- Unreported Judgment
SUPREME COURT OF QUEENSLAND
Davis v Perry O’Brien Engineering Pty Ltd  QSC 202
ROY STEVEN DAVIS and COLLEEN JOYCE DAVIS
PERRY O’BRIEN ENGINEERING PTY LTD
ACN 077 375 207
SC No 5928 of 2016
Supreme Court at Brisbane
2 September 2016
5 August 2016
EQUITY – TRUSTS AND TRUSTEES – EXPRESS TRUSTS CONSTITUED INTER VIVOS – DECLARATION OF TRUST – NECESSITY FOR INTENTION – where parties entered into a Share Sale Agreement to transfer the ownership of a company – where those parties and the company entered into a subsequent deed, which amended the Share Sale Agreement and by which the sellers gave a loan to the company – where the deed provided that the proceeds from the sale of certain items defined in the deed were to be paid to the sellers as soon as they were received – whether the parties intended by that clause that the proceeds were to be held on trust for the sellers
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – PARTIES – RIGHTS AND LIABILITIES OF THIRD PARTIES – where parties entered into a Share Sale Agreement to transfer the ownership of a company – where under the Share Sale Agreement the sellers warranted certain things to the buyers – where the company itself was not a party to the Agreement – where some warranties provided that the sellers would grant indemnities in favour of the buyers over claims against the company arising from circumstances that existed prior to settlement – whether the warranties appear to be intended to create duties enforceable by the company – whether the company is entitled to bring a claim for breach of those promises
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – CROSS-CLAIMS: SET-OFF AND COUNTERCLAIM – SET-OFF – WHAT MAY BE SET-OFF – EQUITABLE SET-OFF – GENERAL MATTERS – where parties entered into a Share Sale Agreement to transfer the ownership of a company – where under the Share Sale Agreement the sellers warranted certain things to the buyers – where the company itself was not a party to the Agreement – where the parties and the company subsequently entered into a deed, which varied the Share Sale Agreement and which made provisions for a loan and repayments – where the sellers seek a declaration that the company must account to them based on a payment obligation under the deed – where the company advances claims for breaches of contract under the Share Sale Agreement – whether the company’s claims can be set-off against the seller’s claims under the deed – whether the company’s arguments about being able to enforce promises in the deed and equitable set-off raise issues which should be tried in the ordinary way, rather than determined on the application
Property Law Act 1974 (Qld), s 55, s 55(6).
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588, cited
Australian Mutual Provident Society v Specialist Funding Consultants Pty Ltd (1991) 24 NSWLR 326, cited
Bofinger v Kingsway Group Ltd (2009) 239 CLR 269, cited
Byrnes v Kendle (2011) 243 CLR 253, cited
D Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10, cited
Drane v Aqualyng Holdings & Anor  QSC 139, cited
Forsyth v Gibbs  1 Qd R 403;  QCA 103, applied
Hawes v Dean  NSWCA 380, cited
Jessup v Queensland Housing Commission  2 Qd R 270;  QCA 312, cited
Kauter v Hilton (1953) 90 CLR 86, applied
Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62, cited
Re Lehman Bros International (Europe) (in admin)  3 All ER 1, cited
Rodgers v ANZ Banking Group Ltd  QSC 190, cited
Sino Iron Pty Ltd v Palmer (No. 3)  2 Qd R 574;  QSC 94, cited
Sun Candies Pty Ltd v Polites  VLR 132, cited
Thomas v D’Arcy  1 Qd R 666;  QCA 68, cited
Tomlinson v Cut Price Deli Pty Ltd (1992) 38 FCR 490, cited
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987-88) 165 CLR 107, applied
N H Ferrett for the applicants
P D Tucker for the respondent
Project Legal for the applicants
Shand Taylor for the respondent
- The applicants were shareholders in a company, Earthpro Pty Ltd, which carried on (and continues to carry on) a civil contracting business. The shares in the company were sold by the applicants to corporate entities associated with Mr Robert Perry and Mr Michael O’Brien. Mr Perry and Mr O’Brien became directors of the company following settlement of a Share Sale Agreement on 23 December 2015. The Share Sale Agreement dated 4 October 2015 (to which the company was not a party) was amended from time to time. It contained various promises by the applicants who, as “the Sellers”, also gave warranties. Partly as a result of a due diligence process and partly because of the perceived need to renegotiate the commercial terms of the Share Sale Agreement so that the Perry O’Brien interests could obtain finance, the Share Sale Agreement was amended. Also, in the circumstances explained in more detail below, the parties to the Share Sale Agreement as well as the company entered into a Deed dated 9 December 2015. The Deed addressed a loan of $750,000 that the applicants were to make the company at completion and contained a promise that the applicants would assign $400,000 of their entitlement to the settlement loan to the new directors of the company for a consideration of $1. The settlement loan was to be used to pay out a bank overdraft in full.
- The Deed defined “Stock” as certain stockpiles and materials that had been purchased and either paid by or invoiced to the company prior to 26 November 2015, and the “Stock Sale Proceeds” as the proceeds the company received from the sale of the Stock. Clause 2.2 of the Deed provided:
“[The company] will sell the Stock as soon as is possible and will pay the Stock Sale Proceeds to the Sellers as soon as it is received by [the company].”
- After the sale was completed on 23 December 2015, Mr O’Brien became aware of a number of matters which were not disclosed in the Share Sale Agreement and which the Perry O’Brien interests say were not disclosed in the period preceding settlement. The Perry O’Brien interests, who now own and direct the company, advance a raft of claims for breaches of warranties given by the applicants as Sellers and other claims of misrepresentation. Mr O’Brien has, with the assistance of his new solicitors, quantified the amount of the claim at $1,860,391.20. The company and the Perry O’Brien interests intend to pursue those claims against the Sellers.
- In this proceeding the applicants seek:
(a)a declaration that by operation of cl 2.2 of the deed executed on 9 December 2015:
(i)such monies as the company has received from the use or sale of “Stock” as listed and defined in the 9 December 2015 Deed have been or were held on trust for the applicants; or
(ii)alternatively, the company is obliged to account to the applicants for such monies as it has received from the use or sale of “Stock” as listed and defined in the 9 December 2015 Deed;
(b)an order for an account in respect of the company’s use or sale of the Stock.
- The company resists the application and contends that:
(a)no trust is created by cl 2.2 of the 9 December 2015 Deed;
(b)it has an equitable set-off in respect of the applicants’ claim; and
(c)the proceeding should, accordingly, continue as if commenced by way of claim, with directions for delivery of pleadings.
- Two substantial issues arise for determination:
(a)Did cl 2.2 of the Deed create a trust in favour of the applicants in relation to the “Stock Sale Proceeds”?
(b)If not, and if the applicants are confined to a monetary claim in respect of the company’s obligation to pay the “Stock Sale Proceeds” to the applicants, then is the company entitled to raise an equitable set-off in response?
Two subsidiary issues arise in relation to the second question. The applicants deny that the company is entitled to advance claims for breach of contract in respect of the Share Sale Agreement to which the company was not a party. According to the applicants, the company is not entitled to invoke s 55 of the Property Law Act 1974 (Qld) or other legal bases upon which a non-party might pursue a claim for breach of contract. The company relies upon s 55 of the Act and general law doctrines, including the argument that one or more of the promises under the Share Sale Agreement is held on trust for the benefit of the company. The second subsidiary argument raised by the applicants concerns equitable set-off. They argue that if the company is entitled to advance claims for breach of contract then those claims do not “impeach” the claim based on the payment obligation in cl 2.2 of the Deed “so as to make it unfair for the claim to be allowed without taking account of the cross-claim”. They rely upon what is said to be an absence of mutuality between their claim and any claims which are available to the company.
- Some facts are not in dispute, but many are. In seeking the relief which they claim, the applicants accept that I should assume the facts which the company asserts for the purpose of this application. The applicants’ argument is that, even accepting that all of those things are true, it does not assist the company because the company does not have the benefit of those claims and because the claimed losses are not losses which the company (as distinct from its shareholders) suffered. Against that background, the following statement of the facts is drawn heavily from the affidavit of Mr O’Brien and the company’s submissions which identify the claims which the company advances by way of offsetting claims.
- Mr Davis invited Mr O’Brien and Mr Perry to become involved in the operational side of the business from 18 August 2015, after the company’s then general manager and one of its project managers had their employment terminated. They gained some familiarity with the business and this led to their companies, MG O’Brien Investments Pty Ltd and RB Perry Investments Pty Ltd, negotiating a Share Sale Agreement dated 4 October 2015.
The Share Sale Agreement dated 4 October 2015
- Under this agreement the Perry O’Brien entities agreed to buy from Mr & Mrs Davis all of the shares in Earthpro Pty Ltd and all of the shares in a related entity, Earthpro Plant Hire Pty Ltd. The purchase price was $5,342,785.98. The agreement required the Sellers to procure the company to provide financial statements for the companies.
- Clause 7 of the Share Sale Agreement concerned conduct before completion of the Share Sale Agreement. Clause 7.1 required that the Sellers procure the company to:
- carry on the business in a proper and efficient manner and in the ordinary course;
- preserve the goodwill;
- carry out maintenance and repairs to all plant and equipment in accordance with good commercial practice;
- maintain all assets; and
- not dispose of or transfer any asset or enter into any agreement except in the ordinary course of operating and conducting the business.
- Clause 7.2 of the Share Sale Agreement provided:
“Pending Completion, the Sellers must not, and must procure the Companies not to (as applicable), without the prior written consent of the Buyer, do any of the following things or allow them to be done:
(k)do anything which results or would be likely to result in the financial position or value of the following becoming materially less favourable than it is at the date of this document:
(iv)the Goodwill; and
(v)any asset of the Companies.”
- Clause 7.3 required the Sellers to inform the Buyer prior to completion of the Share Sale Agreement of any matter or thing that has or may be considered to have a material effect on the value of the business or the company.
- Clause 8 concerns the Sellers’ warranties. Clauses 8.10 to 8.13 provide:
“8.10The Sellers warrant to the Buyer that at the date of this document and at Completion, each of the statements listed at Schedule 1 are true and correct.
8.11The Sellers jointly and severally indemnify and will keep indemnified the Buyer in relation to any Claim arising from any breach of a Warranty given by the Sellers.
8.12The Sellers jointly and severally indemnify and will keep indemnified the Buyer for all future liabilities of or Claims against the Companies or the Business that relate to the period prior to Completion.
8.13The Sellers indemnify and will keep indemnified the Buyer against any loss incurred or liable to be incurred by reason of any Claim for any taxation made against the Companies or the Business, where the Claim arises out of the conduct of the Companies or the Business or out of any act or omission of any of the Companies or the Sellers…which occurred prior to the Completion Date.”
Warranties under the Share Sale Agreement
- Schedule 1 of the Share Sale Agreement lists 56 warranties, for the purposes of cl 8.10. Relevantly, the warranties included the following:
“G.At the Completion Date, each Company has current assets at least equal to 1.25 x current liabilities, as determined with reference to the book value accounting principles.
O.All written information given to the Buyer by the Sellers or the Companies… up to Completion is true and accurate in all material respects. None of that written information is misleading in any material particular, whether by omission or otherwise.
P.No information or details relating to the Companies, the Business, or the Assets which would be material for disclosure to a prudent intending purchaser of the Companies, the Business or the Assets has been withheld or not disclosed to the Buyer.
Q.There are no facts or circumstances which might reasonably be expected materially and adversely to affect the financial position, operations, profitability or prospects of the Companies or the Business.
U.The Financial Statements for the Companies provided by the Sellers to the Buyer:
(2)give a true and fair view of the assets and liabilities (whether present, future or actual), the state of affairs and the financial position of the Companies and the Business…;
(3)make full provision for actual liabilities, tax and bad and doubtful debts…; and
(4)are not misleading in any material particular, whether by omission or otherwise.
Y.Since the date of the most recent Financial Statements provided by the Sellers to the Buyer:
(6)the Business has been conducted in the ordinary course and in a proper and efficient manner…;
(8)no payments have been made or incurred that are not directly linked to the ordinary commercial activities of the Business.
BB.All Tax relating to or accruing in the periods up until and including Completion has been paid.
CC.All obligations in relation to Taxes… have been complied with by the Companies.
(3)have submitted any necessary information, notices, computations and returns to the relevant Government Agency in respect of any Tax… and returns submitted have been true, accurate and not misleading;
FF.All information necessary for the Buyer to determine the Tax liabilities of the Companies at Completion has been provided to the Buyer;
(1)there will not be any Encumbrances over or affecting the Companies, the Business or any of the Assets, other than those relating to Asset Leases;
KK.Each item of Plant and Equipment is:
- in good repair and working condition for its age, properly maintained[,] fully operational and is safe…;
(2)are not in breach of any contract to which they are a party; …
QQ.Nothing has been done or omitted to be done which would make any insurance policy of the Companies, in connection with the Business, or any asset void, voidable or unenforceable…;
RR.There are no facts or circumstances which may give rise to a Claim being made against the Companies in connection with the Business or any asset of the Companies.
SS.The Companies have conducted the Business in all material respects in accordance with all applicable laws…;
TT.The Sellers have provided the Buyers with a complete and accurate list of all employees outlining their period of service, applicable industrial award[s], accrued leave entitlements and remuneration benefits and there have been no material changes to that information since the date of the provision of the list.
WW.The Sellers have provided the Buyers with full details of each employee’s employment history sufficient to enable the Buyer to calculate all termination entitlements, including notice and severance/redundancy entitlements.”
- During the due diligence period Mr O’Brien became aware of certain matters including difficulties associated with a contract which the company had with Austral Bricks. There also was an ongoing dispute with the Caloundra City Council.
- The Austral Bricks contract provided to the company:
(a)income from Austral Bricks, by the company’s extracting and stockpiling clay from quarries operated by Austral Bricks; and
(b)the capacity to acquire fill material from a quarry at German Church Road, upon payment of a royalty to Austral Bricks of $3.00 per cubic metre, for the company’s own contracts.
- Relevantly, cl 4.1 of the Austral Bricks contract provided that all stockpiled material in its quarries was owned by Austral Bricks; that is, no material that was simply stockpiled on Austral Bricks’ quarries was owned by the company.
- A due diligence letter dated 17 October 2015 led to further negotiations.
First amendment to the Share Sale Agreement
- Following the due diligence letter, the parties to the Share Sale Agreement executed an amendment on 26 October 2015 which provided for:
(a)a reduction of the purchase price by approximately $1,800,000, to $3,500,000; and
(b)the addition of cl 6.4 to 6.8, which allocated to the company any risk associated with an ongoing dispute with the Caloundra City Council.
- The effect of this amendment was to remove a Vendor Finance Loan of $2,000,000.
Provision of financial information
- A variety of financial information was provided to the Perry O’Brien entities, including certain MYOB records and certain draft financial statements. These matters gave rise to a concern as to whether the ratio of the company’s current assets to current liabilities was 1.14 (less than the ratio of 1.25 required under Warranty G in Schedule 1 of the Share Sale Agreement). Whether it did or not depended upon whether some of the stockpiled material could be added to the current assets.
- On 3 November 2015, a profit and loss statement and a balance sheet for the company for the period from 1 July 2015 to 31 October 2015 were provided. The transaction continued and the buyers obtained conditional approval from Westpac for funding of the acquisition, subject to a number of conditions. The required conditions prompted a further amendment of the Share Sale Agreement which was executed on 23 November 2015. In order to satisfy Westpac’s conditions, the applicants provided on 23 November 2015 a signed statement as follows:
“1.All statutory obligations of the Companies have been met and are in accordance with legislative requirements;
- All employee superannuation for the Companies has been paid up to date;
- All other employee entitlements for the Companies are paid up to date or provision has been raised for any outstanding amount; and
- All financial statements for the Companies provided to the Buyers present an accurate view of the Companies’ financial position.”
Concerns about the Item G warranty
- On 19 November 2015, Mr O’Brien raised concerns in relation to the Sellers meeting the current ratio (current assets: current liabilities) requirement of 1.25, as stipulated by warranty “G” in Schedule 1 of the Share Sale Agreement.
- Mr O’Brien met with Mr Davis on 21 November 2015 to discuss these concerns, and on 22 November 2015 outlined a proposal whereby:
(a)further monies would be contributed by the Sellers prior to settlement of the Share Sale Agreement; and
(b)funds would be returned to the Sellers for materials that had been paid for, as referred to in the stocktake of 29 October 2015, but which could not be claimed until installed by the company.
- Subsequently, the Buyers and the Sellers agreed to adopt the debtors and creditors of the company as at 25 November 2015, and to use that figure as a baseline for determining amounts payable at settlement of the Share Sale Agreement, after taking into account:
- materials purchased prior to that date but not yet invoiced on jobs;
- material extracted and processed from the German Church Road quarry;
- clay material delivered to, but not yet placed at, the Birkdale Site; and
- an allowance to clear the company’s bank overdraft and keep sufficient cash with the company to pay wages for a month.
- A template “draft” of what was to become the 9 December 2015 Deed was sent by Mr O’Brien to the Sellers’ accountant on 26 November 2015, which:
- annexed a table, in which “Agreed Seller’s Stock – Estimated value” was listed as having a value of $350,000;
- provided that:
- on settlement of the Share Sale Agreement, the Sellers would clear the company’s overdraft and provide to the company amounts for wages in December estimated at $306,000;
- a $250,000 loan to the company from the Sellers would become a loan to the Buyers;
- after settlement, the Buyers would “return the agreed value of the Sellers’ stock, as per attached table”, which estimated stock value at $350,000, but which could not be claimed “due to terms and conditions of contracts or the stock [being] Austral quarry product that [had not] been sold yet.”
- The “Austral quarry product agreed value” was calculated in accordance with the rates identified in Mr Davis’s handwritten notes attached to a survey that Mr Davis organised in respect of stockpiled material. That value was a “net value” figure for the stockpiled material, and substantially less than the company’s “list price” to customers.
- By email on 27 November 2015, the company’s then accountant stated that as at 25 November 2015 the company had:
(a)debtors of $2,089,167;
(b)creditors of $1,868,450, plus superannuation liabilities of $49,524 and taxation liabilities of $152,855;
leaving a surplus of $85,394.
- The accountant proposed a “strategy” in which the Sellers would lend back $750,000 on settlement of the Share Sale Agreement to clear the company’s overdraft completely, and which would be partly repaid:
“… upon sale of stockpiles etc as listed but not accounted for (German church rock, geo fabric etc etc approx. value $350,000) plus $120,000 being the remainder of Colleens $250,000 less the Paul Lucy $130,000. Any outstanding loans after these payments have netted against the $750,000 aforementioned are assigned to the new directors. Please confirm asap and Andre will prepare this document today.”
- The “stockpiles etc as listed but not accounted for (German church rock, geo fabric etc etc approx. value $350,000)” appears to be a reference to the “Agreed Seller’s Stock – Estimated value” in Mr O’Brien’s email of 26 November 2015.
- As to the “$120,000 being the remainder of Colleens $250,000 less the Paul Lucy $130,000”:
(a)Mrs Davis had made contributions to the company in August and October 2015 totalling $250,000, which were recorded in the “Owner’s Drawing” ledger of the company’s management accounts; and
(b)about $130,000 of those funds had been used to pay a claim by one of the company’s contractors (Paul Lucy of Lucy Contractors).
- The Perry O’Brien entities were informed by the company’s accountant on 26 November 2015 that the financial documents provided to them had captured 95 to 99 per cent of all creditors. On that basis, the Perry O’Brien Entities entered into the 9 December 2015 Deed.
The 9 December 2015 Deed
- The 9 December 2015 Deed included the following defined terms:
- Assigned Amount means “the $400,000 assigned under clause 1.1(b)”;
- CBA Overdraft means “all amounts owed by [the company] to the Commonwealth Bank of Australia”;
- Colleen’s Loan means a debt of $120,000 owed by [the company] to Mrs Davis;
- Outstanding Loan Balance means “the Settlement Loan less the Total Loan Repayments and less the Assigned Amount”;
- Settlement Loan means “a loan of $750,000 that the Sellers will make to [the company] at Completion”;
- Stock means a list of 25 items on the Land, the Birkdale site and the German Church Road quarry, that had been purchased and either paid by or invoiced to the company prior to 26 November 2015, including raw material stockpiled at the German Church Road quarry;
- Stock Sale Proceeds means “the proceeds that [the company] receives from the sale of the Stock”;
- Total Loan Repayments means the total of the Stock Sale Proceeds paid by the company to the Sellers.
- Clause 1.1 of the 9 December 2015 Deed provided that on completion of the Share Sale Agreement:
(a)the Sellers would advance the settlement loan to the company;
- the Sellers would assign $400,000 of their entitlement to the settlement loan to the company’s new directors (Mr Perry and Mr O’Brien); and
- the company would use the settlement loan funds to pay out the CBA overdraft in full.
- Clause 2.1 of the 9 December 2015 Deed described Colleen’s Loan as being “interest free, unsecured” and payable in quarterly instalments on 31 March, 30 June, 30 September and 31 December 2016.
- Clauses 2.2 to 2.4 provided:
“2.2[The company] will sell the Stock as soon as is possible and will pay the Stock Sale Proceeds to the Sellers as soon as it is received by [the company]. The Stock at Birkdale and the German Church site will be used for specific projects and payment will be made by [the company] to the Sellers as soon when that Stock is put into the ground and a progress payment is received by [the company] for that Stock. The Stock on the Land can be applied either to specific project [sic] or sold by [the company]. [The company] must obtain the Seller’s prior written approval (which must not be unreasonably withheld) of the terms on which it will sell the Stock before the Stock is sold. It is agreed that [the company] will not repay any of the Assigned Amount until the Total Loan Repayments have been paid in full to the Sellers and Colleen’s Loan has been repaid in full.
2.3The Total Loan Repayments will be set off against the Settlement Loan and once the Total Loan Repayments have been paid to the Sellers and Colleen’s Loan has been repaid in full the Outstanding Loan Balance will be assigned by the Sellers equally to the then current directors of [the company] for $1.00. The Settlement Loan is interest free, unsecured and repayable on the terms of this document.
2.4It is agreed that [the company] may use the Settlement Loan funds after the CBA Overdraft is paid out in full as working capital.”
- By cl 3.1 of the 9 December 2015 Deed, the Sellers and Buyers agreed to enter into a further deed of variation of the Share Sale Agreement to reflect the following:
(a)the deletion of Item G from Schedule 1;
(b)the extension of the date for satisfaction of the finance condition to 22 December 2015; and
(c)Completion Date to be 22 December 2015.
- Accordingly, the net effect of the 9 December 2015 Deed was to:
(a)delete item “G” from Schedule 1 of the Share Sale Agreement;
(b)extend the Completion date under the Share Sale Agreement; and
(c)adjust the purchase price under the Share Sale Agreement through the making of the Settlement Loan, assignment of a portion of it, and then repayment of some or all of the residual portion following the sale of the Stock.
The fourth amendment dated 23 December 2015
- A further deed of variation was executed on 23 December 2015, which largely reflected cl 3.1 of the 9 December 2015 Deed.
Events after settlement
- According to Mr O’Brien, after settlement occurred on 23 December 2015, he became aware of a number of matters which were not disclosed in the Share Sale Agreement or in the period preceding settlement, including that:
(a)the company had additional creditors totalling $476,274.74;
(b)the company’s debtors were overstated, primarily because the company had
over-claimed $279,071.61 in relation to a contract with Redlands City Council. In consequence, the company has made an agreement with the Redlands City Council to pay down that sum by a series of reduced progress claims under the Redlands contract;
(c)the company had an arrangement with its employees in relation to payment of wages whereby employees were permitted to set aside hours they had worked and be paid at a later date. The unpaid wages, which were recorded in a notebook but not entered on the company’s accounting system, gave rise to an additional wages liability of $34,095.59;
(d)the company’s accounts did not record or make provision for particular employee entitlements, including long service leave, totalling $91,737.19;
(e)the company had employment agreements outside the company’s enterprise bargaining agreement, and no provision had been made in the company’s accounts for associated entitlements such as annual leave. These entitlements total $27,133.40;
(f)after the Share Sale Agreement was signed on 4 October 2015 and prior to settlement on 23 December 2015, the company’s funds were used for expenses unrelated to the company’s business, including payments for:
(i)a mechanic to work on race cars raced by Mr Davis, and to purchase parts for those cars; and
(ii)personal expenses items purchased on company credit cards,
(g)the company’s equipment was not maintained during the Sale Period, and the estimated costs of carrying out repairs totalled $408,603.18;
(h)the company did not maintain an appropriate level of consumable stock during the Sale Period, the shortfall being $7,099.50;
(i)the company’s equipment was not conditionally registered as required by the company’s insurance policies. The cost of such registration is $5,901;
(j)the company’s insurance policies required lockable fuel caps on each item of plant, the installation of which will cost $3,406.58;
(k)the company did not hold professional indemnity insurance, which will cost $9,776.25;
(l)the company provided fringe benefits to the applicants, by way of:
(i)home power, telephone, internet and gardening services;
(ii)race car maintenance; and
(iii)use of a motor vehicle,
giving rise to an estimated fringe benefits tax liability of $21,761.15 (based on an income taxation rate of 47 per cent);
(m)survey equipment listed in the company’s asset register is encumbered and subject to ongoing finance obligations, of approximately $32,000;
(n)a contractor – Lucy Contractors – has a potential claim against the company in respect of unpaid consultancy fees for $702,000 which was not disclosed during the Sale Period. Although a payment of $130,000 (plus GST) was made to Lucy Contractors (as noted above in relation to “Colleen’s Loan”), email correspondence that preceded that payment also referred to other work undertaken by Lucy Contractors, and Lucy Contractors has advised that it reserves its right to make further claims against the company.
- As noted, the claims advanced by the Perry O’Brien interests and the company which they now control total $1,860,391.20.
Demands for payment pursuant to cl 2.2 of the 9 December 2015 Deed
- On various dates after settlement the then solicitors for the applicants inquired of the company’s then solicitors about payment of the Stock Sale Proceeds under the Deed. Correspondence ensued over the following months. The applicants contend that the company has not provided an account of the sale of any stock, nor paid any monies received as Stock Sale Proceeds, despite numerous requests over a six month period.
The applicants’ claims
- The company acknowledges that since settlement of the Share Sale Agreement it has sold:
- 11,216 cubic metres of general fill material;
- 4,003 cubic metres of CBR 15 material;
- 2,607 cubic metres of CBR 45 material;
- 79 cubic metres of crusher dust;
- 3,344 cubic metres of 20/40 aggregate; and
- 76 cubic metres of topsoil.
- The applicants contend that larger quantities have been sold by the company. Taking the applicants’ alleged quantities, the sum of $178,090 would be payable to the applicants, adopting the rates nominated by Mr Davis in November 2015 for the stockpiled material referable to the “agreed value” figure of $350,000. Taking the company’s quantities, the sum of $89,778.45 would be payable to the applicants by adopting those rates.
- Additionally, the company has sold quantities of non-stockpile material falling within the definition of “Stock” in the 9 December 2015 Deed, having a value of $55,297.63.
- As noted above, warranties were given by the applicants under the Share Sale Agreement, in relation to:
(a)the absence of any claim (including any contingent claim) against the company;
(b)the accuracy of information provided in respect of the company, particularly in respect of employees and payment of their entitlements;
(c)the submission of accurate tax returns, and payment of any and all tax relating to all periods prior to settlement of the Share Sale Agreement;
(d)the absence of any breach of contract by the company, or facts that would support any claim against the company; and
(e)continuation of the company’s business in the usual and ordinary course.
- The following claims are included in respect of alleged breaches of warranties given under the Share Sale Agreement:
(a)additional creditors of $476,274.74;
(b)the overstatement of a debtor by $279,071.61;
(c)further potential claims against the company, up to $702,000;
(d)undisclosed employee liabilities of $152,966.18;
(e)a fringe benefits tax liability of $21,761.15; and
(f)use of the company’s funds on personal expenses totalling $11,256.29.
- Although these alleged breaches of warranty relate to warranties given under the Share Sale Agreement, to which the company was not a party, the company submits that it is entitled to pursue the applicants for breaches of the warranties. They contend that if there are breaches of legal obligations owed to both a company and its shareholder, then the company’s claim is paramount, and the shareholder will only be permitted to pursue a claim insofar as it relates to loss that is specific to the shareholder and does not overlap with (or reflect) the company’s loss.
Did cl. 2.2 of the 9 December 2015 Deed create a trust?
- The applicants contend that cl 2.2 of the Deed created a trust. They rely upon the first sentence of the clause which required the company to “sell the Stock as soon as is possible” and “pay the Stock Sale Proceeds to the Sellers as soon as it is received” by the company. As noted, the term “Stock” refers to identified stockpiles and materials on certain land that had been purchased and either paid by or invoiced to the company prior to 26 November 2015. The term “Stock Sale Proceeds” was defined by the Deed to mean the proceeds that the company receives from the sale of the Stock.
- There is no dispute that cl 2.2 obliged the company to pay the “Stock Sale Proceeds” as soon as it received them. The issue is whether a trust was created. The principles governing the interpretation of commercial contracts and the circumstances in which a trust is created are not in dispute. The fundamental requirements of a trust include certainty of intention. The intention to create a trust must be clear. As has been said, if a trust is intended, it is simple enough to say so. However, a trust may be created without the use of the word “trust”. The issue concerns the parties’ intention, as objectively demonstrated. An intention to create a trust may be implied, depending upon the circumstances. The question therefore is whether, in the absence of a statement of intention, the circumstances clearly establish an intention to constitute a trust.
- The applicants’ submissions focus upon the use of the word “proceeds” and refer to cases about tracing into the proceeds of a trust asset. However, the use of the word “proceeds” in that context does not determine the meaning of “proceeds” in the context of this contract. Many examples can be imagined in which a promise to pay money, being the proceeds of sale of an item, simply creates a monetary obligation, and does not support the conclusion that an intention to create a trust existed. The parties’ use of the word “proceeds” in cl 2.2 is not determinative of whether an intention existed to constitute a trust.
- The company advances a persuasive argument that the word “proceeds” as it appears in the definition of “Stock Sale Proceeds” refers to the net figure obtained by the company upon sale of the Stock, after expenses associated with that sale. In any case, the clause says nothing about the process by which the proceeds of sale are to be received and accounted for. The parties did not impose an obligation to keep either the gross proceeds or the net proceeds in a particular fund. The obligation to keep trust funds separate and not to mix them with money from other sources has been described as a “hallmark duty of a trustee”. In some cases, the absence of an obligation to keep trust funds separate or the absence of a prohibition on mixing funds will be critical. However, as Lord Collins observed in Re Lehman Bros International (Europe) (in admin):
“There is no doubt that money in a mixed fund may be held on trust, and that a trust of money can be created without an obligation to keep it in a separate account.”
- The applicants seek to distinguish cases such as Jessup and Sino Iron on the basis that in those cases circumstances existed to infer that the parties deliberately refrained from making express provision for a trust. The applicants rely upon what is described as the “relative simplicity” of the Deed. However, the relative simplicity of the Deed does not support the applicants’ case. It simply distinguishes it from the facts of other cases. The relative simplicity of the Deed is equally consistent with the parties intending to create an obligation on the company to pay, without an intention to create a trust.
- The absence of an obligation to pay the proceeds into a separate account is submitted by the applicants to be unimportant in circumstances in which the company was obliged to pay the proceeds upon receipt. However, the obligation to pay the proceeds as soon as they were received by the company does not support the conclusion of an intention to create a trust. An intention to create a trust would be more strongly inferred where the proceeds were to be held for some time before they were accounted for. One reason would be where the creation of a trust would protect the applicants from the risk of insolvency of the company. One may infer that the parties did not intend to create a trust because the proceeds were not to be held for any substantial period.
- A relevant circumstance is that the Stock was not owned by the applicants, and never had been. Loans which were the subject of the 9 December 2015 Deed were described as “unsecured”. The surrounding circumstances, including the parties’ correspondence, do not suggest that a trust in favour of the applicants was intended. Nothing prevented the company from banking a payment it received from the sale of the Stock into a general, working account from which the “Stock Sale Proceeds” would be paid to the applicants.
- In all the circumstances, an intention to create a trust has not been clearly shown. The applicants have not established one of the fundamental requirements of a trust, namely certainty of intention. I therefore decline to make the declaration that the monies are or were held on trust.
Promises for the benefit of the company?
- The application proceeded before me on the basis that if I did not find that a trust was constituted, then the applicants’ claim should be treated as one for “money due under the Deed”, and the issue being whether the company’s “offsetting claims” engaged the principles governing equitable set-off. In substance, if not in form, the applicants’ claim is one for money. In form, the applicants seek a declaration that by operation of cl 2.2 of the Deed, the company is obliged to account to them for such monies as it has received from the use or sale of “Stock” as defined in the Deed. The applicants also seek an order that an account be taken of the company’s use or sales of “Stock” and receipts from such use or sales during the period since the execution of the Deed.
- The question is whether the company’s arguments about being able to enforce promises in the Deed and equitable set-off raise issues which should be tried in the ordinary way, rather than determined on the present application.
- The applicants’ submissions canvass a number of the company’s previewed claims which assert breaches of a number of clauses of the Share Sale Agreement. The applicants argue that the warranties and other promises were given for the benefit of “the Buyers”, not for the benefit of the company, and were, in effect, an assurance that the material facts relevant to the Buyers’ assessment of the price of the shares had been disclosed. Various clauses which were designed to preserve the value of the business pending completion are said to indicate an intention to bestow a benefit on the Buyers, not on the company.
- It is unnecessary to canvas each of these clauses because the respondents’ submissions focus on only a few of them.
- The company submits that a sensible, commercial reading of the Share Sale Agreement indicates that these and other promises were made for the benefit of the company. It relies upon cl 8.12 and cl 8.13 which are quoted at  above.
- Clause 8.12 provides that the Sellers will indemnify “the Buyer for all future liabilities of or Claims against the Companies or the Business that relate to the period prior to Completion”. The claims made against the company in respect of the Redlands City Council contract concerns a future liability that relates to the period prior to Completion. It has been resolved by agreement whereby the company will make reduced progress claims over time, so as to pay down the sum of $279,071.61 that has been over-claimed previously. In order for cl 8.12 to operate commercially and sensibly, the indemnity given by the applicants must operate as a promise in favour of the company, because the Buyer has no liability for a claim against (or liability of) the company.
- Clause 8.13 provides that the Sellers will “indemnify and will keep indemnified the Buyer against any loss incurred or liable to be incurred by reason of any Claim for any taxation made against the Companies or the Business, where the Claim arises out of the conduct ... or out of any act or omission of any of the Companies or the Sellers … which occurred prior to the Completion Date”. Any claims for unpaid tax would be made against the company, and so the applicants’ indemnity would appear to be a promise in favour of the company.
- Clause 8.11 provides that the Sellers will indemnify the Buyer “in relation to any Claim arising from any breach of a Warranty given by the Sellers”. The company submits that any claim arising in relation to the offsetting claims – for example a claim in relation to outstanding employee entitlements or unpaid creditors – would be made against the company (rather than the Buyers). Accordingly, for cl 8.11 of the Share Sale Agreement to operate commercially and sensibly, the applicants’ indemnity must operate as a promise in favour of the company, like the indemnities in cl 8.12 and cl 8.13.
- The applicants concede that the company’s arguments in relation to cl 8.12 and cl 8.13 are stronger than in relation to other clauses. Each of the clauses speaks in terms that encompass claims against the company. However, the terms of the indemnity are expressed as an obligation by the applicants to indemnify and keep indemnified “the Buyer”. The applicants refer to the principle that doubt about the construction of an indemnity is resolved in favour of the indemnifier. The present issue is not about the liabilities or claims which are indemnified. The issue is the party or parties who were intended to benefit from and be able to enforce the indemnity. In terms of s 55 of the Property Law Act, it is sufficient if the promise is one which “creates or appears to be intended to create a duty enforceable by a beneficiary”.
- A promise to indemnify the Buyer against a liability which could never be imposed against the Buyer would be an empty promise. The Buyer, which did not own or control the company prior to the Completion Date, would not be exposed to a liability that related to that period. The subject matter of the indemnities in cl 8.12 and cl 8.13 are liabilities or claims "against the Companies or the Business". The promised indemnity is one which might be said to be intended for the benefit of the company, because it, not its shareholders, is the party which is subject to the liability.
- Further, a reasonable interpretation of the Share Sale Agreement and the presumed intention of the parties in its commercial context is that they intended that the company would be able to enforce the duty at a time when the company came under the control and ownership of the Buyers, who prior to the Completion Date might be unaware of the liability. It makes commercial sense for the entity against which the liability would rest to be able to enforce the promise to indemnify and to
set-off, if possible, that claim against claims made by the Sellers.
- In the present context, I should assess whether the applicants’ claim has sufficient merit to order at this stage of the proceeding the discretionary remedy of an account. The issue arises in a different context to a related dispute which arose in connection with an application by the company to set aside a statutory demand made by the applicants. On 27 May 2016 Douglas J held:
“…it seems to me that those obligations may well be ones which can be described as a promise to do or to refrain from doing an act or acts for the benefit of a beneficiary, namely, in this case, the company, and could also be described as a promise which creates or appears to be intended to create a duty enforceable by the beneficiary.
[T]here seem to me to be many other amounts potentially in dispute or actually in dispute as to justify a setting aside of the statutory demands and allowing the dispute which seems to me to exist to be pursued by more conventional methods of litigation.”
- As the applicants note, Douglas J simply held that the s 55 point was arguable and did not purport to decide the point finally. Although the applicants maintain their argument that the company’s s 55 point has no merit, I am not persuaded of this. The company’s arguments in relation to the clauses upon which it relies have substantial merit. There is a good argument that the company was intended to have the benefit of the relevant promise. The relevant promise is one which, in its contractual context, might appear to be intended to create a duty enforceable by the company so as to make the applicants subject to a duty enforceable by the company to perform that promise. Alternatively, one or more of the promises might be said to be held on trust under the Share Sale Agreement by the Buyer in favour of the company.
- In the case of some clauses, the applicants have an argument that breach of the relevant promise caused a loss to the Buyers, rather than a loss to the company. I am not persuaded that this is so in respect of the particular clauses upon which the company relies for the purpose of this application. The liabilities or claims in question could only be sought against the company, not the Buyers, who had no involvement in the company prior to completion. The Buyers would not need to be indemnified against such a liability or claim. The company, however, would. Such an indemnity would be for its benefit and appear to be intended to be a promise which the company would be able to enforce.
- In short, the company has a reasonable basis to contend that the promises which it relies upon in respect of some of the “offsetting claims” are or appear to be intended for the benefit of the company. Its case is sufficiently strong to decline to order an account, provided those claims are of a nature to give rise to an equitable set-off.
Do the company’s claims raise an equitable set-off?
- The present issue of equitable set-off assumes that the company can rely on s 55 of the Property Law Act, or other exceptions developed at law and equity by which the beneficiary of a promise which was intended to benefit it can enforce the promise. The applicants argue that, even assuming that the company can rely on the applicants’ promises and seek to enforce them in a claim for breach of contract, the company has not established circumstances which impeach the applicants’ money claim pursuant to cl 2.2 of the Deed.
- It is common ground between the parties that an equitable set-off must “impeach” the plaintiff’s claim. The “mere existence of cross demands is not sufficient of itself to give rise to set-off in equity”. It is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim. In Forsyth v Gibbs, Keane JA stated:
“ Consistently with the technique of equity, which does not seek to define what an elephant is but knows one when it sees one, the principles governing the availability of equitable set-off of cross-claims are couched in open textured terms, such as “sufficient connection” and “unfairness”. In some cases, it will be necessary to engage in an evaluation of a range of facts which might establish “sufficient connection” or “unfairness” of the relevant kind. But the principles to be applied are not so vague or subjective that it is never possible to determine, for the purposes of an application for summary judgment, that the facts alleged by a defendant simply fall short of what is required.
 It is important to emphasise that the availability of an equitable set-off between cross-claims does not depend upon an unfettered discretionary assessment of whether it would be “unfair” in a general sense for a plaintiff to insist on payment of the debt owed to it while the cross-claim remains unpaid. It is essential that there be such a connection between the claim and cross-claim that the cross-claim can be said to impeach the claim so as to make it unfair for the claim to be allowed without taking account of the cross-claim.”
- The applicants submit that the company’s claims cannot be set-off against their claim because there is “a complete lack of mutuality”. The applicants acknowledge that mutuality is not the touchstone of equitable set-off, and that the test for equitable set-off has not been formulated in terms of a requirement of mutuality. Instead, if claims are not mutual then there has to be some other reason why a court of equity should permit a
set-off. In applying the “impeachment of title” test, the absence of mutuality and other factors which call into question the closeness of the connection between the two relevant claims will be important. For example, in Hawes v Dean, mutuality was lacking because the parties were not the same and the respective liabilities and entitlements arose from different transactions entered into at different times.
- According to the applicants, it is difficult to see how it could be regarded as unfair to proceed on a right of action against someone whose counterclaim arises out of a different document and on a cause of action for which that party gave no consideration. In my view, this submission tends to minimise the connection between the warranties and other promises in the Share Sale Agreement and the Deed dated 9 December 2015. The Deed formed part of a commercial transaction by which the Share Sale Agreement was amended, and cl 3 of the Deed provided for the parties to the Share Sale Agreement to enter into a further deed of variation of it. An equitable set-off may be available in relation to a claim not based upon a contract directly in issue, but which is directly connected with it. A claim for damages in respect of conduct which leads a party to enter into an agreement may be set-off against a claim for money due under that contract. A set-off may be allowed against a claim by the vendor for the balance of the purchase price in respect of damages for breach of a contractual warranty. Rather than compare the facts of this case to other cases involving sales and similar transactions where equitable set-off has either been permitted or refused, it is important to consider the closeness or otherwise of the connection between the applicants’ claim and the company’s foreshadowed offsetting claims.
- The company submits that the 9 December 2015 Deed was intimately connected with the Share Sale Agreement. It submits that its genesis was a concern about Item G of Schedule 1 of the Share Sale Agreement. Its effect was to remove Item G from the Share Sale Agreement and to:
(a)lend $750,000 to the company;
(b)assign $400,000 of that loan to the Buyers’ directors;
(c)require the company to repay up to $350,000 of the Settlement Loan from the sale of “Stock”; and
(d)assign any shortfall below $350,000 from the sale of the Stock to the Buyers’ directors.
- The company’s case is that its intended owners executed the 9 December 2015 Deed in reliance upon the accuracy of financial figures provided to them by the applicants in October and November 2015. The inaccuracy of those figures is said to lie at the heart of the offsetting claims. This submission should be accepted.
- The argument for an equitable set-off proceeds on the assumption that the company is entitled to enforce promises which were made for its benefit. The applicants’ argument that the company gave no consideration for those promises does not meet this point. The applicants are alleged to have breached obligations which were intended to be able to be enforced by the company. If the alleged breaches of legal obligation had not occurred and if the information provided had been true, then the company would not be exposed to liabilities and claims and be required to seek indemnity in respect of them.
- Although the company may not have given consideration for the promises, which I assume for the purpose of argument it is entitled to enforce, its new owners gave consideration in circumstances in which the parties intended the company to have the benefit of those promises. The consideration was worked out on the basis of promises that certain information, including information about the company’s liabilities, was true. In the circumstances, the fact that the company itself did not give consideration for the promises does not preclude an equitable set-off.
- The offsetting claims may arise out of a different document, namely the Share Sale Agreement as amended, to the document upon which the applicants rely in bringing what is in substance a money claim. However, the two documents are closely connected as part of one commercial transaction. The 9 December 2015 Deed would not have been entered into were it not for the need to vary the Share Sale Agreement and to restructure the way in which the company was to change hands.
- I consider that the applicants’ claim and the company’s offsetting claims are sufficiently connected that the offsetting claims can be said to impeach the claim, and to thereby make it unfair for the claim to be allowed without taking account of the offsetting claims.
Conclusion and disposition
- I decline to declare the existence of a trust because the applicants have not demonstrated a clear intent that cl 2.2 of the 9 December 2015 Deed was to create a trust in favour of the applicants.
- The application before me therefore resembles one for the summary determination of a money claim. The company has advanced a sufficiently strong case that at least some of the promises contained in the Share Sale Agreement were intended for its benefit so as to allow the company to bring certain offsetting claims against the applicants. The amount of the applicants’ claim has yet to be assessed. Its assessment depends upon the appropriate valuation of material and the determination of quantities. In any case, I am not in a position to conclude that the applicants’ claim will exceed the offsetting claims of the company. If established, those offsetting claims are the subject of an equitable
- In the circumstances, I decline to make either of the declarations that are sought or a consequential order for an account.
- The further conduct of any proceeding should be advanced in the usual way, with the delivery of pleadings and other directions to aid the early resolution of the proceedings. Presently, the company’s material has disclosed in affidavit form the materials which it has sold, and I expect the parties to progress any proceedings with appropriate directions for disclosure of documents and the resolution, in a cost-effective manner, of the quantum involved in the applicants’ money claim. Presently, that claim would appear to be within the monetary jurisdiction of the District Court and consideration will need to be given to whether this proceeding and any other counterclaim initiated by the company proceeds in the District Court.
- The only orders which I intend to make at this stage are:
- the declarations sought in paragraph 1 of the originating application filed 16 June 2016 are declined;
- the proceeding continue as if commenced by way of claim;
- the parties confer for the purpose of resolving or narrowing the issues in dispute, identifying the real issues that remain in dispute and agreeing steps for the just and expeditious resolution of those issues at a minimum of expense.
- Before further substantial legal costs are incurred in the matter, the parties should consider a mediation referral order. I will reserve the question of costs, but expect the parties to resolve the issue of costs without the need for a further hearing.
 See the exception to the privity doctrine discussed in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987-1988) 165 CLR 107 at 123-124 per Mason CJ and Wilson J.
 Forsyth v Gibbs  1 Qd R 403 at .
 See Thomas v D’Arcy  1 Qd R 666 at  –  and at  – ;  QCA 68; Rodgers v ANZ Banking Group Ltd  QSC 190 at .
 Korda v Australian Executor Trustees (SA) Ltd (2015) 255 CLR 62 at 71 ; Sino Iron Pty Ltd v Palmer (No. 3)  2 Qd R 574 at 586  – 588 ;  QSC 94 (‘Sino Iron’).
 Kauter v Hilton (1953) 90 CLR 86 at 97.
 Sino Iron at 587 .
 Byrnes v Kendle (2011) 243 CLR 253 at 274.
 Jessup v Queensland Housing Commission  2 Qd R 270 at 274 ;  QCA 312 (‘Jessup’) citing Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588 at 605.
 Sino Iron at 592 .
  3 All ER 1 at .
 Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at 292 .
 Property Law Act 1974 (Qld), s 55(6) (emphasis added).
 Perry O’Brien Engineering Pty Ltd v Colleen Joyce Davis, unreported, Douglas J, Supreme Court of Queensland, SC No 4109 of 2016, 27 May 2016.
 Property Law Act 1974 (Qld), s 55(6).
 See Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987-88) 165 CLR 107 at 123 – 124.
 Drane v Aqualyng Holdings & Anor  QSC 139 at .
 Forsyth v Gibbs  1 Qd R 403 at 406 ;  QCA 103.
 At 406  and  (footnotes omitted).
 Derham, Law of Set-Off, 4th ed at [4.68].
  NSWCA 380 at . Barrett JA, with whom Bathurst CJ and McColl JA agreed, analysed the principles of equitable set-off at  – .
 D Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10 at 25-26; see also Tomlinson v Cut Price Deli Pty Ltd (1992) 38 FCR 490 at 494.
 Drane v Aqualyng Holdings & Anor  QSC 139 at ; see also Australian Mutual Provident Society v Specialist Funding Consultants Pty Ltd (1991) 24 NSWLR 326 at 331-332.
 Sun Candies Pty Ltd v Polites  VLR 132; Drane v Aqualyng Holdings  QSC 139 at .
- Published Case Name:
Davis v Perry O'Brien Engineering Pty Ltd
- Shortened Case Name:
Davis v Perry O'Brien Engineering Pty Ltd
 QSC 202
02 Sep 2016
No Litigation History