Supreme Court New South Wales Medium Neutral Citation: Franz Boensch as trustee of the Boensch Trust v Scott Darren Pascoe [2015] NSWSC 1882 Hearing dates: 21, 22 and 23 September 2015 Date of orders: 10 December 2015 Decision date: 10 December 2015 Jurisdiction: Equity Before: Darke J Decision: Separate questions answered favourably to defendant. Proceedings dismissed with costs. Catchwords: REAL PROPERTY – caveats – whether caveat lodged or maintained without reasonable cause – whether trustee in bankruptcy of a registered proprietor has caveatable interest if property held on trust – whether caveator had honest belief based on reasonable grounds that it had a caveatable interest – Real Property Act 1900 (NSW), s 74P Legislation Cited: Bankruptcy Act 1966 (Cth) Federal Court of Australia Act 1976 (Cth) Real Property Act 1900 (NSW) Real Property (Caveats) Amendment Act 1996 (NSW) Real Property Regulation 2003 (NSW) Cases Cited: Bayblu Holdings Pty Limited v Capital Finance Australia Limited [2011] NSWCA 39 Beca Developments Pty Limited v Idameneo (No 92) Pty Limited (1990) 21 NSWLR 459 Bedford Properties Pty Limited v Surgo Pty Limited [1981] 1 NSWLR 106 Boensch v Pascoe [2007] FCA 1977 Brogue Tableau Pty Limited v Binningup Nominees Pty Limited (2007) 35 WAR 27; [2007] WASCA 179 Collingridge v Sontor Pty Limited [1997] NSWSC 522 Jubilee Properties v Parkview Farm [2013] NSWSC 2011 Lee v Ross (No 2) [2003] NSWSC 507 Lewis v Condon [2013] NSWCA 204 Mahendran v Chase Enterprises Pty Limited [2013] NSWCA 280 Marchesi v Apostoulou [2006] FCA 1122 Natuna Pty Limited v Cook [2007] NSWSC 121 Official Trustee in Bankruptcy v Ritchie (1988) 12 NSWLR 162 Pascoe v Boensch (No 6) [2007] FMCA 2038 Pascoe v Boensch [2008] FCAFC 147 Pascoe v Boensch (No 9) [2009] FMCA 769 Pascoe v Boensch [2009] FCA 1240 Young v Rydalmere Credits Pty Limited (1963) 80 WN (NSW) 1463 Category: Principal judgment Parties: Franz Boensch as trustee of the Boensch Trust (Plaintiff) Scott Darren Pascoe (Defendant) Representation: Counsel: Mr C J Bevan, Ms I Sethi (Plaintiff) Mr D L Williams SC, Mr M F Newton (Defendant) Solicitors: Somerville Legal (Plaintiff) Gilchrist Connell Legal (Defendant) File Number(s): 2012/165657 Publication restriction: None Judgment Introduction 1. These proceedings are brought by Mr Franz Boensch against Mr Scott Pascoe. Mr Pascoe was formerly the trustee of Mr Boensch's bankrupt estate. The proceedings principally concern the lodgement by Mr Pascoe of a caveat (AB 721857) over a property in Victoria Road Rydalmere. Mr Boensch and his former wife Sabine Boensch were at all relevant times joint registered proprietors of the property. 2. The caveat was lodged on 25 August 2005. It ultimately lapsed in September 2009. Mr Boensch claims that Mr Pascoe, without reasonable cause, lodged, and later refused or failed to withdraw, the caveat. Mr Boensch seeks compensation from Mr Pascoe pursuant to s 74P(1) of the Real Property Act 1900 (NSW) ("the Act"). 3. The caveat lodged by Mr Pascoe concerned only Mr Boensch's interest in the property. The caveat described the nature of the estate or interest claimed in the land as "legal interest pursuant to the Bankruptcy Act 1966". The estate or interest was said to arise by virtue of the sequestration order made against Mr Boensch and Mr Pascoe's appointment as trustee. It was stated that: Pursuant to sections 156A(3) and 58(1)(a) of the Bankruptcy Act 1966 property of the bankrupt vests in the Trustee. 1. On 15 May 2015, Bergin CJ in Eq. made an order by consent pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 28.2 for the determination of separate questions in the proceedings. The questions the subject of the order are: 1. Did the defendant lodge Caveat AB721857 over property situated at 255 Victoria Road, Rydalmere (Caveat) without reasonable cause within the meaning of section 74P(1) of the Real Property Act 1900 (NSW) (Act)? 2. Did the defendant, without reasonable cause within the meaning of s 74P(1) of the Act, refuse or fail to withdraw the Caveat after being requested to do so? 3. If the answer to Question 2 above is "Yes", on what date should the defendant have withdrawn the Caveat? 1. The hearing of the separate questions took place on 21, 22 and 23 September 2015. At the commencement of the hearing, Mr Pascoe made an application that a different question be determined as a threshold issue. The question proposed was whether the defendant had a caveatable interest in the property during the relevant period. Not being convinced that such a course would be productive of a quicker or more efficient disposition of the issues, I declined the application. 2. Mr Boensch sues in his capacity as trustee of the Boensch Trust, which was established by a Memorandum of Trust dated 23 August 1999. The Memorandum of Trust provided for the Rydalmere property to be the trust property. 3. The validity of the Boensch Trust became a matter of controversy between Mr Boensch and Mr Pascoe. So, too, did the question whether any transfer of property effected by the Memorandum of Trust was void against Mr Pascoe by reason of s 121 of the Bankruptcy Act 1966 (Cth). These matters were litigated in the Federal Magistrates Court and the Federal Court over a period of some years. Ultimately, Mr Boensch prevailed. 4. Mr Boensch contends that the lodgement of the caveat by Mr Pascoe, and the subsequent maintenance of the caveat in the face of requests to withdraw it, was without reasonable cause. He submits that Mr Pascoe did not have a caveatable interest in the property. He further submits that Mr Pascoe did not have (or could not have had) an honest belief, based on reasonable grounds, that he had a caveatable interest in the property in circumstances where, at relevant times, he had no basis to dispute the validity of the trust (see Statement of Claim paragraphs 7, 8, 13, 18 and 23). 5. Mr Pascoe asserts that he did have a caveatable interest. He further maintains that it was reasonable for him to dispute the validity of the trust and, in the alternative, the transfer of the property into the trust. He says that he was entitled to assert an interest in the property in anticipation of the trust being held invalid or the transfer of the property being set aside, and that he was entitled to assert an interest in the property by reason of Mr Boensch's right of indemnity from the trust property. Mr Pascoe contends that it was reasonable for him to lodge the caveat to protect the legal estate or interest in the property of the bankrupt estate. 6. Before dealing with the competing arguments in detail, it is desirable to set out a summary of the salient events. Summary of salient events 1. Mr Boensch and Sabine Boensch reached a matrimonial property settlement in May 1999. It was agreed that in consideration of a payment to her of $50,000, Sabine Boensch would transfer her interest in the property to Mr Boensch. Such transfer was not actually effected until July 2010. 2. On 23 August 1999 Mr Boensch and Sabine Boensch executed a Memorandum of Trust document which was in the following terms: This is a memorandum of trust created for the benefit of Boensch family with the most important purpose to provide secure means of support to the children of the marriage, Dominic Boensch and Stefanie Boensch, after the divorce of their parents. The trust property is the land and buildings at 255 Victoria Rd, Rydalmere NSW. Sabine Boensch will cause her share of ownership of that land to be transferred to Franz Boensch for him to hold the whole of the land in trust as described above. In due course Franz Boensch will arrange with a solicitor or accountant to prepare a detailed trust document, professionally drafted to give best protection to the children and to ensure favourable tax treatment of income earned by the trust. 1. The signatures were witnessed by a Justice of the Peace, Leon Michael Parsons. The document was not stamped until 29 March 2004. 2. In the meantime, in July 2003 a Mr Michael Costin obtained a judgment against Mr Boensch in the Ryde Local Court. The judgment was obtained after a hearing that lasted some ten days. In October 2003, Mr Costin served a bankruptcy notice on Mr Boensch in respect of that judgment. 3. On 18 March 2004, Mr Boensch and Sabine Boensch as settlors, and Mr Boensch as trustee, entered into a Deed of Trust. The Deed had apparently been prepared by JP Leong & Co, solicitors. It was recited in the Deed that: A. The Settlors wishes to confirm settlement made by them jointly in a "Memorandum of Trust" dated 23 August 1999 upon the trustee as trustee of the settlement and to specify the terms of the trusts on which the trust property is held pursuant to that settlement by the trustee in this deed. B. The trustee has agreed to act as first trustee of the settlement made on 23 August 1999 in the "Memorandum of Trust". C. The terms upon which the settlement was made are now set forth at length in this Deed. D. The parties agree that the settlement made on 23 August 1999 will be named the "Boensch Trust". 1. The Deed of Trust further provided: The trustee acknowledges having received from the Settlors a transfer of title to the fee simple in the property known as 255 Victoria Road, Rydalmere in the State New South Wales, Folio Identifier Auto Consul 7366-5 which the trustee has held on the trusts of the Settlement since 23 August 1999 and continues to so hold. The Settlement shall be known as "BOENSCH TRUST". Until the Vesting Date the trustee must pay the income derived in each year of income in the manner provided by the terms of this deed. The trustee may pay or apply the income to any one or more of the beneficiaries as the trustee thinks fit without any obligation to make payment to all the beneficiaries or to ensure equality among those to whom payments are made…… 10. Subject to the rest of this clause the trustee must pay or transfer the capital on the Vesting Date: (a) to such of the beneficiaries and in such manner as the first named Appointor may by his last will appoint but in default of that appointment…… 15. No trustee may participate in a distribution of income or capital by reason of failure by the Trustee to make a determination under either clause 3 or clause 10 of this deed. 16. The Settlors and the Trustee or any future trustees cannot become beneficiaries. 1. The Appointor was defined to mean Mr Boensch. The beneficiaries were defined as "the first group beneficiaries" which, in turn, were defined as the children of Franz Boensch and Sabine Boensch. The Memorandum of Trust dated 23 August 1999 was attached to the Deed of Trust. 2. On 21 March 2004 Mr Boensch and Sabine Boensch executed a transfer of an estate in fee simple in the property in favour of Mr Boensch. It seems that the transfer was not able to be registered for a time because the first mortgagee, State Bank of New South Wales Limited, would not consent to the registration. 3. In July 2005 Mr Boensch lodged the Deed of Trust (with the attached Memorandum of Trust) and made a Request that the Registrar-General record a caveat in respect of the property pursuant to s 82 of the Act forbidding registration of any instruments not in accordance with the trusts declared by the Memorandum of Trust and the Deed of Trust. Such a caveat was recorded on about 17 August 2005. 4. Also in July 2005 Mr Costin filed a Creditor's Petition in the Federal Magistrates Court, seeking a sequestration order against Mr Boensch. A sequestration order was made on that petition on 23 August 2005 and Mr Pascoe, who was then a partner of the firm Sims Partners, became the trustee of Mr Boensch's bankrupt estate. As Mr Pascoe had earlier provided his consent to act as trustee, he became trustee by virtue of the operation of s 156A(3) of the Bankruptcy Act. He provided his consent following a request made by Mr Costin's solicitor, Ms Karen McLean. 5. Mr Pascoe spoke to Ms McLean on 23 August 2005, shortly after the orders had been made on that day. Mr Pascoe initially deposed that it was a conversation over the telephone. In a later affidavit, Mr Pascoe referred to some Sims Partners billing records, and on the basis of such records, expressed the belief that the conversation may have occurred in a face to face meeting. The billing records contain an entry on 23 August 2005 for Mr Pascoe meeting with Ms McLean. In any case, Mr Pascoe made a file note during the conversation. The file note contains a reference to the Rydalmere property and a "purported trust" in conjunction with a reference to Mr Jim Johnson, counsel for Mr Costin, which says: Jim says lay down to set aside. 1. Mr Pascoe deposed that Ms McLean told him in substance that Mr Johnson believed that there were strong prospects of defeating the trust claim or having any purported trust set aside. In cross examination, Mr Pascoe said that he recalled Ms McLean had used the expression "lay down misere", but the word "misere" did not appear in the note because he was not able to spell it. He rejected the suggestion that the note concerned a recommendation by Ms McLean not to oppose an application to set aside the sequestration order. 2. Later on 23 August 2005 a title search for the Rydalmere property was undertaken by Mr Richard Moretti, an employee of Sims Partners who was assisting Mr Pascoe on the matter. The search showed that Mr Boensch and Sabine Boensch were joint registered proprietors. It also disclosed the existence of the caveat recently recorded by the Registrar-General. 3. Mr Pascoe and Mr Moretti had a lengthy meeting with Mr Boensch at the Sims Partners office on 24 August 2005. I accept Mr Pascoe's evidence that he made a file note during the meeting. Mr Boensch deposed that Mr Pascoe did not take any notes at all during the meeting, but I think he is mistaken in that belief. It appears that Mr Boensch provided certain documents to Mr Pascoe during the meeting, including a copy of the Memorandum of Trust dated 23 August 1999, and at least the front page of the Deed of Trust. There was clearly some discussion at the meeting about the trust and its establishment. I accept that Mr Boensch said that the Rydalmere property was held by him on trust for his children. 4. The caveat was prepared on 25 August 2005. The statutory declaration as to belief in the validity of the estate or interest claimed was made by Ms McLean. The making of the declaration was witnessed by Mr Paul Russell, an employee of Sims Partners who was also a Justice of the Peace. 5. Mr Pascoe was unable to recall any conversation with Ms McLean in which he gave instructions for the lodgement of a caveat. However, the Sims Partners billing records contain entries on 23 August 2005 and 25 August 2005 for both Mr Pascoe and Mr Moretti meeting with Ms McLean. (I note that the meeting with Mr Boensch appears in the billing records against the date 25 August 2005 rather than the actual date of the meeting, being 24 August 2005. The date of the item might be explained by when the entry was made in the billing system rather than when the event actually occurred). It is likely that by 25 August 2005 both Mr Pascoe and Mr Moretti had twice met with Ms McLean in relation to the matter. In my view it is likely that the preparation and lodgement of the caveat was discussed on one or more of those occasions, and that Ms McLean was instructed, by either or both of Mr Pascoe and Mr Moretti, to lodge the caveat. I infer that if Mr Moretti gave the instruction, he did so with the knowledge and approval of Mr Pascoe. I do not accept the suggestion that Mr Pascoe had no knowledge of the lodgement of the caveat. 6. Mr Pascoe deposed that where a bankrupt was a registered proprietor of land it was his usual practice to lodge a caveat over the property at an early stage in the administration. He further deposed that, in following that practice, he believed that as trustee of the bankrupt estate he had an interest in the land which would support a caveat. In cross examination, Mr Pascoe could not recall whether he actually turned his mind to whether lodging the caveat was a good idea. However, he did not accept that he did not formulate in his own mind whether he had a caveatable interest, and he did not accept that when the caveat was lodged he did not have an honest belief that he had a caveatable interest. He said that he understood that whatever interest the bankrupt had as at the date of the bankruptcy was vested in him as trustee. 7. Mr Pascoe deposed that it was usual that the caveats he lodged claimed an interest by virtue of the Bankruptcy Act. He described the form of words used in the caveat in the present case as "a relatively standard form of wording used in caveats lodged in my name as a bankruptcy trustee". 8. Mr Pascoe further deposed that he did not think he should depart from his usual practice in Mr Boensch's case. He deposed that following the meeting with Mr Boensch, he was not satisfied about Mr Boensch's claims of a trust, and he suspected that he may be making such a claim as a means of putting the asset beyond the reach of his creditors. I accept that the instructions for the lodgement of the caveat were given in accordance with the usual practice described by Mr Pascoe. 9. The caveat was lodged promptly, even before Mr Pascoe had received official notification of his appointment from Insolvency and Trustee Service Australia ("ITSA"). Mr Pascoe agreed in cross examination that when the caveat was lodged, he had no reason to believe one way or the other whether Mr Boensch was insolvent when the trust was established in 1999. He also agreed that there was no suggestion of an imminent transfer of the Rydalmere property. Mr Pascoe explained that as a general proposition the trustee needs to act quickly to lodge a caveat because there may be unknown circumstances that could affect the title to the property. 10. On 29 August 2005 Ms McLean sent a letter to Sims Partners, marked to the attention of Mr Pascoe, confirming that the caveat had been lodged. The letter refers to a memorandum of costs and disbursements. That document is not in evidence. However, it appears from the Sims Partners billing records and a tax invoice dated 16 September 2009, that Ms McLean's firm charged $370.23 in relation to the caveat. A submission that Ms McLean's letter of 29 August 2005 was a sham, designed to give the impression that she had been retained in relation to the caveat, was ultimately not pressed. 11. Also on 29 August 2005 Mr Pascoe sent a notice pursuant to s 77A of the Bankruptcy Act to JP Leong & Co. Solicitors seeking production, by 12 September 2005, of documents including files concerning the Boensch Trust. Mr Leong received the letter on about 31 August 2005. Mr Leong deposed that he took no immediate action in response to the notice because he considered that virtually the entirety of his file relating to the trust was privileged. On 23 September 2005 Mr Pascoe sent a letter to Mr Leong stating that as the s 77A notice had expired, he was referring the matter to ITSA for prosecution. On 29 September 2005 Mr Leong replied, stating that the notice had in essence been complied with. The letter further stated that Mr Pascoe "as trustee of the bankrupt estate is de facto trustee of the Trust", and advice was sought as to whether Mr Pascoe would be prepared to relinquish the position. Mr Leong further deposed that he then had a conversation with Mr Moretti. He says that even though he informed Mr Moretti that at least parts of the file were privileged, Mr Moretti demanded that he produce the file or face prosecution. Mr Leong says that he then photocopied his entire file and sent it to Mr Pascoe on 30 September 2005 without formulating any claims for privilege. The documents produced were subsequently inspected by Mr Pascoe. 12. In the meantime, on 1 September 2005 ITSA forwarded to Mr Pascoe an email sent by Mr Boensch on 31 August 2005. In the email, Mr Boensch referred to be being trustee of a trust of a property for his children, and stated that the agreement for the trust was made with a memorandum of trust in 1999. The email went on to refer to a decision made in 2003 to establish a trading trust with Elise Capital Pty Limited (a company of which Mr Boensch is the sole director) as trustee, and Mr Boensch and his children as beneficiaries. 13. Mr Pascoe deposed that the assertion of two different trusts increased his suspicion that Mr Boensch was making statements of that kind in order to defeat creditors. When challenged about the basis for any such suspicion, Mr Pascoe said that the reason was that the deed of confirmation of the first trust occurred after the establishment of the second trust and in circumstances where Mr Boensch was being pursued by a creditor, namely, Mr Costin. 14. Mr Pascoe and Mr Moretti had another meeting with Mr Boensch on 22 September 2005. I again accept that Mr Pascoe made a file note during the meeting. On this occasion, Mr Boensch produced his Statement of Affairs. In answer to the question when he first had difficulty paying his debts, Mr Boensch stated "always". In relation to the mortgage over the Rydalmere property (the mortgagee of which was now the Commonwealth Bank of Australia) Mr Boensch stated that the loan repayments are made by the Boensch Trust and that he considered himself to be a joint guarantor of the mortgage. The Statement of Affairs also referred to Elise Capital Pty Limited, as trustee of Boensch Family Trust No 1 and Boensch Family Trust No 2. 15. In Mr Pascoe's file note there is a reference to Elise Capital Pty Limited and trusts, next to a note "never done anything yet". There is a reference to "Trust" next to notes "s 75 proposal", and "sensible commercial advice to cut losses…….". Mr Pascoe deposed that he suggested that it might be sensible for Mr Boensch to make a proposal to creditors under s 75 of the Bankruptcy Act, and that he made that suggestion because he was not persuaded by Mr Boensch's trust claims in relation to the Rydalmere property. 16. On 23 September 2005 Mr Pascoe received a telephone call from a solicitor, Mr Stephen Mullette, of the Argyle Partnership. Mr Mullette said he was acting for Mr Boensch. It appears from Mr Pascoe's file note of the conversation that there was discussion about the caveat and its removal. On 27 September 2005 Mr Mullette sent a letter to Mr Pascoe which included the following: I note that following your appointment, and no doubt as a matter of course, a caveat was lodged on Property Registered in the name of Mr Boensch together with his former wife, Sabine Boensch, at 255 Victoria Road, Rydalmere, being Volume 7366 Folio 5 ('the Property'). I am instructed that the Property is held on trust for Mr Boensch's children pursuant to the terms of a memorandum of trust created between Mr Boensch and his former wife on 23 August 1999, and confirmed by Deed of Trust dated 18 March 2004. A copy of these documents are enclosed. No doubt you will need to review these documents for your own benefit. However, the terms of the trust are clear, such that the property does not fall within the divisible property in the bankruptcy, and the trustee's interest will not support the caveat lodged on the title. My client requests that the caveat be withdrawn within 21 days from the date of this letter, in the absence of which he will need to consider his options, including whether to file a lapsing notice at the Department of Lands. I will notify you prior to filing the lapsing notice. If you require longer than the 21 days to form a view on my client's claim please advise how long and I will obtain instructions. 1. On 30 September 2005 Mr Pascoe sent a letter to Mr Leong. He stated that in his opinion the trustee in bankruptcy does not take over the role of trustee of the trust. Mr Pascoe also confirmed receipt of the copy of Mr Leong's file. 2. The file produced by Mr Leong contained a further copy of the Memorandum of Trust dated 23 August 1999. This copy was executed, but there was no notation that the execution had been witnessed by a Justice of the Peace. There were also some formatting differences between this copy and the copy of the Memorandum of Trust previously provided. Mr Pascoe thought this unusual in the absence of some explanation. He deposed that his scepticism about Mr Boensch's claims was increased by another document produced by Mr Leong, being a letter from Mr Leong to Mr Boensch dated 17 March 2004, which refers to Mr Boensch wanting to be nominated as a beneficiary of the trust. Mr Pascoe's suspicions were further aroused by affidavits signed by Mr Boensch and Sabine Boensch in March 2004 (which he thought may have been prepared for the purpose of supporting the claim that the property had been held on trust since 1999), and by the executed transfer to Mr Boensch dated 21 March 2004 (which he suspected was part of an attempt by Mr Boensch to defeat his creditors). 3. On 11 October 2005 a letter was sent to Mr Moretti by Mr George Nicolaou, an accountant who it seems acted for Mr Boensch and some companies associated with Mr Boensch or Sabine Boensch, including Elise Capital Pty Limited and Boensch Pty Limited. Mr Nicolaou's letter was accompanied by various records including trust deeds dated 18 November 2003 for Boensch Family Trust No 1 and Boensch Family Trust No 2 – Rentals. Mr Pascoe deposed that when he reviewed those trust deeds he had difficulty understanding what assets were held in the trusts, and this reinforced doubts about whether the documents already provided by Mr Boensch truly reflected his affairs. 4. On 12 October 2005 Mr Pascoe sent a letter to Mr Mullette requesting that Mr Boensch provide, by 8 November 2005, any documentation he intended to rely on in establishing the trust. Mr Pascoe also asked for the originals of the constituent trust documents. In a further letter sent on that date to Mr Mullette, Mr Pascoe asked for a period of 60 days in which to obtain documentation and advice, and form a view about Mr Boensch's claim. 5. On 17 October 2005 Mr Pascoe, Mr Moretti and Ms McLean attended a conference with Mr Johnson of Counsel. Mr Pascoe recalls discussion about the need to see original documents. Following the conference, Mr Pascoe sent a letter to Ms McLean outlining the further actions to be undertaken by each of them in relation to the "recovery process". It was envisaged that, in the first instance, preliminary advice on prospects of success would be obtained from counsel. It was also contemplated that examinations of Mr Boensch and Sabine Boensch may be necessary. 6. On 21 October 2005 Mr Pascoe made his first report to creditors. On page 3 of the report Mr Pascoe advised that he was investigating the validity of the trust asserted by Mr Boensch in the light of issues such as that "no action in relation to the trust appears to have been taken until 2003". Mr Pascoe also referred to the Registrar-General's caveat, which prevented him from registering himself on the title, and his own caveat which had been lodged "to protect the interests of creditors". 7. On 24 October 2005 Mr Pascoe sought information from the Commonwealth Bank of Australia concerning the mortgage over the Rydalmere property. On 28 October 2005 he sent a letter to Mr Boensch requiring him to produce the original Boensch Family Trust Deed and original Declarations of Trust. 8. On 31 October 2005 Mr Mullette sent a letter to Mr Pascoe which included the following: I refer to your recent letters. Mr client relies on the trust deed and declaration provided to you previously. If there is any reason not to accept these documents as sufficient to satisfy the trustee of the claim of my client, then please advise. Otherwise I will be advising my client to lodge an application for a lapsing notice on the caveat on the property. My client is not prepared to wait 60 days and does not understand why such a long period would be required. I note that you have requested certain documents from my client, including original trust documentation. This is not property of the bankrupt estate, and is required for the administration of the trust. My client will provide a certified copy shortly, and is prepared to allow the inspection of the original trust deed at our offices by prior arrangement…… I look forward to your advice as to when the caveat will be withdrawn. 1. As foreshadowed in Mr Mullette's letter, on 7 November 2005 Mr Boensch forwarded a certified copy of the Deed of Trust dated 18 March 2004. Attached to that document was a certified copy of the Memorandum of Trust dated 23 August 1999. On 9 November 2005 Mr Mullette advised that the original Boensch Trust Deed was available for inspection at his office. 2. On 11 November 2005 Mr Leong sent a letter to Mr Pascoe maintaining that the trust property now vested in Mr Pascoe as Mr Boensch's trustee in bankruptcy, and requesting Mr Pascoe to sign a deed providing for Sabine Boensch to be appointed as trustee of the trust. 3. On 15 November 2005 Mr Mullette sent a letter to Mr Pascoe in which he took issue with the concerns Mr Pascoe had expressed in his report to creditors concerning the validity of the trust. The letter concluded with the following: In reality, it seems to us, the only basis upon which the trust may be questioned is if the Memorandum of Trust dated 23 August 1999 is some form of fraud or sham. There is simply no evidence or indication of this and we do not understand the trustee to seriously contest otherwise. If we are incorrect, please let us know. In the circumstances, then, there can be no question of the entitlement of our client, as trustee of the Boensch Trust to hold the property clear of any encumbrances including the caveat which you have caused to be lodged. Our client instructs us that he has given all such information as the trustee required in relation to the establishment of the trust, and yet the report to creditors and our previous communications have given no indication that the caveat will be withdrawn in the immediate future. In the circumstances, our client is no longer prepared to suffer the caveat to remain on title. We will be filing a Lapsing Notice after seven days from the date hereof unless the caveat is withdrawn by that time. 1. That letter constitutes the first request to remove the caveat identified in the Statement of Claim. 2. A meeting of creditors was held on 16 November 2005. The minutes reveal that there was discussion concerning the possibility of action to recover property from the trust, and the funding of such. Mr Pascoe deposed that at some time prior to that meeting he formed the view that even if Mr Boensch's trust claims were valid Mr Boensch was likely to have a trustee's right of indemnity out of trust assets. 3. It appears that on about 23 November 2005 Ms McLean spoke to Mr Mullette. Arrangements were made for an inspection of the original trust documents, and Mr Mullette agreed that in the meantime no lapsing notice would be issued. 4. On 30 November 2005 Mr Pascoe and Mr Moretti attended at Mr Mullette's office to inspect the original trust documents. Once again I accept that Mr Pascoe made a file note during the meeting. Mr Boensch was in attendance. He produced the original documents. Mr Pascoe deposed that he was assured by Mr Boensch that there was only one original executed Memorandum of Trust. In light of the existence of a second executed version of the Memorandum of Trust (as produced by Mr Leong) Mr Pascoe felt further doubt concerning Mr Boensch's credibility. Mr Pascoe's file note of the meeting does suggest that Mr Boensch said that there was only one original Memorandum of Trust. The file note also suggests that Mr Boensch said that the Memorandum of Trust had been signed at the home of the Justice of the Peace. 5. On 5 December 2005 Mr Mullette sent an email to Ms McLean (copied to Mr Pascoe). The email apparently attached a statutory declaration made by Mr Boensch to the effect that there was only one version of the Memorandum of Trust. The email itself provided an address for Mr Parsons, the Justice of the Peace who apparently witnessed the signatures on the Memorandum of Trust. The email included the following: On my instructions and from the documents I have seen, there can be no question that the trust is valid. My client intends filing a lapsing notice shortly. I will seek instructions and notify you beforehand. If you have any reason to suspect that the trust is not exactly what it says it is, I would be happy to take instructions regarding the trustee's concerns. 1. On 14 December 2005 Mr Leong sent a letter to Mr Pascoe calling for the execution of the deed he had earlier forwarded to him. Mr Leong stated that if the deed was not executed and returned by 27 January 2006 then proceedings would be commenced. 2. It appears that there was no response by Mr Pascoe to either Mr Mullette's email of 5 December 2005 or Mr Leong's letter of 14 December 2005. Nevertheless, no lapsing notice was served and no proceedings were commenced. 3. On 21 February 2006 Mr Boensch sent an email to Mr Pascoe which attached a signed statement which sought to provide detailed answers to various matters that had been raised. The statement included the following: Most of the living expenses are provided for by the Trust. I live at the trusts will. At the moment I do not have any living expenses. My accommodation is at the mercy of the Trust as it is a mutually beneficial arrangement. I provide some form of security for the balance of the property. 1. On 22 February 2006 Mr Pascoe sent a letter to Mr Boensch seeking further information, including as to the mutually beneficial arrangement referred to by Mr Boensch in his statement. Mr Boensch responded by stating, in effect, that the mutually beneficial arrangement only concerned the room he occupied. He explained that it was not of a standard as would permit it to be let, and the mutual benefit was that he had a roof over his head and the trust property had the appearance of being occupied. 2. Arrangements were then made for examinations of Mr Boensch and Sabine Boensch to take place on 3 May 2006 in the Federal Court. Sabine Boensch attended and was examined on that occasion. Mr Boensch was not able to attend due to medical reasons. He was eventually examined in March 2009. 3. A second meeting of creditors was convened to take place on 9 June 2006. A motion to remove Mr Pascoe as trustee of the bankrupt estate was on the agenda. The motion was lost in circumstances where it was opposed by Mr Costin, who accounted for more than 54% of the value of creditors entitled to vote. The minutes of the meeting indicate that Mr Pascoe informed those present that he had obtained advice regarding recovery of assets pursuant to s 121 of the Bankruptcy Act, and that he had formed a view that he had reasonable prospects of success in proceedings seeking the recovery of property from the trust. 4. Mr Pascoe deposed that he had by that time received a Memorandum of Advice from Mr Johnson of counsel. In cross examination Mr Pascoe confirmed, in effect, that he relied on that advice in forming his view as to reasonable prospects of success. 5. Mr Johnson's Memorandum of Advice was prepared after the examination of Sabine Boensch. It commences by setting out a chronology of relevant events. After referring to certain aspects of the examination of Sabine Boensch, Mr Johnson expressed the view that as the underlying transaction concerning the trust took place on 23 August 1999, a claim under s 120 of the Bankruptcy Act would not be available. He then turned to whether a claim could be made under s 121 of the Bankruptcy Act. Mr Johnson continued: It is clear from the terms of the trust document of 23 August 1999 that there was no consideration paid for the transfer. It is equally to be inferred from the file notes which I have referred to in the above chronology that at all times it was the intention of the bankrupt to retain an equity in the property which was the subject of the Declaration of Trust. To that extent the terms of the Memorandum of Trust would appear, at least until the signing of the Deed of Confirmation, a "sham" or illusory not truly and properly reflecting the intention to create legal relationships between the parties reinforced in the present circumstances having regard to the expressed desire on the part of the bankrupt in communications with JP Leong to retain a position of beneficiary of the property when the new trust was being considered. 1. After noting a number of matters that appeared relevant, Mr Johnson expressed his opinion that it was appropriate (subject to obtaining funding) for Mr Pascoe to make an application for orders seeking relief under s 121 of the Bankruptcy Act to set aside the Memorandum of Trust and the Deed of Confirmation (presumably a reference to the Deed of Trust made on 18 March 2004). 2. On 19 July 2006 Mr Pascoe commenced proceedings against Mr Boensch and Sabine Boensch in the Federal Magistrates Court. The relief sought included declaratory relief to the effect that the Memorandum of Trust, the Deed of Trust and the transfer dated 21 March 2004 were of no force or effect, a declaration under s 121 of the Bankruptcy Act that the Memorandum of Trust was void as against Mr Pascoe, and relief under s 120 or alternatively s 121 of the Bankruptcy Act in respect of the Deed of Trust and the transfer dated 21 March 2004. Ms McLean acted as Mr Pascoe's solicitor in the proceedings. Mr Johnson of counsel was briefed throughout. Mr Pascoe deposed that, based on the legal advice provided to him, he believed that the proceedings had good prospects of success. 3. On 29 August 2006 Mr Johnson sent an email to Ms McLean. Mr Pascoe's files do not contain any record of the email being sent or provided to him. Mr Pascoe deposed to a belief that he probably saw the email in about August 2006, but in cross examination conceded that there was really no evidence that he saw it at that time. Mr Johnson's email refers to a recent decision of the Federal Court in Marchesi v Apostoulou [2006] FCA 1122. It appears that Mr Johnson considered that the principles concerning voluntary assignments that were discussed in that case were of relevance to the proceedings against Mr Boensch. Mr Johnson concluded that it was obvious that Memorandum of Trust was an imperfect gift and was not effective to convey any equity for the purposes stated. He further stated that if the Deed of Confirmation was anything it was a declaration of trust which would clearly fall within the ambit of ss 120 and 121 of the Bankruptcy Act. 4. The litigation in the Federal Magistrates Court continued. It appears that there were numerous interlocutory disputes, including in relation to whether privilege had been lost in relation to certain documents relied upon by Mr Pascoe. On 8 October 2006 Ms McLean forwarded to Mr Pascoe a report made to her by Mr Johnson concerning a directions hearing held in the matter. Mr Johnson's report contains the following: As indicated to you in conference, I consider the position of the Trustee, Applicant, should be that even if the documents which are the subject of the claim for privilege are not capable of being used, there would be reasonable prospects of success in relation to the proceedings, both in relation to Milroy v Lord issue and also in relation to the operation of sections 120 and 121 of the Bankruptcy Act 1966. 1. Mr Pascoe deposed that he noted Mr Johnson's advice to that effect. 2. On 27 November 2006 Mr Johnson sent an email to Ms McLean (copied to Mr Pascoe). In that email, Mr Johnson expressed the opinion that, having regard to the judgment in Marchesi v Apostoulou (supra), and a further judgment of the Federal Court in Official Trustee v Turner, Mr Pascoe was entitled to be registered as the proprietor of the Rydalmere property. 3. Mr Pascoe and Mr Moretti attended a conference in Mr Johnson's chambers on 13 December 2006. It appears that the purpose of the conference was to discuss the proceedings that had recently been commenced by Mr Boensch against Mr Pascoe in which orders for his removal as the trustee in bankruptcy were sought. Ms McLean did not attend the conference as Mr Pascoe was concerned that she might have a conflict in dealing with those proceedings. Mr Pascoe explained in cross examination that he was concerned she might be a witness in those proceedings. Mr Johnson dictated a Memorandum of Advice during the conference. A copy of the Memorandum of Advice was sent to Mr Pascoe on 18 December 2006. It refers to Mr Johnson's view, based on Marchesi v Apostoulou (supra) that the Memorandum of Trust (incorrectly said to be dated August 2003) was an imperfect gift. 4. Mr Pascoe subsequently retained Ms Sally Nash, solicitor, to act for him in the proceedings brought by Mr Boensch. In March 2007, in the course of those proceedings, Mr Boensch produced to his solicitors the original transfer dated 21 March 2004. Those solicitors were instructed to hold the document in their possession pending the final decision of the Court in Mr Pascoe's proceedings. They were instructed that if the Court found that the trust was validly constituted then the transfer would be returned to Mr Boensch, but if the Court found that the trust was not validly constituted they would deliver the transfer to Mr Pascoe. In a letter dated 11 April 2007 to Mr Pascoe, Ms Nash expressed the view that the transfer was clearly void under s 120 or s 121 of the Bankruptcy Act. Mr Pascoe deposed that he noted that Ms Nash's views were generally consistent with the other advice he had received. He agreed in cross examination that in circumstances where Ms Nash was not retained in the Federal Magistrates Court proceedings, he could not place much weight on those views. 5. On 6 September 2007 an order was made in Mr Pascoe's proceedings for the determination of a preliminary question, namely, whether the Memorandum of Trust constituted a valid declaration of trust or otherwise created a valid interest in the Rydalmere property. The question was heard by Raphael FM in November 2007. His Honour delivered judgment on 6 December 2007 (see Pascoe v Boensch (No 6) [2007] FMCA 2038). He answered the question in the affirmative, and thus adversely to Mr Pascoe. 6. On 10 December 2007 Wright Commercial Lawyers, acting for Mr Boensch, sent a letter to Ms McLean formally requesting that Mr Pascoe withdraw his caveat. The letter stated that if the caveat was not promptly removed then Mr Boensch would either apply for an order for removal under s 74MA of the Act or apply under s 74J of the Act for a lapsing notice to be prepared. The request was expressly made to be without prejudice to Mr Boensch's rights to claim compensation under s 74P of the Act. 7. The letter from Wright Commercial Lawyers constitutes the second request to remove the caveat identified in the Statement of Claim. It was forwarded by Ms McLean to Mr Pascoe and Mr Johnson as an attachment to an email she sent later on 10 December 2007. Her email included the following: I trust that my instructions will be to give an indication that an appeal will be lodged and accordingly the caveat will not be removed until the appeal has been determined. 1. Mr Pascoe deposed that he recalls having an understanding from his lawyers that he had a proper basis to maintain the caveat at least until the determination of an appeal from the judgment of Raphael FM. He further deposed that he did not receive any legal advice following that judgment to the effect that he ought to withdraw the caveat. In cross examination, Mr Pascoe agreed that he did not seek or obtain advice at that time as to whether the caveat should be withdrawn. He further stated that by 10 December 2007 he had discussed the matter with Ms McLean, and a view had been formed that an appeal was likely to be lodged. He said that the terms of Ms McLean's email reflected that position. 2. On 16 December 2007 Ms McLean sent a further email to Mr Pascoe, seeking confirmation that she could respond to Wright Commercial Lawyers by saying that the caveat will not be removed and that it is likely that an appeal will be lodged. It is not clear what instructions, if any, were given by Mr Pascoe to Ms McLean at that time. 3. In the meantime, on 13 December 2007 Mr Boensch's proceedings against Mr Pascoe were dismissed (see Boensch v Pascoe [2007] FCA 1977). Ms Nash, in an email to Mr Pascoe on 17 December 2007 concerning those proceedings, made some observations concerning the proceedings in the Federal Magistrates Court. She referred, for example, to the issue of proof of insolvency in 1999 and also to Mr Boensch's right of indemnity out of trust assets. 4. On 18 December 2007 Ms McLean forwarded to Mr Pascoe an email she had received from Mr Johnson. In his email, Mr Johnson expressed the view that it would be appropriate for Mr Pascoe to seek leave to appeal from the judgment of Raphael FM. He further stated that he proposed to discuss the appeal with Mr Bigmore QC in Melbourne. 5. Mr Johnson sent a further email to Ms McLean on 17 January 2008 (copied to Mr Pascoe). In this email, Mr Johnson discussed the question whether the assets of the Boensch Trust, of which Mr Boensch is the trustee, is property which vests in Mr Pascoe as his trustee in bankruptcy. Mr Johnson noted that such an argument would be a "fall-back position" in relation to the contention that the trust was a sham. He sought instructions as to whether he should fully investigate the issue and provide a detailed advice. 6. Mr Pascoe deposed that he understood from that email that Mr Johnson was advising that even if the trust was upheld as valid, Mr Boensch may still have a beneficial interest in the Rydalmere property which would vest in his trustee in bankruptcy. Mr Pascoe further deposed that he believed at the time that Mr Boensch would have a beneficial interest in the property by reason of his right of indemnity out of the trust assets, and that Mr Johnson was suggesting an additional reason to conclude that Mr Boensch may have a beneficial interest in the property. 7. An application for leave to appeal from the judgment of Raphael FM on the separate question was filed in due course. Leave to appeal was granted. The appeal itself was dismissed by the Full Court of the Federal Court on 18 August 2008 (see Pascoe v Boensch [2008] FCAFC 147). The appeal had been argued for Mr Pascoe by Mr Bigmore QC, who led Mr Johnson. 8. Wright Commercial Lawyers sent a letter to Ms McLean on the day the judgment was delivered. The view was expressed that there was now no utility in Mr Pascoe proceeding further with the proceedings, and a further request was made for the withdrawal of the caveat. 9. That letter constitutes the third request to remove the caveat identified in the Statement of Claim. 10. Mr Pascoe deposed that he believed that even if an appeal from the decision of Raphael FM on the separate question (or further appeals) failed, he had a basis for maintaining his caveat. Mr Pascoe stated in cross examination that he understood he still had his applications under ss 120 and 121 of the Bankruptcy Act. He further stated that he did not receive any legal advice following the decision of the Full Court to the effect that he should withdraw the caveat. 11. On 15 September 2008 Mr Pascoe filed an application in the High Court of Australia for special leave to appeal against the decision of the Full Court of the Federal Court. The application was dismissed on 12 March 2009 pursuant to High Court Rules 2004 (Cth) r 41.11.1. 12. The Federal Magistrates Court proceedings were themselves dismissed on 13 August 2009 (see Pascoe v Boensch (No 9) [2009] FMCA 769). On that day Raphael FM dismissed an application by Mr Pascoe to amend his application, and upheld an application by Mr Boensch for summary dismissal. Notwithstanding that Mr Pascoe had adduced some evidence concerning the state of Mr Boensch's solvency in 1999, his Honour was of the view that Mr Pascoe did not have reasonable prospects of establishing insolvency at that time. Having reached that conclusion, his Honour considered that Mr Pascoe would not be able to make out his case under s 121 of the Bankruptcy Act and it was accordingly appropriate for the proceedings to be dismissed pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth). 13. On 25 August 2009 Ms McLean was served with a lapsing notice in respect of Mr Pascoe's caveat. She forwarded the notice to Mr Pascoe on that day. On 8 September 2009 she sent an email to Mr Pascoe seeking instructions about whether to make an application to extend the operation of the caveat. Later on 8 September 2009 Mr Pascoe replied by email in the following terms: I have thought about this overnight and think we should try to minimise the fronts we are fighting him on by letting the caveat lapse. He still has the Reg Gen caveat and the mortgage on title. We know that he won't sell. His only option is refinance. It would take a very brave refinancier to lend against the property after doing a title search. I think this is a risk we can bare (sic). 1. Mr Pascoe deposed that, at that time, he thought that any interest which Mr Boensch had in the property as a consequence of a right of indemnity "would be of limited value". He further stated that he did not want to be a party to another set of proceedings that might ultimately be of little value to creditors. 2. The decision to allow the caveat to lapse had been made notwithstanding that an application had been filed for leave to appeal against the decision of Raphael FM to dismiss his proceedings. That application was ultimately dismissed on 3 November 2009 (see Pascoe v Boensch [2009] FCA 1240). 3. As no order for the extension of the operation of the caveat was obtained by Mr Pascoe, his caveat lapsed on about 15 September 2009. Relevant principles 1. Caveats are dealt with under Part 7A of the Act, which contains sections 74A to 74 R. Sections 74P provides: (1) Any person who, without reasonable cause: (a) lodges a caveat with the Registrar-General under a provision of this Part; (b) procures the lapsing of such a caveat; or (c) being the caveator, refuses or fails to withdraw such a caveat after being requested to do so, is liable to pay to any person who sustains pecuniary loss that is attributable to an act, refusal or failure referred to in paragraph (a), (b) or (c) compensation with respect to that loss. (2) Compensation referred to in subsection (1) is recoverable in proceedings taken in a court of competent jurisdiction by the person who claims to have sustained the pecuniary loss. (3) A person who is a caveator is not entitled to bring proceedings under subsection (1)(b) if that person, having had an opportunity to do so, has failed to take all reasonable steps to prevent the caveat from lapsing. 1. There is no doubt that on 25 August 2005 Mr Pascoe lodged caveat AB721857 under a provision of Part 7A, namely, section 74F(1). There is also no doubt that Mr Pascoe was on a number of occasions requested to withdraw the caveat, but he refused or failed to do so. The caveat was never withdrawn by Mr Pascoe. It lapsed on about 15 September 2009 in accordance with the operation of section 74J(4) of the Act. The separate questions are thus directed to whether Mr Pascoe lodged the caveat, or refused or failed to withdraw it, "without reasonable cause" within the meaning of s 74P(1). 2. The phrase "without reasonable cause" was employed in a statutory predecessor to s 74P(1), namely, s 98 of the Act as it was prior to the repeal of that section by the Real Property (Caveats) Amendment Act 1996 (NSW). That amending legislation introduced what is now Part 7A of the Act, including s 74P(1). It should be noted, however, that s 74P(1) initially used the expression "wrongfully and without reasonable cause". 3. The former s 98 of the Act was considered by Wootten J in Bedford Properties Pty Limited v Surgo Pty Limited [1981] 1 NSWLR 106. At 108 his Honour stated: I think the foundation for reasonable cause must be, not the actual possession of a caveatable interest, but an honest belief based on reasonable grounds that the caveator has such an interest. That, of course, may not be enough. In Young v Rydalmere Credits Pty Limited (1963) 80 WN (NSW) 1463 a caveator was held to have acted without reasonable cause when he lodged a caveat not for the protection of his interest but for an ulterior motive and without regard to its effect on transactions to which the caveator had agreed. 1. In Beca Developments Pty Limited v Idameneo (No 92) Pty Limited (1990) 21 NSWLR 459 the Court of Appeal dealt with a question whether a caveat had been lodged "wrongfully and without reasonable cause" within the meaning of s 74P(1) as it stood between 31 August 1988 and 1 February 1997 (when it was amended by the Real Property Amendment Act 1996 (NSW) to its current form). Clarke JA found it helpful to have regard to cases concerning the former s 98, including the decision of Wootten J in Bedford Properties Pty Limited v Surgo Pty Limited (supra), and Young v Rydalmere Credits Pty Limited (1963) 80 WN (NSW) 1463 where Macfarlan J took a somewhat different approach. Clarke JA expressed the view that Wootten J was correct to conclude that "without reasonable cause" meant an absence of an honest belief based on reasonable grounds that the caveator had a caveatable interest (see at 469G, 470E-F, 471C-D and 474G-475A). Clarke JA also stated (at 475A) that if a caveator had a caveatable interest, that would provide reasonable cause for the lodging of a caveat. His Honour further stated that the additional word "wrongfully" imposed a requirement that the caveat be lodged deliberately by a caveator knowing that he had no interest in the land (see at 472G-473A). Waddell AJA took a different view as to the meaning of "wrongfully" (see at 479G-480B). However, he cited, with approval, the statement of Wootten J that the foundation for reasonable cause was an honest belief based on reasonable grounds that the caveator has a caveatable interest (see at 478G-479A). Kirby P did not expressly approve of the approach taken by Wootten J, but he spoke consistently with it when he stated (at 463B): The facility of the caveat is one of the most valuable provided by the Act. It should not be circumscribed by the imposition of a risk of liability to pay compensation under the Act simply because of some technical default on the part of the caveator. That could have an undesirable chilling effect on the proper lodgement of a caveat later found to be unjustified but at the time of lodgement bona fide believed to be necessary to protect a legitimate and then apparent interest of the caveator. 1. Section 74P(1), in its current form, has been construed in a manner consistent with the approach taken by Clarke JA to the former section 98. That is to say, it has been held that in order to establish that a caveat was lodged without reasonable cause, it is necessary to show (a) that the caveator did not have a caveatable interest, and (b) that the caveator did not have an honest belief based on reasonable grounds that he had a caveatable interest (see, for example, Collingridge v Sontor Pty Limited [1997] NSWSC 522 at [10] per Young J; Lee v Ross (No 2) [2003] NSWSC 507 at [23] per Palmer J; and Natuna Pty Limited v Cook [2007] NSWSC 121 at [195] per Biscoe AJ). 2. In Mahendran v Chase Enterprises Pty Limited [2013] NSWCA 280 at [52], Barrett JA (with whom Emmett and Gleeson JJA agreed) cited, with approval, the following statement by Biscoe AJ in Natuna Pty Limited v Cook (supra) at [195]: "Reasonable cause" for the lodgement of a caveat exists where the caveator has an honest belief, based upon reasonable grounds, that the caveator has a caveatable interest. In order to establish liability under s 74P, the onus is on Mr Cook to prove, first, that Natuna had no caveatable interest and, secondly, that Natuna did not have an honest belief based on reasonable grounds that a caveatable interest existed. As to the second issue, the test is partly subjective and partly objective. It is subjective in that it requires an examination of the caveator's actual belief and whether it was honestly held. It is objective in that it requires that the belief be held on reasonable grounds [citations omitted]. A caveator may have reasonable grounds upon which to believe that it has a caveatable interest even though it is mistaken and it is ultimately held that it did not [citation omitted]. 1. Barrett JA also referred (at [53]) to the decision of the Court of Appeal of Western Australia in Brogue Tableau Pty Limited v Binningup Nominees Pty Limited (2007) 35 WAR 27; [2007] WASCA 179 at [81] where a test of honest belief based upon reasonable grounds was adopted in relation to the corresponding statutory provision in that State. Determination 1. It is first necessary to consider whether Mr Pascoe had a caveatable interest in the Rydalmere property. 2. Mr D L Williams of Senior Counsel, who appeared with Mr M F Newton of Counsel for Mr Pascoe, submitted that there was a caveatable interest by reason of the operation of s 58(1) of the Bankruptcy Act. It was submitted that upon the making of the sequestration order against Mr Boensch, his interest in the property vested forthwith in Mr Pascoe, and this was so even if Mr Boensch held the property as trustee on trust for other persons. Reliance was placed upon the decision of Powell J in Official Trustee in Bankruptcy v Ritchie (1988) 12 NSWLR 162 where his Honour held (at 174) that property of a bankrupt, even if held on trust, vested in the trustee in bankruptcy upon the making of the sequestration order. 3. Mr Williams also referred to the judgment of Leeming JA (with whom McColl JA and Sackville AJA agreed) in Lewis v Condon [2013] NSWCA 204. In that case a registered proprietor of land (Colleen) became bankrupt. The land was claimed to be held upon trust. The trustee in bankruptcy (Mr Condon) lodged a caveat over the property shortly after the sequestration order was made. He later succeeded in obtaining an order from Nicholas J that he was entitled to become the registered proprietor. The principal issue in the proceedings was whether the trustee in bankruptcy held the property beneficially or whether he held it subject to the trust. That issue largely turned upon whether the trust was a sham. Leeming JA rejected the argument that the trust was a sham. His Honour then went on to deal with the effect of the sequestration order upon the trust. His Honour stated (at [91]-[92]): Upon the making of the sequestration order on 14 May 2012, s 58 of the Bankruptcy Act 1966 (Cth) applied. That had the effect that such interest as Colleen had in the Property vested forthwith in equity in Mr Condon. Legal title did not vest forthwith in Mr Condon. (Section 90 of the Real Property Act establishes a procedure whereby a trustee in bankruptcy can obtain registration as proprietor of land pursuant to the vesting effected by s 58(2) of the Bankruptcy Act (Cth)). Mr Condon ultimately took advantage of that procedure to become registered proprietor of the Property and thereby acquire legal title. But it is clear law that those statutory vestings do not destroy any trust of which the bankrupt was a trustee. Section 116(2)(a) of the Bankruptcy Act (Cth) excludes from the vesting property held by the bankrupt in trust for another person, and s 82 of the Real Property Act excludes notice of trusts on the register. It follows that neither the vesting effected by s 58(1) nor the title created by registration of a transfer of an "estate in fee simple" to Mr Condon on which he relied destroyed any trusts in respect of the Property. 1. Leeming JA then considered the effect of the order that Mr Condon was entitled to become the registered proprietor, and in particular whether it gave rise to a res judicata. In that context, his Honour observed (at [100]): ……The issue before Nicholas J was whether Mr Condon had a caveatable interest. Plainly, he did, from the time of the sequestration order and his appointment as trustee in bankruptcy, for by dint of s 58 of the Bankruptcy Act (Cth) he was entitled to become the registered proprietor. That was so irrespective of whether or not Colleen, or for that matter Appinville or Robana, was the trustee of the Kenthurst Investments Trust. Even if a new trustee has not obtained title to trust property from a retiring trustee before a sequestration order is made against the latter, that does not prevent the trustee in bankruptcy from having a caveatable interest derived from s 58. Consistently with that position, Mr Condon's application to obtain registration of title under s 90 of the Real Property Act did not positively assert the absence of a trust; he merely denied that Robana had any basis to lodge a lapsing notice. Moreover, the terms of the order made by Nicholas J say nothing about any equitable interests in respect of the Property. In any event, such interests are not to be recorded on the register, as was properly pointed out by counsel then appearing for Mr Condon. 1. No reference was made to Official Trustee in Bankruptcy v Ritchie (supra). However, the statements made by Leeming JA, which are set out above, seem to me to be consistent with the approach taken by Powell J in that case. The position appears to be that the trustee in bankruptcy of a registered proprietor of land under the Act has a caveatable interest in the property by reason of s 58 of the Bankruptcy Act, even if the registered proprietor holds the title on trust for other persons. 2. Mr C J Bevan of Counsel, who appeared with Ms I Sethi of Counsel for Mr Boensch, contended that Mr Pascoe had no caveatable interest. It was submitted that Mr Pascoe was bound by the judicial determination that a valid trust over the Rydalmere property was created by the Memorandum of Trust dated 23 August 1999. It was further submitted that in circumstances where the trust was valid and enforceable against Mr Pascoe, his right to become registered proprietor pursuant to s 90 of the Act was merely a right to be registered which was not itself a caveatable interest for the purposes of s 74F(1) of the Act. Mr Bevan also contended that the only caveatable interest Mr Pascoe could assert was the legal interest he claimed in his caveat, and there was no such interest because s 58(1)(a) of the Bankruptcy Act would only operate to effect a vesting of the property in equity. 3. In my opinion it follows from Official Trustee in Bankruptcy v Ritchie (supra) and the observations of Leeming JA in Lewis v Condon (supra) that Mr Pascoe had a caveatable interest in the Rydalmere property. He had such an interest from the time he became Mr Boensch's trustee in bankruptcy by virtue of s 156A(3) of the Bankruptcy Act. Upon that occurrence, s 58(1)(a) of the Bankruptcy Act operated, in equity, to vest Mr Boensch's interest in the property (as the proprietor of an estate in fee simple), in Mr Pascoe. That interest was an estate or interest in land within the meaning of s 74F(1) of Act, and was thus capable of being the subject of a caveat. 4. In circumstances where, as found in the proceedings in the Federal Magistrates Court and the Federal Court, Mr Boensch held the property as trustee subject to the trust established by the Memorandum of Trust dated 23 August 1999, the vesting in Mr Pascoe was itself subject to the terms of the trust. Nonetheless, the existence of the trust does not mean that Mr Boensch's interest did not vest in Mr Pascoe in accordance with s 58(1)(a). 5. Neither is it accurate to characterise Mr Pascoe's interest as merely a right to be registered as proprietor pursuant to s 90 of the Act. That right of Mr Pascoe's is underpinned by the interest in the property that is vested in him by virtue of s 58(1)(a) of the Bankruptcy Act. 6. It is correct that unless Mr Pascoe attained the status of registered proprietor, the interest in the property vested in him only in equity, and it would not be accurate to describe his interest as a legal, as opposed to an equitable, interest. Nevertheless, I do not think that Mr Pascoe's caveat, albeit that it employs the expression "legal interest", should be construed in that way. It is clear from Schedule 1 of the caveat, read as a whole, that the estate or interest claimed consists of the property of Mr Boensch, the registered proprietor, which vested in Mr Pascoe pursuant to s 58(1)(a) of the Bankruptcy Act when he became Mr Boensch's trustee in bankruptcy. The expression "legal interest pursuant to the Bankruptcy Act 1966" is apt to describe an interest that arises as a matter of law pursuant to statute. I would not read it as expressing an intention to confine the claim to only a legal interest in the property as opposed to an equitable interest in the property. The intention seems to be to claim whatever interest arises by virtue of s 58(1)(a). The claimed interest is, in my view, adequately described in the caveat. I note further that it is not necessary, in order to comply with the requirements for particularisation of the estate or interest claimed, to specify whether the estate or interest is legal or equitable (see clause 7 and Schedule 3 to the Real Property Regulation 2003 (NSW), in force when the caveat was lodged). If my construction of the claimed interest is incorrect, the assertion of a legal as opposed to an equitable interest could properly be regarded as a technical deficiency, and it would not necessarily follow that the caveat was lodged or maintained without reasonable cause (see Beca Developments Pty Limited v Idameneo (No 92) Pty Limited (supra) at 468E per Clarke JA). 7. In my opinion, Mr Pascoe had a caveatable interest in the Rydalmere property by virtue of s 58(1)(a) of the Bankruptcy Act. Moreover, he claimed such interest in the caveat he lodged. That caveatable interest subsisted throughout the life of the caveat. In those circumstances, it seems to me that it cannot be said that Mr Pascoe lodged the caveat, or refused or failed to withdraw the caveat, without reasonable cause within the meaning of s 74P(1) of the Act (see Beca Developments Pty Limited v Idameneo (No 92) Pty Limited (supra) at 475A per Clarke JA). 8. That conclusion is sufficient to dispose of the separate questions in a manner favourable to Mr Pascoe. However, in case my conclusion is wrong, I will go on to consider the position on the basis that in circumstances where the trust asserted by Mr Boensch was valid and enforceable against Mr Pascoe, there was no caveatable interest. That is, I will consider whether, on that assumed basis, Mr Pascoe had an honest belief based on reasonable grounds that he had a caveatable interest. 9. I do not doubt that at all relevant times Mr Pascoe honestly believed that he had a caveatable interest in the Rydalmere property. Mr Pascoe gave evidence that he believed that, as the trustee in bankruptcy of a registered proprietor, he had an interest in the land which would support a caveat. Mr Pascoe said that he understood that whatever interest the bankrupt had as at the date of the bankruptcy was vested in him as trustee. I accept Mr Pascoe's evidence to that effect. 10. Mr Pascoe was cross examined at length. He created a favourable impression as a witness who was endeavouring to give honest and accurate answers to the questions put to him about events that took place many years ago. I generally accept his evidence as truthful and reliable. 11. Mr Pascoe's stated belief is supported by his evidence of the existence of a usual practice to lodge caveats in respect of land of which the bankrupt is the registered proprietor. The existence of such a practice was not challenged. Neither was Mr Pascoe's evidence that the words used in the caveat were in "a relatively standard form" for caveats he lodged. The words used adequately described an interest of the kind Mr Pascoe believed he had. 12. I accept Mr Pascoe's evidence to the effect that at all relevant times up to 3 November 2009 (when his application for leave to appeal against the dismissal of his proceedings was refused), he believed that there were reasonable prospects that the trust (or trusts) asserted by Mr Boensch in respect of the Rydalmere property would either be found to be invalid, or declared void against him pursuant to the Bankruptcy Act. I further accept Mr Pascoe's evidence to the effect that he thought (from at least the time of the first meeting of creditors in November 2005) that even if Mr Boensch held the Rydalmere property on trust, Mr Boensch might have a right of indemnity in relation to the property. It follows that at all relevant times Mr Pascoe held the view that Mr Boensch might have had an interest in the property that was more than a bare legal title, and that upon the making of the sequestration order such interest was vested in him as the trustee in bankruptcy. 13. I interpolate here that Mr Pascoe's beliefs concerning Mr Boensch's interest in the property were not based solely upon legal advice. Rather, they were a combination of his own views, based on his investigations, and legal advice received. 14. I turn now to consider whether Mr Pascoe's belief concerning the existence of a caveatable interest was based on reasonable grounds. 15. By the time the caveat was lodged on 25 August 2005, Mr Pascoe was aware that Mr Boensch claimed he held the Rydalmere property on trust for his children pursuant to the Memorandum of Trust dated 23 August 1999. Mr Pascoe had been given a copy of that document (which had not been stamped until March 2004) during a meeting with Mr Boensch. However, Mr Pascoe was not satisfied about Mr Boensch's claims of a trust. He considered he should be cautious about accepting what Mr Boensch said, and would need to objectively investigate the matter and make his own assessments. Mr Pascoe had also been told that Mr Johnson believed that there were strong prospects of defeating the trust claim or having the trust set aside. I accept Mr Pascoe's evidence about what he was told by Ms McLean in that regard. I also accept that his note "Jim says lay down to set aside" did not relate to a possible application to set aside the sequestration order against Mr Boensch. In my view, Mr Pascoe had reasonable grounds to believe that the asserted trust might not be valid or enforceable against him. I do not think it was in any way unreasonable of Mr Pascoe to hold the view that the matter required investigation and assessment. I note that the terms of the letter sent by Mr Boensch's solicitor on 27 September 2005 apparently accept that Mr Pascoe would need some time in order to form a view about Mr Boensch's claim. 16. Mr Pascoe's investigations continued throughout the remainder of 2005 and in to 2006. Mr Pascoe gave evidence that he requested relevant taxation records, but none were produced in respect of the trust. Mr Pascoe went on to state in evidence that no documents were produced to show that the trust was being carried on between August 1999 and October 2003, when the bankruptcy notice was served on Mr Boensch. Various documents were produced. Amongst them was a letter from Mr Leong to Mr Boensch dated 17 March 2004 which referred to Mr Boensch wanting to be nominated as a beneficiary of the trust, and trust deeds dated 18 November 2003 for two further family trusts, one of which was apparently concerned with "rentals". These documents, coupled with the absence of documentary evidence to suggest that the asserted trust had actually been carried on as such, in my view provided a reasonable basis for Mr Pascoe to remain unconvinced about Mr Boensch's trust claim. 17. Mr Boensch was to be examined in May 2006. Unfortunately, the examination did not proceed due to medical reasons. By the time of the second meeting of creditors in June 2006, Mr Pascoe had received advice from Mr Johnson to the effect that the Memorandum of Trust appeared to be a sham (at least until it was confirmed in March 2004), and that it would be appropriate to seek relief under s 121 of the Bankruptcy Act in relation to the transfers of property purportedly effected by the Memorandum of Trust and the later Deed of Trust. Mr Pascoe believed, based on that advice, that the proceedings he commenced in July 2006 had good prospects of success. Mr Bevan criticised the advice as flawed, by reference to the conclusions reached by the Full Court of the Federal Court. In my view, whilst Mr Johnson's views as to the validity of the trust were ultimately not accepted, his advice was not shown to be without foundation, or otherwise unsupportable. Still less was it shown that Mr Pascoe should have realised that was the case. 18. An attack was also made upon the advice contained in Mr Johnson's email to Ms McLean on 29 August 2006. That advice referred to the recent decision in Marchesi v Apostoulou (supra) and to the principles concerning voluntary assignments. It may well be that this advice was in that respect somewhat wide of the mark in the context of the proceedings between Mr Pascoe and Mr Boensch, which concerned an alleged declaration of trust by a registered proprietor of property. It is not clear whether Mr Pascoe actually saw the advice. In any case, there is no firm evidence that the advice was relied upon by Mr Pascoe in any significant way. It seems that, at most, the advice was seen by him as consistent with the substance of the advice he had already received concerning the proceedings in the Federal Magistrates Court. It is likely that later advice received from Mr Johnson (for example on 18 December 2006) to the effect that the Memorandum of Trust was an imperfect gift was treated similarly by Mr Pascoe. 19. A more general attack was made upon Mr Pascoe's reliance upon advice received from Ms McLean and Mr Johnson. It was submitted that as they had been (and continued to be) retained by Mr Costin, they were in a position of conflict such that it was unreasonable of Mr Pascoe to rely on any advice from them. I do not accept that submission. The nature of the conflict was not clearly explained by Mr Bevan. In any case, having undertaken to provide legal advice to Mr Pascoe, Ms McLean and Mr Johnson plainly owed duties to him, and in my view it was not unreasonable of Mr Pascoe to receive and place reliance upon advice from them, merely because of their retainer by Mr Costin. 20. In my view, Mr Pascoe had reasonable grounds to think that he had reasonable prospects of succeeding in the Federal Magistrates Court proceedings. I note in that regard that in March 2007, solicitors for Mr Boensch were instructed to hold the original transfer dated 21 March 2004 and deal with it in accordance with whether or not the trust was found to be validly constituted. That rather suggests that Mr Boensch himself accepted that Mr Pascoe might succeed on that issue. 21. It turned out that on 6 December 2007 the preliminary question concerning the validity of the trust was answered adversely to Mr Pascoe. Raphael FM did not accept that the Memorandum of Trust was a sham, and he rejected the argument that it involved an imperfect gift. 22. I accept Mr Pascoe's evidence that by 10 December 2007 he was of the view that an appeal was likely to be lodged. By that time Mr Pascoe had discussed the question of an appeal with Ms McLean. It is not clear whether he had by then received Mr Johnson's views on the question. I further accept Mr Pascoe's evidence that he understood from his lawyers that he had a proper basis to maintain his caveat at least until an appeal had been determined. I do not think it has been shown that Mr Pascoe lacked reasonable grounds for such a view. Of course, even if the decision of the Federal Magistrate on the separate question was not overturned on appeal, the balance of the proceedings concerning relief under the Bankruptcy Act remained to be determined. 23. By 18 December 2007 Mr Pascoe had received the briefly expressed views of Mr Johnson concerning the judgment of Raphael FM. Mr Johnson referred to findings that were "incorrect and not supported by the evidence or the law" and stated that it would be appropriate to seek leave to appeal. Such leave was later given. 24. The appeal itself was unsuccessful. The Full Court of the Federal Court considered that when the Memorandum of Trust was viewed in the context and circumstances of its making, it was tolerably clear that there was an intention on Mr Boensch's part to create a fixed trust for his children of the Rydalmere property. The court noted that the evidence concerning Mr Boensch's dealing with the property up to July 2003 (when Mr Costin obtained his judgment) was slight but nonetheless served more to confirm than falsify the conclusion about intention, albeit that Mr Boensch's claiming of the payment of rates on the property as a business deduction was inappropriate. The sham argument was apparently not run on the appeal. There is no suggestion in the judgment that the arguments that were advanced by Mr Pascoe were not reasonably arguable. 25. Mr Pascoe gave evidence that even if an appeal from the decision of Raphael FM (or further appeals) failed, he understood that his applications for relief under ss 120 and 121 of the Bankruptcy Act remained. That was indeed the case. Mr Pascoe had earlier received advice from Mr Johnson that it was appropriate to seek relief under s 121 of the Bankruptcy Act in respect of the Memorandum of Trust. 26. An important evidentiary issue in relation to that aspect of the case was whether Mr Boensch was solvent at the time the Memorandum of Trust was executed in 1999. The state of Mr Pascoe's knowledge or understanding concerning that issue, in the period from 18 August 2008 (when the Full Court delivered its judgment) to 26 May 2009 (when Mr Pascoe completed a report as to solvency) was little touched upon in evidence. Mr Pascoe did say that in 2006 he had "some evidence of insolvency in 1999" arising primarily from the examination of Sabine Boensch. I accept that evidence. As mentioned, on 26 May 2009 Mr Pascoe completed a report as to solvency. It was annexed to an affidavit sworn by him on that day for the purpose of the Federal Magistrates Court proceedings. Mr Pascoe concluded that Mr Boensch became insolvent at the time of entering into the Memorandum of Trust or shortly thereafter. Mr Bevan cross examined Mr Pascoe about his report (which was admitted into evidence during Mr Pascoe's re-examination). It was put, and Mr Pascoe agreed, that his conclusion about insolvency was not definitive in terms of timing. It was not put to Mr Pascoe that he did not actually hold the opinion expressed in the report, or that such opinion was not soundly based. 27. However, on 13 August 2009, Raphael FM refused an application by Mr Pascoe to amend his Points of Claim so as to better particularise the s 121 case. His Honour further concluded that on the existing pleadings, Mr Pascoe did not have reasonable prospects of establishing Mr Boensch's insolvency at the time he entered into the Memorandum of Trust. Accordingly, his Honour dismissed the proceedings pursuant to s 31A of the Federal Court of Australia Act. I note that s 31A provides, for the purposes of the section, that a proceeding need not be hopeless or bound to fail for it to have no reasonable prospects of success. 28. In my opinion, where Mr Pascoe had received legal advice concerning the seeking of relief under s 121 of the Bankruptcy Act, and had at least some evidence suggesting Mr Boensch was insolvent in 1999, it has not been shown that Mr Pascoe did not have reasonable grounds to believe, at least up to 13 August 2009, that the s 121 application had reasonable prospects of success. 29. Further, as I have found, Mr Pascoe thought that even if Mr Boensch's trust claims were valid, Mr Boensch might have a right of indemnity out of trust assets. I think that by May 2009 at the latest, Mr Pascoe had reasonable grounds for such a belief. There was evidence that Mr Boensch had made payments to the mortgagee of the Rydalmere property after the establishment of the trust (see, for example, Mr Pascoe's report as to solvency at paragraph 5.3). There was also evidence (referred to the in the judgment of the Full Court of the Federal Court) that Mr Boensch had paid rates on the property. The details of Mr Boensch's "mutually beneficial arrangement" with the trust concerning his occupation of the property was somewhat obscure. It seems that the extent of any right of indemnity was unclear to Mr Pascoe, although he accepted that he ultimately came to the view that such right was likely to have little value. 30. Mr Pascoe was served with a lapsing notice on 23 August 2009. Even though he had filed an application for leave to appeal against the dismissal of his proceedings, he decided to allow the caveat to lapse. It appears that one of a number of reasons for letting the caveat lapse was that any right of indemnity possessed by Mr Boensch was likely to be of only limited value. The fact remains, however, that such a right would constitute property of Mr Boensch that would vest in Mr Pascoe upon the making of the sequestration order. 31. For the above reasons even if it is assumed, contrary to my opinion, that Mr Pascoe had no caveatable interest, I do not think that Mr Boensch has established that, at any relevant time, Mr Pascoe's belief as to the existence of a caveatable interest was not based on reasonable grounds. Accordingly, I am not satisfied that Mr Pascoe either lodged his caveat, or refused or failed to withdraw it after being requested to do so, without reasonable cause within the meaning of s 74P(1) of the Act. 32. In reaching that conclusion I have not found it necessary to specifically deal with various matters raised by Mr Bevan and Ms Sethi in their detailed submissions. It should not be thought that I have overlooked those matters, including the submission that Mr Pascoe ought to have obtained specific legal advice about whether to lodge the caveat and, in the face of requests to withdraw it, ought to have obtained specific legal advice about whether to maintain the caveat. Mr Bevan cited Bedford Properties Pty Limited v Surgo Pty Limited (supra) at 109 where Wootten J stated: The drastic nature of the power [to lodge a caveat] is relevant in considering what is "reasonable cause" for its use, just as the dangerous character of a thing is relevant to deciding what is reasonable care in handling it. Before exercising such a power, a person can reasonably be expected to get proper advice, and be reasonably sure of his ground. If he does not, he may find that he has acted at his peril. …… 1. However, I do not read his Honour as intending to lay down a general principle that a caveator will be held to have acted unreasonably if "proper advice" is not obtained before the lodging of the caveat. In each case, the question whether a caveator has lodged, maintained or failed to remove a caveat without reasonable cause must be determined on the basis of the particular facts of the case at hand. 2. I note further that whilst the lodgement of a caveat may have drastic consequences, including interference with the orderly completion of transactions involving the property affected, it is well to bear in mind also that Part 7A of the Act enables a registered proprietor to take advantage of a simple and inexpensive procedure for the lapsing of caveats that have been lodged under s 74F of the Act (see s 74J). The invocation of that procedure effectively compels the caveator to justify its claim by seeking an order under s 74K of the Act extending the operation of the caveat. Such an order is made only where the Court is satisfied, in accordance with principles akin to those that apply on an application for an interlocutory injunction, that the caveator's claim has or may have substance and it is appropriate in the circumstances for the operation of the caveat to be extended. Almost invariably, the Court requires the caveator to give the usual undertaking as to damages. In more urgent cases, a registered proprietor can make an application under s 74MA of the Act for the withdrawal of a caveat. A caveator facing such an application is effectively required to establish that it would be granted an interlocutory injunction to protect the interest claimed (see Bayblu Holdings Pty Limited v Capital Finance Australia Limited [2011] NSWCA 39 at [20]). Again, it is almost invariably the case that the caveator is required to give the usual undertaking as to damages if the caveat is to remain (see Jubilee Properties v Parkview Farm [2013] NSWSC 2011 at [45]). Conclusion 1. It follows from the conclusions I have reached above that the separate questions must be answered as follows: Question 1: No Question 2: No Question 3: Does not arise. 1. It was agreed that if the separate questions were answered in that way, Mr Boensch's proceedings should be dismissed. The Court will so order. The Court will further order that Mr Boensch pay Mr Pascoe's costs of the proceedings. ********** 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: 10 December 2015