Karbines and Karbines and Anor

[2008] FamCA 307

FAMILY COURT OF AUSTRALIA

KARBINES & KARBINES AND ANOR [2008] FamCA 307

FAMILY LAW – PROPERTY – trusts – husband and wife directors and shareholders of the intervener company – company monies used to make mortgage payments on house property owned by husband and wife – no evidence that company received benefit or consideration for such payments - company in liquidation – liquidators seeking constructive trust over property to extent of mortgage payments made by the company – husband and wife in breach of duties as directors and fiduciary agents of the company for making such payments – constructive trust declared – order for sale of property and payment to the company in the sum of the extent of the constructive trust

Warby and Warby (2002) FLC 93-091
Finlayson and Gillam (2002) FLC 93-121
ASIC and Edensor Nominess Pty Ltd (2001) 204 CLR 559
Lewis and Paris King Investments Pty Ltd and Rayhill and Rayhill (2006) FLC 93-278

Keith Henry and Co Pty Ltd and Stuart Walker and Co Pty Ltd and Another (1958) 100 CLR 342
Re Charge Card Services Ltd (1987) Ch 150
Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226

APPLICANT: Mrs Karbines

RESPONDENT: Mr Karbines

INTERVENER: C Pty Ltd (In Liquidation)

FILE NUMBER: MLF 2479 of 2005

DATE DELIVERED: 2 May 2008

PLACE DELIVERED: Adelaide

PLACE HEARD: Adelaide

JUDGMENT OF: Dawe J

HEARING DATE: 17 March 2008

REPRESENTATION

COUNSEL FOR THE APPLICANT: Mr Jordan

SOLICITOR FOR THE APPLICANT: Maddens Lawyers

THE RESPONDENT: In person

COUNSEL FOR THE INTERVENER: Mr Barnett

SOLICITOR FOR THE INTERVENER: Norman Waterhouse

Orders

1. It is declared that the husband and wife hold the property at E, Queensland, being Lot … on Registered Plan … in the County of … and Parish of …, Title Reference … (“the [Queensland] property”) on constructive trust for the intervener C Pty Ltd (In Liquidation) ACN … to the extent of the sum of SIXTY FIVE THOUSAND THREE HUNDRED AND ONE DOLLARS [$65,301.00].

2. That if the said sum of SIXTY FIVE THOUSAND THREE HUNDRED AND ONE DOLLARS [$65,301.00] has not been paid to the intervener C Pty Ltd (In Liquidation) by the 30^th June 2008 the liquidator shall be entitled to sell the Queensland property by public auction or private treaty.

3. The proceeds of sale are to be paid as follows:

   3.1in payment of the reasonable costs of and incidental to the sale;

   3.2in payment of the mortgage to the Commonwealth Bank of Australia;

   3.3in payment of the sum of SIXTY FIVE THOUSAND THREE HUNDRED AND ONE DOLLARS [$65,301.00] due to the first intervener C Pty Ltd (In Liquidation);

   3.4the balance of proceeds of sale to be held in trust by the liquidator in an interest bearing account pending further order of this Honourable Court.     

IT IS NOTED that publication of this judgment under the pseudonym Karbines and Karbines and Anor is approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth)

FAMILY COURT OF AUSTRALIA AT ADELAIDE

FILE NUMBER: MLF 2479  of 2005

Mrs Karbines

Applicant

And

Mr Karbines

Respondent

And

C Pty Ltd (In Liquidation)
Intervener

REASONS FOR JUDGMENT

Introduction

1. The first intervener, C Pty Ltd (In Liquidation) (“the Company”) seeks orders that the Company is “entitled to a constructive trust over the property at [E] Queensland” and an order for the sale of the property and payment to the Company of the sum of $65,301 (being the amount the liquidator claims is the extent of the constructive trust).  In the alternative the claim is that the Company should have an equitable charge or lien over the Queensland property to the extent of the amount of $65,301 or again in the alternative, that the husband and wife have caused loss to the Company entitling it to damages in an amount equal to the payments made.

2. The application is made by the Company intervening in the Family Court proceedings commenced between the husband and wife who are the directors and shareholders of the Company which is now in liquidation.

Hearing

1. The first intervener’s application was heard by me as a separate issue on the 17 March 2008 in Adelaide.  The property settlement proceedings between the husband and wife are part heard before me and are due to resume at the end of May 2008.

2. At the hearing before me on the 17 March 2008 Mr Barnett appeared for the liquidator of C Pty Ltd (In Liquidation), Mr Jordan appeared as counsel for the wife and the husband was in person.

3. On behalf of the wife the court was informed that the wife concedes the intervener’s claim against the Queensland property provided

   a)the claim is fixed in the sum of $65,301 and

   b) an order for sale is made to specifically secure the payment. 

   The wife did not oppose an order that the intervener’s legal costs in respect of the proceedings be agreed or taxed provided that the wife had liberty to subsequently argue that the costs be apportioned solely to the husband.

4. The husband opposed the orders sought by the first intervener.

5. The first intervener relied on the affidavit of Mr R and by reference part of the affidavit of Mr M sworn on the 17 July 2007 with annexures.  The husband relied on his affidavit received by the Court on the 17 March 2008 (document 139) an unsworn affidavit.  The husband swore to its truth on oath in the witness box when giving his oral evidence on the 17 March 2008.

6. At the hearing the liquidator Mr R, Chartered Accountant gave evidence.  The husband also gave oral evidence.

7. I heard final submissions and reserved my decision.

Background and chronology

1. The husband and wife married in 1983.  C Pty Ltd was incorporated in 1987.  The husband and wife have an equal shareholding in the company which operates as the trustee for the Family Trust which was established in December 1987.  The directors of the company are the husband and wife (and from time to time other members of the husband’s family such as his brother or his mother).

2. In 2002 the husband and wife purchased property at E in Queensland (the “Queensland property”) for $300,000.

3. The husband and wife separated in November 2005.  Property settlement proceedings were commenced by the wife in the Family Court in Melbourne in August 2005.The husband arranged for the incorporation of another company, B Pty Ltd, (of which the husband was the sole director and shareholder) in February 2005.  It is also alleged that the husband appointed the new company B Pty Ltd as the trustee of the Family Trust in about April 2005.

4. On the 13 February 2007 the Supreme Court of South Australia placed C Pty Ltd in liquidation.  Mr R of S & Co was appointed the liquidator. 

5. The company B Pty Ltd is now also in liquidation. 

6. The liquidator of C Pty Ltd has indicated that he has possible outstanding significant claims against the husband and wife over and above the claim in relation to the Queensland property.

7. The Family Court of Australia has the jurisdiction to make the orders sought by the liquidator.  (No objection was taken by any of the parties to the Family Court deciding the issues.)

8. I am satisfied that the controversy between the husband, wife and the liquidator clearly forms part of the matter between the husband and the wife involving (as it clearly does) the determination of the assets and liabilities of the husband and wife and the common substratum of facts relating to the Queensland property and the operation of C Pty Ltd.  (See Warby and Warby (2002) FLC 93-09, Finlayson and Gillam (2002) FLC 93-121 and ASIC and Edensor Nominess Pty Ltd (2001) 204 CLR 559.)

9. In Lewis and Paris King Investments Pty Ltd and Rayhill and Rayhill (2006) FLC 93-278 the Full Court of the Family Court of Australia referred to these cases and said at paragraph 127:

   “The nature of the jurisdiction is referred to by Allsop J writing extrajudicially in his article “Federal Jurisdiction and the jurisdiction of the Federal Court of Australia in 2002”, Australian Bar Review (2002) 23(1) at 29.  See also Zines L, “Federal, Associated and Accrued Jurisdiction”, in Opeskin B and Wheeler F, eds, The Australian Federal Judicial System, (Melbourne: Melbourne University Press, 2000).  Allsop J, in describing and comparing accrued jurisdiction and associated jurisdiction said, at 19:

   “These terms denote different concepts, which it is important not to confuse. ‘Accrued jurisdiction’ is that part of the matter which is not specifically federal.  It is probably a term best avoided.  The whole matter is federal if it arises under a federal law.  It is apt to mislead if one thinks of State or common law jurisdiction clamping on to federal jurisdiction.  It is all federal jurisdiction, if it is one controversy.  The old notion of there perhaps being some ‘discretion’ as to whether the court will accept this ‘accrued’ jurisdiction may well be wrong (or at the very least, unreliable) in the light of recent statements in the High Court in Re  Wakim, Edensor and Austral Pacific.” [footnotes omitted]”

Evidence and findings

1. The liquidator provided evidence that the Company’s funds had been used to pay the mortgage for the Queensland property.  This was accepted by both the husband and wife.  The records of the Company indicate that the Company spent $65,301 making payments of the loan due by the husband and wife to the mortgage secured for the purchase of the Queensland property.

2. I accept the evidence of Mr R.

3. The husband also gave evidence.

4. His oral evidence confirmed his affidavit evidence that the property at Queensland was used to store stock of C Pty Ltd and that part of the property was used as an office and showroom.  His evidence was that people engaged to work for one of his companies visited the property and that his mother from time to time provided them with lunch.

5. In his affidavit and in his oral evidence the husband said that he had arranged for the house to be put in the names of himself and his wife.  He admitted that the Company made the loan repayments which he said was in lieu of paying rent.

6. The husband admitted that his mother has resided in the property since its acquisition and continues to reside there.

7. During cross-examination the husband conceded that his taxation returns for the year 2004 disclose that the husband received an income from C Pty Ltd and also received rent but the rent related to a property in G and not the Queensland property.  I accept that the evidence in particular Exhibit 37 discloses that the husband did not declare as income any rent in relation to the Queensland property.

8. Part of the evidence of the husband in cross-examination includes these passages:

   “It’s the position, is it not, that you did not declare to the Commissioner of Taxation for that year 2004 receiving any rental income in respect of the Queensland property, did you?    --- I think [R] did do the right thing.  It may in – she might have banded (sic) it in 2005 because I do know that the account – because I was concerned about the situation of Queensland at one stage, you now, if we’d be up for capital gains or what the situation was, where – would we default or what would we be doing wrong, but they did tell – I remember the accountant telling me, “Look, we’ll worry about that later,” but I can’t remember what happened, sorry.

   Your position to her Honour this morning is that the company [C] Pty Ltd was renting the Queensland property from you and your wife who were the owners of the property? --- Yes, I suppose it’s got a bit twisted because the owner of the property is really my mother, but it’s in our name, so I understand where you’re coming from.  It was put into our names and the company was, yes – in effect, it was actually renting the property from – in effect it was renting the property, but for us internally because of the way we were, we had it to pay off the loan.”

   and later

   “MR BARNETT:  Mr [Karbines], isn’t the reason that there is no inclusion in your 2004 tax return for rental income in respect of the Queensland property because there wasn’t any rental arrangement between you and your wife and the company [C] Pty Ltd? --- Honestly, looking at paperwork and picking the eyes out of it, that is a possibility.  I don’t know that it’s true, to be honest with you, but at the end of the day it’s not the truth, but I can see where you’re coming from.  It’s not even close to the truth, and if it’s – I don’t know – shall I just agree with it and cheat everybody that’s involved?  I mean – can I say: selling the Queensland house does not affect my wife; does not affect anyone in this room.  Doesn’t really affect me, except for the last two years that I’ve paid for it.  But it does affect [J Karbines].  But [she] knows – my wife – “Sell it, hey [J], sell it, get her out, teach her a lesson.”  It’s nothing to do with any of us or my wife.  The only person’s (sic) that going to suffer about this wrong decision of Queensland house is [J Karbines], and that is the truth.  Whether there’s a technicality that [the respondent husband] is an idiot how he runs a business, point taken, but I have got something like 19 plaques up on the wall, but they’re not business orientation; they’re achievements.”

9. During cross-examination the husband also conceded there was no document recording any agreement between himself and the wife on the one part and the Company relating to the Company renting the premises from them.

10. Exhibit 12 from the proceedings between the husband and wife was shown to the husband.  The following evidence was given:

    “HER HONOUR:  Mr Barnett, can you have a look at that.  In relation to that exhibit for the transcript recording it is headed [C] Group Of Companies Balance sheet.  It provides two sets of figures:  one as at 30 June 2004 and another as at 30 June 2005.  Both of those entries contain an item under Non-Current Assets Land And Buildings Queensland, $297,254.70 for both years.  I understood that to relate to the property in Queensland which we’re now dealing.  Mr [Karbines], do you concede that?

    MR [KARBINES]:  Yes, I saw that, your Honour.  I can see that in that line it shows the property and it shows the liability to the loan underneath.

    HER HONOUR:  “Commonwealth Bank Queensland ([E])” ---

    MR [KARBINES]:  Yes.

    HER HONOUR:  --- in someone’s handwriting, $256,215.90 in one year and $254,957.91 in the other year.

    MR [KARBINES]:  Yes, I saw that bit, your Honour, and the only thing that I’m not sure of is that at the times when I – and I did not get involved much with accounting but [R] says to me that, “[Mr Karbines], I’ve got” – there’s a system where we have loan accounts – if something comes out on here that it may refer to a particular loan account and how it was handled – the transaction.

    HER HONUR:  Mr Barnett and Mr Jordan, do either of you want Mr [Karbines] to be cross-examined about this document at all?

    MR JORDAN:  No, your Honour.

    HER HONOUR:  It seems to suggest that the [Queensland] property was an asset owned by the [C] group of companies.

    MR BARNETT:        No, I don’t want to ask him anything about it.

    HER HONOUR:  Do you want to give any further evidence, Mr [Karbines], in view of the fact that I’ve found this document, exhibit 12, which suggests that the Queensland property with which we’re concerned today was owned by the [C] group of companies?

    MR [KARBINES]:  I just want to tell the truth, don’t get me wrong.  Yes, the paperwork does clearly show – I read that and it puts it in an asset and it shows the liability, so the paperwork there shows that it was owned.  Now, the point is that I suppose if we were to pay all the people back that paid it off with interest then give it to the company and get them to sell it.  I don’t know.  I can only be honest.  The fact is that [J] definitely paid the deposit; consequently different people have paid it off to keep her going so there’s other hidden problems, but I can see because we were paying the loan off as in lieu of rent, which is the truth, the way we’ve done it – [R] has put it in there as an asset and a liability to show it but then she does separate loan accounts after that with the accountant.  Now, which way that should be interpreted is a good point.”

11. The husband’s evidence concerning the arrangements between the husband and wife and the Company and his mother was at times inconsistent.  The documentary evidence of the accounts of the Company and the husband’s income tax returns contradict some of the evidence of the husband.

12. I am satisfied that the evidence clearly indicates that the husband, as the day to day manager of the Company, and the husband and wife as directors of the Company used the Company’s money to make the payments which were due to be paid on the mortgage over the property in Queensland.  The evidence also establishes that the Queensland property was purchased by the husband and wife in their personal capacity.

13. Whilst I accept that the companies operated by the husband and wife, and possibly including C Pty Ltd, from time to time may have received some benefit because stock was kept at the premises, the evidence is not at all clear as to which of the companies operated by the husband and wife received these benefits.

14. I am also satisfied that the husband’s mother occupied the premises owned by the husband and wife in Queensland.  (The husband alleged that she did not receive full wages for her work on behalf of one of the business entities because she was able to occupy the premises rent free.)

15. Counsel for the wife conceded that the sum was due but did not concede that an interest in the real estate was created.  The wife did not oppose an order for sale and payment of the full amount to the liquidator upon sale.

16. The liquidator has established that the Company’s monies were used to pay the mortgage over the Queensland property which is owned by the husband and wife.

17. The husband and wife have not established that the Company received any benefit or consideration for the payment by the Company of the monies paid to discharge the mortgage.

18. This establishes that the husband and wife have breached their duties as directors and as fiduciary agents of the Company.  The liquidator therefore asserts a beneficial ownership of the Queensland property to the extent of the payments.

19. In Keith Henry and Co Pty Ltd and Stuart Walker and Co Pty Ltd and Another (1958) 100 CLR 342 (Dixon CJ, McTiernan J and Fullagar J) said at page 350:

    “The doctrine of Keech v. Sandford (1) is shortly stated by saying that a trustee must not use his position as trustee to make a gain for himself: any property acquired, or profit made, by him in breach of this rule is held by him in trust for his cestui que trust.  The rule is not confined to cases of express trusts.  It applies to all cases in which one person stands in a fiduciary relation to another: …”

20. The husband and wife have benefited in their personal capacity by the payments made by the Company in circumstances which were in breach of their fiduciary duties as directors of the Company.

21. The liquidator has established that the husband and wife owe the Company the sum of $65,301 being the monies paid by the Company to reduce the mortgage on the property owned by the husband and wife in Queensland.  This therefore establishes that the Company has an equitable interest in the Queensland property to the extent of the payments made.

22. The Company has established a right to an equitable interest in the property to the extent of the payments made.  (The liquidator did not seek to assert a share of the profit if any made from the use of the funds of the Company for the benefit of the husband and wife.)

23. The liquidator seeks the sale of the Queensland property in order to recover the monies due.  The wife agrees to the payment of the sum of $65,301 but only from the proceeds of sale of the Queensland property.  As previously indicated the husband opposes the payment and the sale of the Queensland property.

24. In Re Charge Card Services Ltd (1987) Ch 150 at 176 Miller J said

    “The essence of an equitable charge is that, without any conveyance or assignment to the chargee, specific property of the chargor is expressly or constructively appropriated to or made answerable for payment of a debt, and the chargee is given the right to resort to the property for the purpose of having it realised and applied in or towards payment of the debt.”  (See also Hewitt v Court (1983) 149 CLR 639.)

1. In Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 the High Court stated at paragraph 50:

   “A court of equity may authorise the sale of assets held by the trustee so as to satisfy the right to reimbursement or exoneration. In that sense, there is an equitable charge over the "trust assets" which may be enforced in the same way as any other equitable charge (See Hewitt v Court (1983) 149 CLR 639 at 663).”

2. It is established therefore that this Court can order the sale of the property to enable the liquidator to recover the funds due having established that the liquidator has an equitable interest in the property to the extent of the amount owed.

3. The liquidator has established:

4. (1)    that the property is owned by the husband and wife;

   (2)that the husband as manager of the Company and one of the directors of the Company has caused the payments to be made by the Company for the benefit of the husband and wife who are directors of the Company;

   (3)that the payments made for the benefit of the husband and wife have been in breach of their duties as directors and fiduciary agents of the Company thereby establishing the beneficial ownership to the extent of the payments by the Company on behalf of the Company.

5. The Company now seeks to enforce payment of the amount due and seeks to recover its equitable interest by an order for sale of the Queensland property.

6. I am therefore satisfied that the Company is entitled to be paid the sum of $65,301 and that to the extent of that sum the Company has an equitable interest in the property in Queensland.

7. It is appropriate for the Court to make the declaration sought by the liquidator.

8. The husband does not deny that the Company’s monies were used to make the payment of $65,301 in reduction of the mortgage over the Queensland property.  The wife agrees to make the payment but only from the proceeds of sale of the Queensland property.  The husband opposes the sale of the Queensland property.

9. If, after an appropriate time, the Company has not received the sum of $65,301 then it is appropriate for the Company to recover its money due from the husband and wife by way of sale of the Queensland property in which they have established an equitable interest.

I certify that the preceding fifty one (51) paragraphs are a true copy of the reasons for judgment of the Honourable Justice Dawe.

Associate: 

Date:  2 May 2008