ACN 063 346 707 Pty Ltd (formerly known as South Passage Pty Ltd) v Douglas James Marshall

These proceedings are the third time that the conduct of the first defendant (Mr Marshall) and his partner, Ms Karen Chase (Ms Chase), has required the attention of a judge of this Court. That conduct appears to have the sole purpose of vexing their, respectively, brother-in-law and brother Mr Stuart Chase (Mr Chase).

The plaintiff (South Passage) is the registered proprietor of a farming property (the Property) on which Mr Chase has lived and worked since 1982. Mr Chase is now the sole director and shareholder of the plaintiff. This was not always the case.

In these proceedings, South Passage alleges that three dealings - a lease, a mortgage and a variation of mortgage - purportedly granted to Mr Marshall over the Property when South Passage was under the control of Ms Chase are shams, and therefore void and of no effect. South Passage seeks consequential orders that the second defendant (the Registrar General of NSW) (Registrar General) cancel the recording on the folio for the Property of those purported dealings, together with a caveat lodged by Mr Marshall which relies on them (together the Impugned Instruments).

For the reasons which follow, the Court is satisfied that South Passage is entitled to the relief which it seeks.

Mr M Bennett of Counsel appeared for South Passage. The Court records its gratitude to him for his thorough and lucid written and oral submissions. There was no appearance for Mr Marshall, who has not filed a defence or any evidence. The Registrar General has entered a submitting appearance save as to costs.

On 19 April 2022, the Court made these orders:

Mr Bennett read several affidavits which together prove what, in my view, was sufficient compliance with the orders set out in the preceding paragraph. Mr Bennett did not seek further confirmatory orders as to service, although I would have made such an order if asked. It follows that service of the documents referred to in those orders is taken to have been effected on Mr Marshall on 13 May 2022. This is because that is seven days after the last-mentioned means of service was effected, being an SMS sent to Mr Marshall's mobile phone on 6 May 2022.

When the matter came on for hearing before me this morning, Mr Marshall was called outside of court. There was no appearance by him or any other person on his behalf. As will become apparent from the facts which I am about to set out, Mr Marshall's absence from the litigation today continues a pattern from the earlier proceedings in relation to South Passage and the Property.

I begin by immediately drawing to attention the judgment of Rees J in In the Matter of ACN 063 346 708 (formerly known as South Passage Pty Ltd) [2018] NSWSC 1709 (the 2018 Judgment). These reasons should be read with the 2018 Judgment, which provides further helpful background concerning the history between these parties.

Mr Chase's and Ms Chase's adoptive father was a solicitor in Taree. The origins of the present difficulties appear to lie in their late father's practice of putting various properties for each of his children into separate companies.

For the purposes of these proceedings, the Court finds the facts to be as follows.

Mr Chase began living and working on the Property in or about 1982. Since then, he has paid all expenses in relation to the Property and has undertaken significant improvements to it over the years. The various members of Mr Chase's family, including Mr Marshall, have known for many years that for all intents and purposes the Property is Mr Chase's.

South Passage was incorporated on 1 February 1994 and became the registered proprietor of the Property on a date which the evidence does not disclose.

In 2007, Mr Chase was appointed as a director of South Passage.

In 2014, Ms Chase and Mr Marshall caused Mr Chase to be removed as a director of South Passage. That step was ultimately reversed, and Mr Chase restored as the sole director and shareholder of South Passage, by Rees J in the 2018 Judgment.

On 27 June 2014, Ms Chase and Mr Marshall changed South Passage's registered address to a property owned by Mr Marshall in Kambah in the Australian Capital Territory.

The first of the Impugned Instruments appears to have come into existence on 1 July 2014 (the Lease). The Lease was a purported grant by South Passage to Mr Marshall of a lease over the Property for a term of three years commencing on 1 July 2014, with both an option to renew the Lease for a period of 10 years and to purchase the Property. The Lease was executed by Ms Chase on behalf of South Passage and signed by Mr Marshall as lessee.

The Lease has only eight operative clauses and does not appear to be a document prepared by a solicitor. Its relevant terms were:

It is clear from the evidence of Mr Chase by reference to his own knowledge and the books and records of South Passage that the yearly rental of $10 has never been paid. Mr Chase has continued during the purported term of the Lease to pay all rates and charges in respect of the Property. Mr Marshall has never visited or sought to occupy the Property. Nor has Mr Marshall ever made any attempt to eject Mr Chase from the Property during the time that he was purportedly the lessee. Furthermore, Mr Marshall is an accountant. There is no suggestion that he has ever attempted to operate a grazing or agricultural enterprise on the Property during the time that he was purportedly its lessee.

Insofar as Mr Chase is aware, both in his own right and as a director of South Passage, the Lease has come to an end and the option under the Lease was never sought to be exercised. Similarly, the time limited under the Lease for the exercise of the purported option to purchase has also expired.

I interpose that, given the history which appears from the 2018 Judgment and the facts found in these reasons, Mr Chase remains concerned that unless reference to the Lease is removed from the register, some baseless assertion of the exercise of either of those options may still be made by Mr Marshall. The Court is satisfied that is a reasonable concern for him to hold, and which supports the utility of both the declaration and orders sought by South Passage in relation to the Lease.

On 30 December 2014, the second of the Impugned Instruments (the Mortgage) was apparently brought into existence. The Mortgage over the Property was executed on behalf of South Passage by Ms Chase as its sole director and secretary and by Mr Marshall as mortgagee. Their signatures were witnessed by the same person at a bank in Woden in the Australian Capital Territory.

The Mortgage contains only these four operative clauses and, like the Lease, does not appear to be a document prepared by a solicitor:

On 24 May 2016, the third of the Impugned Instruments was apparently brought into existence (the Variation of Mortgage). Again, the Variation of Mortgage was executed on behalf of South Passage by Ms Chase and by Mr Marshall as mortgagee. The signatures of each of them was witnessed by the same Justice of the Peace at Tuggeranong in the Australian Capital Territory.

It contains only these five operative clauses and, again, the Court finds it is not a document prepared by a solicitor:

The five year term of the Mortgage ended in 2019. No money was ever advanced by Mr Marshall to South Passage under the Mortgage and Mr Marshall has never demanded repayment of any funds allegedly advanced.

The five year term under the Variation of Mortgage ended in 2021. Contrary to the assertion in the Variation of Mortgage, not only was $500,000 not advanced by Mr Marshall to South Passage, but there does not appear ever to have been a debt of $600,000 comprising the amounts said to have been the subject of the Mortgage and the Variation of Mortgage owed by South Passage to Mr Marshall. Mr Marshall has not sought repayment of any of those funds, or of any of the interest to which, on its face, he would have been entitled under the Variation of Mortgage.

To the knowledge of Mr Chase and by reference to the records of South Passage, no sum totalling $600,000 or any lesser amount apparently received from Mr Marshall has ever been expended on the Property. All expenses for the maintenance of, and improvements to, the Property during the relevant period have been met by Mr Chase from his own resources. Furthermore, as I set out in [37] below, Mr Marshall has failed to respond, among other things, to a request to provide any evidence of advances under the Mortgage or the Variation of Mortgage.

On 6 February 2018, Lindsay J determined the matter of Chase v Chase (Eq Divn 191027 of 2016). In those proceedings Mr Chase and his mother sued Ms Chase and another family company, including for a declaration that Ms Chase held her shareholding in South Passage on trust for Mr Chase, and an order that she transfer those shares to him.

A defence was filed in those proceedings which Lindsay J noted as having been filed "ostensibly" by Ms Chase. Other than that step, there appears to have been no other participation in the proceedings by Ms Chase or the other defendant, and neither of the defendants appeared before his Honour on the trial of the proceedings.

His Honour granted relief including:

On 8 February 2018, that is a mere two days after Lindsay J's orders were made, Ms Chase caused South Passage to be deregistered. One consequence of that deregistration is that South Passage lost its name and is now formally known by its ACN number.

Ms Chase's actions required Mr Chase to commence the next proceedings against his sister, being those resolved by the 2018 Judgment. Ms Chase had to be served, as occurred in these proceedings, pursuant to orders for substituted service and she did not appear at the hearing before Rees J.

Her Honour made orders at the conclusion of her judgment which included:

Just over three months later, on 21 February 2019, Mr Marshall lodged over the Property the fourth of the Impugned Instruments (the Caveat). The Caveat is a handwritten document apparently prepared and signed by Mr Marshall which, insofar as it purports to affect the Property, relies upon the Mortgage and the Variation of Mortgage.

On 24 July 2019, the solicitor for Mr Chase and South Passage, Mr J Crowther, wrote to Mr Marshall including:

Mr Crowther has given evidence today which confirms that no reply has ever been received from Mr Marshall to the letter extracted in the preceding paragraph. Significantly for present purposes, this means that Mr Marshall has not taken the opportunity presented by that correspondence to indicate whether he holds the original title deed for the Property, or to substantiate the advance of any funds under the Mortgage or Variation of Mortgage by him to South Passage.

These proceedings were commenced by Statement of Claim filed on 28 June 2021.

I gratefully adopt and apply the summary of legal principles set out by Leeming JA (with whom McColl JA and Sackville AJA agreed) in Lewis v Condon; Condon v Lewis [2013] NSWCA 204 (Lewis):

By reference to the facts which I have set out in [12] to [37] above, Mr Bennett submits the Court should be satisfied that the Lease, Mortgage and Variation of Mortgage are shams in the sense set out by Leeming JA in Lewis. The Court accepts that submission.

Insofar as the Lease is concerned, Mr Marshall has never purported to exercise any of his rights under it, most notably to enforce his right of exclusive possession against Mr Chase. Nor has he ever sought to tender any rent under the Lease. There is no evidence that funds were ever advanced under the Mortgage and Variation of Mortgage. And insofar as $600,000 might be thought to be a substantial amount of money, no claim has ever been made by Mr Marshall for repayment of that or any other sum, or for interest that might be owing on it.

But for the existence of the documents purporting to record these transactions, any suggestion that the actual legal relationships of lessor and lessee and mortgagor and mortgagee arose between South Passage and Mr Marshall would, on the evidence, be nothing more than an illusion. Those documents, the Court concludes, do not translate the illusion into an enforceable legal reality. If those documents are of no force and effect then the Caveat, insofar as it purports to burden the Property relying upon them, is also unsupportable for want of Mr Marshall having a caveatable interest in the Property.

The Court finds that each of the Lease, Mortgage and Variation of Mortgage is a sham. They are not intended ever to have been of any legal effect. The Court is satisfied that they were brought into existence by Mr Marshall and Ms Chase with the deceptive intention of doing nothing more than giving the appearance that Mr Marshall had a registrable estate or interest in the Property. It follows that, first, they are, and always have been, void and of no legal effect and, second, that Mr Marshall has no caveatable interest in the Property to support the Caveat insofar as it relates to the Property.

To the extent that any further factual finding is necessary then the Court also finds that the only purpose for which the Impugned Instruments were brought into existence was to vex Mr Chase by their registration.

The findings in the preceding two paragraphs are based upon the facts found in these reasons and the conduct which resulted in the proceedings before Lindsay J and Rees J. I have also taken into account that Ms Chase did not defend either of those proceedings, nor has Mr Marshall defended these, putting South Passage and Mr Chase to the expense of litigation, including the costs of taking steps to effect substituted service. The behaviour of Mr Marshall and Ms Chase (it would be artificial to look at the conduct of one without the other) is not that of people who had legal rights which they seriously wished to defend, but rather that of people who wanted to cause South Passage and Mr Chase as much inconvenience as possible.

In reaching these conclusions, I have borne in mind Leeming JA's salutary observations that a finding of sham requires a cautious approach with proof of the requisite facts and intention and, in particular, intention to deceive to be established in accordance with the Briginshaw standard, or more precisely, I would respectfully suggest, its statutory manifestation in s 140 of the Evidence Act 1995 (NSW). I am satisfied of the matters set out in [43] and [44] above to that standard, that is taking into account the seriousness of a finding of an intention to deceive.

South Passage seeks relief in accordance with s 138 (2) and (3) of the Real Property Act 1900 (NSW):

Section 138(2) specifies two prerequisites to the making of an order under s 138(3), both of which are met in this case.

First, these are proceedings where the Court will, by declaration, make a determination as to an estate or interest in land. The declarations will be to the effect that the Lease, Mortgage and Variation of Mortgage are void and of no effect and therefore do not confer an estate or interest in the Property on Mr Marshall.

Second, by reason of the conduct of Mr Marshall and Ms Chase which appears from the history which I have set out above, including his failure to respond to the letter of 24 July 2019 (see [36] above), and most recently Mr Marshall's apparent lack of interest in participating in these proceedings, the Court is satisfied that Mr Marshall will not co-operate to enable the register to be corrected by, for example, providing a discharge of the Mortgage. The least expensive and most straightforward way to give practical effect to the declarations which the Court will make is to make ancillary orders under s 138(3).

The Court will therefore order that the folio of the register relating to the Property be amended by the cancellation of each of the notations in the folio which refer to the Impugned Instruments.

While South Passage's statement of claim only seeks costs against Mr Marshall on the ordinary basis, by his written submissions Mr Bennett has applied for an order in favour of his client on the indemnity basis. That application is well made. While in some circumstances it might be a matter of concern to the Court that the application for indemnity costs had not been notified earlier to Mr Marshall, given the history of this case and its predecessors, that is not an impediment to a special costs order in this case.

There are two reasons why an order for indemnity costs will be made. First, the Court is satisfied that Mr Marshall’s conduct in relation to the Impugned Instruments was undertaken with an intention to deceive. Second, he has failed to defend the proceedings in any way, thereby putting South Pacific to the costs of these proceedings, consistently with the Court’s view (see [45] above) that Mr Marshall and Ms Chase wish to cause South Passage and Mr Chase as much inconvenience as possible. The Court is therefore satisfied that this is an appropriate case to exercise its discretion to order that Mr Marshall pay South Passage's costs of and incidental to these proceedings on the indemnity basis.

As I have noted, the Registrar General has entered a submitting appearance save as to costs. I will give the Registrar General leave to notify my chambers whether she wishes to make any application as to the costs of the proceedings.

Finally, there are two reasons why the Court will stay the orders that I will shortly pronounce for the correction of the register for a short period of time to afford Mr Marshall an opportunity to move to set those orders aside.

First, today has proceeded in his absence. Again, given the history of this and the earlier proceedings, that in and of itself may not have justified a stay.

However, and second, while South Passage satisfied the Court that Mr Marshall had been served with the proceedings by reference to the order for substituted service set out in [6] above, no attempt appears to have been made to give Mr Marshall specific notice of the date of today's hearing.

These proceedings were fixed for hearing before me by Darke J on 28 July 2022. That left plenty of time for further notice to have been attempted to be given to Mr Marshall of the actual hearing date. Frustrating as that process may have been for South Passage, in the absence of Mr Marshall having been given formal notice of the date of today's hearing, it seems to me appropriate that he be given a short opportunity to move to set the Court’s declarations and orders aside.