Yeshiva Properties No 1 Pty Limited & 6 ORS v JOAN MARSHALL [2005] NSWCA 23 (17 February 2005)

CITATION: YESHIVA PROPERTIES NO.1 PTY LIMITED & 6 ORS v JOAN MARSHALL [2005] NSWCA 23

FILE NUMBER(S):

40889/2004

HEARING DATE(S): 26/11/2004

JUDGMENT DATE: 17/02/2005

PARTIES:

YESHIVA PROPERTIES NO.1 PTY LIMITED & 6 ORS – APPELLANTS

JOAN MARSHALL – RESPONDENT

JUDGMENT OF: Mason P Beazley JA Bryson JA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): 3094/2004

LOWER COURT JUDICIAL OFFICER: Gzell J

COUNSEL:

N.C. Hutley SC and A.P. Spencer - Appellants

C.E. Adamson SC and J.M. Miller - Respondent

SOLICITORS:

Arnold Bloch Leibler - Appellants

Duncan Scott, Solicitor – Respondent

CATCHWORDS:

TRUSTS – Constructive trusts – accessary liability – to company of person dealing with directors of company – financier lent $520,000 to companies (which were trustees of college) on “caveat loan” short term at extremely high interest on unregistered mortgage with caveat over school lands – companies resisted repayment and claimed that lender incurred accessary liability for dishonest assistance to directors – companies arrested that many irregularities in steps leading to loan and informed direction of payment to another company also controlled by directors showed involvement of lender in knowledge of facts “...which themselves would to a reasonable man, tell of fraud or breach of trust...” (Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) [1975] HCA 8; 132 CLR 373 at 412by Stephen J) – trial judge after review of facts found no accessary liability – held – findings confirmed, appeal dismissed.

LEGISLATION CITED:

Charitable Trusts Act 1993 s.6, s.27

Charities Act 1960 s.28

Charities Procedure Act 1812 (U.K)

Imperial Acts Application Act 1969 s.17

Supreme Court Rules 1970

Supreme Court Act 1970 s.60, 63

DECISION:

Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40889/2004

MASON P

BEAZLEY JA

BRYSON JA

THURSDAY 17 FEBRUARY 2005

YESHIVA PROPERTIES NO.1 PTY LIMITED & 6 ORS v JOAN MARSHALL

Judgment

1 MASON P: I agree with Bryson JA.

2 BEAZLEY JA: I agree with Bryson JA.

3 BRYSON JA: The appellants (plaintiffs in the Equity Division) appeal against orders made by Gzell J on 14 October 2004, for reasons published on 8 October 2004, by which his Honour dismissed the plaintiffs’ claim and on the defendant’s cross-claim ordered payment of a mortgage debt of $520,000 plus interest, with further orders including costs on the solicitor and client basis as specified in the mortgage. The amount of interest is extremely high; the mortgage provided for interest in default at 8.5% per month, and Gzell J ordered interest of $640,889.00 to 14 October 2004 and thereafter at $1,425.81 per day.

4 There are two groups of plaintiffs and of appellants. The first group is Yeshiva Properties No. 1 Pty Ltd and companies with similar names and the numbers 2 to 6, referred to as Y 1-6. These plaintiffs, referred to as the first plaintiffs, and also as the first cross-defendants, were mortgagors in mortgage dated 30 June 2003 in favour of Ms Joan Marshall the defendant, now the respondent, to secure an advance of $520,000 made that day to the first plaintiffs and to Mr Yosef Feldman (whose forename is sometimes given as Yossi), Mr Pinchus Feldman and Mrs Pnina Feldman (hereinafter “the Feldmans”). The mortgage was secured over the land in register folio 1/734736. The land has frontages to Blake, Napier and Rodney Streets, Dover Heights, and at the time of the mortgage a school (the Yeshiva College) was conducted there. Although Y 1-6 and the Feldmans were all borrowers of the loan advance, only Y 1-6 were registered proprietors of the land. The mortgage was an unregistered second mortgage; Mortgage 6162249 to Meriton Finance Pty Ltd had priority over it. Caveat 9746003F lodged on 30 June 2003 notified the respondent’s claim to a mortgage interest. An interlocutory order at an early stage provided for the land to be sold and $1,200,000, part of the proceeds of sale, to be paid into this Court; this order was carried out and that sum remains under the Court’s control.

5 Yeshiva Properties No. 7 Pty Ltd, referred to as Y7, also a plaintiff and an appellant, was not a borrower or mortgagor, and its presence on the record at first instance and on appeal appears to be superfluous; it was a cross-defendant but the orders on the cross-claim did not extend to it. Y7’s apparent association with Y1-6 is that Y7 also had the same directors, the Feldmans, and the same secretary, Mr Henry Kinstlinger, and shared the words “Yeshiva Properties” in its name with a number in sequence.

6 Y 1-6 were trustees of a trust which has been said to be a charitable trust, although its character as a charitable trust does not need to be investigated now. This trust was created in 1978 and given the name Sydney Talmudical College Building and Maintenance Fund (hereinafter “the Trust”). Y1-6 became trustees in 1991. On 30 June 2003 a Deed was set up and according to its terms, Y 1-6 appointed Y7 as new trustee in their place as they resigned, and the properties owned by the trust, including the land, were to be transferred to Y7. However the appointment and the transfer of title did not take place as the Deed was never registered. It has been said at a number of places that the land was an asset of the Trust; while I do not regard this subject as important, I will observe that there does not appear to be any clear proof of this proposition, and the clearest matter in evidence is that the land was referred to in the schedule of trust property to the ineffective Deed of Appointment of Y7 as new trustee. Although the instrument constituting the Trust was in evidence, it was not contended that the respondent was on notice of the terms or even of the existence of the Trust. As notice of the Trust was not alleged or proved, it is only of peripheral importance whether or not the land was an asset of the Trust.

7 When the hearing of the appeal opened Senior Counsel for the appellants referred to s.6 particularly subs.6(1) of the Charitable Trusts Act 1993, and stated that the present proceedings have been brought and conducted without any authorisation of the Attorney General and without obtaining leave of the Court. Senior Counsel did not ask us to grant leave or to make any particular order, and went no further than drawing these provisions to our attention. Senior Counsel for the respondent did not ask us to make any order which might give effect to subs.6(1) and did not suggest that the provisions of that subsection raised any obstacle to our hearing and determining the appeal; which counsel asked us to do.

8 So far as has been made known to this Court, the Attorney General has had no involvement in the proceedings at any stage and is not aware of them. If leave is necessary, the question of leave could be considered now having regard to subs.6(2A), under which leave can be given to commence proceedings, that is, in this case, the proceedings in the Equity Division. Leave is not required for an appeal: see subs.5(2).

9 If this Court were satisfied that subs.6(1) applied, the appropriate order would not, it seems to me, be an order dismissing the proceedings. The appropriate response would be to direct that the proceedings be stayed pending obtaining the Attorney General’s authorisation or leave of the Court, and it would only be after continued failure to obtain authority or leave, or after a clear indication that the plaintiff did not wish to obtain authority or leave, that proceedings would be disposed of; not on the merits, but by a permanent stay.

10 In the Equity Division Y1-6 contended that they hold the school property as trustees of a charitable trust; and they put the deed creating the charitable trust into evidence. However the plaintiffs did not claim relief based on breach of trust by the defendant, or on knowledge by the defendant of the terms or existence of the Trust. The proceedings were brought to protect property rights of the plaintiffs as trustees, and the facts that they are trustees, and that the trust is allegedly a charitable trust, were only incidentally relevant; the claims against the defendant were not founded on these facts.

11 It is not clear to me that ss.5 and 6 and the requirement for authorisation or leave have any application where trustees claim remedies for the protection of trust property, and the existence, validity or terms of the charitable trust are only incidentally relevant and are not in dispute. Sections 5, 6 and 7 are recognisably successor legislation to the Charities Procedure Act 1812 (U.K), known as Sir Samuel Romilly’s Act, in force in New South Wales until replaced by s.17 of the Imperial Acts Application Act 1969, which was then repealed by s.27 of the Charitable Trusts Act 1993. In somewhat wider terms than the earlier legislation ss.5, 6 and 7 of the Charitable Trusts Act 1993 provide means of overcoming formal difficulties about standing to sue in litigation relating to the existence and enforcement of charitable trusts. There was, before the enactment of the Charitable Trusts Act 1993, no difficulty about the standing of the trustee of a charitable trust to bring proceedings for the protection of the trust property; see for example observations in Uniting Church in Australia Property Trust (NSW) & Anor v. Monsen & Anor [1978] 1 NSWLR 575 at 588-589 (Rath J). See also Hauxwell v. Barton-Upon-Humber Urban District Council [1974] Ch 432 at 449 to 451, where Brightman J was dealing with s.28 of the Charities Act 1960 (see p.447) which has a general but not close resemblance to ss.5 and 6.

12 In the present case it is doubtful whether the proceedings are charitable trust proceedings as defined in subs.5(1). No party has asked us to make any order in enforcement of the prohibition under that subsection. In my opinion the Court should not make any order or direction relating to the operation of subs.6(1) of its own motion. In view of what I regard as the proper outcome of the proceedings, the operation of subs.6(1) does not appear to me to have any real importance.

13 The proceedings in the Equity Division were commenced by Summons on 1 June 2004 and have been conducted with expedition at first instance and on appeal. Instead of pleadings a summary of the appellants’ contentions and other information was set out in the Summons under Commercial List practice, and the respondent filed points of defence and a cross-claim. It is not clearly recognisable that these documents raised the case contended for before the Court of Appeal. The summary does not state the appellants’ claims in a clear or satisfactory way, and to some extent this Court is left to understand what is in issue from the course of evidence, particularly of cross-examination at the Trial, from references to the parts of counsel’s submissions at the Trial which were recorded, and from what Gzell J treated as issues for determination. It is markedly unsatisfactory that the appellants’ claim, based on alleged accessary liability of the respondent for breaches of fiduciary duty by the directors of the plaintiffs, was not pleaded in a full and clear way so as to reveal what were alleged to be breaches of fiduciary duty, and what acts and events made the respondent liable. The fiduciary duties to breach of which it was claimed that the respondent was accessary were duties to Y1-6 of the Feldmans as directors; the Feldmans were the only directors of Y1-6 at the time of the events late in June 2003.

14 The Supreme Court Rules 1970 require that allegations of fraud and of matters which may cause surprise be pleaded: Pt.16 r.2 and Pt.15 r.13(1). A claim alleging accessary liability is close to a claim of fraud, knowledge and intention are of central importance, and allegations like these must be made clearly if proceedings are to be conducted fairly. Where an equitable claim is based on alleged dishonesty, or otherwise on Barnes v Addy (1874) LR9ChApp 244, it is inappropriate that there should be anything less than a fully distinct statement in the pleading of what it is in substance that is charged against the alleged accessary. As ever where fraud is alleged, there is a need for full and clear particularity.

15 The appellants’ Senior Counsel complained, at a number of significant points, that the learned Trial Judge had not made findings on matters on which it was essential to make findings; I will deal further with these complaints, but I observe now that the appellants are in a poor position to assert that there was a failing of this kind unless the allegations were pleaded in a clear way. Many facts and issues were raised at the Trial and dealt with in cross-examination of the respondent’s principal witness Mr Ross Roxo for which there was little or no previous indication that they were alleged to be important, or were alleged at all, or that they were facts which to a reasonable man told of fraud or breach of fiduciary duty. It is not an appropriate way to conduct an Equity suit to dredge out every fact and circumstance which could be represented as in some way adverse to the defendant, and then sieve through them to piece together a ground of suit; but something very like that was sought to be accomplished in the present case.

16 It was also necessary to plead in clear terms the breach of fiduciary duty alleged against the Feldmans. This too was not clearly stated in a manner which could be said to put the proceedings on a basis where the Trial could be fair. The learned Trial Judge made no ultimate conclusion on this, and in my opinion the appeal can be disposed of without a conclusion on it on my part.

17 The grounds on which remedies associated with accessary liability are granted in Equity are not highly concrete, and as is usual for remedies based on unconscionable conduct, remedies are awarded on consideration in great detail of the particular facts and an exercise of judgment on unconscionability related to those facts. The law of accessary liability derives largely from observations of Lord Selborne LC in Barnes v Addy at 251-252, but extends considerably beyond the subjects with which his Lordship expressly dealt. This case, as in the usual case, does not involve trustees, but persons who are subject to fiduciary duties, and does not involve agents of trustees, but persons who although they are not agents act in some way as accessaries to breaches of fiduciary duty and “assist with knowledge in a dishonest and fraudulent design on the part of the [fiduciaries],” to adapt the second limb of Lord Selborne LC’s formulation.

18 Accessary liability is not confined to trustees, to trusts, to agents, or to assisting with knowledge. In New South Wales the principal source of the law is a passage in the judgment of this Court in United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 252 D-E to 254E (and there is later discussion in the same judgment). This Court in US Surgical appears to have approved views expressed in Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373 by Stephen J at 408 to 412 dealing with what knowledge on the part of the accessary is required to establish accessary liability, and particularly to his Honour’s conclusion at 412: “If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from inquiry for fear lest he learn of fraud. But to go further is, I think, to disregard Equity’s concern for the state of conscience of the defendant.” This view, with which Barwick CJ concurred, did not go as far as the view of Gibbs J towards regarding constructive knowledge as sufficient. Stephen J and Barwick CJ did not form a majority in Consul and a different opinion was expressed by Gibbs J a member of the majority. Notwithstanding that US Surgical was reversed on appeal on other grounds, the views of Stephen J became the established opinion in this State.

19 Courts in New South Wales have not followed the English courts on a rather long excursion towards and then against accepting states of mind less concrete than actual knowledge of facts which would tell of fraud to a reasonable man, after which they have achieved an even stricter position overall than that of Stephen J; see Baden Delvaux & Lecuit v Societe Generale pour Favoriser le Development du Commerce [1993] 1 WLR 509, Royal Brunei Airlines Sdn Bhd v Tan Kok Ming [1995] UKPC 4; [1995] 2 AC 378, Twinsectra Ltd v Yardley [2002] UKHL 12; [2002] 2 AC 164, and Cadwallader v Bajco Pty Ltd [2002] NSWCA 328 at para 198-199 (Heydon JA). Submissions by counsel on behalf of the appellants were founded on Stephen J’s view. It was not contended that this was not appropriate, and in my view it was.

20 Changes of opinion in England are recorded in the judgment in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming at 387-389. Their Lordships addressed what is involved in a test of honesty (at 389-391) and adopted a test of dishonesty for accessary liability at 392 in the following passage:

The accessary liability principle

Drawing the threads together, their Lordships’ overall conclusion is that dishonesty is a necessary ingredient of accessary liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. ‘Knowingly’ is better avoided as a defining ingredient of the principle, and in the context of this principle the Baden scale of knowledge is best forgotten.

21 This restatement departs significantly from the terms in the second limb of Lord Selborne LC’s formulation in Barnes v. Addy: “... unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.” The requirement of dishonesty has moved, as according to Lord Selborne LC a dishonest and fraudulent design on the part of the trustees was necessary, whereas in Royal Brunei Airlines Sdn Bhd v Tan Kok Ming what is necessary is a breach of trust or fiduciary obligation, which may not necessarily be dishonest. The test of dishonesty is now applied to the accessary; in clearer terms than Lord Selborne LC’s words would show, although to my reading his Lordship’s words do require dishonesty of the accessary. With Royal Brunei Airlines Sdn Bhd v Tan Kok Ming it becomes possible and accurate to identify the second limb of Lord Selborne LC’s formulation as accessary liability for dishonest assistance. Although I find their Lordships’ exposition difficult to distinguish from that of Stephen J in Consul, the authority to be applied in the present case is the Australian authority.

22 In the application of Stephen J’s test it is not necessary that the fraudulent scheme or purpose of the fiduciary or trustee should be fully known, or should be understood in any detail at all; the test is complied with if the known facts would communicate to a reasonable person a general understanding that there was a fraud, breach of trust or breach of fiduciary duty.

23 I will give an outline of the facts of the present case. The respondent lives in Bangalore, India and she herself took no significant part in the relevant events. Her brother Mr Roxo, who is a mechanical engineer by profession, made some short term bridging finance investments, commencing at some time in 2002. He called these “Caveat Investments,” and explained “A caveat investment is a short-term advance secured by a mortgage which while unregistered is noted in a caveat”. Characteristically these are loans for one or several months at very high rates of interest, in this case 6% per month until default, and are made for some short-term business purpose, such as bridging finance pending a more conventional borrowing or completion of a sale. Characteristically applications for loans are made with urgency and loans are completed within a short period. Only borrowers whose circumstances placed them under great pressure would wish to obtain such loans or contemplate paying such rates of interest.

24 Mr Roxo first heard of the proposed loan about Wednesday 25 June 2003. Mr Roxo had no earlier dealings with the Feldmans or the Yeshiva companies and had no knowledge of their affairs, although the Feldmans were then involved in disputes and litigation which had in fact received much notice in the press, involving an investor named Mr Gutnik and another school or college. The initial approach to Mr Roxo came in a telephone call from Mr Doug Jovanovic of Global Synergy Finance, a finance broker; this was Mr Roxo’s first knowledge of or dealing with Mr Jovanovic and his company. It was Mr Roxo’s evidence (Blue 3/554) that Mr Jovanovic told him: “I have a short term bridging finance deal, second mortgage, low LVR property in Dover Heights, rezoning and development for $800,000. The borrower is a property development company, Yeshiva Properties No. 7 PL. They will pay 6% per month for one to two months. Our commission is 2%.” In the conversation Mr Jovanovic also said: “Look they require the money in three days and the project is worth $20,000,000 plus to them ...”. In the course of the conversation Mr Roxo said that there would be an 8% establishment fee, that he might perhaps be able to put together about $500,000, and that he might be able to settle by Friday (meaning 27June 2003). He asked what was the exit strategy and was told: “We are organising the re-finance and we have a conditional approval for finance.” Mr Jovanovic asked Mr Roxo to talk to Y7’s directors, the Feldmans, and their solicitor, Mr Chris Crawley, directly to speed up the process. Mr Jovanovic sent Mr Roxo some documents including a loan summary and valuation.

25 About the same day Mr Roxo spoke to Mr Yosef Feldman by telephone; among many other things Mr Yosef Feldman said (Blue 3/555):

My parents and I are directors of Yeshiva Properties No. 7. The company requires $800,000 to do a subdivision on a property in Dover Heights. The property is worth around $17 million as is and will be worth more than $22 million after subdivision. We have an estimate of valuation, from R V Dimond. Presently, they are doing a full valuation. There is a first mortgage to Meriton Finance of $7.8 million. Meriton is also doing the re-development project for us.

...

The company only requires the funds until the refinance comes through. We have conditional approval for a refinance loan of $11 million. That can happen anytime, within a few weeks. We also have the option of selling the property and we have an offer for $15 million for it, which we are considering. The term we are looking for is for 1 month to at most 2 months. The school on the property is being [relocated] to a much lower cost location.

26 Mr Roxo said that he could manage only about $500,000, and discussed rates of interest and fees. Mr Yosef Feldman said (Blue 3/555):

We could pay 6%, it will only be for one month and we need the money urgently. Yeshiva Properties stands to make a lot of money if we are allowed to go ahead with the subdivision and sale. If it does not happen now we may not be able to do so at a later stage. Meriton is assisting us with the development at almost no cost, and if we sell the property, Yeshiva Properties will be able to pay off the first mortgage and be debt free.

He also said: (Blue 3/556) “Yeshiva Properties needs some money urgently to proceed with the development and sale.”

27 It was suggested in cross-examination of Mr Roxo (Black 49-50) to the effect that there were anomalies in what Mr Yosef Feldman told him in that those in control of the school were not going to be able to sell and relocate the school and complete the sale within one or two months. In my opinion there was no real anomaly as what would be involved in the sale of the property, if there were to be a sale, was not highly defined, and did not need to be. Mr Roxo said (Black 50E):

Now, I did not think it was necessary to analyse every single logistical problem that he might encounter in achieving any one of those two options. My main concern that there was a broker who was telling me that obtained finance or he was obtaining the refinancing and that was the mechanism which we would repay. Mr Feldman tells me that it’s true and, in addition, it was what was another option. Perhaps you’re right, that they wouldn’t have been able to move the school in that time and I can’t argue that point.

In my view Mr Roxo, and a reasonable person in his position, had no occasion to think more deeply than this into what was to happen to the school if there were to be a sale.

28 Mr Roxo spoke to Mr Steward Rowan of the office of R.V. Dimond, Valuer, about 26 June 2003 and was given some information about the preparation of the valuation, the value and the prospect of sale, in terms which indicated that subdivision was under consideration. On 27 June 2003 Mr Roxo also spoke to Mr Chris Crawley, solicitor whose name he was given by Mr Jovanovic, and Mr Crawley told him (Blue 3/557):

I am acting for Yeshiva Properties No. 7. The funds are required for a short term only, until the refinance and/or subdivision and sale of the property.

Mr Crawley further said that the transaction was urgent and that if the loan was not settled by the end of the financial year the borrowers would not be proceeding with the loan (Blue 3/557).

29 Mr Roxo carried out a Multi Power Express Search on Y7 at about 6.00pm on 27 June 2003. This was a search of information in the registers of the ASIC; the search followed up the names of the Feldmans so as to show all other companies of which they were directors. Mr Roxo produced an incomplete copy of the search paper with his affidavit; other pages were produced during the hearing. The Multi Power Express Search appears to have been the first source of detailed information available to Mr Roxo identifying the directors of Y7, and shows that the Feldmans were the sole directors. Mr Yosef Feldman’s occupation was stated, in the Multi Power Express Search, to be a Chief Rabbi.

30 In the documents which Mr Jovanovic sent Mr Roxo the property was described as Yeshiva Collage (sic) (Blue 3/735) and as Yeshiva College in a valuer’s letter (Blue 7/373). Mr Roxo also received a copy of a letter from Waverley Council’s Manager Strategic Planning to Meriton Apartments Pty Ltd of 23 May 2003 dealing with a proposed rezoning of the land; this letter indicated that a project of redevelopment involving rezoning and subdivision was still at a very preliminary stage. This clearly showed that the property was a school and was zoned for that use. It was known to Mr Roxo from several sources that the land was in use as a school or college and that use continued.

31 The learned Trial Judge’s statement (Red 39Q): “The school had been transferred to other premises and the land was ready to be redeveloped” is erroneous; there is no evidence that those events had happened, and there is no evidence that anyone asserted that they had happened at the time of the negotiations and advance. There is no basis for thinking that Mr Roxo was told or believed that the school was not operating on the property. Even so there is no real anomaly between that fact and the evidence about what he was told about the need for the loan. In my opinion no importance should be attributed to this error. There are no real anomalies between what Mr Roxo was told about a development proposal, prospects of sale and refinancing, or otherwise what he was told in relation to the reason for which the borrowing was required, and his knowledge that the school was still operating. The association of the transaction with the affairs of an educational body, and with religious affairs does nothing in my mind to make suspicious what otherwise would not have been suspicious. Religious and educational trusts and corporations hold land and engage in redevelopments, subdivisions, refinancing, borrowings and other business transactions just as do other trusts and corporations.

32 With retrospection the accounting materials prepared by the administrators of Y 1-6 while the companies were in administration or liquidation, including Mr Dean-Willcock’s evidence and reports (to which I will refer), make it seem very unlikely that the explanations given to Mr Roxo about the need for the borrowing were true. In my view the evidence shows no reason for Mr Roxo to doubt, on what he knew, that the borrowing was in some way related to a short-term need pending a redevelopment proposal involving subdivision, or until refinance. Mr Roxo had no occasion to investigate what he was told fully, or to pursue enquiries until he was given a clear exposition of what the need for the loan was and he had a clear understanding of how it related to subdivision, redevelopment or refinance. What he was offered was a good business deal from the point of view of the respondent, for whose interests he was responsible, and he was dealing with representatives of the persons who truly were the directors of Y1-7. Whether the Feldmans were really in the state of urgency which they professed to be in, whether they were managing affairs well or badly, and what arrangements they were making for care or disposition of funds were not really Mr Roxo’s affair, unless he had some real grounds for knowing that he was involved in dishonest exercise of their powers. The circumstances did not call on him for suspicion or vigilance.

33 There were further conversations over the next few days in one of which Mr Yosef Feldman said: (Blue 3/557)

Yosef said: “We are prepared to be personal guarantors for the loan.”

[Mr Roxo] said: “I will list you as joint borrowers.”

Yosef said: “Not a problem, you will get your money back within 1 month from the refinance or sale of the property.”

34 Mr Roxo produced a letter of offer bearing date Thursday 26 June 2003. There are two forms of this letter of offer in evidence; one refers only to Y 7 as the borrower, to the loan advance as $500,000 and to the security documentation as a mortgage; the other refers to the Feldmans as well as Y7 as borrowers, to the loan advance as $520,000 and to the security documentation as a caveat. Although there is no clear explanation in the evidence it seems probable that the second form referring to the Feldmans as well as Y7 as borrowers was not brought into existence until 30 June 2003. Mr Roxo said on affidavit (Blue 3/557) “On the 26th June 2003 I forwarded a letter of offer to the borrowers. This was returned executed.” He then produced a copy of the letter of offer with executions of Y 1-6 and the Feldmans. The letter in evidence bears handwritten alterations showing not Y7 but Y1-6 among the borrowers, so that the loan was accepted on behalf of all seven companies under their seals as well as by the Feldmans under their signatures. . Mr Roxo did not say in evidence when the letter was returned executed, and circumstances make it highly probable that it was given to him on the evening of 30 June 2003 on the occasion when the advance was made.

35 It was contended that Mr Roxo’s account of how it came about that the Feldmans took part in the transaction, and did so as principal borrowers and not as guarantors was not clear or credible; at the core of this contention was the anomaly that Mr Roxo attributed readiness of the Feldmans to participate as guarantors and as borrowers to what Mr Yosef Feldman said at a time not clearly shown by evidence but apparently on Friday 27 June 2003, whereas a letter of offer which did not require the Feldmans to do so was issued on 26 June 2003. I see that it is improbable that the Feldmans volunteered to accept personal liability after a letter of offer not so requiring had been issued; it seems more probable that their participation was known to be available from some fairly early stage. I see no reason why it is impossible. It is not, in my opinion, clearly shown by evidence that the proposal for the Feldmans to be guarantors, or join as borrowers, came later in time than the first version of the letter of offer being communicated to them. The evolution of differences between the two forms of letter of offer, the times of production and communication of the letter, and the return of the version with acceptances do not clearly appear from Mr Roxo’s evidence. I do not find it surprising that anomalies and gaps appeared in his account of the order of events; plainly the business was attended to in a great rush. I do not see these anomalies as lending support to the appellants’ case that Mr Roxo knew of facts which themselves would tell of fraud or breach of fiduciary duty to a reasonable man.

36 It was contended that the differences between different versions of the letter of offer were important. I do not see them as of real significance; the differences and their anomalies reflect the general high urgency and poor competence with which affairs were handled by the persons with whom Mr Roxo was dealing, and his difficulty of explaining all turns of events in a negotiation in which there were significant changes in a short time. The appearance of the earlier date 26 June 2003 on what is plainly the later form of the letter of offer does not in my mind constitute any real ground for disbelieving Mr Roxo’s evidence to the effect that he found out about Y1-6 and not Y7 being the registered proprietors of the land on 30 June 2003.

37 Until 30 June 2003 all communications and preparations took place, so far as Mr Roxo’s evidence shows, on the view that Y7 was the registered proprietor of the land and was to be the borrower and the mortgagor. Mr Roxo prepared loan documentation including a form of mortgage and form of caveat which treated Y7 as the proprietor, and he forwarded these documents electronically to Mr Crawley’s firm by a message at 10.28 am on 30 June 2003 (Blue 3/584). Mr Roxo also carried out a title search electronically on the morning of 30 June 2003 and found that Y7 was not the registered proprietor and that Y1-6 were. He then telephoned Mr Crawley who said in explanation (Blue 3/558): “I thought the transfer had been done, but it is not a problem, we will have to register the transfer first, before we lodge the caveat.” Mr Crawley also said: “In effect it is no more than a name change, there is no problem, we’ll be registering the name change first. The name on the mortgage document will be the same as on title.”

38 It was Mr Roxo’s evidence that shortly after 2 pm on 30 June 2003 he received a telephone call from Mr Jovanovic emphasising the need for the matter to settle that day.

39 At about 2.22 pm or soon afterwards Mr Roxo received back from Mr Crawley’s office by fax transmission copies of executed documents; by this time the form of mortgage had been altered by hand so as to show the mortgagors as Y1-6 and not as Y7, and the mortgage had been executed under seal by each of Y1-6 and also Y7(Blue 3/586 to 594). Mr Roxo also received copies of other documents relating to settlement; including a cheque direction, altered so as to show Y1-6 as well as the Feldmans as the borrowers giving the direction, bearing their signatures and seals, and directing that the last of the cheques required, described as “surplus,” be for $438,309 to Y7. There were other documents supporting settlement of the loan including a declaration establishing independent legal advice, a general acknowledgement of receipt of documents and authorisation to complete the documents, a declaration about characteristics of the security property and a Consumer Credit Code declaration stating that the purpose of the loan was “for business purposes.” (See Blue 5/1306).

40 Ms Fofi Zeglis, a solicitor employed in Mr Crawley’s office, completed and lodged a caveat by the respondent claiming an interest under an unregistered mortgage; a receipt stamp shows that this was lodged at 3.35pm on 30 June 2003. Mr Roxo said that Ms Zeglis telephoned him, informed him that the caveat had been lodged and asked that he draw the cheque.

41 In his affidavit Mr Roxo said: (Blue 3/559)

Some time later I received a telephone call from Yosef Feldman in which words to the following effect were said:

Yosef said: “We require the cheque drawn in favour of Vageta Pty Limited.”

I said: “I will have to make out the cheque in the name of all the named borrowers on the documents unless I am provided with a written direction executed by all parties.”

Yosef said: “Don’t worry I will get that now and give that to you before you hand over the cheque.”

Yosef said: “Can I meet you at your office.”

I said: “I prefer to do the settlement at your Solicitor’s office.”

Yosef said: “We have already left the office and are at home.”

I said: “Well if it’s more convenient I will bring the cheque over to you as long as I can inspect the documents before I hand over the cheque.”

Yosef said: “That would be better, our address is 67 Penkivil Street in Bondi.”

42 Settlement of the loan took place in the evening of 30 June 2003 when Mr Roxo went to the Feldmans’ house at 67 Penkivil Street, Bondi by arrangement and met Mr Yosef Feldman there. Mr Yosef Feldman gave him the executed form of mortgage and other relevant documents including a handwritten cheque direction (Blue 3/606). The handwritten direction is not an impressive document. It is in these words:

30/6/03

We direct the monies from J Marshall to be paid to Vageta.

This document was signed by Mr Yosef Feldman, Mr Pinkus Feldman, Mrs Pnina Feldman and Mr Kinstlinger, whose names were written out below their signatures. The document did not attribute their signatures to any particular company, or to a company at all. Instead of having a bank cheque in favour of Y7 Mr Roxo had with him a bank cheque in favour of Vageta Pty Ltd for the settlement amount (with a small discrepancy from the amount in the cheque directions) and he handed that to Mr Yosef Feldman.

43 I find it difficult to see all respects of the operation which the handwritten cheque direction had. The four persons who signed it were the Feldmans and Mr Kinstlinger, who were directors and secretary of all companies Y1-6 and also Y7. The Feldmans were also directors and Mrs Pnina Feldman was secretary of Vageta. In the circumstances in which Mr Roxo was asked to act on the handwritten cheque direction and in which it was handed over to him it appears to me that it operated as a direction by which each of the Feldmans and also each of the Yeshiva companies including Y7 were bound; it should be treated as having been given on behalf of each and all of them. That is to say, it should in my opinion be treated as given on behalf of Y7, to which the direction forwarded by the Mr Crawley’s office earlier in the day directed that the proceeds of the loan be paid. Thus the cheque direction’s operation is not inconsistent with the earlier direction, but is a further direction which, I would think, Y7 was entitled to give and on which Mr Roxo was entitled to act. I see no room to doubt that the mortgage advance should be treated as having been paid to the borrowers, and then paid on at their direction. In the same way the advance should be treated as having been paid to Y7 and then paid on at Y7’s direction. It is not the appellants’ case that the mortgage advance had not been paid at all; indeed their case seems to require that it be established that it was paid, and that they incurred liability as borrowers for it, otherwise they would not have any need for an equitable remedy.

44 Mr Roxo did not in his affidavit give an exact time of the telephone call from Mr Yosef Feldman requesting the cheque to be in favour of Vageta, but his narration of earlier events puts it later than several things – receiving a fax transmission with copies of the executed documents from Mr Crawley’s office, receiving a telephone call from Mr Jovanovic, and receiving a telephone call from Ms Zeglis informing him “I have just lodged the caveats. Can you draw the cheque?” to which Mr Roxo replied: “Okay, I’ll call you when I have the cheque.” With fair certainty, this cannot have been the true order of events; I say this because only one bank cheque in the appropriate amount was obtained, and an appropriate amount to pay for that cheque was drawn at 2.12 pm on 30 June 2003, it seems a fair certainty that this was the bank cheque in favour of Vageta. The amount withdrawn is different only by $10 from the amount of the bank cheque required on settlement, the probable explanation being that there was some bank fee. It seems to follow with fair certainty that, considerably earlier in the day than his evidence would show, Mr Roxo knew that a bank cheque in favour of Vageta was required.

45 The Trial Judge appears to have been of the view that the caveat was lodged “early in the afternoon of 30 June 2003. There was a taxi receipt timed at 2.09 pm.” This passage suggests that his Honour found that the caveat was lodged at about 2.09 pm. However the taxi receipt is not related to lodgement of the caveat and a stamped receipt shows that the caveat was lodged at 3.35 pm. His Honour correctly found that the debit in the bank records for the bank cheque in favour of Vageta was timed at 2.12 pm (Red 37N). It is likely that his Honour had an incorrect view about the time and order of events of lodging the caveat and obtaining the cheque. The error is of minor importance, as it is clear that his Honour correctly understood that the cheque was obtained much earlier in the afternoon than Mr Roxo’s evidence elsewhere would suggest, and hence that it is highly probable that Mr Roxo knew that a cheque in favour of Vageta was required earlier in the afternoon that his evidence would suggest.

46 In Mr Roxo’s evidence he had several conversations in the course of the day with persons from Mr Crawley’s office, Mr Crawley at least once and Ms Zeglis at least twice, but Mr Roxo’s evidence does not show that he explained to the solicitors the significant change relating to the arrangements for payment. There is some general appearance of anomaly in that the cheque’s being in favour of Vageta and not, as in the earlier direction, in favour of Y7, was never mentioned in any conversation between Mr Roxo and anyone at Mr Crawley’s office.

47 It was not established that Mr Crawley and his firm were not involved in the arrangements for the cheque to be drawn in favour of Vageta, nor was it established that they did not know of such arrangement; the highest at which the appellants’ counsel was able to put the matter was to point out that Mr Roxo’s evidence did not suggest that the solicitor had anything to do with drawing the bank cheque; and also to point out that circumstances showed (as they appear clearly to show) that the arrangement was made significantly earlier in the day than stated in Mr Roxo’s evidence. The cheque was prepared, it would seem, at or about 2.12 pm, whereas it has been shown by a fax transmission record that the solicitors communicated documents including a cheque direction with authority for payment to Y7 20 minutes later at 2.32 pm (Blue 5/1306).

48 Senior Counsel for the appellants complained that the Trial Judge made no finding about the circumstances in which the cheque came to be drawn in favour of Vageta. Mr Roxo’s evidence overall shows unreliable positions on the times of his conversation with Ms Zeglis in which he said he would only draw cheques after the caveat was registered, the time at which the bank cheque in favour of Vageta was obtained: his evidence yields nothing to dispel the possibility that he may have deliberately refrained from letting Ms Zeglis know that the cheque was in favour of Vageta and had already been obtained while talking to her about subjects which included the circumstances in which he would obtain a cheque in the context of her having sent a cheque direction for payment to Y7. The cross-examination includes this passage: (Black 36 H-M)

Q. Do you think you might have lied to Sophie Zeglis and told her you were going to draw the cheque when in fact you had already done so?

A. It’s possible.

Q. Why would you do that?

A. To ensure that, well, I don’t know. I mean, the cheque was, had to be drawn in a hurry before the bank closed but I wouldn’t hand the cheque over ‘til the caveat was lodged and if there’s any attempt to obtain the cheque without, or pressure me in handling over the cheque without the caveat being lodged, you know, I wouldn’t give in to that.

The answers are unsatisfactory and almost incomprehensible: but so are the questions, which did not distinctly confront Mr Roxo with the suggestion that it was said against him that he had deliberately concealed from Ms Zeglis the proposed payment to Vageta and the cheque by which the payment was to be made. Mr Roxo’s answers do not suggest that he knew that the questions gave him a chance to answer a charge of deliberate concealment: and from the form of the question, he was not distinctly so charged.

49 It was not directly suggested to Mr Roxo in cross-examination that he had deliberately withheld knowledge of the direction to make the cheque payable to Vageta from Mr Crawley’s office, and I do not see any room, on a reasonable basis, for a finding that he deliberately did so, still less for a view on appeal that not so to find was an error. Mr Roxo was not the only available source for evidence about the state of the solicitors’ knowledge, and if the appellants contended at the trial that the solicitors in fact had no knowledge of that matter, it was open to them to prove it by calling evidence from the solicitors’ firm. After all, they were the solicitors acting for the appellants at that time, and there is no basis for thinking that the respondent was under any onus of proof with respect to this fact.

50 Unless it were in some way established that Mr Roxo knowingly participated in concealing from the solicitors at Mr Crawley’s office the fact that the settlement cheque was to be payable to Vageta, and that it was not to be drawn in accordance with the cheque direction which the solicitors had forwarded, the time on 30 June 2003 when Mr Roxo learnt that a cheque to Vageta was required does not appear to me to be important. His account of the times and order of events is plainly unreliable; it is extremely unlikely that he was told of the requirement for a bank cheque in favour of Vageta as late in the afternoon and at the point in the events which his evidence suggested. Without some clear showing of an appropriately strong motivation, there could not reasonably be a finding that Mr Roxo participated in some scheme to keep knowledge of the payment to Vageta away from Mr Crawley and his firm. Overall it appears to me to be markedly unlikely that Mr Roxo would engage in activity which he knew to be dishonest, or he should reasonably have known was dishonest, in the interests of the Feldmans, of whom he had no knowledge until a few days before the transaction, when to do so might risk a large sum of money for which he was responsible to his sister. The pursuit of an opportunity to gain very high rates of interest over a short time is conceivably a motive for such behaviour, but it is not possible to reason from that perception to the conclusion that it was.

51 As it was the appellants’ case that Mr Roxo was aware of facts which (paraphrasing Stephen J in Consul at 412) themselves would, to a reasonable man in Mr Roxo’s position, tell of fraud or breach of trust (or in this case, breach of directors’ fiduciary duty), and as they did not prove any facts or circumstances which raised such a case in relation to the giving of the cheque direction and the preparation of the cheque, the matter complained of does not have the importance attributed to it.

52 As explained in submissions on appeal the breach of directors’ duty by the Feldmans was said to be that they raised money upon the credit of the Yeshiva companies, and did so not for any purpose connected with the business of the companies, but for the purpose of diverting the funds to Vageta. The existence of the Trust and the obligation of Y1-6 as trustees were said to be (and in my view are) relevant when addressing whether the Feldmans acted in breach of their fiduciary duty as directors; but it was not said that the breach of duty as directors was specifically to take Y1-6 into breach of the duty of the companies as trustees, nor was it said that the respondent was (in any sense) on notice of the existence of the Trust, or a breach of that Trust. Counsel put forward a large array of facts known to Mr Roxo as showing irregularity to such a marked degree in the course followed in obtaining the loan and directing payment of the proceeds as, according to counsel’s submissions, to tell of breach of fiduciary duty to a reasonable person. There are many events which counsel claimed came under consideration in this array, and it is true that most of them have some aspect of irregularity. Counsel put forward as “quite central facts” the alteration of the identities of the potential borrowers, that is Y7 in the first form of the letter of offer, then the Feldmans and Y7, then the change on the morning of 30 June 2003 to Y 1-6, the registered proprietors, and the Feldmans.

53 In written submissions the appellants’ Senior Counsel contended that Gzell J failed to give appropriate considerations to the “central facts”:

Trial Judge’s Errors

8. The Appellants submit that the Trial Judge:

a. failed to make critical findings of fact; and alternatively in one respect erred in his consideration of the credit of Mr Roxo;

b. was mistaken about significant facts;

c. failed to consider relevant matters in the case advanced by the Appellants.

d. misapprehended the case made by the Appellants.

e. failed to apply the test for knowing participation in a breach of trust to all of the relevant facts;

f. erred, in any event, in the manner in which the test should be applied;

54 It was contended that findings of the facts relating to when Mr Roxo first learned of Vageta, and when he learned that the Feldmans controlled it, were central to the case made by the appellants on the extent of Mr Roxo’s knowledge and on his credit. It was contended that the Trial Judge had not made findings or appropriately comprehensive findings on these matters; that these matters would certainly have been significant, and might well have been decisive, and that the Trial Judge’s conclusion on the application of Stephen J’s test was arrived at without consideration of them. It was further contended that the Court of Appeal was not in a position to make those findings, and that the appropriate remedy was a new trial, so that findings could be made establishing, as the appellants contend, Mr Roxo’s knowledge of the association between Vageta and the Feldmans, and the time and circumstances of the direction for payment to Vageta, and conclusions about the application of Stephen J’s test.

55 It was further submitted that the Trial Judge was in error in giving no consideration, or no detailed consideration to several matters which were said to be telling matters and to be known to Mr Roxo. These were:

§ The late change in the identity of the borrowers,

§ The apparent indifference on the part of the Feldmans to the identity of the borrowers.

§ The fact that the Feldmans volunteered to be guarantors and later agreed to be the borrowers.

§ The implausibility of the explanation that the transaction was tax driven.

§ The changing reasons for the transaction over a period of three days.

§ The haste with which the transaction was progressed.

56 Counsel further offered the criticism of the judgment of Gzell J that his Honour gave the event of diversion of the funds to Vageta, which was referred to by counsel as syphoning, inappropriately isolated consideration. It was contended that to test the state of Mr Roxo’s knowledge by Stephen J’s test in Consul it was necessary to have regard to a context consisting of all the facts of which had come to Mr Roxo’s knowledge during the negotiation. It was contended that in that context Mr Roxo was confronted by a desperate act of directors diverting money and prepared to do anything they could to divert money to their own use to the detriment of Y1-6, and that this falls within Stephen J’s test. The facts referred to include comprehensively practically every turn of events in the negotiation. Among those referred to by counsel were that Mr Roxo knew that there had been a proposal to transfer title of the land from Y 1- 6 to Y 7, that consideration of transferring the title had some relation to protecting assets from the Gutnik litigation, the relationship between the Feldmans and Vageta, and the introduction of the proposal for payment of money to Vageta at a late stage, in circumstances of which Mr Roxo’s explanation was unsatisfactory, and in which the solicitors acting for Y 1-6 and for the Feldmans were not involved. It was contended that it was an error to isolate single facts in the chain of events; indeed as presented by counsel almost every fact and circumstance from the first inquiry to the payment and receipt of the documents was part of the demonstration. Counsel said that Mr Roxo’s knowledge “... can only be understood in the total context of everything that happened as a lot happened over those 4 days and it really can be understood if one looks at it as a continuum, and makes findings of fact about that continuum which we say his Honour did not.” (Transcript 9, Line 20-24).

57 In my view the reasons given by the Trial Judge show no lack of understanding of the test for accessary liability as stated in the judgment of Stephen J. His Honour said at 30:

30. It was submitted that Mr Roxo should have carried out a greater degree of due diligence than he did. But any failure in that regard did not enliven the second limb of Barnes v Addy. There was nothing in the information given to him and which he discovered in carrying out his due diligence that would, of itself, suggest breach of duty on the part of the directors of Yeshiva 7. The case for the Yeshiva companies was not based upon the initial information acquired by Mr Roxo but was based on his knowledge when the arrangements were varied.

This reference and his Honour’s reasons generally do not indicate any lack of understanding of the correct test or any failure to apply it. It was necessary for the Trial Judge to address the parts which, according to the appellants’ case made up the sum, and on a whole reading of the reasons given, there was in my view a fair and clear exposition of the basis on which the appellants’ case was rejected.

58 In complaining that the Trial Judge did not look at the totality of the events it was said that his Honour erroneously split up the events into discrete events and discrete time periods. It was said that the Trial Judge did not address the changing purposes of the transactions as explained to Mr Roxo, and in particular did not address the reference to tax problems which were said to be a change in purpose.

59 The evidence underlying the reference to a tax issue appears in the oral evidence of Mr Roxo: (Black 50I-N)

Q. Did you ever ask why they needed this money so quickly?

A. Yes I did.

Q. What did they say?

A. It was to meet some end of year tax issues and they were cash strapped at that time in respect to this development. Whether it was spelt out to me, I understood that, but certainly I was under the distinct impression that if we didn’t settle by 30 June the loan would not proceed.

Q. And you inferred because it was the end of the year that there was a tax driven purpose?

A. Yes.

60 There is no definition, in any information given to Mr Roxo of which evidence speaks, of what the “end of year tax issues” were, or how they impacted on the transaction. In my opinion there is nothing implausible or suspicious about the attribution of urgency to some undefined tax driven purpose in relation to a requirement to settle a loan advance or other money transaction by 30 June. The information given to Mr Roxo relating to the tax issues was not, in my understanding, inconsistent with other explanations relating to redevelopment and proposed sale or refinancing. Nor does it seem to me to be strange or suspicious that no real explanation was given of the tax issue, or of whether or how it impacted on the proposed borrowers; it might perhaps have impacted on some person with whom the borrowers wished to deal, but in Mr Roxo’s circumstances, it was not an explanation which should reasonably have prompted further inquiry because it did not raise any reasonable suspicions that there may be some dishonesty fraud or breach of duty afoot.

61 Counsel also put forward knowledge communicated to Mr Roxo of some purpose of moving the properties away from or protecting the properties from what was referred to as the Gutnik litigation. The Gutnik litigation referred to was Yeshiva Properties No 1 Pty Ltd v Lubavitch Mazal Pty Ltd [2003] NSWSC 615 which related to a mortgage over a different school property. On 25 June 2003 those proceedings were under reserved judgment after hearing, and Young CJ in Eq gave judgment on 16 July 2003 for reasons then published against Y 1 to Y 6 for $14,275,038.83. It was said that defeating possible claims of Mr Gutnik against the land in the Gutnik litigation was an aspect of making the land attractive to Mr Roxo as a security so as to take the transaction forward; and it was a transaction in which very large advantages were to be obtained. What is referred to as defeating or evading the Gutnik litigation, or by related expressions, was not a very clearly expressed subject in any communication which have been proved to be made to Mr Roxo.

62 Raising credit on assets or moving title to land to another registered proprietor with the object of defeating a claim in pending litigation are exercises which may be carried out honestly: the point of view of the person making an adverse claim is not the only point from which to look and there may be some counteracting advantage, even for a transfer for which there is no money consideration. On the slight information given to Mr Roxo I do not see that he had knowledge of any matter within the test in Consul. If anything, Mr Roxo’s continuing with the proposed loan after he learnt that Y1-6, which were involved in the Gutnik litigation, were the proprietors of the land and were to be the borrowers is an indication that he is not consciously participating in any dishonest or improper evasion of some threat proposed by the Gutnik litigation.

63 There is relatively little in evidence about Vageta. The directors of Vageta were the Feldmans, and two of them, Mr Pinchus Feldman and Mrs Pnina Feldman, owned the two issued shares. So far as appears, Vageta has never had any registered or unregistered interest in the land. Indeed the same is true of Y7, although there are some indications that it might have been proposed at some stage to transfer the land to Y7 through the Trust. The initial approach to Mr Roxo was made on the basis that he was dealing with Y7 and that Y7 owned the land, leading to his belief to that effect, not dispelled until some time in the morning of 30 June 2003 when he made an electronic title search after he had sent loan documentation to Mr Crawley’s office. Vageta is mentioned in the Multi Power Express Search which Mr Roxo obtained on 27 June 2003 among a number of companies of which one or more of the Feldmans were directors. A later Multi Power Express Search made for the purpose of the hearing confirms that on 30 June 2003 the directors of Vageta were each of the three Feldmans and that Mrs Pnina Feldman was then its secretary.

64 Mr Roxo’s evidence taken as a whole (although it is not completely clear on this) appears to mean that he did not advert to the fact that Vageta had common directors with Y1-7 on 30 June 2003 when it was arranged that the cheque was to be in favour of Vageta. It is not at all difficult to believe that he did not advert to such fact referred to in the Multi Power Express Search, which contains a large body of information over many pages. Unless Mr Roxo actually did advert, when he heard on 23 June 2003 that a bank cheque in favour of Vageta was required, to the fact that Vageta was mentioned in the Multi Power Express Search paper which he obtained on 27 June 2003, and to the connection between Vageta and the Feldmans, there does not seem to me to be any basis for embarking on consideration of whether that was an indication that some dishonest scheme was in progress. Even if he had so adverted, I would not think that there was any real indication to that effect. The fact of common directorship is not in my opinion an indication that the direction for payment was or might be in any way dishonest, or significant at all. Payment of the proceeds of a loan to some other company is not an indication of dishonesty.

65 The close association between the Feldmans as directors both of Y 1-7 and also of Vageta does nothing to establish that there was a breach of fiduciary duty or any dishonest circumstances in relation to the direction of payment. While the facts available are so bare that it is difficult to reach any conclusion, it is possible to see the common directorship as an indication that there may well have been some legitimate purpose for the payment. Mr Roxo’s difficulties and plain inaccuracy in his evidence recounting how it came about that the bank cheque was drawn in favour of Vageta were the circumstances of which the appellants’ counsel claimed with the greatest intensity and zeal that they showed dishonesty or consciousness of wrong dealing, but they did no more than the many other circumstances on which counsel relied for their supposed cumulative effect. In my opinion the circumstances in part and also in whole do no more than show that Mr Roxo had participated in a transaction conducted with no real competence, with astonishing haste and on imperfect information, with several very significant changes of direction in the course of the six or seven days while the whole matter was accomplished, and that he had great difficulty in giving a clear and detailed account of the order of significant events. Far from being an indication of dishonesty, I find his difficulty to be altogether unremarkable, in relation to business conducted in such a scramble. It is no wonder that Mr Roxo, giving evidence in October 2004, could not speak reliably about the order of events or about all the events in a rushed transaction late in June 2003. Indeed it would be wonderful, almost to the point of being suspicious, if he could.

66 It was contended that notwithstanding the references to Y 7, Mr Roxo in fact knew from the beginning of the transaction that Y 1 to 6 were the owners of the land. Evidence shows that in July and September 2003, after Young CJ in Eq gave judgment in the Gutnik litigation, Mr Roxo communicated with Mr Crawley. In an electronic message on 16 July 2003 (Blue 5/1295) Mr Roxo said: “Your earlier verbal advice ... that this action related to other properties and had no affect on the security” and on 2 September 2003 (Blue 5/1293): “... we based our decision to lend the money to Yeshiva 7 based on your advice that the transfer from Yeshiva 1-6 was taking place and that this would take this property out of the reach of the other ‘unrelated Gutnik action’”. In cross-examination Mr Roxo did not give a clear or comprehensible account reconciling the statements in these communications with his evidence about the events and his state of knowledge, and the Trial Judge said of this (Red 39):

39 Notwithstanding Mr Roxo’s attempt to explain the email, the two accounts do not stand together. Either Mr Roxo knew about the Gutnik litigation on or before 30 June 2003 or he did not. But while that conflict gives pause as to the veracity of this portion of his evidence, it does not ground the additional assumption of complicity by Mr Roxo in any attempt by the Feldmans to engineer an indebtedness of Yeshiva 1 to 6 to Vageta to justify the direction that the loan funds be paid to it.

67 It was contended that the Trial Judge did not make a finding on whether the account in the second electronic message reflected Mr Roxo’s state of mind during the negotiations, and that this was a failure not to make a finding on a critical matter. In my view the Trial Judge’s reasons show clear advertence to the difficulty of resolving what in fact happened, but also deal adequately with the subject by drawing the conclusion that Mr Roxo’s evidence did not ground the conclusion of complicity engineering a false picture of indebtedness to justify payment of the loan funds to Vageta. In my opinion the evidence on these subjects, even taken at their worst for the respondent, shows that Mr Roxo’s real concern was to have security, a caveat and a direction from appropriate persons as to payment of the loan funds, and that he did not concern himself with the reasons why the money was being directed to Vageta. In my opinion he had no occasion in all honesty to concern himself with that matter. In considering the email of 2 September 2003 and what it explains, it is important to notice that what it speaks about, the decision to lend money to Y7, and the basis of that decision, were not what in fact happened; what in fact happened was that money was lent to Y1-6, no transfer of title of the land from Y1-6 to Y7 took place, and the undefined and obscure object of result of taking the property out of the reach of an “unrelated Gutnik action” did not influence what in fact happened.

68 The Trial Judge saw that there was a basis for a contrary finding, having regard to Mr Roxo’s electronic messages, and also to other evidence in which Mr Roxo said to the effect that he kept records of conversations, although these had been lost in some misadventure within the computer. However the Trial Judge’s finding was reasonably available on Mr Roxo’s evidence on affidavit and orally, including his evidence under challenging cross-examination, and there is no clear ground for holding that the finding was erroneous.

69 Mr Dean-Willcocks and Mr Malanos were appointed administrators for each of Y 1-7 on 19 August 2003. Later they were removed as administrators and appointed as provisional liquidators; for Y 1-6 this occurred on 1 September 2003 and for Y7 on 5 September 2003. On 18 December 2003 they appointed themselves joint voluntary administrators for each Y 1-7. They made extensive investigations for a report on the affairs and accounts of Y 1-7 and of other entities, and Mr Dean-Willcocks stated some results of these investigations in his affidavit of 22 September 2004 (Blue 2/327-552). His opinion on the basis of the financial information available to him was that on 1 July 2003 none of Y 1-7 was indebted to Vageta in any amount; he referred to one possible exception, which is not relevant (Blue 2/335). His opinion was that the Feldmans were not indebted to Vageta on 30 June 2003 either. Mr Dean-Willcocks also referred to accounting records which appeared to show that Yeshiva Jewish Day School Limited (YJDSL), a company the affairs of which were also in some way related to the Yeshiva College, was indebted to Vageta (Blue 2 334 [29] and 500 – 502). These records showed indebtedness and many transactions between YJDSL and Vageta from 1999 onwards, including indebtedness to Vageta of $1,927,406.00 on 31 December 2002 and $1,993,613.00 on 14 August 2003. Mr Dean-Willcocks was not satisfied that the debts recorded actually did exist, and the accounting records he abstracted in the report produced with his affidavit do not to my reading show any reflection of the proceeds of the respondent’s loan. The payment of proceeds of the loan to Vageta cannot, on the basis of records examined and reported by Mr Dean-Willcocks, be attributed to payment on account of any debt or other obligation of YJDSL to Vageta which is recorded in those accounts.

70 In a later report, annexure 3 to the provisional liquidators’ investigation report of 30 November 2003 (Blue 1614- 1617, an extract from this document) the provisional liquidators reported: (Blue 1617 D-I)

Director Yossi Feldman and company secretary Henry Kinstlinger have advised the payment to Vageta was used to repay the loan account of Vageta with STCA in the amount of $437,309. We are advised Vageta had advanced monies previously to STCA which then made payments acting in their capacity as manager of Properties to McCabe Terrill Lawyers with respect to the Lubavitch Mazal litigation.

We are advised by Henry Kinstlinger that McCabe Terrill Lawyers were paid $490,000 in the period May – June 2003 and that Vageta advanced $449,000 towards these costs in the same period, which was partly repaid through the proceeds of the Joan Marshall loan.

The information attributed to Mr Yosef Feldman and Mr Kinstlinger does not explain the relationship between the direction to pay to Vageta and exercise of the powers by the Feldmans as directors of Y 1-7.

71 The reason for directing the proceeds of the loan to be paid to Vageta is not explained in any satisfactory or comprehensible way by the evidence of Mr Dean-Willcocks and Mr Malanos. The administrators’ attempts to establish what had happened did not produce any clear explanation; their reports seem to show that books of accounts existed in which a transaction or a purported transaction was recorded in which Y7 advanced the amount of the cheque to Vageta on 1 July 2003; but this explains nothing of how it came about that Y1-6 were among the borrowers of that money yet it was directed to be paid to Vageta. The later existence of accounting entries, which are not really comprehensible and are fairly clearly wrong, explaining some notional dealings between Y7 and Vageta does nothing to explain what took place.

72 In my view the evidence of the administrators does next to nothing to establish that conduct of the Feldmans as directors of Y1-6 in directing payment to be paid to Vageta was in breach of their fiduciary duties to Y1-6; it does no more than to establish that no purpose or good reason is known why the advance was directed to be paid that way. In my opinion there is no substantial showing on evidence that there was a breach of fiduciary duty of the Feldmans as directors to Y1-6; if that were to be shown it would be necessary to go much further than evidence of the Administrators showing that the Administrators were unable to establish that there was any indebtedness of Y1-6 to Vageta, and that information was produced which rather tended to the contrary. No evidence was called by any party from the Feldmans, or from any other source internal to Y1-6 to establish the absence of any actual or intended transaction and of any other circumstances which could show a good-faith purpose for making the payment. Many purposes can be imagined, many of them dishonest, but also many of them appropriate in the interests of Y1-6; the true position is not known and is not shown by evidence.

73 Nor does any of this material tend to any degree at all to show that Mr Roxo within the test given by Stephen J in Consul knew facts which to a reasonable person told of fraud, or showed that he was participating dishonestly in dealing with the money being advanced. The extremely limited evidence about Vageta and its affairs and about why money was paid to Vageta clearly make it possible that the funds were diverted by the Feldmans, who completely controlled Vageta, to their own use, bearing in mind that as far as appears Vageta’s affairs had no connection with the Yeshiva College, the charitable trust or the business of Y1-6. Nothing in the evidence takes this further than a plain possibility or does anything to indicate, either to the Court now or to a reasonable person in Mr Roxo’s position at the time, that anything dishonest on the part of the Feldmans was probably happening. Vageta’s part in the affair generally and the reason why, on 30 June 2003, a very late stage in the preparation for the loan, there was a direction for payment to Vageta, are all quite unexplained, and there are no reasons why it could be supposed that it was for the respondent to explain these things, or why it should be supposed that in the absence of an explanation, the worst should be assumed. If the Feldmans had been parties to the litigation it seems likely that the hearing would have taken a materially different course in this respect, as in other respects.

74 Counsel also said that there were many indications that the conduct of Y1-6 and their directors was desperate. This was not an overstatement; from the very beginning the proposed transaction was presented to Mr Roxo as one in which borrowing for large sums of money was on very short notice had to be completed in a few days, money was needed for a relatively short time and there was a readiness to pay interest at an extremely high rate. The first conversation between Mr Jovanovic and Mr Roxo contained an indication that money was required within 3 days, that is, by Friday 27 June 2003; later expressions showed that completion on Monday 30 June 2003 was essential.

75 Counsel said (Transcript p35) to the effect that, in companies associated with the running of a school, this was desperation borrowing, it should be known that desperate people do desperate things, it was borrowing at extraordinary interest rate, a series of changing explanations were given, the companies involved were altered, and ultimately all the balance of the advance was paid away to a company which was not giving security, was not a debtor and was controlled by the directors. At the last minute, and without regularising the documents the money was just diverted to a company owned by desperate people. It was contended that the extreme circumstances speak so clearly of the probability of fraud that it was dishonest on the part of Mr Roxo not to see the fraud.

76 To my mind it is likely that a severe need for funds in the short term, with a severity that could be called desperate, would be an almost universal aspect of applications for advance of money on the kind of terms which Mr Roxo had available. Only circumstances of extreme urgency could move anybody to entertain paying the kind of interest rates Mr Roxo quoted, particularly a person who could offer security over property which was encumbered for far less than what was then believed to be its value.

77 When claims based on alleged accessary liability and the second limb of Barnes v Addy are made it is usual, in my experience, that the trustee or fiduciary whose liability is alleged to be the principal liability is joined in the suit and that appropriate equitable remedies are claimed against that person. This accords with the usual approach taken by Courts of Equity in which, so far as is practicable, all aspects of the controversy are brought under consideration and resolved in the same suit. This approach is sometimes expressed in the obscure maxim ‘Equity delights to do justice,” which alludes to the Courts’ wish to resolve the whole controversy and give effect to all equities of all persons involved in the controversy. The same policy is expressed in ss.60 and 63 of the Supreme Court Act 1970. Except when the principal cannot be found, is insolvent, has a bankruptcy discharge, or is unavailable to be sued for some other reason, it is appropriate that that person should be joined as a defendant. There may be advantages for the attainment of justice if that person can be required to produce documents on discovery, answer interrogatories or otherwise to participate in the proceedings. It is not safe to assume that all relevant aspects of the principal persons’ conduct are known to an accessary.

78 Y1-6 released the Feldmans and also Y7 and Vageta from any possible claims by a Deed of Settlement made on 14 December 2003, when Y1-6 and Y7 were in provisional liquidation and before the present proceedings were commenced on 1 June 2004; there were 43 individual and incorporated parties to the Deed of Settlement which contained a comprehensive scheme of releases among many persons whose affairs were in various ways related to Y1-6 and Y7. By different provisions of the Deed Y1-6 and also Y7 gave very comprehensive releases to the Feldmans and to Vageta; the companies also obtained comprehensive releases from the Feldmans, and from a number of other persons. The Deed has the effect that it would have been pointless for Y1-6 to bring any further proceedings against the Feldmans, or against Vageta. It also means that Y1-6 are unable to offer to make available to the respondent the rights and remedies which they have, whatever they are and whatever value they have, against the Feldmans and Vageta, or against Y7. The actual circumstances of Vageta and its capacity to make a repayment do not appear from evidence. Vageta’s having general discharges from the borrowers seems, looking at the matter rather generally, to be a substantial difficulty for direct recovery by the respondent against Vageta.

79 When asked by the Court whether the appellants made any offer to do equity to the respondent as a condition of obtaining relief Senior Counsel for the appellants replied to the effect that the respondent continues to have her rights against the Feldmans who were debtors with Y1-6 in the mortgage, and that this being so there was no need for the appellants to make any proposal to do equity. I do not think that this dealt appropriately with the question whether any condition should be placed on the grant of equitable relief to the respondent, as the appellants’ rights against the Feldmans and separately against Vageta, and the rights of Y1-6 against Y7 are not necessarily to be equated with the rights of the respondent against the Feldmans. Further it appears to me that some value obtained by Y1-6 must be represented by the highly comprehensive chain of releases which they obtained under the Deed of Release, and to the extent to which Y1-6 bargained away their rights against the Feldmans, Y7 and Vageta in the Deed of Release, they should bring the value of that advantage into account when they seek an equitable remedy against the respondent. These subjects would in my opinion have been quite important if it had been shown that Y1-6 were otherwise entitled to some equitable relief. They attracted very little attention during the hearing of the proceedings, and as other views I have expressed mean that they are not ultimately important, I would not pursue them to any conclusion.

80 To my mind it is doubtful whether an equitable remedy against an alleged accessary should be granted to a plaintiff who has given the alleged defaulting trustee or fiduciary a release, or has decided not to sue the trustee or fiduciary. Doing equity as between the plaintiff and the accessary, who is not the person principally liable, seems to me to be possible only if the plaintiff also pursues his claim against the person principally liable. A plaintiff who seeks an equitable remedy commits himself to a suit in which all equities in the controversy will be resolved together, and the Court should not allow the plaintiff to decide which party to sue and which party to ignore or give a release, perhaps for forensic advantages related to assessed readiness to contest the claim. If the party principally liable has a release under bankruptcy or some other legislation there may be no purpose in requiring it to be joined as a party; except perhaps to obtain discovery. Even so, any dividend or other advantage obtained in the bankruptcy would obviously have to be brought into account. The appellants obtained some advantages from the release granted to the Feldmans and Vageta, as they also obtained releases from many parties; their case seemed to me to require a full explanation of what it was that moved them to release the Feldmans, whose conduct they were complaining about, and Vageta, which was said to have obtained a large amount of the appellants’ money. There must have been some large advantage, and it should have been explained, evaluated and credited in any remedy to which the appellants were otherwise entitled. While I feel these concerns strongly, they were not debated on appeal and the appeal can be disposed of without reaching conclusions on them.

81 The basis overall of Gzell J’s decision is clear. It is no less clear because his Honour did not deal explicitly with every aspect of the complex array of facts and circumstances which it was asserted show, when taken together, that the respondent through Mr Roxo incurred accessary liability. Aspects of the facts with which his Honour did not explicitly deal should not have importance attributed to them for that reason: overall the ground of decision is quite clear as a rejection of a conclusion of dishonesty on Mr Roxo’s part for which the evidence did not furnish a substantial basis. The respondent’s rights are not conditional upon Mr Roxo’s giving a clear and convincing account of the events and clearing away whatever apparent anomalies can be retrospectively suggested. The factual error identified in the reasons is minor and inconsequential. No good ground has been shown for setting aside Gzell J’s findings and orders. In my opinion the Court should order: Appeal dismissed with costs.

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LAST UPDATED: 18/02/2005