Tracing: A remedial process to capture an unfaithful trustee

Tracing: A remedial process to capture an unfaithful trustee

A brief history of tracing

Tracing is a complex and often misunderstood area of trust and property law. It is predicated on retrospective use of misapplied trust funds. It potentially allows the beneficiary of a trust to get trust funds back when the situation seems bleak.

A simple example of tracing can be seen with the following hypothetical:

  • X takes $100 in breach of trust and buys a painting from a shop owner with the misappropriated money.

Tracing will allow the retrospective searching of the funds back into A’s hands, and not that of the shop owners, as the shop owner transacted without notice and in good faith, therefore, will not be liable.

However, there are shortcomings with the ability to trace; a further example can be seen with mixed funds:

  • If $1000 of trust money is mixed with the trustees own money (lets say another $1000 totaling $2000) and the trustee withdraws $1200 and spends it on a holiday[1]

In this situation the beneficiary has a secured claim to the remaining $800, however, will need to get in line for the other $200.

What does the case law have to say?

The pivotal cases of Re Hallet’s Estate and Re Otaway suggest that there is a presumption of innocence when a trustee spends money from a mixed trust account, meaning that the money spent is presumed to be that other than belonging to the trust[2].

Furthermore, the case of Scott v Scott suggests that if a breaching trustee uses misappropriated funds to purchase an asset that appreciates, the beneficiary may be able to get a proportionate increase in value.

Are there any prohibitions to tracing?

Yes, the following situations will generally break the chain in tracing:

  1. Dissipation – when money is spent on unrecoverable items or events;
  2. Bona fide purchaser for value without notice;
  3. Tracing into a debt[3];
  4. Money spent on improvement,[4] but at most the beneficiary may be able to get a charge over the asset, however, the beneficiary does not get a proportionate share, he/she will only get the amount that was lost[5]; and
  5. If it would be inequitable to allow tracing – if a party has changed their position.

Conclusion

The role of tracing is to assist beneficiaries in their endeavour to re-acquire some of their trust assets after a trustee’s bad behaviour. While tracing is a complex and often unclear area of law, it can yield great results for clients.

If you need any further information about tracing please do not hesitate to contact JHK Legal for advice.

[1] In this situation the holiday money would be considered dissipated.

[2] Re Otaway was a clarification and extension on the view in Re Hallet’s.

[3] Unless it is secured.

[4] Generally seen as dissipation.

[5] But if it would be inequitable the Court will not do it.

Paul Scagliotti
SENIOR ASSOCIATE

Why a full deposit is better than waiting for the balance…

It’s fairly common in real estate contracts to see the deposit broken down into two components, an initial deposit on signing (or within a couple of business days of signing) and then the balance deposit on the satisfaction of finance, other conditions precedent, or just simply later in the contract negotiations.  The standard form contracts in Queensland contain a condition that allows for the Vendor to claim the balance deposit as a part of its damages in the event that a Buyer defaults on the contract terms.

However, a recent decision of the New South Wales Supreme Court in Kazacos v Shuangling International Development Pty Ltd [2016] NSWSC 1504 (Kazacos Case) has made clear that when entering into property contracts Vendors should consider obtaining the full deposit for the transaction or risk not being entitled to claim the balance deposit in the event of Buyer default.

The Contract was for the sale of a property valued at $17 million.  The contract contained a special condition requiring payment of the deposit in two instalments, the first instalment being an initial deposit and the second instalment being payable on the date of Completion (or in the event that the Buyer failed to complete) (Balance Deposit Clause).  Only the initial deposit of $850,000 was paid to the Vendor.

Various extensions were provided to the date of completion but the contract was ultimately terminated.  The property was resold for $18 million and the Court determined that as a result of the resale the Vendor’s position was increased by $1,719,000.00 when compared to settlement under the original contract.

The Vendor sought to enforce the Balance Deposit Clause and claimed the balance $850,000.00 from the Buyer under clause 9.1 of the Contract which provided that the Vendor could claim for the deposit (up to 10% in the event of purchaser default).  The Court considered whether the Balance Deposit Clause was, in fact, a deposit.  The essential nature of a deposit had been previously considered in Brien v Dwyer [1978] HCA 50 where Jacobs J stated that the essential character of a deposit was:

“An assurance to the vendor, a security to him pending completion.  He can take his property off the market and not concern himself with other offers in the case the sale should go off, with the comfort that at least the deposit is there for his security.”

Therefore, as the Balance Deposit was required to be paid on the completion date or on default, it could not be said to be security for the performance of the Contract.

The Court considered prior decisions indicating that interpretation of whether the balance deposit is, in fact, a penalty requires looking at the timeframe for payment of the balance deposit and whether it occurs at completion or by default.  Where it is, it is more likely to be classed as a penalty and not enforceable by the Vendor.

This case reiterates that Vendors need to carefully consider whether it is necessary to have a balance deposit and to ensure that either:

1)     the initial deposit received under the contract is sufficient to provide comfort in the event the Purchaser fails to complete the contract; or

2)     that any balance deposit is payable early on in the contract and is not linked to any default or termination provisions of the contract to increase the likelihood of it being considered a deposit and not a penalty.

If you have any property related questions please contact JHK Legal on 07 3859 4500.  The above article is not intended to be a substitute for legal advice.

Belinda Pinnow

ASSOCIATE

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Deciding whether to be “naughty” or “nice” for 2017 – some things to consider if you are a company director

While the saying often goes that “nice people finish last” before you decide to indulge yourself in the New Year, spare a thought for your 2016 actions and ensure that a bit of further indulgence doesn’t end with you being unable to manage your company.

Part 2D.6 of the Corporations Act 2001 (Cth) (the Act) contains a number of provisions to disqualify a person from managing corporations (the Disqualification Provisions).  The Disqualification Provisions serve three main purposes, they:

1)     protect company shareholders;

2)     punish the offending director; and

3)     act as a general deterrence.

 

The Disqualification Provisions of the Act will apply in the following situations:

1)     A director is automatically disqualified from managing a company if convicted of certain criminal offences.  Criminal offences having a disqualifying effect include:

a) offences pertaining to the making of decisions relating to the company or which may affect the financial position of the Company: see section 206B(1)(a) of the Act; or

b) offences that are contraventions of the Act punishable by imprisonment for more than twelve months (or three months where it is an offence relating to dishonesty): see section 206B(1)(b) of           the Act; or

c) offences in a foreign jurisdiction punishable by imprisonment for longer than twelve months: see section 206B(1)(c) of the Act.

 

2)     A director is automatically disqualified if he or she becomes an undischarged bankrupt under the Bankruptcy Act 1966 (Cth) (the BA) or fails to comply with a deed of arrangement under Part X of the BA: see sections 206B(3) and 206B(4) of the Act.

 

3)     A director is automatically disqualified if disqualified from acting as a director of a foreign company (or being concerned with the management of a foreign company) pursuant to an order of a foreign Court: see section 206B(6) of the Act.

 

4)     Where a Court on application from ASIC elects to disqualify a director:

a) after making a declaration under section 1317E of the Act that the director has contravened a civil penalty provision of the Act: see section 206C(1) of the Act.

b) on account of the director being an officer of two or more failed companies within the last seven years: see section 206D(1) of the Act.

c) due to repeated contraventions of the Act: see section 206E(1) of the Act.

d) due to the director being subject to an order of disqualification from a foreign court: see section 206EAA of the Act.

 

What will happen next?

So, what happens if you end up on the ASIC disqualified persons register?

The length of disqualification will ultimately depend on the nature or grounds for the disqualification but can be up to twenty years in extreme circumstances.  During that period, the disqualified person is unable to manage a corporation.

Section 206A of the Act explains the concept of “managing corporations” and provides that any disqualified person will commit an offence if they:

1)     make or are seen to participate in making decisions on behalf of the company which affect the whole or a substantial part of the company;

2)     act in any capacity in which they might significantly affect the financial position of the company;

3)     communicate or provide instructions or wishes to directors knowing or expecting that those instructions or wishes will be carried out on their behalf.

So, while you may no longer be a director, if for example you are involved in negotiating rent or credit facilities you may still be seen as participating in making decisions which relate to a substantial part of the business and have committed an offence under section 206A of the Act.

Decision making when disqualified also becomes relevant if the company subsequently enters liquidation. Where a disqualified person has been making management decisions, section 588Z of the Act enables a liquidator to apply to make the disqualified person personally liable for part of the company’s liabilities if there is a connection between the debts and liabilities of the company and the decision making of the disqualified person.

If you need any assistance with understanding your corporate obligations or have any other corporate law questions, please contact us on 07 3859 4500.

 

Belinda Pinnow

Associate

Can I lodge a caveat on real property if someone owes me money?

JHK Legal is often asked the question “I have a credit agreement in place with a client and they have not paid their invoices – can I lodge a caveat against their property or the guarantor’s property?

This article is a guide of what you may be able to do in the above situation in Queensland. It is not a substitute for legal advice. If you have any questions or concerns we suggest that you contact JHK Legal for further information.

What is a caveat?

A caveat is a notice you can register against land/land and building that prevents the registration of further interests that may affect your interest recorded in the caveat, unless your consent is obtained (with some exceptions).

Who can lodge a caveat?

The fact that someone owes you money does not give you an automatic right to lodge a caveat – you must have a “caveatable interest”.

You should consider the credit agreement under which the goods were sold or services provided (and/or any guarantee) to determine if it includes a clause that charges all of the client’s (and/or the guarantor’s) legal and equitable interest (present and future) of whatsoever nature held in any and all real property, as security for obligations under the credit agreement.

For example in BBC Hardware Limited v G.T. Homes Pty Ltd [1997] 2 QD R 123 Thomas J stated:

The charges in question arise under the fairly familiar terms of a supplier’s agreement. Such charges were obtained both from the defendant company and the defendant directors. Each defendant, in the relevant document, committed itself himself or herself to the following:

The applicant hereby charges with the due payment of those money all of the applicant’s interest in real property, both present and future, and the applicant consents to the company lodging a caveat noting its interests hereunder.

Such a charge has been recognised in many cases as creating a recognisable equitable interest. It as described in Clark v Raymor Brisbane Pty Ltd [No. 2] [1982] Qd. R 790, 795 as an equitable general charge securing a contingent debt under a guarantee and capable of attaching a property in land. No defence or facts have been presented or offered by the defendants challenging the validity of the charge.”

Is there a system to govern the lodgement of caveats?

In Queensland the Land Title Act 1994 (QLD) governs the system for the lodgement of caveats.

JHK Legal can assist you with the lodgement of the appropriate forms at the Department of Natural Resources and Mines. There is a fee payable, dependent upon the number of interested parties already noted on the title of the real property.

What happens after a caveat is lodged

After a caveat is lodged and registered, any other interested parties will be notified of your caveat by the Registrar.

Unless the registered owner’s consent is lodged at the time the caveat is lodged, you will have three months to issue proceedings in a court of competent jurisdiction (generally District Court or Supreme Court) to establish the interest claimed in the caveat, and notify the Registrar of the same, failing which, the caveat will lapse. This does however provide you some time to negotiate with the debtor, if that option is available.

The debtor may also serve you with a notice requiring that the proceedings be commenced within 14 days of service of the notice.

The above time frames, and the correct lodgement of the caveat is important as there are only limited circumstances in which a caveat may be lodged more than once, and very rarely do our clients meet that criteria.

What happens if the debtor still does not pay me after the caveat is lodged and proceedings have been commenced?

Depending on how the proceedings are framed – if you are successful and obtain a judgment, you may be awarded orders for sale of the property, and/or a declaration of your interest in the property. Further steps will then need to be taken if you wish to sell the property.

Please note that if the property is sold all other interested parties will need to be considered when it comes to distributing the sale proceeds – for example other caveators and mortgagees.

If the debtor pays me in full or we come to a settlement arrangement and an agreed, reduced amount is paid do I have to remove the caveat?

Short answer – yes. JHK Legal can assist you with this process. Depending on the terms of settlement, generally we would suggest to provide a signed Form 14 – General Request (Withdrawal of Caveat) to the debtor (or their solicitor) for their lodgement once the settlement funds are received in cleared funds.

Something to keep in mind

A charging clause, and as a result a caveat, does not give you priority over prior registered mortgages.

Conclusion

If you are owed money and you wish to consider lodging a caveat and enforcing your rights, JHK Legal are happy to assist you through the process.

 

Alicia Auden

Associate Director – Brisbane

January 2017

So you’ve received a statutory demand…

A creditor can serve a statutory demand for payment of a debt/s pursuant to section 459E of the Corporations Act 2001 (Cth) (“the Act”) if the debt/s is/are due and payable to the creditor by the company and the total amount must be at least the statutory minimum (presently $2,000.00).

The company that is served with the statutory demand has twenty-one days from service in which to respond in one of the following three ways:

  1. pay the amount sought by the creditor;
  2. secure or compound for the amount of the debt, to the creditor’s reasonable satisfaction; or
  3. file and serve an application seeking to set aside the statutory demand;

failing which there is a rebuttable presumption of insolvency created upon which the creditor may rely upon to apply to the court seeking to wind up the debtor company.

What the above illustrates is that failing to respond, or come to a resolution with a creditor, within those twenty-one critical days can have severe consequences for your company.

Please note that this article is for information purposes only and is not a substitute for legal advice. Please contact JHK Legal office if you require advice on this topic.

What should you do if you receive a statutory demand?

JHK Legal often assists clients when they are served with statutory demands.

We suggest that you send the statutory demand to our office as soon as possible with all the relevant information regarding the debt/s – including invoices, correspondence and any court documents  (for example, a judgment). We can then advise of your best options moving forward.

We understand that this can be a stressful period of time, particularly as facing the option of paying the demanded amount in a short period of time may put stress on your cash flow.

What happens if you pay the debt in the statutory demand within twenty-one days of service?

If you pay the debt the subject of the statutory demand within twenty-one days of service, the statutory demand ceases to have effect. We would suggest for completeness to obtain confirmation in writing that the creditor will not take any further steps.

It must be noted that payment is not an admission that the debt is owing and does not stop the debtor company from appealing any judgment behind the statutory demand.

What does it means to “secure or compound” a debt to the creditor’s satisfaction

“Compounding a debt” means the creditor accepting an arrangement for payment of the amount of the debt or for a different amount.

The compounding or securing:

  1. requires there to be a mutual agreement between the debtor and creditor (note, that this can be inferred from the conduct of parties); and
  1. must also recognise that the debt is due and payable.

The phrase “to the creditor’s reasonable satisfaction” means that where a debtor puts forward a proposal that is subsequently rejected, a court may decide whether rejecting it was reasonable in all the circumstances of the matter.

On what basis may a statutory demand be set aside?

A statutory demand may be set aside pursuant to:

  1. section 459H of the Corporations Act 2001 (Cth) if the Court is satisfied of either or both of the following:
  • there is a genuine dispute between the company and the creditor about the existence or amount of a debt to which the statutory demand relates; or
  • the company has an offset claim; and/or
  1. Section 459J of the Corporations Act 2001 (Cth) if the Court is satisfied that:
  • because of a defect in the statutory demand, substantial injustice will be caused unless the statutory demand is set aside; or
  • there is some other reason why the statutory demand should be set aside.

What is a genuine dispute?

The company seeking to set aside the statutory demand has the onus or proving a genuine dispute on the balance of probabilities.

There is a great amount of commentary as to what constitute a “genuine” dispute, however we find White J decision in Soudan Lane Pty Ltd v Glen Bradshaw t/as Pacific Coast digital [2007] NSWSC 772 to be quite useful in trying to understand the concept:

“a genuine dispute will exist about a debt if there is a plausible contention requiring investigation that the company is not indebted.”

There are two types of genuine dispute – one that relates to the “existence” of the debt, the other to the “amount”. With that in mind, to have a statutory demand set aside the Court must be persuaded that there is a genuine dispute in relation to the:

  1. the existence of the debt; or
  1. part of the debt if, when subtracted from the total amount of the debt identified in the statutory demand, that part of the debt is less than the statutory minimum of $2,000.00.

In relation to the second option, if the substantiated amount of the demand is equal or greater than the statutory minimum then the Court may make an order varying the demand as specified in the order and declare that the statutory demand to have had effect, as varied, from when the statutory demand was served on the company.

What is an offsetting claim?

Section 459H(5) of the Act defines an offsetting claim as

a genuine claim that the company has against the respondent by way of counterclaim, set-off or cross-demand (even if it does not arise out of the same transaction or circumstances as a debt to which the demand relates).”

With that in mind, to have a statutory demand set aside on this basis the Court must be persuaded that there is an offsetting in relation to the:

  1. all of the debt; or
  1. part of the debt if, when subtracted from the total amount of the debt identified in the statutory demand, that part of the debt is less than the statutory minimum of $2,000.00.

Much like with a genuine dispute, if the substantiated amount of the demand is equal or greater than the statutory minimum then the Court may make an order varying the demand as specified in the order and declare that the statutory demand to have had effect, as varied, from when the statutory demand was served on the company.

What is a defect that will cause substantial injustice?

Section 9 of the Act defines a defect as including:

“ (a)  an irregularity; and

 (b)  a misstatement of an amount or total; and

 (c)  a misdescription of a debt or other matter; and

(d)  a misdescription of a person or entity.”

It must be kept in mind though, to be a basis to set aside a statutory demand, it must not just be a defect, but one that will cause substantial injustice.

Examples of defects that have caused substantial injustice resulting in the demand being set aside include a failure to include in the statutory demand a clear an unambiguous description of the debt (or debts), or three independent creditors issuing a single statutory demand claiming a composite amount from the debtor (where the composite amount claimed comprises separate amounts owed to each creditor). In the latter of the two examples, the Court found that the statutory demand gave no indication regarding how the debtor was to ‘pay, compound or secure’ the amount claimed where there were three separate creditors with three separate amounts.

Examples of defects that do not cause substantial injustice include an omission of the “warning” box in the statutory demand, an omission of the signature from the statutory demand and omission of notes from the statutory demand, amongst many other items.

What other reasons why a statutory demand should be set aside?

The expression “some other reason” in section 459(J)(1)(b) of the Act is quite broad, however we find that quite often if there is a cause for a statutory demand to be set aside under this subsection it is likely to stem from one of the following reasons:

  1. in some cases if the conduct of the creditor in issuing the statutory demand is an abuse of process, is unconscionable or gives rise to substantial injustice;
  1. there are certain problems relating to the affidavit in support of the statutory demand (if the statutory demand is not supported by a judgment debt); or
  1. if the statutory demand is supported by a judgment debt in some cases if that debt is subject to an appeal, stay or has been set aside.

Summary

What the above illustrates is that the law surrounding statutory demands is quite complex. Deadlines are strict and can have severe consequences. If you receive a statutory demand, we suggest that you contact your local JHK Legal office to obtain advice as soon as possible.

 

Alicia Auden

Associate Director – Brisbane