Puddick v Dyamond Developments Pty Ltd (No 2)

The Court delivered judgment in these proceedings on 18 April 2019: see Puddick v Dyamond Developments Pty Ltd [2019] NSWSC 431.

The plaintiffs substantially succeeded in obtaining the relief that they sought.

The Court made final orders on 24 May 2019 in terms that were agreed between the parties.

The parties were in disagreement as to whether the Court should make two of the orders sought by the plaintiffs. The Court received written submissions and heard oral argument on 24 May 2019.

The first order as to which there was disagreement was in the following terms:

The effect of this declaration, if made, would be to establish that the third defendant holds the PMY shares on trust for the first defendant. Alternatively, if the third defendant has disposed of the PMY shares, the effect of this declaration would be to establish that the third defendant would hold the value of those shares on trust for the first defendant. I observe in passing that it is difficult to see how the third defendant could hold the value of the shares on trust for the first defendant. A trust can only exist over distinct property in the hands of the trustee. If the third defendant had sold the shares for a price, it would be possible for the Court to declare that the third defendant holds so much of the price as it retains on trust for the first defendant. The only way that the first defendant could recover the value of the shares from the third defendant would be to obtain an order for equitable compensation in the amount of that value.

The plaintiffs did not seek a declaration in these terms in their amended statement of claim. However, in the conventional way, they sought further orders as the Court sees fit. I am satisfied that the parties litigated the issue of whether the third defendant gave consideration for the transfer of the PMY shares that were transferred to it for apparently nil consideration. I found, at [108] of the principal judgment, that the transfer took place for nil consideration.

Section 90(1) of the Civil Procedure Act 2005 (NSW) provides:

That provision requires the Court to make all necessary orders to determine the issues in dispute between the parties. In my view, it justifies the Court in principle making a declaration that the transfer took place for no consideration, provided that it is otherwise appropriate for the Court to do so.

The defendants objected to the Court making the declaration sought by the plaintiffs on the following grounds: first, that the plaintiffs did not plead in their claim matters that entitle them to the declaration; and secondly, that it was not established that all of the PMY shares that were transferred by the first defendant to the third defendant had been acquired with either of the plaintiffs’ money. In fact, as the submission went, the evidence would suggest that only part of the transferred shares could have been acquired with either of the plaintiffs’ money.

As to the first of these grounds, for the reasons that I have given above, the Court is not precluded from making an appropriate declaration on the ground that it was not specifically claimed in the amended statement of claim. However, in my view, the declaration should only be made to establish that the transfer was for no consideration. Transfers of property can, in some circumstances, be effective in changing the beneficial ownership of the property, notwithstanding that the transferee does not provide consideration for the transfer. In certain circumstances, gifts of property will be effective. That will usually depend upon the intention of the transferor, and whether any essential formal requirements have been complied with. Not only was the issue of whether the transfer of the shares was effective to convey beneficial title to the third defendant not pleaded by the plaintiffs, it was also not addressed at the hearing.

As to the defendants’ second ground, I do not accept that the plaintiffs are precluded from obtaining from the Court an appropriately worded declaration concerning the basis upon which the transfer of shares took place, by reason of the fact that the rights the subject of the declaration are between defendants, and do not concern any direct right of the plaintiffs, and it may be that some of the PMY shares were acquired by the first defendant other than with the money of the plaintiffs. The Court will, in due course, make orders for the carrying out of a tracing process, if the first and second defendants do not first pay to the plaintiffs the monies now owing to them under the judgments that the Court has already entered. The granting by the Court of a suitably worded declaration in favour of the plaintiff, as to the absence of consideration for the transfer, may have utility in relation to the working out of the tracing exercise that may need to be conducted.

Consequently, the Court will make a declaration, but in a more limited form than was sought by the plaintiffs.

The second order that was in dispute between the parties was in the following terms:

The plaintiffs sought indemnity costs, essentially on the grounds that the first defendant became a trustee in favour of the plaintiffs for the amounts that the plaintiffs had paid to the first defendant under their agreement with the second defendant, and at his direction, as soon as the purpose for which the payments had been made failed. The plaintiffs submitted that the proceedings were, in effect, proceedings to recover trust monies. The plaintiffs also submitted that the first and second defendants had acted unreasonably in defending the proceedings, as the reasons for judgment demonstrate that they had no basis for doing so.

The principles governing the circumstances in which the Court will order that costs be paid on the indemnity basis, including the significance of the conduct of the defendant which gave rise to the proceedings, were considered in detail by Campbell J (as his Honour then was) in Hypec Electronics Pty Ltd (in liq) v Mead; BL & GY International Co Ltd v Hypec Electronics Pty Ltd (2004) 61 NSWLR 169; [2004] NSWSC 731. It will be appropriate to set out his Honour’s discussion at [40]-[46] at some length:

In the light of these principles, I reject the plaintiffs’ submission that costs should be awarded on the indemnity basis, because the defendants’ conduct the subject of the proceedings constituted breaches of trust or wrongful involvement in such breaches. I am also not satisfied that the defendants conducted the defence with the degree of delinquency that would justify the award of indemnity costs. The defence was conducted in a proper way, and it does not follow from the fact that the Court thoroughly rejected the defences raised by the defendants that the defendants necessarily acted unreasonably in defending the claims made against them by the plaintiffs.

I will therefore make the following orders, in addition to the orders made on 24 May 2019: