now he knew that the second defendant had purported to act in accordance with its rights and obligations under the trust deed. It therefore appeared that the plaintiff should be required to specify, albeit not with the formality of a pleading, the basis upon which he claimed that the Trust's assets had been misapplied. 19The points of claim were prepared as if Zelotde , as trustee of the Rungdee Trust, had already been joined as the third defendant. The statement of the parties contained in the points of claim listed Zelotde as the third defendant. 20The matter then proceeded in argument on the basis that it was assumed that Zelotde was a party to the proceedings. In fact, no order has been made joining that company as a party to the proceedings. After I reserved judgment I made an enquiry of the plaintiff whether he wished to apply for an order that Zeltode be joined as the third defendant to the proceedings. I was advised that the plaintiff requested the court to make an order to that effect. I enquired of the existing defendants whether they opposed the making of an order joining Zelotde. I was advised that the application was opposed. 21I caused the matter to be relisted before me on 16 April 2014 in order to hear submissions to resolve the issue. On that occasion I was advised by counsel for the existing defendants that the application was opposed on the ground that there was no proper legal basis for the court to make any order as sought against Zelotde. When I enquired whether an argument was put that the defendants or Zelotde would suffer any procedural unfairness if a formal order was made joining the company as third defendant after the completion of the interlocutory application, I was informed that the application was not opposed on that basis. The only basis of opposition was, as I have noted, that there was no substance in the plaintiff's claim against Zelotde. 22While it may be available for parties to oppose the joinder of another party on the basis that the claim against that other party is doomed to fail, that opposition could only succeed if the proposed claim was so lacking in substance that, if the proposed new party had been joined as a party by the initiating process, the proposed new party would be entitled to an order for summary dismissal of the proceedings against it. As will appear from what follows, I am satisfied that the plaintiff's claim against Zelotde would not have been liable to be summarily dismissed had Zelotde been originally joined as a party to the plaintiff's summons. If a formal application were now made by the plaintiff to join Zelotde as a further defendant, in my opinion that application would be granted. Furthermore, the first defendant is the sole shareholder and director of Zelotde. Even if that company is not now joined so that it will be directly bound by any order made upon the plaintiff's interlocutory application, it would be readily available to the court to make any appropriate order against the first defendant that prevented him, on an interlocutory basis, from causing Zelotde to dispose of or dissipate the moneys paid to it out of the Trust's account. In these circumstances Zelotde should not suffer any procedural unfairness if an order is now made that it be joined as the third defendant, which will effectively make regular the assumption upon which the points of claim were drafted. I will make an order to that effect. 23Zelotde has not been served with any application that it be joined, and it has not appeared by counsel on the application. Both the order that it be joined as a party, and any substantive interlocutory order that may be made against it, will be made on an ex parte basis. Accordingly, it will be necessary to give Zelotde leave to approach the court for orders vacating the order that it be joined as a third defendant, as well as an order vacating or varying any substantive order. 24It will be convenient to consider the allegations made in the points of claim from the perspective of the terms of the trust deed. 25Under Schedule 1 of the deed, it is dated 18 February 2008. The second defendant is nominated as trustee. The plaintiff is nominated as the appointor. 26The "income beneficiaries" are defined in Schedule 2. They include the plaintiff, any spouse of the plaintiff, any child of the plaintiff or spouse of the child, the lineal issue of any child of any income beneficiary, certain other relatives, any company in which any income beneficiary holds a share, any trust in which any income beneficiary has an interest, certain charities, and the second defendant as trustee. 27"Corpus beneficiaries" are defined in Schedule 3 in the same terms. 28Clause 3 provides for distributions of income, subject to clause 5, which permits the trustee to accumulate income before the end of any financial year for such period as it thinks fit, but not greater than the period permitted by law. Under clause 3(a), the trustee is given an absolute discretion to determine the proportion of the income to be paid to each income beneficiary. 29Clause 4(b) gives to the trustee a similar absolute discretion as to how distributions of capital should be made, before the vesting date, among the corpus beneficiaries. There is a restriction in clause 9(c) upon the freedom of the trustee to make distributions of capital. If the trustee is a company having a sole director who is also one of the beneficiaries, or if the trustee is a sole trustee who is also one of the beneficiaries, no determination may be made distributing any capital to such beneficiary during the period the beneficiary is the sole director of the trustee or the sole trustee. 30Clause 8 vests power in the appointor to replace the current trustee from time to time. Clause 8(f) provides that the power to appoint or remove a trustee may be exercised by written instrument or by deed signed by the appointor. I note that the plaintiff has purported to remove the second defendant as the trustee, "and to appoint another trustee to replace" the second defendant, by means of par 26 of his points of claim. It is not necessary for me to decide the issue, but it would appear that par 26 will not be effective. First, it is not a written instrument signed by the plaintiff. Secondly, the replacement trustee is not identified. 31In his points of claim the plaintiff alleges the terms of the trust deed that give to the trustee an absolute discretion in the distribution of income and capital, and also the restriction in clause 9(c) that is referred to above. The plaintiff alleges in par 25 that the distribution of capital contravened clause 9(c). The points of claim also refer to various other provisions of the trust deed, but as I understand it, the thrust of the plaintiff's claim that the defendants engaged in a breach of trust in relation to the distributions of both income and capital are found in pars 22 to 24 of the points of claim. In essence the plaintiff claims that, even though in respect of income the trustee had an absolute discretion as to its distribution, in making the resolutions to distribute all of the income and all of the capital, the second defendant, under the control of the first defendant, was not conscientiously exercising its powers as trustee, but was simply treating the trust as if it was a sham, and the assets of the trust were the property of the first defendant to deal with as he wished. 32The plaintiff's claim that the resolutions were not genuine exercises of the trustee's discretion is based on evidence given by the first defendant, principally in his affidavit affirmed on 27 November 2013. I will not set out that evidence in detail. It is sufficient to note that the first defendant claims that the creation of the Trust was indeed a sham that was intended to protect the first defendant's assets from the reach of his estranged wife, as a result of matrimonial proceedings that were contemplated at the time the Trust was established. The first defendant said that the initial contribution of capital to the Trust came from the first defendant's own money, although an artificial arrangement was put in place to make it appear that the first defendant had acquired a trucking business from the plaintiff's company, to make it appear that the capital was contributed by the plaintiff. 33It is notable that in par 32 of his affidavit, when referring to $500,000 of the initial payment of $600,000 that the first defendant paid to the plaintiff's company, the first defendant said "the deposits returned $500,000 of the $600,000 to me via the Trust." He also said in par 42: "In June 2013, the business and taxation utility of the Trust having passed, I distributed the income and capital held by the Trust to various entities entitled to those distributions pursuant to the Trust Deed." 34The plaintiff tendered a redacted extract from the diary of an officer of the National Australia Bank that concerned the bank account of the Trust. The extract includes the following report of a discussion on 3 May 2013 between a bank officer and the accountant for the Trust: "Spoke to Grant Woodward's accountant and outlined our concerns, requested a copy of the Trust Deed, which has been saved to file [redacted]. Accountant verbally advised that to his knowledge the funds held in NAB accounts in the Woodward Family Trust were either wholly or predominantly Grant's." 35There is also a diary entry for 14 June 2013 in the following terms: "Upon the provision of company and trust details in accordance with KYC, we opened up a new trust entity for Grant Woodward - called "Zelotde Pty Ltd Atf The Rungdee Trust". He also instructed the following transfer be made: Prepaid $885k from Xpress Freightlines Term Deposit. Transferred 885k from Xpress Freightline into the Woodward Family Trust [illegible account number]. Grant subsequently transferred these funds into the new Trust account 944059237. Transferred $1,337,805.85 From the Woodward Family Trust to Zelotde Pty Ltd Atf The Rungdee Trust." Xpress Freightlines Pty Ltd is a company engaged in the trucking business, of which the first defendant is the sole director. 36The plaintiff did not give evidence in answer to the first defendant's evidence as to the manner in which the Trust was created, although in his affidavit he claimed to have established the Trust himself, and made the initial capital contribution from his own monies. 37The plaintiff did, however, give evidence in par 15 of his affidavit of 23 October 2013 that the first defendant threatened to "move everything" in the Trust to Thailand. After the end of his marriage (as referred to above) the first defendant formed an association with a Thai woman, and spent considerable time in Thailand as well as in Australia. The plaintiff also gave evidence, in par 17, that the first defendant said: "I am taking the money to Thailand." 38In par 45 of his own affidavit the first defendant denied that he said any of the things attributed to him in par 16 of the plaintiff's affidavit. In that paragraph the plaintiff summarised a conversation that he alleged took place between himself and the first defendant's solicitor in Port Macquarie. One of the statements that the solicitor allegedly attributed to the first defendant was that he had decided to move to Thailand, and take all of the money with him. 39The significance of the first defendant's denial is therefore uncertain. Strictly, the first defendant denied that he made the statement to the solicitor that he had decided to move to Thailand, and take all of the money with him. The first defendant did not deny the statements that the plaintiff attributed to him that were set out in pars 15 and 17 of the plaintiff's affidavit. 40The first defendant did not put forward any evidence that it would cause him any significant damage or inconvenience if an appropriate interlocutory injunction were to be made by the court to preserve the funds that were in the Trust's account as at 14 June 2013, pending the determination of the dispute between the parties. 41The defendants put into evidence a copy of a letter from the solicitor, referred to in par 16 of the plaintiff's affidavit, to the first defendant dated 29 May 2013, in which the solicitor conveyed to the first defendant an offer of settlement made by the plaintiff. The letter was probably subject to 'without prejudice' privilege, but no objection to the tender was made by the plaintiff. The letter suggested that, if the first defendant caused $200,000 to be paid into trust accounts established for each of two of the plaintiff's grandchildren, and $500,000 into a trust account for another grandchild, the plaintiff would release the defendants from his claims in relation to the Trust. 42In determining whether the plaintiff is entitled to any continuation of the interlocutory relief, and what that relief should be, the court must start from the position that the Trust exists on the terms of the trust deed. 43Prima facie, it was a contravention of the second defendant's duties as trustee for the second defendant to resolve to pay the $1,383,218.63 capital of the trust to the Rungdee Trust, as that contravened par 9(c) of the trust deed. The first defendant caused that payment to be made. The third defendant received the money, as trustee of the Rungdee Trust. For the purposes of this interlocutory application I would infer that the third defendant received the money with the first defendant's knowledge of the circumstances in which it had been paid. 44I have come to the conclusion that, at this interlocutory stage of the proceedings, there is a reasonably arguable case that, in relation to both resolutions to make distributions of the income and the capital of the Trust, the first defendant caused those payments to be made as he regarded the Trust as a sham and as a vehicle for holding assets to which he was personally entitled, without the limitations imposed by the Trust. On the evidence the validity of that claim is debatable. 45There is evidence about the circumstances in which the original capital contribution to the Trust was made. The plaintiff claims that he made the contribution out of the price for the purchase of his company's trucking business by the first defendant's company. The first defendant claims that all of the transactions were artificial. That is an issue that remains to be dealt with in the proceedings. The issue will only arise if the first defendant files a pleading that puts the original validity of the Trust in issue. 46There is virtually no evidence as to how the Trust accumulated the additional capital and income, save that the extract from the bank's diary, that is set out above, suggests that an amount of $885,000 from the first defendant's trucking company may have been paid out of a term deposit in its name into the Trust's account. 47There remains a very live issue as to the circumstances in which monies were paid into the Trust's account, and whether in reality all such monies were intended to be held on the terms of the Trust, or not. 48The Trust's accounts as at 14 June 2013 are not in evidence, and, strictly, the amounts which constituted income and capital have not been proved. The terms of the two resolutions, which are set out above, suggest that the defendants' accountant was satisfied as to which monies should be treated as income, and which monies should be treated as capital. 49I am satisfied that the plaintiff has made out, to the interlocutory standard, a prima facie case that he is entitled to the relief that he claims: Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57 at [19], [70]-[71]. 50The evidence justifies an inference that there is some risk that, if appropriate interlocutory orders are not made or continued, the first defendant will cause all of the monies distributed out of the Trust's account to be taken to Thailand. 51The defendants have not provided any evidence, at this stage, which would tend to support an argument that the balance of convenience did not favour interlocutory relief. 52On the other hand, there is a real possibility that the resolution to distribute the income was authorised by the trust deed. It may well be that a considerable part of the funds in the Trust's account were never intended to be held on the terms of the Trust. The first defendant may suffer practical difficulties if all of the funds are required to be preserved pending the final determination of these proceedings. 53I have come to the conclusion that the proper interlocutory order for the court to make is to order that each of the defendants cause all monies under their joint or separate control, that were paid out of the Trust's account following the resolutions made by the second defendant on or about 14 June 2013, to be paid within seven days into a joint account in the names of the solicitor for the plaintiff and the solicitor for the defendants, to be retained by those solicitors pending the further order of the court. 54Paragraph 7 of the amended summons seeks an order that the moneies be paid back into the Trust's account with the National Australia Bank. I would not make that order on an interlocutory basis, as the plaintiff may gain control of that account, if he exercises his power as appointor under the trust deed to replace the second defendant as trustee with himself. The account into which the moneys are to be paid should be under the joint control of the parties' solicitors. 55That order should be made on the basis that the defendants have leave on seven days' notice to the plaintiff to apply to the court for an order varying the first order, if upon evidence the defendants can establish that the balance of convenience favours the court ordering the solicitors to release to the defendants any specified sum for use by the defendants in any manner approved by the court. 56In this case the appropriate costs order is that the cost of the interlocutory application be each party's costs in the cause. In my view the evidence that has been placed before the court to date is not sufficient to permit the Court to form any sound initial view as to the likely outcome of any contested proceedings between the plaintiff and the defendants, and the range of potential outcomes from those proceedings is relatively open. 57I will make the following orders, subject to the solicitor for the plaintiff and the solicitor for the defendants having an opportunity to advise the Court that they are prepared to hold the funds in accordance with order (3): (1)Order that Zelotde Pty Ltd, as trustee for the Rungdee Trust, be joined in these proceedings as the third defendant. (2)Grant leave to the third defendant to apply on seven days' notice to the plaintiff for an order vacating the order that it be joined as a third defendant, and vacating or varying any of these orders as made against it. (3)On the plaintiff by his counsel giving the usual undertaking as to damages order, each of the defendants to cause all monies under their joint or separate control that were paid out of the Woodward Family Trust's account following the resolutions made by the second defendant on or about 14 June 2013 to be paid within seven days into a joint account in the name of the solicitor for the plaintiff and the solicitor for the defendants, to be retained by those solicitors pending the further order of the Court. (4)Grant leave to the defendants on seven days' notice to the plaintiff to apply to the Court for an order varying order (3) to authorise the solicitors for the parties to release to the defendants, or any of them, any specified sum for use by the defendants in any manner approved by the Court. (5)Direct the solicitors for the plaintiff and the defendants to advise the associate to Robb J within three working days whether or not they are prepared to hold the monies on the terms of order (3). (6)Order that the costs of the plaintiff's application for interlocutory relief be each party's costs in the cause. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 May 2014