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- Unreported Judgment
K & S Butler Pty Ltd v Gladstone Motor World Pty Ltd QSC 113
SUPREME COURT OF QUEENSLAND
16 April 2003
24 March 2003
1.The defence and counterclaim filed 25 February 2003 is struck out.
2. Defendant granted leave to replead.
3. All Applications are adjourned to 9 May 2003 with costs reserved.
PRACTICE – APPLICATION FOR SUMMARY JUDGMENT – where breach of trust alleged – where particulars of allegations required
Uniform Civil Procedure Rules rule 5
Mr G Crow for the Applicant
Mr T Somers for the Respondent
Hancocks for the Applicant
Macdonald & Michel for the Respondent
Rule 5 of the UCPR states the “purpose of these rules is to facilitate the just and expeditious resolution of the real issues in civil proceedings at a minimum of expense.”
Judged by this criteria this action is already an abysmal failure. The current applications concern the defence and counterclaim filed on 18 February, 2003. This is the fourth attempt at producing a document meeting this description to the satisfaction of the plaintiff. From the perspective of the plaintiff this attempt also fails. The plaintiff’s current application is for summary judgment on the basis either that it fails to properly plead a defence or alternatively, that the defence is inadequately particularised and fails to comply with the rules.
Conceptually the issues as they appear from the pleadings and the material filed are simple. The plaintiff company, K & S Butler Pty Ltd, was a unit holder in the Gladstone Motor World Unit Trust. The defendant trustee, Gladstone Motor World Pty Ltd (“the trustee”), operated a motor vehicle dealership in Gladstone. The business was the property of the trust. The defendant by counterclaim, Kevin Butler, was a director of the trustee and a shareholder and director of the plaintiff. By a written agreement Mr Butler was appointed manager of the motor dealership. Among his express duties were duties to “keep proper books of account and records of the business as directed by the owner”. There were also the usual duties of good faith.
These clauses of the Trust Deed appear to be relevant for present purposes:
In this deed unless the context otherwise requires:-
(a)“Act” means the Income Tax Assessment Act 1936.
10INCOME AND CAPITAL
10.1Determination of income
The trustee may determine whether a receipt or outgoing is to be regarded as being on account of capital or income or partly on account of one and partly on account of the other. In determining the income of the trust fund for a financial year the trustee may as far as is reasonably possible exercise the powers conferred on it under this sub-clause so as to minimise the liability to income and capital gains tax of the unit holders. If the trustee fails to make a determination under this sub-clause prior to midnight on 30th June in a financial year, the amount which under the provisions of the Act represents the “net income” (within the meaning of Section 95 of the Act) for that year in relation to the trust fund is to be taken to be the income of the trust fund for the purposes of this deed.
10.2 Accumulation of income
(a) The trustee may before the end of a financial year resolve to accumulate a part of the income of the trust fund for the financial year:-
(i) To recoup any losses of the trust fund in any prior financial year; or
(ii) As reserves to meet contingencies, to provide for repairs or maintenance, for depreciation or for any other purpose.
10.3 Distribution of income to unit holders
(a) Subject to any special rights as to sharing of income to any units, the remaining income of the trust fund for a financial year is distributed to the persons who at midnight on the last day of the financial year are the unit holders in proportion to the units registered in their respective names.
(c) If the trustee has not prior to midnight on 30th June of a financial year resolved to distribute the remaining income due to a unit holder in one or more of the means available to it under Clause 12.1, such income must be credited to a separate account in the books of the trust in the name of the unit holder so that such moneys will constitute a debt due to the unit holder at call and will not bear interest.
13STATEMENTS AND ACCOUNTS
The trustee must cause financial statements to be prepared by a qualified public or chartered accountant, including a profit and loss account and a balance sheet at the end of each financial year certified by such accountants to be a true and proper statement of the affairs of the trust fund setting out all:-
(a) Income of the trust fund;
(b) Capital of the trust fund;
(c) Costs and disbursements and other outgoings paid or payable out of the trust fund and chargeable against income;
(d) Capital expenditure and liabilities chargeable to capital;
(e) Investments and money comprised in the trust fund;
(f) Accounts held in the accumulated income account;
(g) Amounts distributed by the Trustee to unit holders; and
(h) Amounts held in retained moneys pursuant to Clause 10.4.”
There is no suggestion in the material or submissions before me that any of the money claimed by the plaintiff is “retained money”. Neither is there any issue in relation to any money being distributed in accordance with Clause 12.1.
It is admitted on the pleadings that sums of money were set aside under clause 10.3 of the Trust Deed on account of undistributed income otherwise due to the plaintiff for the years 1999/200 and, 2000/2001. The plaintiff alleges but the trustee denies that as at 30th June 2002 the balance in the plaintiff’s account stood at $346,856. It is this sum for which the plaintiff sues, relying on the provisions of clause 10.3.
Mr Butler and the now sole director of the trustee, Mr McCosker fell out during the latter part of 2002. Mr Butler ceased to be manager of the business. The plaintiff demanded payment of the sum of money shown in the accumulated income account. The defence purports to raise a “set-off” against the plaintiff’s claim. It is alleged that as manager Mr Butler failed to carry out an obligation to revalue stock vehicles and write off obsolete parts, with the result that the profits were overstated to the extent of $151,115.96. After Mr Butler’s dismissal as manager, the trustee had a fresh set of accounts prepared by its accountants which valued stock on the median price in Glass’s Guide.
The basis set up by the trustee for being entitled to set off the reduced profit figure is that Mr Butler was a director and at least the major shareholder of the plaintiff. The overvaluing of stock and the failure to write off or write down obsolete parts is said to constitute a breach of Mr Butler’s duties as manager.
As I understand the true nature of the defence the trustee wishes to raise to the claim, it is this. It denies that the sum of $346,856.00 was owing as at 30th June 2002. Rather, it alleges that as at that date the true sum owing was $195,740.04. The profit previously shown in the books was artificially inflated by the actions of Mr Butler in showing unrealistically high values for the stock vehicles traded in and obsolete parts.
The effect of clause 10.1 of the trust deed is that “Income” in any given period is income under s 95 of the Income Tax Assessment Act 1936. That section makes the income earned by a trustee in such capacity for tax purposes the same as would have been earned if the trustee was beneficially entitled to the income of the trust. As I read Clause 10.3(c) of the trust deed “such moneys” which constitute a debt refers to the undistributed income. There is no magic in the state of the internal accounts at any particular date. If the accounts wrongly state what was the income for tax purposes there is no obvious reason why those accounts cannot to that extent be ignored or varied as the case may be. Ultimately, what the plaintiff would, it seems to me, be entitled to under Clause 10.3 is its share of the net income of the trust for tax purposes after deducting amounts otherwise dealt with prior to midnight on 30th June in the relevant year. Just as income tax returns can be varied to show the true taxable income when errors are discovered so, it seems to me, can the internal accounts be amended. I consider that the amount to which the plaintiff is entitled under Clause 10.3(c) is, at least for the purpose of the present interlocutory action, the plaintiff’s share of whatever part of the income declared for tax purposes by the trust is left over and not otherwise dealt with.
I can see no obvious basis on which the trustee is entitled to “set-off” any amount it claims is owing to it by Mr Butler against a debt it owes to the plaintiff company just because Mr Butler has a significant interest in the plaintiff. Nonetheless there may be a real issue as to the income for the 1999/2000 and 2000/2001 financial years which determines the amount to which the plaintiff may be entitled.
An amount of $195,740.04 is admitted to be owing and I can see no basis for denying the plaintiff judgment for this amount. Whether any greater amount is owing seems to me to depend on the taxable income. Prima facie and subject to any legitimate amendment of the return this would be the amount in relation to which tax was paid in the relevant year.
More generally, for reasons I will now set out I consider the defence and counterclaim to still be in a most unsatisfactory state. I will give the trustee a further opportunity to correct it. In view of the unsatisfactory progress of this action to date I propose to make the price of the further opportunity as follows. I will adjourn the plaintiff’s application for summary judgment and the defendant’s cross application for a stay to the 9th May 2003. On that day I will give judgment for the plaintiff for the sum of $195,740.04 unless the trustee can identify some reason not presently apparent why the plaintiff is not entitled to judgment for at least that amount. I will also give judgment for any further part of the claim in relation to which the trustee does not satisfy me on oath that there is a serious issue to justify a trial.
There is nothing in the Trust Deed to which my attention has been drawn which would permit the setting off of losses earned in a subsequent year against undistributed profits from a previous year. Clause 10.2(a) only permits the setting off of prior losses against subsequent profits. Clause 19.2 expressly precludes any right of indemnity by the trustee against the unit holders for any deficiency in trust assets.
The plaintiff continues to complain about the particularisation of the defence. The defendant seeks to rely on a breach of duty or misconduct on the part of Mr Butler in order to justify the adjustment of the accounts. If the accounts overstate the income on a proper accounting basis acceptable to the Commissioner of Taxation I consider there is a prima facie basis for amending them. In such circumstances, rather than focussing on alleged misconduct on the part of Mr Butler the pleading should identify the accounting errors in the original accounts and, any rulings issued by the Commissioner or other basis relied on for treating stock and parts in the way the trustee submits they ought to be treated. The particulars of the stock adjustments should then set out in schedule form similar to the way in which they were set out in the amended further and better particulars filed on 1 November 2002. In relation to the claim for obsolete parts, those parts should be identified by name as well as stock number and show the price at which they were entered in the original accounts, the amended price and the difference. There should also be some brief explanation of why they were revalued. Again, the particulars should form part of the pleading even if much of the information is contained in an attached schedule. It is unsatisfactory to have them contained in a set of particulars of a pleading which is no longer relied on and which no longer bears any real similarity to the operative document.
If there are any other differences between the original accounts prepared under the stewardship of Mr Butler and the current accounts these should be identified.
As discussed above, my present view in relation to this matter subject to hearing argument is that “income” for the purposes of this trust is the amount in relation to which tax is payable in any year. I would expect to have particulars as to the amount declared for tax purposes in the relevant years and particulars of any amendment to the tax returns. Having regard to the accountant’s notes to and compilation report on the amended profit and loss statements I will need to be persuaded by evidence that the method of accounting for stock and obsolete parts in the amended accounts is at least arguably the proper approach. If the reporting for tax purposes is in accordance with the original rather than the amended accounts or if a breach of duty claim against Mr Butler in relation to the accounts is to be persisted with I will require evidence of any instructions provided to Mr Butler by the trustee in relation to his accounting, how he deviated from these accounting instructions and who set up the accounting systems. If no accounting instructions were given I will require a case to be pleaded and supported by sworn evidence explaining why in the absence of any instruction it is improper for stock to remain in the books at cost. In my view it is quite inadequate simply to assert that an advantage might have been derived by accounting in a different way. That does not appear to be the case sought to be made out against the plaintiff or Mr Butler. As I read it, the case sought to be made out is that the method of accounting adopted was at worst fraudulent and at best incompetent and in breach of duty. No attempt has been made so far to properly make out any such allegation. The facts pleaded up to this point in time do not, in my view, support an inference of impropriety much less that the impropriety was on behalf of the plaintiff and thus capable of giving rise to a set off. There should at least be facts pleaded from which an inference can be drawn that Mr Butler was acting on behalf of the plaintiff and not his employer in preparing accounts. The mere fact that Mr Butler was a shareholder and director of the plaintiff falls well short in my opinion. If a set-off is claimed otherwise than on the basis of Mr Butler being agent for the plaintiff I will require authority to support the setting off of claims between different parties.
The counterclaim should also be properly particularised. The particulars of the allegation of unauthorised use of motor vehicles in paragraph 3(i) are insufficient to enable the defendant to meet the allegation. No vehicles are identified. The basis on which the calculation is done is a mystery. It appears to be based on a total number of days at a daily rate. Such a basis of calculation may well be capable of being justified but the source of the daily rate, the actual days in relation to each vehicle or some other basis for nominating the number of days must be identified. The particulars should also identify why a daily rate is appropriate rather than the actual loss to the trustee or some other calculation is appropriate.
The assets alleged to have been misappropriated by Mr Butler would be adequately particularised in my view once the lists are incorporated into a current pleading, the fact of payment by the trustee and basis of valuation are set out. The material opposing the grant of summary judgment in favour of the defendant by counterclaim will need to set out the basis for the allegation that the goods have been misappropriated.
In relation to the unauthorised payment of personal expenses alleged in paragraph 3(iv) and 3(v) the relevant limits of the authorisation to use the credit card or to expend the trustee’s money should be identified. The reason the trustee says the expenditure was unauthorised should be set out. The basis for the calculation of interest including the rate should be identified. I can find no particulars in any of the filed documents relating to the content of the claimed $46,843.00 in paragraph 3(v). This should be attended to.
Since a dollar amount for the secret commissions is alleged there must be a basis for nominating that amount. If so, it should be pleaded. If there is in fact no basis for nominating an amount that should be stated together with the facts said to support the inference that such commissions were paid.
In relation to the counterclaim more generally I will require the defendant to respond to the affidavit of Mr Butler filed on the 28th January 2003 if it is to satisfy me that summary judgment should not be given in favour of Mr Butler on the counterclaim.
I will reserve the issue of costs until the fate of the action generally is determined.
- Published Case Name:
K & S Butler Pty Ltd ACN 086 162 898 v Gladstone Motor World Pty Ltd ACN 079 201 700 as trustee for The Gladstone Motor World Unit Trust
- Shortened Case Name:
K & S Butler Pty Ltd v Gladstone Motor World Pty Ltd
 QSC 113
16 Apr 2003