InDispute Commercial Litigation Bulletin November 2014 Issue No 5 > Contents Hello and welcome to our Spring edition of InDispute. Can You Take Enforcement Action Against Trust Property?....Page 3 In the last few months, our team has been involved in a range of disputes from dealing with rogue tenants in retail leasing matters to advising clients in relation to misleading and deceptive conduct claims under the Australian Consumer Law. Court of Appeal Confirms Costs Order Against Non-Parties for Pursuit of Claim Based on Fraud................Page 4 In this issue, our team shares their views on a recent Victorian Court of Appeal decision on the cost consequences of pursuing court proceedings, what to do if you get asked to produce confidential documents in a proceeding you are not a party to, the enforcement of judgments in the context of assets held by a trust, and obtaining compensation orders against a defendant found guilty of stealing. Sentencing Act and Enforcing Judgments.......Page 6 We hope you enjoy this edition of our bulletin and please contact us if you have any queries. Subpoenas and Confidential Documents.....................Page 7 InDispute Commercial Litigation Bulletin > Can You Take Enforcement Action Against Trust Property? > Clients commence litigation proceedings for a variety of reasons however a very important issue that we always ask our clients to consider is: if you manage to obtain judgment against the defendant, what assets are there to enforce the judgment against? Recently, we considered whether a judgment debt obtained against an individual (in his capacity as a trustee for a superannuation fund) could only be enforced against the assets of the trust or if it could also be enforced as against properties owned in his individual capacity. As a starting point, the trustee is the legal owner of the trust property (as a trust is not a separate legal entity). As stated in the case of General Credits Ltd v Tawilla Pty Ltd ([1984] 1 Qd R 388), a trustee is personally liable for any debts that he or she incurs in the course of carrying out the trust unless he or she incurs the debt on the basis that only trust assets will be available for the payment of the debt. As a starting point, the trustee is the legal owner of the trust property (as a trust is not a separate legal entity). As stated in the case of General Credits Ltd v Tawilla Pty Ltd [1984] 1 Qd R 388, a trustee is personally liable for any debts that he or she incurs in the course of carrying out the trust unless he or she incurs the debt on the basis that only trust assets will be available for the payment of the debt. In order to carve out personal liability, there needs to be an express agreement with the third party in which the trustee specifies that his or her liability to the creditor is not personally undertaken but only extends to trust assets. In the absence of an express agreement serving to limit this form of personal liability, the issue of liability is determined by considering the construction of the documents in question. Reference needs to be had to all the circumstances of the case including the nature of the contract and the subject matter in which it is to operate. A debt incurred “as trustee” may be interpreted to mean that only the assets of the trust (and not those personally owned as trustee) are available to the creditor to meet the debtor’s obligation. However, in other circumstances, it could be construed as reflecting the basic proposition that the trustee is personally liable for the debt incurred as trustee. Rigby Cooke Lawyers - InDispute 3 > Court of Appeal Confirms Costs Order Against Non-Parties for Pursuit of Claim Based on Fraud > Often in litigation, the daunting spectre of costs orders hangs over each party in the event that they should fail in proving or defending their case. However, on rare occasions the Court will also decide that a third person (or persons), not a party to the proceeding, should be liable to pay some or all of the costs of the successful party. This occurred in the recent case of Ballantyne Suites & Ors v Ballantyne Chambers & Ors [2014] VSCA 223 where the Court of Appeal confirmed that it will readily order costs against non-parties to litigation where, among other things: 1.that party has a significant interest in the litigation; 2.that party has played an active role in the litigation; and 3.where the interests of justice require that such an order is made. Facts Mr Henry Mischel (Mr Mischel) was a unit holder in two trusts (Ballantyne Property Suite 1 & Ballantyne Property Suite 2) (Unit Trusts) which were established in February of 2005 to purchase properties in Ballantyne Street, South Melbourne. Ballantyne Chambers Pty Ltd (Chambers) was appointed as Trustee. On 25 October 2011, Mr Mischel was declared 4 Rigby Cooke Lawyers - InDispute a bankrupt and five days later (by deed dated 2 August 2011) Ballantyne Suites Pty Ltd (Suites) purported to replace Chambers as Trustee. Often in litigation, the daunting spectre of costs orders hangs over each party in the event that they should fail in proving or defending their case. However, on rare occasions the Court will also decide that a third person (or persons), not a party to the proceeding, should be liable to pay some or all of the costs of the successful party. On 2 February 2012, Chambers was placed into liquidation and Suites then requested that the liquidator execute a transfer of the properties held by it on behalf of the Unit Trusts to Suites as the new Trustee. The liquidator refused on the basis that it was not satisfied that transfers by Mr Mischel of his units in the Unit Trusts to the trustees of two discretionary trusts were valid transfers. The discretionary trusts (the Kelly Mischel Discretionary Trust and the Bradley Mischel Discretionary Trust) had purportedly been established by Mr Mischel on 6 June 2006 for the benefit of his children. On 14 December 2012, Suites commenced a proceeding in the Supreme Court against Chambers and its liquidator contending that the transfers were in fact valid and sought, among other things, a declaration that Chambers held its interests in the properties on trust for Suites as Trustee. Chambers and its liquidator argued at trial that Mr Mischel fraudulently backdated a series of documents for the purpose of avoiding the operation of the five year relation-back period under s 120 of the Bankruptcy Act 1966 (Cth) and that the transfers of his units were as such invalid. On 10 September 2013, the trial judge ruled for Chambers and the liquidator and held that Mr Mischel had concocted and backdated a number of trust documents in or about July or August 2011. Subsequently, Chambers and the liquidator gave notice that they would be seeking orders (pursuant to section 24 of the Supreme Court Act 1986) that Bradley Mischel and Kelly Mischel (Mischels) be ordered to pay some or all of their costs. InDispute Commercial Litigation Bulletin > Court of Appeal Confirms Costs Order Against Non-Parties for Pursuit of Claim Based on Fraud (continued) > In resisting the order, the Mischels argued that: “the sins of their father should not be visited upon them; and that this was especially so in circumstances where they were not cross-examined at trial to the effect that they were knowingly concerned in their father’s fraud” The trial judge made the costs orders nonetheless and in doing so noted that the Mischels: “played an active part in the litigation by determining to accept the word of their father and prosecute a case which depended upon his word being accepted by the Court. …in circumstances where they knew of their father’s chequered history, involving fraud on his clients, and had no personal knowledge of the contemporaneous facts surrounding preparation and execution of the critical documents.” Appeal In appealing the decision of the trial judge, the Mischels argued that the Court did not give sufficient weight to the failure by Chambers and the liquidator to: warned that costs might be sought against them personally, they could have been cross-examined during trial as to the knowledge of their father’s fraud and that the trial judge’s failure to give adequate consideration to this fact constituted an error. Further, they submitted that there needed to be something ‘exceptional’ in their own conduct (not just their father’s) which would warrant the exercise of the Court’s discretion to award costs against them personally. The Court of Appeal, in confirming the trial judge’s decision, found that the Court at first instance had given sufficient consideration (to the extent that it needed to) to the fact that no security for costs application had been brought prior to the hearing and that the Mischels had not been warned of the danger to them personally of a costs order. The case is an important reminder that the Court will not hesitate (where the interests of justice requires) to look behind the veil created by a series of trusts in order to award costs against those it sees as having, perhaps unreasonably, pursued litigation. The case for such an order will be particularly strong in circumstances where the claims pursued are based upon a fraud and does not necessarily require that those against whom the orders are sought were complicit in or perpetrated the fraud. Importantly, the Court also found that the Mischels had construed the necessity for ‘exceptional circumstances’ too narrowly and that whilst perhaps not complicit in the father’s fraud, the Mischels must have known: 1.make a security for costs application when the proceeding was first brought; a)of their father’s previous convictions for serious fraud; 2.warn the Mischels that they may face a third party costs application. b)that the transfer had taken place on their father’s insolvency; and The Mischels contended that, had they been (or payment) for the transfer of the units to them. c)that they had not given any consideration Rigby Cooke Lawyers - InDispute 5 > Sentencing Act and Enforcing Judgments > The Sentencing Act Victoria 1991 (Vic) (Act) provides an interesting opportunity for someone that has been wronged by a criminal event to obtain an order or judgment that operates in a similar fashion to a civil judgment. Introduced in the Kennett era to operate somewhat as a “user pays system”, the party wronged can now ask, at the conclusion of a criminal trial, for an order. There are a number of pre-conditions to this application being made. A common pitfall is the misconception that it can be made in the period of 12 months post the conviction in the criminal trial. Experience suggests that the office of Public Prosecutions (OPP) is less than enthusiastic in assisting with these applications, even more so when it means (post the conviction) having to bring the convicted person back to Court. The Act and specifically section 86 allow the party wronged, in addition to making any victim impact statement, to apply for a pecuniary penalty order against the alleged criminal defendant. The operation of the Act however can only be triggered in the event of the criminal defendant pleading guilty or being found guilty by a Court. 6 Rigby Cooke Lawyers - InDispute Perhaps the least known but most public application of these provisions was post the Longford Gas enquiry when a number of the families of the workers (who were either injured or died in the Longford gas explosion in Gippsland) sought orders in favour of themselves or the deceased Estates after Esso had been found guilty of breaches of the relevant Occupational Health and Safety Act, Rules and Regulations. Instead of each of the families having to run separate actions against Esso for the breaches, they, in effect, “tagged along” behind the criminal conviction and sought orders from the Trial Judge, Supreme Court Justice Cummins, for compensation. In effect, the WorkCover Authority ran the liability aspect for the families and individuals. Once found that Esso had been guilty of and committed a breach of the Occupational Health & Safety Act and the relevant regulations, this was a “conviction” for the purposes of the Act allowing the numerous injured workers to make a claim. Most commonly our experiences have been in situations where a staff member or consultant has misappropriated funds from a client’s business and this has resulted in a police prosecution for either fraud or obtaining financial advantage by deception. If a criminal conviction has occurred, instead of running a civil action (in which one would have to prove a liability aspect), the only issue that the Court needs to be convinced of is the quantum of the loss sustained by the client for an order pursuant to the Act to be made. The peculiar nature of the order is that, although it looks like a civil judgment and can be enforced in a similar fashion, because it stems from a criminal act and is a pecuniary penalty, it continues and is not absorbed, as a general rule, into any bankruptcy in the event of the individual entering bankruptcy. It entitles the applicant to participate and be considered by a trustee in bankruptcy. The order is not discharged at the end of the bankruptcy period which is generally three years from the date of the filing of the bankrupt’s statement of affairs with the trustee. The important factor is to ensure that, as far as timing is concerned, the application for compensation is not left too late so that the application can be heard at the same time as the criminal sentencing application. Further, we are also required to liaise directly with the OPP and the defendant’s solicitor, as the judge enquires as to what rectification/repayment has made by he defendant. Formal documentation is also required to be filed with the criminal division of the respective Court. InDispute Commercial Litigation Bulletin > Subpoenas and Confidential Documents > What would you do if you were required to produce documents to the court which were highly confidential or commercially sensitive? This has recently been a question faced by several of our clients in response to: The first thing you need to be aware of is that your ability to object to the production of documents will depend on the process upon which you are being asked to produce the documents. The table below highlights the key differences between two processes. (a) an application for third party discovery (i.e. a request for a company which is not a party There are often cases where non-parties to a proceeding are requested to produce document to the proceeding to produce documents); that it never intended to be viewed by other (b)a subpoena. parties. This is often the case with business records THIRD PARTY DISCOVERY SUBPOENA Where do the documents get produced? Documents get produced to the party who made the request. Documents get produced to the Court. Any party to the proceeding can then inspect the documents. How do you know what documents to produce? Documents must be relevant to the issues in dispute. As a non-party the request for documents must be sufficiently detailed to enable you to determine whether the documents are relevant in the proceeding. Documents must be accurately described so that you are able to identify what documents need to be produced. that contain commercially sensitive information. In such circumstances, the non-party can object to the production and/or disclosure of the confidential documents. When met with such application, courts are required to assess the confidential nature of the documents. This issue can be overcome by the documents in question only being provided to solicitors of the party seeking disclosure of the documents on the condition that the solicitor gives an undertaking to the court not to show the documents to any other entity (including its clients). This is often seen to be a reasonable step in determining whether such documents are relevant to the issues in dispute in the court proceeding. If you are served with a non-party discovery application or a subpoena, it is important that you act in time and seek legal advice as failing to respond to these applications may result in adverse orders being made against you and ultimately you may end up being in contempt of court. Rigby Cooke Lawyers - InDispute 7 Our Team Elizabeth Guerra-Stolfa / Partner Commercial Litigation T +61 3 9321 7864 [email protected] Ben Wyatt / Partner Commercial Litigation T +61 3 9321 7823 [email protected] Radhika Kanhai / Partner Commercial Litigation T +61 3 9321 7880 [email protected] Rob Oxley / Senior Associate Commercial Litigation T +61 3 9321 7818 [email protected] Nicola Chow / Lawyer Commercial Litigation T +61 3 9321 7907 [email protected] Joseph Carneli / Lawyer Commercial Litigation T +61 3 9321 7806 [email protected] Level 11, 360 Elizabeth Street Melbourne Victoria 3000 T 61 3 9321 7888 F 61 3 9321 7900 www.rigbycooke.com.au To unsubscribe from this publication If you do not wish to receive publications of this type from us in the future, please notify us by sending an email to: [email protected] Your request to remove you as a subscriber should include the word “unsubscribe” and your full email address to allow us to correctly identify your removal from our lists. 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