Fabrizio v Wickham Hill Investment Pty Ltd

The application in the present matter was heard in the Applications List on 6 and 27 April 2018.

At the first hearing, the Court was concerned with an application by the defendant by notice of motion filed on 8 December 2017 to file an amended defence and an amended statement of cross claim.

During that hearing, it became apparent that the real issue in contention was that the effect of the amendments would be to withdraw admissions that the defendant had made in its initial pleadings.

When it was pointed out by the Court that, if the defendant wished to be given leave to withdraw admissions made in pleadings, it should specifically seek that relief, the defendant sought and obtained an adjournment to amend its notice of motion. The defendant was ordered to pay the costs of the day.

The defendant filed an amended notice of motion on 17 April 2018, by which it sought the following relief:

The plaintiff in these proceedings is Judith Mary Fabrizio. The defendant is Wickham Hill Investment Pty Ltd. The defendant has filed a cross claim against the plaintiff and her estranged husband, Franco Fabrizio.

The plaintiff's statement of claim was filed on 2 February 2017. It seeks the following relief:

The plaintiff pleaded in pars 1 to 3 of her statement of claim that the Wickham Hill Unit Trust (the Trust) was established in June 2012, and that the defendant is the trustee of the Trust. The plaintiff does not know what documents govern the terms of the Trust.

Importantly, the plaintiff then pleaded, in par 4:

The plaintiff then pleaded in pars 5 and 6 that when the Trust was established it was the common mutual intention of the plaintiff, the defendant and other interested entities that the plaintiff would be issued units in the Trust, and in par 6 that valuable consideration was paid for the units by the plaintiff through her estranged husband.

Then, par 7 made the following allegation:

The plaintiff then pleaded in pars 8 and 9 that the plaintiff has an implied contractual right to have a copy of, or to inspect, any document establishing the Trust, as well as a proprietary interest in any such document. The plaintiff also alleged a right of access to the Trust's documents based upon the fiduciary duty owed by the defendant.

Paragraph 10 contains an allegation that the defendant has breached its duties by refusing to give the plaintiff access to relevant Trust documents.

In pars 11 to 19 of the statement of claim, the plaintiff alleges that the defendant holds property on trust for the Trust, which was acquired for $6 million and is now worth $10 million. It is alleged that the defendant has leased the property for a rental of $600,000 per annum, but has not required the lessee to pay the rent. The plaintiff alleges that the defendant has a duty to ensure that the rent is collected, and has breached that duty.

The plaintiff then alleges:

The plaintiff then alleges in pars 25 to 28 the basis of her entitlement to inspect the Trust's documents.

Thus, although the plaintiff pleaded that she is entitled to a distribution of $3335 as a result of the resolution made by the defendant, the only relief that she is seeking, apart from the declaration that she holds 17.5% of the issued units in the Trust, and that she be issued with certificates for the units, is that orders be made that the defendant facilitate the plaintiff being given access to and an opportunity to inspect the Trust's documents.

The defendant filed a defence to the statement of claim on 3 May 2017.

Relevantly, the defendant responded to par 4 of the statement of claim by par 4 of the defence as follows:

Although par 4 of the statement of claim only alleged that, upon the establishment of the Trust, units in the Trust were issued, par 4 of the defence went further than to admit that allegation. It contained a positive allegation that one unit in the Trust was issued to the plaintiff as trustee for her estranged husband.

Paragraph 6 of the defence contained allegations concerning an alleged loan agreement dated 6 May 2012 between the plaintiff's estranged husband and a gentleman called Risheng Lai, under which Mr Lai agreed to lend Mr Fabrizio $1 million for the purpose of acquiring what had been defined as the Target Factory.

The alleged effect of the loan agreement was that the loan to Mr Fabrizio would be secured by the Target Factory, and that if the loan was not repaid by 30 June 2015, then all interest in the Target Factory would "revert to" Mr Lai, who would have a right to take it over and sell it. The defendant alleged:

The defendant alleged that Mr Fabrizio or the plaintiff breached the loan agreement when the loan was not repaid when it fell due.

The defendant also pleaded the terms of a 28 May 2012 loan agreement in par 6 of its defence. That loan agreement appears to be inconsistent with the 6 May 2012 loan agreement, in that it alleges that Mr Haiyang Xu agreed to lend Mr Fabrizio the sum of $1 million for the purpose of acquiring the Target Factory. It is alleged that Mr Xu would have the same rights as Mr Lai had under the earlier loan agreement. Sub-paragraph (j) is materially the same as sub-par (e) that is extracted above.

The effect of these allegations is pleaded by the defendant in par 6 of the defence as follows:

The defendant then pleaded, in response to par 7 of the statement of claim the following:

As par 7 of the statement of claim contains an allegation that 17.5% of the units were issued to the plaintiff, the effect of par 7 of the defence is that the defendant did not specifically respond to that allegation. In so far as the defendant repeated the paragraphs referred to, it clearly alleged that at least one unit had been issued to the plaintiff, and that "the units in the Trust" held by the plaintiff were held on trust for Mr Fabrizio, or alternatively Mr Fabrizio acted as the agent of the plaintiff for the purpose of entering into the two alleged loan agreements.

It does not appear that the defendant admitted that the plaintiff held 17.5% of the units in the Trust, unless the technical view is taken that such an admission was made as a result of the failure of the defendant to positively deny or not admit that allegation in par 7 of its defence.

The gravamen of the defence is that, although it admitted that at least one unit in the Trust was issued to the plaintiff, it alleged that "any units in the Trust held by the Plaintiff were forfeited as a result of the breach of the” two loan agreements, so that the plaintiff no longer holds any units in the Trust.

Although the defence contains an allegation that the consequence of the breach of the two loan agreements by Mr Fabrizio was that the interest in the Target Factory would revert to Mr Lai, or Mr Xu, who would have a right to take it over and sell it, no basis is pleaded in the defence as to why these events would have the effect that any units in the Trust issued to the plaintiff would be forfeited. If the defendant's allegations are accepted at face value, a consequence of the breach by Mr Fabrizio would be that one or both of Mr Lai and Mr Xu would be entitled to the Target Factory. That might reduce the assets of the Trust to nil, so that the units in the Trust held by the plaintiff would be worthless. It would not affect, however, the validity of the issue of the units.

The defendant then pleaded in par 8 that for the reasons set out in pars 4 and 7 of the defence, the defendant denied that the plaintiff is a unit holder of the Trust "and therefore does not have an implied contractual right or implied interest in any documents relating to the Trust".

For the reason that I have just given, that is not an effective defence to the plaintiff's claim that, as a unit holder in the Trust, she is entitled to be provided with access to and be allowed to inspect such documents of the Trust as her beneficial interest in the Trust would entitle her to have.

It should be mentioned that there was no reliance by either party on any terms of the instrument that created the Trust as either giving unit holders an entitlement to the Trust's documents, or denying them that right.

Paragraph 9 of the defence contains a similar assertion as to why the plaintiff is not entitled to access to the Trust's documents by reason of a breach of fiduciary duty by the defendant.

For the sake of completeness, it should be noted that, in par 18 of the defence, the defendant alleges a positive claim concerning the making of the 6 May 2012 and 28 May 2012 loan agreements, and the consequences of the breach of those agreements by Mr Fabrizio. The defendant repeated the positive allegation that the plaintiff held the units in the Trust on behalf of Mr Fabrizio, or that Mr Fabrizio acted as her agent in acquiring them.

As I read the allegations in par 18, there is no basis pleaded as to the mechanism by which the breach of the loan agreements would lead to the forfeiture of the units in the Trust held by the plaintiff.

It will now be appropriate to address the amendments that the defendant seeks to make by being given leave to file its draft amended defence and a draft amended first cross claim amended statement of cross claim.

First, as to the draft amended defence, the new par 4 would be a simple admission of par 4 of the statement of claim, which would take effect as an admission that units in the Trust were issued.

The positive allegation contained in the original par 4 of the defence would be deleted.

All of the allegations concerning the 6 May 2012 and the 28May 2012 loan agreements would be deleted, because those are allegations that would be moved to the amended cross-claim and revised.

The new par 7 of the amended defence would be in the following terms:

This new par 7 would effect a denial of the plaintiff's allegation that 17.5% of the units were issued to the plaintiff. It would admit that Mr Fabrizio became entitled to 17.5% of the units, but that was subject to the terms of the two loan agreements. Those terms would be as pleaded in the amended cross claim.

Put briefly, although the amended cross claim would be pleaded in somewhat more explicit terms to the pleading that it replaced, it substantially made the same allegations as would be deleted from the original defence, except that in par 8a it alleges:

Strangely, par 9c of the draft amended cross claim, which pleads that effect of the 28 May 2012 loan agreement, only alleges that on breach "all interest in the Target Factory will revert to Xu and he has to (sic) right to take over the Target Factor (sic)". There is no equivalent allegation of a right to the beneficial interest in any corporate vehicle or trust in which the Target Factory would be held.

It should be noted that, even in relation to the expanded effect of the 6 May 2012 loan agreement upon breach, there is no positive identification of the term of that document that purports to have the effect that a breach of the loan agreement would give Mr Lai a beneficial interest in all units that had been issued in the Trust.

I have set out above the allegations in pars 20 to 24 of the statement of claim, concerning the defendant having resolved to pay to the plaintiff a distribution of income of $3335 in respect of the units in the Trust held by her, and the failure to pay that distribution.

In pars 14 and 15 of the original defence, the defendant did not admit those allegations. The amended defence would have the same effect.

During the course of the hearing on 27 April 2018, it became apparent that the only real issue between the parties was the opposition by the plaintiff to the defendant being given any leave to withdraw admissions that it had made to the effect that the plaintiff was a holder of units in the Trust, whether such admissions were to be found in the defence or the cross claim. The plaintiff is otherwise not concerned with the various amendments to its pleadings that the defendant seeks to make.

In support of her opposition to the defendant being given leave to withdraw the admissions, the plaintiff relies upon the fact that she has prepared and served her evidence in support of her claim on the assumption that she did not have to prove that she was a holder of units in the Trust, and she has not attempted to do so.

At the hearing, the plaintiff pointed to the evidence that caused her to make the allegations in pars 20 to 24 of the statement of claim concerning the resolution of the defendant to pay a distribution to her, and the notification of that fact to the Commissioner of Taxation, with the attendant consequences.

That evidence consisted of the Trust’s Electronic Lodgement Declaration for its 2013 tax return, its 2014 tax return and its 2014 Financial Statements. The first two documents have not formally been signed on behalf of the defendant, but the modern practice is that documents of this type can be lodged electronically in a form that does not bear a signature. Proper practice would usually involve a properly signed tax return being preserved by the relevant tax agent. There was some positive evidence that the 2013 tax return had actually been lodged, but that may not have been the case for the 2014 tax return. The 2014 Financial Statements that were in evidence did not bear the signature of the relevant director of the defendant, Rui Yong Chen.

The 2013 return recorded the plaintiff as being a beneficiary of the Trust with a share of income of $3335. The 2014 tax return also showed the plaintiff as being a beneficiary of the Trust, with an income of $3492. The trial balance that apparently forms part of the 2014 Financial Statements records the plaintiff as having an opening balance of $3335.06 credit, with $126.24 tax deducted.

The plaintiff’s solicitor, Jim Kekatos, gave evidence that he prepared the evidence for the plaintiff on the basis that an admission had been made that the plaintiff was a unit holder in the Trust. He also gave evidence of speaking to the accountant for the Trust for the period from June 2012 to sometime in 2016. The accountant made the following statements to him in the week before he prepared his affidavit:

Mr Kekatos also said that the accountant informed him that there were applications for units and copies of unit trust certificates for all unit holders forwarded to the new accountants, and said: “One of the certificates I saw was in the name of Judith Fabrizio”.

The defendant relied on the following evidence in response to that tendered by the plaintiff.

Mr Xu, who described himself in his affidavit in support of the defendant’s notice of motion as its general manager since 2015, said that between 19 June 2012 and 18 October 2014, the sole director and secretary of the defendant was Mr Chen. Mr Xu said that on 28 May 2012 Mr Fabrizio, Mr Chen and another person, borrowed $1 million from Mr Xu under a loan agreement of that date. He said that the same three men borrowed $5 million from Mr Lai under a loan agreement dated 6 May 2015. (This is inconsistent with the allegation that the amount was $1 million in the defence and the cross claim). Mr Xu said that none of the funds have been repaid.

Mr Xu said that, after the statement of claim was received, he searched the defendant’s office to find a unit register, which he could not find. He said that in about March 2015, in the course of responding to the statement of claim “I formed the opinion that Frank’s interest in the Winery was probably held by Judith on his behalf”. Mr Xu gave reasons for that belief. Those reasons include that Mr Fabrizio had said to him that he had put everything in the plaintiff’s name, for a period the plaintiff held shares in the defendant, Mr Xu had no direct knowledge of who the unit holders were, and the plaintiff asserted that she was a unit holder and Mr Xu had no information sufficient to draw any different conclusion.

Consequently, Mr Xu caused the defendant to state in its defence that the plaintiff held one unit in the Trust.

Mr Xu stated his belief that the admission was made inadvertently and in error, without proper consideration of all the relevant material and circumstances that became available to him afterwards.

Mr Xu then referred to the results of further investigations and his consideration of the evidence relied upon by the plaintiff, and additional material that contradicts the admission.

That evidence includes an affidavit by Mr Fabrizio sworn on 22 September 2017 served on the defendant by the plaintiff. Mr Xu said he formed the opinion that the evidence contradicted the admission in that (note that the sub-pars start at (e)):

I interpolate that the plaintiff responded to this evidence by saying that it is hardly surprising that Mr Xu did not find material in the plaintiff’s evidence that proved that she had been issued units in the Trust, because that fact had been admitted. The plaintiff’s submission that it would be absurd for the Court to permit the defendant to withdraw the admission simply because the plaintiff had not proved the fact has weight.

Mr Xu gave evidence of a discussion with Mr Lai in which he asked the latter whether he knew if a register was created for the Trust before 1 January 2016, and if so whether Mr Lai had a copy. Mr Lai’s response was that he requested Mr Chen, Mr Fabrizio and the other person “not to allocate any units and not to create any unit register prior to repayment of interest to me and my principal”.

Mr Lai gave evidence of a conversation with Mr Chen in about 2012, in which Mr Chen said words to the effect: “We will set up a unit trust but the units will be held on trust for you and Mr Xu who are the lenders, until the money is repaid”.

The defendant’s solicitor, Sarah Cappello, gave affidavit evidence in response to that given by Mr Kekatos, of her own discussion with the defendant’s former accountant. One statement made by the accountant was, in relation to the schedule of people holding units in the tax return: “I can’t remember if it was a spreadsheet or schedule but I wouldn’t have made up the numbers”. He confirmed that all documents were forwarded to the later accountants. He said that he could not remember seeing a unit certificate for the plaintiff, but said that the certificates were prepared by someone else. He also said that he did not specifically say to Mr Kekatos that the plaintiff was a unit holder.

There was no evidence from either side about whether any inquiries had been made of Wong and Myers, to see whether any relevant documents could be found.

There was no issue between the parties concerning the principles to be applied by the Court concerning the circumstances in which the Court should permit a party who has made a formal admission to withdraw that admission.

There are many authorities which have accepted the applicability of the principles set out by Santow J (as his Honour then was) in Drabsch v Switzerland General Insurance Co Ltd (unreported, Supreme Court of NSW, 16 October 1996). A convenient exposition of the authorities may be found in the judgment of Brereton J in In the matter of Dymocks Book Arcade Pty Ltd [2013] NSWSC 298, as follows:

Although there are a great many authorities that bear upon this issue, I would only add reference to Brereton J’s observation in In the matter of JRJ Plumbing Supplies Pty Ltd (in liquidation) [2015] NSWSC 2026 at [11], that one of the principles that apply to the withdrawal of an admission “is that the Court needs to be satisfied that the admission is being withdrawn not for purely tactical reasons but because there is a good basis for doing so”.

In the present case, I am satisfied that the defendant was clearly under no disability and made a clear and distinct formal admission in its defence. The defence was drafted with the aid of the defendant’s lawyers. Mr Xu’s evidence proves that he thought about the matter, and had reasons satisfactory to himself as to why he should admit the plaintiff’s allegation that she held at least one unit in the Trust. The effectiveness of the admission is supported by the fact that it was volunteered in response to par 4 of the statement of claim, and then repeated in par 7 of the defence.

The reasons that Mr Xu has given for having second thoughts do not in my opinion provide a satisfactory foundation for a case that in fact no units in the Trust were ever issued to the plaintiff. At best, the most that Mr Xu has been able to show is that subsequent enquiries have not proved that units were issued to the plaintiff, and the further enquiries have proved to be inconclusive.

The balance of the evidence given by the parties’ solicitors of their conversations with the defendant’s former accountant, albeit that the evidence is hearsay, provides substantial support on balance for the conclusion that the plaintiff was a unit holder in the Trust as reflected in the Trust’s tax returns and Financial Statements.

The defendant did not apparently make further enquiries of the new accountants, and its failure to do so is unexplained.

Although the evidence provided by the unauthenticated tax returns and Financial Statements does not conclusively prove that units in the Trust were issued to the plaintiff, no positive reason has been given by the defendant as to why at the end of the day that evidence will not be sufficient to establish on the balance of probabilities that the plaintiff was a unit holder in the Trust.

In part, the defendant’s position rests upon the proposition that there was some agreement with Mr Chen and the others that they would not issue units in the Trust until the various loans had been repaid, but the allegation that such an agreement was made is not inconsistent with the proposition that units were in fact issued, given in particular that even par 4 of the draft amended defence admits the allegation in par 4 of the statement of claim that units in the Trust were issued.

The plaintiff has accepted the defendant’s admission and acted upon it by preparing and serving its evidence on the basis that it was accepted that the plaintiff was a unit holder in the Trust. I acknowledge the defendant’s response, that the preparation of the case is at an early stage, and there is time for the plaintiff to supplement her evidence. However, it remains the case that the plaintiff has acted upon the defendant’s admission.

The reality of the situation appears to be that the persons who now control the defendant were not in control of the company at the time when the units in the Trust may have been issued to the plaintiff. It appeared at the hearing that it was Mr Chen who was in control at the relevant time. Mr Chen is not in the camp of the defendant. The defendant does not have objective evidence that will enable it to know whether units were issued, whether unit certificates were created, or whether there was a register of units. Given that no inquiries have apparently been made of the later accountants, the Court must proceed upon the basis that, if the issue had to be determined at trial, questions of fact would have to be decided on the probabilities based substantially on such evidence as is presently available.

It follows that even though the defendant’s desire to withdraw its admission may be genuine, it is in reality a tactical step that is based on a second thought and that its object is to throw back onto the plaintiff the need to start from scratch and to take on the evidentiary burden of trying to prove that all necessary steps were taken by the defendant to issue one or more units in the Trust to the plaintiff.

I am not satisfied that the defendant has justified the Court giving it leave to withdraw the admission, as the real consequence will be to cause significant delay in the progress of the proceedings and in all probability will also substantially increase the costs.

It must be remembered that, although it will be a forensic advantage to the defendant if the plaintiff fails to prove that she is a unit holder in the Trust, because her case will then fail, the case put by the defendant in its existing pleadings is that it does not matter that one or more units were issued to the plaintiff, because by means that do not emerge clearly from the defendant’s pleading, the plaintiff’s entitlement to any units in the Trust has been extinguished.

The primary factor, however, that has influenced my judgment as to the proper resolution of this dispute is that the defendant has not established that in all likelihood it has admitted a fact that is false. On balance, on the present evidence, the fact admitted is likely to be true, at least on the balance of probabilities. The defendant has not established any real likelihood that evidence will become available to it that will disprove the fact that has been admitted. Consequently, the withdrawal of the admission with the leave of the Court will not further the interests of justice, but will merely give the defendant a tactical advantage, and increase delay and cost, in a manner inconsistent with the application of s 56 of the Civil Procedure Act, 2005 (NSW).

The parties should confer in order to prepare short minutes of order which will have the effect of the Court granting leave to the defendant to amend its pleadings, except in so far as the amendments would have the effect of withdrawing the defendant’s admission that the plaintiff was a unit holder in the Trust. Those short minutes of order should be provided to my associate, and the matter relisted if agreement cannot be reached.

The defendant must pay the plaintiff’s costs of the notice of motion as amended, and there should also be the conventional order as to costs thrown away as a result of the amendments being permitted. The parties should include directions for the future conduct of the proceedings, and the orders should relist the matter before the Registrar at an appropriate time.